According to estimates by SBI Research, foreign currency deposits attracted by banks through the Foreign Currency Non-Resident (Bank) (FCNR(B)) scheme, amounting to USD 127 billion, are capable of providing additional bank lending at the level of INR 25 trillion and generating a nominal profit of approximately INR 5 trillion for banks over five years.
These deposits, placed under the preferential swap scheme, were mobilized less than three months before the Reserve Bank of India (RBI) announced the closure of the window for accepting such deposits.
SBI Research calculated that at an interest rate of 7.5 percent, these funds could generate approximately INR 1.8 trillion in annual income. After deducting expenses on deposit interest, estimated at INR 75,000 crore per year, the report shows an effective net interest margin of about INR 1 trillion annually, which amounts to INR 5 trillion over a five-year period.
The research body's report, published on Friday, notes that using a reduced and slowed credit multiplier of 2.5, these deposits could lead to additional lending of INR 25 lakh crore (trillion) and an effective yield of 7.50 percent, ensuring an increase in nominal earnings of INR 1.8 trillion per year for banks.
The study also forecasts additional interest costs of about INR 1.75 trillion and foreign exchange devaluation costs of INR 3.18 trillion, based on the assumption of a 5 percent annual depreciation of the rupee over five years.
The report emphasizes that the RBI's special dollar-rupee swap program was designed to hedge the currency risk associated with these deposits. Consequently, subsequent rupee devaluation should not be considered an additional specific cost for FCNR (B) beyond hedging costs.
SBI Research stated that after hedging the currency risk on the principal amount through this mechanism, further rupee devaluation does not incur additional contractual losses on the principal amount for either party (banks or RBI).
Total hedging costs for USD 127 billion were estimated at nearly USD 15 billion. The calculation is based on an average annual hedging cost of 3 percent for the dollar against the rupee and dividing the deposits into maturity intervals—one, three, and five years.
The report also indicates that investing USD 100 billion from these funds in globally invested assets with a 4 percent return over five years could yield about USD 20 billion. After deducting estimated hedging costs of USD 15 billion, a surplus of about USD 5 billion, or INR 50,000 crore, would go to the central bank's balance sheet.
Thus, the report states that the total profit for banks will be a nominal INR 5 trillion, and for the RBI—INR 0.5 trillion. Furthermore, the large inflow of liquidity from this scheme over time may be absorbed by holiday season demand, credit distribution channels, new loan approvals, and government expenditures such as advance taxes and goods and services tax.
