A good opportunity for NRIs to earn more money
There is a good opportunity for rich NRIs (Non Resident Indians) to take advantage of the new directive by the Reserve Bank of India. The Reserve Bank of India has allowed banks to swap dollars raised through FCNR deposits for Indian Rupees at a fixed swap rate of 3.5 percent. This is much lower than the market rate of 7 percent to 8 percent. This comes after RBI liberalized interest rates on FCNR deposits from LIBOR + 300 bps to LIBOR + 400 bps. Though this decision of RBI was to provide support to the falling Indian Rupee and also to bridge the current account gap, but it also gives an ample opportunity for a NRI’s to take advantage and earn more money by investing his funds in FCNRB account.
Big banks generally provide leverage to their premium customers on their money as loans. This leverage can go up to 20 times depending on the relationship and risk profile of the customers. If a NRI customer of bank in Singapore invests $1000 in a FCNRB deposit, and his bank lends him another $9000, the NRI customer gets interest on a total of $10000. While the bank may charge 2.5 percent (1 percent to 2 percent over the LIBOR), the NRI will get around 4.5 percent as deposit interest.
The NRI customer gets an effective 2 percent (FCNR interest less interest charged by his lending Bank) on his leveraged amount and the entire 4.5 percent on his own principal. Thus the total amount a NRI earns is:
Own Money ($1000): $45 (@ 4.5 percent)
Loan extended by bank ($9000): $180 (@2 percent)
This total return of $225 on his $1000 investment translates into a whopping 22.5 percent on his own invested amount.
And if this NRI customer has a good relationship with the bank and has an appropriate risk profile, he can earn 42.% on his $1000, assuming his bank would be willing to lend him $19000.
So, there is a great opportunity for NRI customers to earn better returns on his money while India gets much needed dollars to save its falling rupee.