Foreign Currency Non-Resident (Bank), or FCNR-B, deposit mobilisation has been a very promising early step and even the bankers of big foreign banks are optimistic about what it can do in terms of impact on India’s banking and liquidity situation. Brokerage companies Jefferies, UBS and Macquarie have also highlighted the positive early indicators and said that high inflows of foreign currencies may help to smooth domestic liquidity and reduce immediate pressure on bank balance sheets.
Jefferies says early discussions with banks suggest that the mobilisation is largely driven by fresh money rather than recycled funds. The money is coming from the UAE, Singapore and Hong Kong, among other key global financial centres, for instance. Internal banking networks, together with partner banks and their clients, are playing a big role in transferring these funds to Indian banks.
Jefferies estimated that total FCNR-B mobilisation in the range of $50 billion to $70 billion could prove to be a significant positive for the banking sector. But the sustainability of the trend would depend partly on whether current Internal Rates of Return remain attractive enough for depositors. If the momentum continues, the resulting improvement in foreign-currency liquidity could benefit some segments of the financial sector.
In the case of investors who are looking to benefit from the improved liquidity conditions, Jefferies has considered Non-Banking Financial Companies and smaller private sector banks as possible options. For those institutions, if the inflows are sustained, the funding conditions will be improved and liquidity availability will be more plentiful.
UBS also noted strong early mobilisation on the other foreign borrowing mechanisms. Banks already raised $1.97 billion through the External Commercial Borrowing swap facility and another $1.34 billion through the Overseas Foreign Currency Borrowing swap facility, it said. These figures are also at least a bit stronger than what bank management told us earlier in their earnings call.
The brokerage also expects mobilisation to accelerate in the coming weeks. Large private sector banks have also said in recent weeks that their efforts to attract foreign currency deposits could get more traction, thus contributing to banking-sector growth, they said.
Macquarie described the latest FCNR-B flow data as a positive surprise and a net benefit for the wider banking system. Foreign banks may have increased their participation in the mobilisation drive, helping strengthen the flow of funds into the country.
The growing inflows could be of significant help at a time when domestic liquidity conditions remain a major concern for lenders. FCNR-B deposits may provide banks with greater flexibility in terms of lending and credit growth and thus reduce funding needs and liquidity pressures.
With big brokerages seeing the early data positively, the scale and sustainability of FCNR-B mobilisation will be an important trend for India’s financial markets in the coming months.
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