India resurrects loans to NRIs

Another move to defend sagging rupee.

India is allowing foreign banks to provide upfront financing for wealthy “Non-Resident Indian” (NRI) clients to entice them into placing their US dollar deposits in India. Banking industry sources said the move could raise US$10 billion or more.

The scheme allows banks to pool their resources with non-residents and place deposits in India, creating larger deposits with each new account. This move reinstates a practice that proved successful in 2000 when the rupee was also under pressure. Foreign banks will finance the bulk of these dollar deposits since this will avoid the need for a sovereign bond or special government-backed deposit schemes to attract dollar inflows to support the rupee.

Foreign banks operating in India are offering the terms to their richest private banking clients by providing roughly 90% of the foreign currency deposit placed in India. The banks will officially roll out the upfront loans this week. Analysts said client equity in these deposits is just 10% and the client effectively makes between 18 and 21% on the US dollar.