What changed
The interest rate ceiling on FCNR(B) deposits of all maturities was lowered from LIBOR/SWAP rates (effective March 28, 2006) to minus 25 bps, effective from close of business on January 31, 2007. For floating rate deposits, the ceiling is now SWAP rates minus 25 bps with a six-month reset period. Additionally, banks are prohibited from granting fresh loans exceeding Rs 20 lakh against NR(E)RA or FCNR(B) deposits to depositors or third parties.
What it means for you
Banks will now pay lower interest on FCNR(B) deposits, which may reduce their cost of foreign currency funding but could make these deposits less attractive to NRIs. The loan cap of Rs 20 lakh aims to curb speculative advances against NRI deposits and prevent upward pressure on asset prices in sensitive sectors. Banks must ensure no artificial slicing of loans to bypass this limit.
What you must do
- Update FCNR(B) deposit interest rate offerings to comply with the new ceiling of LIBOR/SWAP minus 25 bps for all maturities contracted from January 31, 2007.
- Implement a system to cap fresh loans against NR(E)RA and FCNR(B) deposits at Rs 20 lakh per depositor or third party, effective immediately.
- Monitor and prevent any artificial splitting of loan amounts to circumvent the Rs 20 lakh ceiling.
- Review existing floating rate FCNR(B) deposits to ensure the interest reset period is set to six months.
Who it affects
All banks accepting FCNR(B) deposits, Co-operative banks handling NRI accounts, NRI depositors with FCNR(B) accounts, Branches processing loans against NRE/FCNR(B) deposits
What is the new interest rate ceiling for FCNR(B) deposits?
For all maturities contracted from close of business on January 31, 2007, the ceiling is LIBOR or SWAP rates for the respective currency and maturity minus 25 basis points. For floating rate deposits, the ceiling is SWAP rates minus 25 bps with a six-month reset period.
Why did RBI impose a Rs 20 lakh loan limit against NRE/FCNR(B) deposits?
RBI observed a sizeable increase in NRI deposits and advances against them, which could avoid upward pressure on asset prices in sensitive sectors. The limit is meant to address large advances to high net worth individuals and prevent circumvention of the ceiling.
Does the loan cap apply to existing loans or only new ones?
The directive prohibits granting fresh loans in excess of Rs 20 lakh against NR(E)RA and FCNR(B) deposits. It does not mention existing loans, so it applies to new loan sanctions from the effective date.