What changed
The ceiling on NRE term deposit rates for 1-3 year maturities was lowered from LIBOR/SWAP plus 100 bps to plus 50 bps, effective from close of business on January 31, 2007. This applies to fresh deposits and renewals, with the same cap for maturities beyond three years. The change was part of the Third Quarter Review of the Annual Policy Statement for 2006-07.
What it means for you
Co-operative banks must immediately cap NRE deposit rates at the new lower ceiling, reducing their ability to offer competitive rates to NRIs. This will likely slow NRE deposit inflows and may pressure margins, as banks can no longer use higher rates to attract foreign currency. The move also aims to discourage large advances against NRE deposits, with a parallel prohibition on fresh loans above Rs. 20 lakh against such deposits.
What you must do
- Update NRE term deposit rate sheets to ensure rates for 1-3 year maturities do not exceed LIBOR/SWAP plus 50 bps, effective January 31, 2007.
- Apply the same ceiling to renewals of existing NRE deposits and deposits with maturities over three years.
- Review and halt any fresh advances above Rs. 20 lakh against NRE or FCNR(B) deposits, as per the policy announcement.
- Communicate the rate change to all branches and treasury desks immediately to ensure compliance.
Who it affects
State Co-operative Banks (StCBs), District Central Co-operative Banks (DCCBs), NRE depositors and their relationship managers, Treasury and ALM teams at co-operative banks
Does this rate ceiling apply to existing NRE deposits?
No, it applies only to fresh deposits contracted from January 31, 2007, and to renewals of existing deposits after their maturity. Existing deposits are not affected.
What is the LIBOR/SWAP rate reference for this calculation?
The ceiling uses the LIBOR or SWAP rates for US dollar of corresponding maturity, as on the last working day of the previous month. For example, for deposits booked in February 2007, the reference would be the rates from January 31, 2007.
Are there any other restrictions on NRE deposits beyond the rate cut?
Yes, the policy also prohibits banks from granting fresh loans exceeding Rs. 20 lakh against NRE or FCNR(B) deposits, to avoid upward pressure on asset prices in sensitive sectors.