NRI is now biggest non-resident lender

TIMES NEWS NETWORK, JUNE 02, 2006
The Economic Times

Move over World Bank. The biggest source of India’s foreign debt is now our very own NRI. Non-resident Indians have emerged as the largest overseas lender to India, surpassing traditional sources such as multilateral and bilateral foreign agencies.

Throughout the 1990s and the early part of this millennium, multilateral organizations such as the World Bank agencies formed a major chunk of India’s outstanding external debt. Since then, however, NRI deposits in India have grown manifold and they now form the largest share of the country’s stock of external debt.

And this is not a freak flash in the pan. While this trend of the NRIs being the largest overseas lenders started in ’03-04, it gathered momentum in ’05-06. In the quarter ended December ’05, NRI deposits accounted for 28% of India’s outstanding external debt, while multilateral organizations formed 26.8% of the total debt.

During April-February ‘05-06, there was a net inflow of $1.9bn against a net outflow of $1bn in the same period last year. Clearly, NRIs seem quite upbeat on the India story with the compounded annual growth of NRI deposits being more than 20% since ’01-02, compared to a CAGR of 4% of the outstanding external debt.

NRI deposits consist of rupee denominated deposits, NR(E)RA, and foreign currency denominated deposits namely FCNR(B). Nearly 65% of the deposits are now rupee denominated as compared to just 30% in 1990. This augurs well for the stability of the inflows since in rupee denominated deposits the exchange rate risk is borne by the individual depositor, unlike the FCNR deposits where the bank has to bear the risk.

During April-February ’05-06, however, nearly 65% of the inflows were in the FCNR account due to the recent volatility the rupee.

In spite of the recent hardening of rates globally, the interest rates offered to NRIs on rupee and forex deposits remain attractive. And the recent hike in NRI deposit rates by RBI is likely to keep NRI money flowing into India. The ceiling on interest rates for NR(E)RA has been increased to 25 to 100 basis points above LIBOR for US dollar, for deposits of one to three years maturity.

FCNR(B) rates too have been increased to LIBOR rates compared to the previous cap of 25 basis points below LIBOR.

At present the LIBOR rate in US dollars is at 5.4%. It therefore makes more sense for NRIs to put their savings in high interest yielding deposits in India as compared to the low interest savings accounts in the country of their residence.

After the BOP crises of 1991, a number of steps have been taken to enhance the stability of NRI deposits. Such measures include rationalization of interest rates of rupee denominated deposits, linking the interest rates on forex deposits to the LIBOR and discontinuing with the short term NRI deposits (maturity of less than one year). Right after the 1991 crises non repatriable deposits were encouraged.

However, with India’s comfortable position in forex reserves, deposits have been made fully repatriable once more. Net inflows of both rupee and forex deposits grew phenomenally during 2003-04, after which it turned negative for a year before picking up again in FY06.

During the 1990s most of India’s external debt requirements were fulfilled by the World Bank agencies such as IBRD and IDA. Moreover, there was heavy dependence on bilateral borrowings, which constituted the second largest source of external debt during the 1990s. This, too, has been declining consistently since the last three years, mainly because of the prepayment of high cost debt owed to some of the countries.

India’s outstanding external debt March end December end Rs crore 2001 2003 2005 2005(QE) Multilateral 145105 142720 138977 144,012 Bilateral 74519 79918 75350 70,403 NRI deposits 77273 110022 143267 149,792 QE:

Quick estimates Source:Finance Ministry, Govt of India
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