What changed
RBI increased the maximum interest rate banks can offer on fresh NRE term deposits (1-3 years) from LIBOR/SWAP plus 175 bps to plus 275 bps. For FCNR(B) deposits of all maturities, the ceiling was raised from LIBOR/SWAP plus 100 bps to plus 125 bps. The new rates apply from close of business on November 23, 2011, and also cover renewals of existing deposits.
What it means for you
Banks can now offer higher rates on NRE and FCNR(B) deposits, making these products more attractive to NRIs. This should help increase inflows of foreign currency deposits, improving banks' foreign exchange liquidity. However, it also raises banks' cost of funds on these deposits, potentially squeezing net interest margins if not managed carefully.
What you must do
- Update your core banking system and product pricing to reflect the new NRE ceiling of LIBOR/SWAP + 275 bps and FCNR(B) ceiling of LIBOR/SWAP + 125 bps.
- Communicate the revised rates to all branches and NRI relationship managers immediately.
- Review your deposit mix and pricing strategy to balance NRI deposit growth with cost of funds.
- Ensure compliance with the six-month interest reset period for floating rate FCNR(B) deposits.
Who it affects
All scheduled commercial banks (excluding RRBs) offering NRE and FCNR(B) deposit accounts, NRI customers and their relationship managers, Treasury and asset-liability management teams, Retail banking product teams
Do these new ceilings apply to existing NRE deposits?
No, they apply only to fresh deposits and renewals of existing deposits after their maturity, effective from November 23, 2011.
What is the ceiling for NRE deposits with maturity over three years?
The ceiling for three-year deposits (LIBOR/SWAP + 275 bps) also applies to deposits with maturity exceeding three years.
How is the LIBOR/SWAP rate determined for these ceilings?
The rate is taken as on the last working day of the previous month for US dollar of corresponding maturities.