MUMBAI, June 19 (Reuters) – Indian lenders are seeking the central bank’s approval to offer loans via branches in India’s tax-neutral hub, GIFT City, to fund dollar deposits under a new scheme, two sources familiar with the matter said.
Earlier this month, the Reserve Bank of India offered to subsidise hedging costs for foreign currency non-resident (FCNR) deposits as a way to encourage banks to bring in dollar flows from the Indian diaspora.
The scheme, previously used in 2013 to support the rupee, typically allows banks to offer loans to customers, who then park this money in dollar deposits with Indian lenders.
Banks believe their units in the Gujarat International Finance Tec-City (GIFT City), which operate under offshore banking rules, function similarly to foreign banks and should be permitted to offer such funding, the sources said, requesting anonymity as they are not authorised to speak with the media.
The RBI did not respond to Reuters queries.
The central bank’s rules allow customers to take leverage, and Indian lenders are permitted to issue standby letters of credit to overseas banks offering such loans, guaranteeing repayment.
However, it is unclear whether these provisions apply to overseas branches of Indian banks, including those in GIFT City, and whether they are eligible to provide these loans.
“Most banks have branches in GIFT City, but many of them do not have a presence in foreign countries. If the leverage is not allowed through GIFT, these banks will have to depend on foreign lenders,” said VRC Reddy, treasury head at Karur Vysya Bank.
Economists and analysts expect the RBI’s measures to bring in significant capital inflows.
Brokerage Nomura estimates the scheme could attract $55 billion, with the bulk expected in August and September.
“Compared to 2013, while U.S. dollar rates are much higher, the scheme will also provide leverage to investors, which will boost returns,” Nomura said in a note.
