| Rising currency and cap on NRI rates prompt lenders to promote NRO accounts. |
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| The rising rupee and the cap on interest rates has hit the flow of non-resident Indian (NRI) deposits into the country. Banks such as ICICI Bank and HDFC Bank are promoting the repatriable non-resident ordinary (NRO) rupee deposits in an attempt to attract NRI depositors. |
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| The NRO deposits rose to $2,128 million in August 2007 from $1,739 million in April 2007. The foreign currency NRI deposits remained nearly flat at $15,397 million in August 2007 compared with $15,170 million in April 2007. The non-resident external (NRE) deposits have declined to $25,353 million in August 2007 against $25,675 million in April 2007. |
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| The interest payable on foreign currency non-resident (FCNR) deposits is capped at Libor minus 75 basis points and on NRE deposits at Libor. |
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“The rupee appreciation has had an impact on NRE and FCNR deposit growth, although it is important to note that customers continue to remit money to their families. It is the discretionary investments which are being postponed,’’ said Manish Misra, general manager and head NRI services at ICICI Bank.
LOSING LUSTRE
Monthly NRI deposits in 2007-08P ($mn) |
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| HDFC Bank has launched a major marketing programme to promote NRO deposits. “We are looking to market the NRO deposit product. However, this product is not picking up from a repatriation perspective as there is a lot of paper work involved. The RBI has constantly been lowering the interest rates that banks can offer on FCNR deposits. At the same time, customers can get an overdraft of only around Rs 20 lakh per account. This has acted as a deterrent for FCNR deposits,’’ said a senior HDFC Bank executive. |
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| Meanwhile, the country’s largest private sector bank has launched non-resident ordinary (NRO) fixed deposit (NRO FD), with an interest rate of 8.5 per cent per annum. |
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| To promote this product, the bank has provided the benefit of concessional rate of tax deducted at source (TDS) under the double taxation avoidance agreement (DTAA). It will offer this feature initially to NRIs from countries such as the United States, UK, Canada and Singapore, with whom India has double taxation avoidance agreements (DTAA). |
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| The interest on NRO FD is subject to a tax of 30.9 to 33.9 per cent, if DTAA benefit is not allowed. Such tax is deducted at source on plain NRO FDs. This makes the post-tax yield on plain NRO deposits relatively unattractive for a savvy investor. |
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| For example, a plain NRO FD giving an 8.5 per cent interest rate per annum, gives a post tax yield of six per cent (TDS being deducted at the rate of 30.9 per cent). |
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| However, with the DTAA provisions applied to a NRO FD, ICICI Bank’s NRI customers will be entitled to a lower TDS of 15 per cent, subject to fulfilment of prescribed conditions, resulting in an effective post tax return of around 7.4 per cent. The customers will have to provide a declaration stating that he or she is eligible under the DTAA provision |
-Business Standard
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