Non-resident Indians (NRI) will now have to settle for lower returns from their deposits in India. The central bank has reduced the ceiling on NRI deposits – FCNR (B) and NRE – by 50 basis points, making these deposits less attractive for investors. The downward revision in the cap on interest rates comes in the wake of large capital flows into the country. 
 
At present, the interest rate ceiling on FCNR (B) deposits is fixed at London Inter Bank Offered Rate (Libor) minus 25 basis points for all maturities. Now, this will be Libor minus 75 basis points. 
 
For NRE deposits, where the depositor takes the exchange rate risk due to the conversion of the funds into rupees, the interest rate ceiling has been brought down to Libor. Earlier, the ceiling was not to exceed 50 basis points above Libor. 
 
“These measures should result in smaller net inflows and help stabilise the rupee in the medium term,” said Romesh Sobti, country executive, India ABN Amro Bank. 
 
RBI’s decision is expected to reduce the scope for interest rate arbitrage and check the rise in money supply. The central bank had lowered the ceiling as late as in January 31, 2007, on FCNR (B) by 25 bps and NRE by 50 bps. 
 
The inflow of NRI deposits showed a quantum jump between April and December 2006 over same period in 2005. They (flow) registered an increase of $3.2 billion in April-December 2006 over that of $1.1 billion in April-December 2005. 
 
The outstanding NRI deposits rose from $ 35.13 billion as on March 31 2006 to $ 39.31 billion at the end of January 2007, according to RBI data. 

The rupee was overvalued by 12.21 per cent as on April 18, 2007, according to the Reserve Bank of India. The rupee, which was Rs 41.98 per dollar on April 18, surged further to close at a nine-year high of 41.67/68 on Monday.

According to the six-currency, trade-weighted real effective exchange rate (REER), the rupee has appreciated by 7.8 per cent since April 2006, when the rupee was overvalued by 4.12 per cent.

The rupee has been gaining on the back of large capital inflows due to foreign fund investments, foreign direct investment (FDI) and overseas borrowings by companies and banks.

The RBI, which is staying away from intervening in the foreign exchange market to prevent the rupee from appreciating, has also added to the domestic currency’s strength.

The rupee had gained by over 2 per cent in March 2007 alone as the RBI refused to buy dollars and infuse rupee liquidity, diluting its tight monetary stance.

Capital flows during 2006-07 were substantially higher than a year ago led by FDI flows on the back of strong growth prospects and buoyant investment demand. FDI inflows at $16.4 billion during April 2006-January 2007 were substantially higher than the inflows of $5.82 billion in 2005-06.

NRI deposits increased to $39.13 billion from $35.13 billion at the end of March 31, 2006, and Indian companies and banks raised a total of $28.71 billion from overseas markets in 2006-07, 29 per cent more than a year earlier.

The country’s foreign exchange reserves crossed the $200 billion mark at the end of March 2007, with forex interventions by RBI during 2006-07 (upto February) totalling more than $24 billion, almost triple the amount of interventions in 2005-06. However, with headline inflation continuing to average over 6 per cent in March, the central bank did not mop up dollars from the forex market.

According to Ajit Ranade, chief economist, Aditya Birla Group, the current spurt in the rupee was unusual, and mainly on account of the RBI not having intervened in the forex market.

“The underlying macro economic indicators, be it current account deficit, fiscal deficit or domestic inflation, all point to rupee weakening,” he said.

Reflecting the growing interest rate differential, in view of increasing domestic interest rates, the one-month forward premia has increased to 6.99 per cent in March 2007 from 3.79 a year earlier. The six-month premia has also moved up to 3.8 per cent from 2.43 per cent over the same period.

NRI deposits in Kerala banks touched a new high of Rs.329 billion on Dec 31, 2006.

NRI deposits in 3,539 branches of various banks grew from Rs.288 billion in December 2005 to Rs 329 billion, constituting 38.42 per cent of all deposits in the state’s banks, said figures released at a bankers’ committee meet here on Tuesday.

Details of the NRI deposits show that the State Bank group leads the pack with a total of Rs 124 billion, followed by private sector banks with Rs 101 billion. Then come nationalised banks with Rs 97 billion.

The State Bank of Travancore, Kerala’s own bank, leads all other banks with a record Rs 81 billion. Among private sector banks, the Federal Bank leads with Rs.48 billion.

Kerala has a record two million Keralites working abroad, of which close to 85 per cent are in the Middle East.

While home loans are available to resident individuals as well as non-resident Indians (NRIs), there are some differences in the terms and conditions applicable to the two. Here are a few points to get started:

Who is an NRI?

Banks follow the RBI definition, that is, an Indian citizen who holds a valid Indian passport and who stays abroad for employment or for carrying on business or vocation outside India or stays abroad under circumstances indicating an intention for an uncertain duration of stay.

Terms and conditions

Eligibility:

The NRI has to be a graduate. The same does not apply to resident Indians. He should earn a minimum monthly income of $2,000. This criterion may differ across housing finance companies (HFCs).

Size of loan:

The loan amount should not exceed 85 per cent of the cost of property. In case of Indian residents, banks can lend up to 90 per cent of the cost of property. The size of the loan depends upon the borrower’s repayment capacity. However, there is a maximum limit. For instance, HDFC offers loans of up to Rs 1 crore, while SBI offers a maximum loan of up to 24 times the borrower’s net monthly income.

Repayment:

The NRI has to pay the EMI cheques through his non-resident-external (NRE)/ non-resident-ordinary (NRO) account. He cannot make payments from his savings account (if any) in India.

Tenure:

The rate of interest is almost similar to loans availed by residents. The difference lies in the tenure of loans. Residents can avail home loan for 20 years or even more. However, leading banks or HFCs provide home loan only for a maximum of 15 years.

Paperwork:

NRIs are required to submit additional documents. For example, certain documents like a copy of the passport and a copy of the works contract (also sometimes referred to as the contract card/labour card) are required only for NRI loans. He also has to submit property-related documents including original title deed tracing the title of the property for a minimum period of the last 13 years; encumbrance certificate for the last 13 years; agreement of sale/construction, if any; approved plan/license, ULC clearance/conversion order; receipts for having invested the margin money through normal banking channels from the NRE and/or NRO account in India.

Bankable business

ICICI Bank provides 100 per cent financing if the property is bought from any of the builders it has tied up with. However, this offer is limited to specific projects.

HDFC too has tied up with service associates in Kuwait, Oman, Saudi Arabia and Qatar, apart from having a presence in Dubai. These offices offer advisory services in real estate and real estate financing to Gulf-based NRIs wanting to acquire homes in India. These offices coordinate the entire loan process in India. Even Bank of Baroda provides margin money in the country where the NRI resides if the borrower is not physically present in India to carry out the loan formalities.