Foreign banks dominate FCNR(B) inflows under RBI concessional swap

FCNR(B) inflows tilt heavily in favour of foreign lenders

Foreign banks have cornered the lion's share of deposits flowing into the country under the Reserve Bank of India's concessional swap facility for Foreign Currency Non-Resident (Banking) accounts, or FCNR(B). Data accessed by TIVRA News shows that a bulk of the dollars that have come in through this window have been routed by foreign lenders operating in India.

The central bank had opened the concessional swap window to encourage banks to raise foreign currency deposits from non-resident Indians. The facility allows banks to swap these dollars at a rate more attractive than the prevailing market rate, effectively lowering their cost of raising funds.

Why foreign banks are leading the charge

Banking analysts point to the global reach and existing relationships of foreign banks as a key reason for their dominance. These lenders have a wider network of NRIs abroad, especially in the Gulf and advanced economies, giving them a natural advantage in mobilising such deposits.

Indian public and private sector banks, while also active, have not matched the pace of their foreign counterparts. Their domestic focus and comparatively smaller overseas branch networks limit their ability to tap into the NRI deposit pool as aggressively.

The trend is notable because FCNR(B) deposits are a crucial source of stable, long-term foreign currency funding for the banking system. They also help bolster India's foreign exchange reserves, which the RBI has been keen to build up.

RBI's swap window and its impact

The concessional swap facility, which the RBI periodically opens, is designed to give banks an incentive to bring in dollars. Under the scheme, banks can swap their FCNR(B) deposits with the RBI at a rate that is more favourable than the market forward rate. This makes it cheaper for them to offer competitive interest rates to NRIs.

For the RBI, the inflows provide a cushion against external shocks. A higher stock of FCNR(B) deposits reduces the immediate pressure on the balance of payments, especially during times of global volatility.

However, the concentration of these inflows among foreign banks has raised some eyebrows. A senior banking source, speaking on condition of anonymity, told TIVRA News that while the facility has been successful in attracting dollars, the skewed participation suggests Indian banks may need to strengthen their NRI outreach.

Officials have not yet confirmed whether the RBI will extend the current swap window or open a fresh one. The window closed for fresh inflows earlier this month, and the central bank is expected to review its impact before deciding on the next step.

The data underscores a broader trend in India's banking sector: foreign lenders, despite their smaller branch count, continue to punch above their weight in cross-border capital mobilisation. For Indian banks, the challenge is to close this gap.

What happens next will depend on global interest rate movements and the RBI's assessment of the forex reserves position. If the central bank sees a need to further shore up reserves, another window cannot be ruled out.