The FCNR (B) deposit scheme mobilised $127 billion within a short span of less than 3 months, which could generate a notional profit of around Rs 5 trillion (Rs 5 lakh crore) for banks over five years, and to RBI another Rs 0.5 trillion (Rs 50,000 crore), according to a report by SBI Research.
This success has become a particular point of pain for an august school of naysayers
“Even though the regulator took a wise decision to curtail the scheme preponing its closure, the mammoth fund flows eclipsed the frontier calculations, with the needle immediately shifting to the cost(s) architecture as being pushed by the lobby of naysayers,” the report argued.
The report tested the hypotheses of “august school of naysayers” on four quadrants individually and then retraced back to the overarching factors converging into pillars of resilient macros that travel beyond what meets the ordinary eyes.
“Firstly, the cost of the Scheme and Benefits to Banking System. The cost and price attributed to the scheme is a distraction at best going by common prudence and evolving landscape of elevated borrowing costs across global markets,” said the SBI report.
The ‘cost’ of the FCNR (B) scheme has primarily two components; interest outgoes through the contractual maturity period at contracted rates of interest and the hedging cost.
In fact, the vaulting yields in dollar terms across global markets is hovering around 7.5-8.0 per cent for AAA rated corporates, given elevated borrowings by multiple actors, thus making these deposits at 6-6.5 per cent quite attractive and also the elevated cost of bulk borrowing in local markets (38 per cent through bulk deposits) should calm down somewhat through these liquidity pools, having a sobering effect on overall systemic pricing of wholesale deposits/CDs.
Secondly, the logic of the naysayers regarding hedging cost and adding back depreciation and ascribe it to a notional loss of Rs 5 trillion is “completely incorrect”.
“This is because once the liabilities have been hedged by the counter parties (a back-to-back hedging is prevalent), the direction of the currency becomes immaterial on the due date of maturity and hence double counting the same exposure (cost of hedging PLUS cost of depreciation) does not serve any meaningful interpretation but purely a work of fiction,” the report further argued.
Thirdly, the gush of (unanticipated) liquidity is being portrayed as a challenging feat to the system.
“However, if we look at the levers anchoring its end usage, there is little reason to ponder much or panic as the festive season demand, credit disbursal pipeline, new advances sanctions, outflows on account of advance taxes and GST flows make it align to an elevated systemic liquidity, anchoring robust credit management by banks,” the report noted.
Fourthly, for the RBI, the deployment of say $100 billion globally investible avenues at a yield of say 4 per cent, over 5 years, should accrue profits of $20 billion, which offsets the outgo on hedging ($15 billion) and actually adds some profitability of say $5 billion/Rs 50,000 crore to the RBI B/S also at current estimates.
“It may be noted that RBI’s investment of the dollars received (hedge was allowed in USD only) is open to permitted avenues as per its board approved policy only and not at the whims of the naysayers. In a high yields environment prevailing now, current investments can even earn higher returns than what were envisaged and calculated earlier,” said the report.
Thus, overall profit to banks is a notional Rs 5 trillion and, to RBI, another Rs 0.5 trillion, it added.
