Summary of this article
Banks seek RBI approval for NRI deposit rebooking.
Special FCNR scheme offers significantly higher interest rates.
Early withdrawals may rise if RBI rejects proposal.
Commercial banks have approached the Reserve Bank of India (RBI) seeking permission to allow non-resident Indian (NRI) customers to prematurely withdraw and rebook existing deposits under a special Foreign Currency Non-Resident (Bank), or FCNR(B), deposit scheme that currently offers significantly higher returns.
The move comes after several NRI depositors expressed interest in shifting funds from existing FCNR deposits to the newly introduced scheme, which offers interest rates ranging from 6 per cent to 7.1 per cent for deposits with maturities of three to five years. Earlier, similar deposits generally earned between 3.35 per cent and 4 per cent.
Demand For Higher Returns
Bankers have told The Economic Times that some large depositors have already started closing their existing term deposits before maturity and moving funds to other banks that are offering higher rates under the special FCNR(B) scheme.
The RBI has recently introduced measures to encourage foreign currency inflows. Under the scheme, the central bank has offered to swap fresh dollar term deposits raised until September 30 at par. This effectively removes the hedging cost for banks on eligible deposits, allowing them to offer higher interest rates to customers.
Banks have passed on most of this benefit to depositors, making the scheme more attractive compared to existing FCNR deposits.
Existing Depositors Left Out
However, RBI has clarified that the benefit applies only to fresh deposits and deposits that have already matured. Existing FCNR deposits continue to earn the lower rates agreed upon at the time of investment.
Bankers say customers who opened deposits in the past two to three months are particularly affected because they are unable to access the higher rates despite investing recently.
As a result, banks have requested the RBI to allow depositors to break existing FCNR deposits and rebook them under the new scheme without having to shift funds to another institution.
Withdrawal Rules And Potential Impact
Under current RBI rules, FCNR(B) deposits have a mandatory lock-in period of one year. The depositor will not be paid interest if he/she withdraws funds before completing one year. Withdrawals after one year attract a penalty, with banks deducting one percentage point from the contracted interest rate.
Despite these penalties, some depositors are reportedly willing to forgo interest income because the higher rates available under the new scheme could offset the loss.
Bankers estimate that nearly USD 1 billion worth of deposits could be withdrawn prematurely if the RBI does not permit rebooking of deposits placed over the past three years. Under the special scheme, eligible FCNR deposits must be in multiples of USD 1 million and carry a minimum lock-in period of one year. While banks may accept deposits in various foreign currencies, the RBI's swap facility is available only for US dollar deposits.
