What changed
The interest rate ceiling on FCNR(B) deposits for the 3-5 year maturity period, which was raised to LIBOR/Swap plus 400 basis points in August 2013, will continue until February 28, 2014. From March 1, 2014, it will revert to the pre-August 2013 level of LIBOR/Swap plus 300 basis points. The ceiling for 1-3 year deposits stays unchanged at LIBOR/Swap plus 200 basis points.
What it means for you
Banks get an extra month (until end-Feb 2014) to offer the higher 400 bps spread on 3-5 year FCNR(B) deposits, which may help them attract more foreign currency deposits in the short term. From March 1, the lower 300 bps spread will reduce the cost advantage for banks raising longer-tenor FCNR(B) funds, potentially making these deposits less attractive to customers. Banks should plan their FCNR(B) pricing and deposit mobilization strategies accordingly before the March 1 change.
What you must do
- Update your FCNR(B) deposit interest rate slabs and system parameters to reflect the new ceiling for 3-5 year deposits effective March 1, 2014.
- Communicate the revised rate ceiling to your treasury, branch network, and product teams to ensure compliance from March 1.
- Review your FCNR(B) deposit mobilization targets and pricing strategy for the 3-5 year bucket, considering the lower spread from March.
- Monitor LIBOR/Swap rates closely to price deposits competitively within the new ceiling.
Who it affects
All scheduled commercial banks (excluding RRBs) offering FCNR(B) deposits, Treasury and asset-liability management teams, Retail and corporate customers holding or planning FCNR(B) deposits
What is the new FCNR(B) interest rate ceiling for 3-5 year deposits from March 1, 2014?
From March 1, 2014, the ceiling for 3-5 year FCNR(B) deposits will be LIBOR/Swap plus 300 basis points, down from the current LIBOR/Swap plus 400 basis points.
Does the 1-3 year FCNR(B) deposit ceiling change?
No, the ceiling for 1 year to less than 3 years remains unchanged at LIBOR/Swap plus 200 basis points both before and after March 1, 2014.
Why did RBI extend the higher ceiling until February 28, 2014?
RBI stated it was giving banks some additional time before reverting to the pre-August 2013 ceiling, likely to allow banks to adjust their deposit pricing and funding strategies.