INDIA BUSINESS WORLD - JUNE 2006
THE MONTH THAT WAS...

NRI IS NOW BIGGEST NON-RESIDENT LENDER

   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 the country, surpassing traditional sources such as multilateral and bilateral foreign agencies.

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

And this is not a flash in the pan. While the trend of NRIs being the largest overseas lenders started in 2003-04, it gathered momentum in 2005-06. In the quarter ended December 31, 2005 , NRI deposits accounted for 28% of the country's outstanding external debt while multilateral organisations formed 26.8% of the total debt. During April-February 2005-06, there was a net inflow of $1.9 billion against a net outflow of $1 billion 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 2001-02, 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 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 2005-06, however, nearly 65% of the inflows were in the FCNR account due to the recent volatility in 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 are likely to keep NRI money flowing into the country. The ceiling on interest rates for NR(E)RA has been increased to 25-100 basis points above Libor for the 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 the US dollars is at 5.4%. Therefore, it makes sense for NRIs to put their savings in high interest-yielding deposits in India compared to the low interest savings accounts in the country of their residence.

After the BoP crisis of 1991, a number of steps have been taken to enhance the stability of NRI deposits. Such measures include rationalisation 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 with maturity of less than one year.