FCNR(B) inflows to boost bank liquidity for festive season lending

Increased FCNR(B) deposit inflows will boost bank liquidity, likely leading to more lending to meet consumer demand during the festive season and support economic activity, said former Standard Chartered Bank MD Sanjeev Mehta.

Increased inflows through Foreign Currency Non-Resident Bank, or FCNR(B), deposits could give banks more liquidity to lend and support consumer demand during the festive season, former Standard Chartered Bank MD Sanjeev Mehta said on Thursday.

Banks to Deploy Funds Amid Festive Season

Speaking to ANI on the sidelines of the Global Fintech Fest (GFF) in Mumbai, Mehta said banks receiving additional deposits would look to deploy the money as keeping such funds idle carries a cost. “As you know, what does a bank do? On one side, it takes liabilities and, on the other side, it gives loans. The liability here is the deposit. Money came to banks through FCNR(B). Once liquidity comes into the banking system, banks have to deploy that money somewhere,” Mehta said.

He said the cost of such deposits, including hedging expenses, could make it important for banks to find avenues to deploy the funds. “If that money is costing a bank around 9.5-10 per cent, then unless the bank lends or deploys it further, it becomes a significant cost for the bank,” he said.

Mehta said the timing could also coincide with higher demand during the festive months, when consumers typically spend on products such as refrigerators, mobile phones and other consumer durables. “When the festive months are approaching in India and banks have this liquidity available, naturally they would want to deploy it in the market,” he said, adding that such spending could eventually be reflected in economic activity.

Lending Risks Unlikely to Increase

Mehta, however, said higher liquidity did not by itself mean that risks associated with bank lending would increase. “I would not say that simply because more money has come into the system and more loans can be given, the risk automatically increases. Risk does not increase as long as banks continue to follow their policies, standards and established parameters,” he said.

According to him, risks could rise if lenders moved away from their internal credit standards or risk-management frameworks under pressure to deploy funds.

Inflows Helped Moderate Rupee Depreciation

Mehta also said FCNR(B) inflows had helped India at a time when the rupee was facing pressure against the US dollar. He said bringing foreign currency into the country through deposits from overseas Indians increased dollar inflows and helped moderate the pace of rupee depreciation.

“The FCNR(B) decision taken by the government and RBI was, in my view, a very good decision and it came at the right time,” Mehta said.

What are FCNR(B) Deposits?

FCNR(B) deposits allow non-resident Indians to keep term deposits with Indian banks in permitted foreign currencies, insulating depositors from fluctuations in the rupee during the deposit period. (ANI)

(Except for the headline, this story has not been edited by Asianetnews Editorial staff and is published from a syndicated feed.)