68 Responses to Leveraged FCNR Deposits – Why FCNR deposits suddenly became attractive for NRIs and What are the risks?

  1. Hardik Harjani says:

    Hi sir,

    It states- “NRI would get loan of 9-10 times or even 19-20 times on his investment at lower rates and total amount, together with loan, is invested in FCNR deposits with bank in India earning higher interest.”

    Why is it that the whole procedure is to be repeated 9-10 times or 19-20 times? I could not understand this, please tell me regarding the same.

    Thank You!

    Best Regards,
    Hardik

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      This was being done 4 years ago and the product has already ended. NRIs who have invested in such products already made more than 15-20% return. Thanks.

  2. Z Hay says:

    Hi
    I want to create an FCNR in sbi bank in us dollars for around $40k. I will be sending the money on dollars. What bank charges will be imposed? Commision , service tax?

    Please explain

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      I don’t think there would be any service charge or commission or service tax. Thanks.

  3. manish says:

    Would you please add me to your blog?

  4. A. Thakker says:

    Dear Jigar,

    Please advise your views on the UK Pound for the next 12 months and whether it is advisable, to invest in a leveraged FCNR GBP deposit for 12 months (390 days)

    Regards,

    A.W. Thakker

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Please provide more information like your home country (whether UK), amount of leverage, FCNR FD rate, and how the investments will be made and/or redeemed and other relevant info for me to give my views. Thanks.

      • A. Thakker says:

        Dear Jigar,

        Thank you for your Email and in response to your queries, I would advise as follows:

        1. I am an Indian Citizen (NRI)

        2. The amount of leverage is about 5 to 6 times the amount of deposit.

        3. FD rate of return is around 4% to 5 % variable

        4. Investment will be made in GBP with a leading Indian Bank

        5. Investment will be redeemed after 390 days.

        6. Estimated range at which the investment will be booked is between INR 88/- to INR 105/- to one GBP. Anything below or above this would mean that my investment would get eroded.

        I would appreciate your feed back and thank you once again.

        With kind regards,

        A. W. Thakker

        • A. Thakker says:

          Hi Jigar,

          I await hearing from you. As you will be aware, the GBP has dipped to its lowest levels – so, is it a good time to go in to GBP leveraged deposits. You guidance would be appreciated.

          With kind regards,

          A. Thakker

          • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

            The Leveraged FCNR deposits were only available until Nov 2013. If you expect GBP to appreciate in future against your currency (assume AED), you may want to invest in GBP. However, you would be taking currency risk i.e. GBP may depreciate. Thanks.

        • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

          1. If your return in GBP is in double digit, you may invest. Please note that I have contact with most of all the major banks and have not heard about any leveraged FCNR deposits. So you may invest at your own risk.
          2. This may be FCNR deposits with forward cover. If that is the case then, your maturity would be in INR and you may have to take currency risk. You may refer to my blog on the subject to understand the product. Thanks.

  5. very interesting. there are some middle eastern banks provide these instruments. and coupled with banks in india. e.g. icici , hdfc etc.
    question: are there any banks other than FGB (first gulf bank) providing similar services?thanks

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      It was only for a small window in 2013. Currently, no banks are offering Leveraged FCNR deposits. Actually, the Leveraged FDs are maturing in 2016. Thanks.

  6. raj says:

    Nice Article.

  7. Suresh says:

    Hi Jigar,
    are there any leverage FCNR options available? what are the best banks you suggest for FCNR? I sent maill to couple of banks but no reply.

    Suresh

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Not Anymore but foreign banks do give 3-4 times leverage on your investments to invest in foreign bonds of Indian companies abroad. Thanks.

      • Govind says:

        Hi Jigar, it would be very helpful if you could possibly give a concrete example of such a leveraged bond scheme and how it actually works in practice for the investor. Many thanks.

        • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

          Please email us with your requirement. The product is not for everyone. Thanks.

  8. Pd says:

    Hi
    I purchased a property against long term capital gain on property and paid initial amount for the purchase. The total purchase price of new property is above the long term capital gain amount .But I forgot to deposit the balance amount of long term gain in capitals gain account before filing of return.
    Will the balance amount become taxable even though my new property value is more than long term capital gain amount on old property .

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Unfortunately, yes. You would get credit for payment made until the date of filing tax return. The funds in capital gains tax account can only be utilized for payment to builder/contractor. Unless you create an account and transfer the funds, the IT department would not know how you will utilize the funds. Thanks.

  9. rakesh kolapkar says:

    Hi Jigar,

    i appreciate your concise writing & product knowledge. How do i subscribe for the blogs of your. So that i can receive these blogs in least time.

    Queries:
    1) what is the maximum allowed leverage in this product & does it require any collateral except FCNR deposit?
    2) how does leverage of 20 times allotted on FCNR deposit, is it once at start or it is in continuous manner, when corresponding leverage amounts are invested?

    can i get these blogs over your regular mailer. Can i you add my name in your mailing list for latest updated blogs.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      I think the product is no longer available.
      I will add your contact details in our database and send you an email everything there is new blog. Thanks.

  10. nitin says:

    Hi Jigar.
    Would the maturity amount from Deposit by NRI invested in -FCNR Forward cover fully Tax exempt in India as well as in India. Please let me know
    thanks
    nitin

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Interest on FCNR is exempt in India, the gain on the forward cover is debatable and may not be straightforward. Thanks.

  11. Hari says:

    I had a NRE account more than 10k and transfered it to a CD in Rupees…Are both my savings account and my cd reported in fbar separately.
    Will it not be double counting?

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      It would depend on how you report your accounts. If you report by Customer ID, you may combine. If you report by account number, you would need to report both accounts. Unique ID is the key. Thanks.

  12. Sameer says:

    Thank you for informative article.
    I am attending US university as masters student on non immigrant visa and will be able to save 1000$ per month from assistantship. Is it advisable to invest it in SBI fcnr forward cover after 2 months? I’d like to get money back after one year. What other options do I have, except NRE?

    I would pay tax in us on my assistantship but on non immigrant visa would not pay on interest earned from banks.

    Any help is appreciated

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      While there are many options for investments in India, if you need the money back after 1 year, I would suggest to keep in USA or in FCNR FD of 1 year. There is currency risk in NRE FD and equity is a risky investment in short term (1 year). Thanks.

  13. Krishan Kanhaiyya says:

    Dear Mr Patel, I read your very informative article with great interest. It appears that the interest rate of FCNR is fixed with respect to LIBOR/SWAP rates displayed by FEDAI . The foreign currency in FCNR is converted to Rupees and a forward contract is taken to reconvert into original currency at maturity. Since September 2013, the banks enters into a swap with RBI, otherwise they were swapping in the market for reconversion.

    Does all this mean that FCNR is an swap?

    Many thanks

    Krishan

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      For NRI or investor, FCNR is not a swap but FD. However, the bank does not want to take the currency risk so would hedge the risk by entering swap (giving $ to RBI now for $ on maturity) or a forward contract (giving $ loans to clients now and entering forward contract for $ on maturity). Thanks.

      • Krishan Kanhaiyya says:

        Dear Jigar,
        Thank you for that reply.

        What I was trying to understand was the underlying nature of FCNR. From your reply, it would appear that the FCNR is actually a swap.
        I also see from the FCNR account opening forms of all banks that they will pass on the swap costs to the customer in case of premature termination.
        So to come back to my original query, is the FCNR a swap?

        Many thanks

        • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

          For investor’s perspective, it is an investment. And, for bank’s perspective, it depends on bank’s requirement of foreign exchange for re-lending and/or how banks manage their foreign exchange risk. They may keep it open and decide not to hedge. If bank can’t keep forex and has to convert in INR, you may argue it to be a swap as they would be paying forex on maturity. But, it is just one of many ways how they manage their forex risk and bank may or may not do it. In short, I don’t think FCNR is a swap. Thanks.

  14. Deepak Jain says:

    Hi Jigar

    Its difficult to get the interest rates on FCNR – Forward Cover from different banks when you are in USA as they have not listed interest rates on there website and customer care do not know this. Can you publish the interest rates for 5 Year deposit for mainline banks offering currently. As you mentioned in your blog banks offering in the range of 12%-20%. Even if you can mention for banks you know, it will be appreciable and knowledgeable for all.

    Thanks
    Deepak

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Forward premium on various currencies fluctuates on a daily basis so it would be difficult or practically not viable for banks to list the FCNR + forward cover rates on the website. However, you may be able to get the FCNR rates on the website. Also, the Leverage FCNR deposit scheme has ended as the RBI did not extend the swap window. Thanks.

  15. KC says:

    Hi Jigar,

    Does the FATCA rule apply to all deposits held with the institution – like NRE FDs, FCNR, etc or just to FCNR. Does that mean as the rupee strengthens, the closer you are to the FATCA reporting limits?

    Thanks,
    Kavita

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      1. Yes, FATCA rule apply to all deposits including NRE, NRO and FCNR – both Fixed deposits and savings account balance as well.
      2. Yes. The exchange rate for all currencies (including INR) published by the US Treasury are to be used for conversion.
      Thanks.

  16. Harshit says:

    Hi Jigar,
    Can you suggest me which bank would be preferd for NRI banking? Had gone through IDBI Bank NRI service or some other bank. As IDBI Bank offers basic NRI banking products like Non Resident Rupee Checking Account, Non Resident Rupee Term Deposits and Foreign Currency Non Resident Deposit.
    Please suggest me. check this migh it would eassy to suggest me http://www.idbi.com/nri-banking.asp

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      All banks would offer you the NRO, NRE and FCNR accounts. The selection of bank would depend on your objectives or nature of work or service expectations, amount of investments, among other factors. I have nothing for or against any bank; the perfect bank for you would depend on your requirements. Thanks.

  17. SANAY says:

    which according to you is better –

    1. Leveraged FCNR deposit done by an NRI in UAE or any other country other than India, fetching him return of (around) 18 %, also taking the risk of unfixd LIBOR and fluctuative interest rate ?

    or

    2. FCNR deposit done by an Indian bank like Indusind, where you get confirmed 12.5 % return on the FCNR B deposit made in INR ? Pls be advised here I am referring the FCNR to be made in INR and maturity would also be in INR.
    for instance – i invest Rs. 1,00,00,000 for 5 yr through this product, i get a return of around Rs. 1,70,00,000 at maturity (easily repatriable & tax free).

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      1. Leveraged FCNR is WAY BETTER. No question about it. Return is higher, tax free in India and NO Currency Risk. However, the investment option is no longer available as RBI has not extended the swap window.

      2. Generally, I do no recommend FCNR with forward cover. You take currency risk and I am of the opinion that your partial return would be taxable. Please see my two blogs in this regard for details: 1. Should NRIs invest in FCNR deposits with Forward Cover? 2. Are FCNR deposits with Forward Cover Completely Tax free for NRIs in India?
      For your case, I can not tell with the limited information. If you still want to do it, park only a part of money. You should not park all money at one place as there are many good options available for investments in India. Once you enter, it would be difficult, if not impossible, to get out.

  18. vinjal says:

    Dear Jigar,
    Thank u for the valuable article.

    I ( Indian NBFC) wanted to know i can utilise a foriegn party’s FCNR with foreign bank to get loan from Indian Bank ? How can a proceed with it?

    Or Else .. Can i get a loan from Indian Bank on the basis of the Bank Guarantee given by a foreign Bank?

    An Early reply would be appreciated.
    Thank YOU.

  19. Chandni says:

    Hi Jigar,

    Thanks for the comprehensive article…

    A quick question , the article says the deadline for swaps was November 30th, 2013..

    Any updates on extension ?

    M in US n wish to open one …

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Unfortunately, RBI has not extended the deadline and the swap window is now closed. Thanks.

  20. Rihan says:

    dear sir,
    i am NRE can i invest FCNR forward book in different bank ?
    Rihan

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Yes, you could have. However, RBI has closed the swap window. Thanks

  21. Himanshu Parikh says:

    Can somebody give me information on banks in USA is offering the loan? phone #s will be great. I tried to talked to JPM Chase and they have no idea about what FCNR swap is.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Unfortunately, Banks were not offering these services to US based clients mainly due to FATCA compliance. The Indian banks were offering to NRIs who can physically visit their branch in India. The swap window is now closed. Thanks.

  22. Ramesh Verma says:

    Indian public sector bank State Bank of India (SBI) through its Dubai Branch is offering this product with 9 times leverage, with a lock-in period of 5 years.

    I am 60, an NRI residing in Oman and wish to apply for the same in joint name with my wife 3 years younger. The minimum amount to be put in is $100,000 with a lock in period is 5 years. SBI will contribute 9 times i.e. $900,000. The applicants should have an asset base exceeding $500,000 and any reduction therein during coming 5 years will amount to a default. So will death of an applicant.
    Can you plz clarify:-
    1. What if I lose the NRI status during this period? Shall the principal sum n interest thereon be paid in USD only at maturity?Will it become taxable thereafter in India?
    2. Will it be eligible for repatriation if I continue to be an NRI for 5 years?
    3. Where do the leverage amount come from? SBI, RBI or any other source like Federal Reserve?
    4. What are the repercussions of a “Default”?
    5. Can it all be insured against any pitfall?
    Shall be grateful for your reply at my email as well.

    Best regards
    Ramesh Verma

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      1. FCNR deposits are exempt from tax for NRIs and Resident but Not Ordinary residents. If you have stayed outside India for say 10 years, the FCNR FD interest would continue to be exempt from tax after about 3 years from your return. Thereafter, while you can hold the FCNR FD until maturity, it would be taxable.
      2. FCNR funds are repatriable funds so you can repatriate all funds. No restrictions, as of now.
      3. The leverage amount come from, in your case, would be from SBI Dubai branch.
      4. If SBI India would default, you would not get the deposits. Do you think SBI would default in 5 years? I sincerely doubt that.
      5. I am not sure about any default insurance.
      Thanks.

  23. sanjiv shah says:

    Hi Jigar

    Your article is highly informative.
    I need some advice.
    I am based in UK and been offered the FCNR leveraged deposit by SBI UK.
    SBI is accepting only US dollar deposit. If I do the deposit, I will have to bear the FOREX conversion buy/ sell rate difference. Return yield is 11% pa for 3 yr deposit. Current exchange rate for £ to $ is 1.60. Where do you see the exchange rate heading in 3 years time? I am happy to take the risk as I have a good cushion of 11% return.
    Secondly, from taxation view point: How would the revenue office see my income. If I deposit £100000 and with leveraged amount (9 times) if my FCNR deposit is up to £1000000, and the FCNR deposit interest rate is 4.7%, effectively I am earning £47000 pa. ( I understand I will be paying interest on the loan of 900000 @3.96%pa). But would the UK tax revenue office see my earning as £47000 and pay full tax on that amount? Will I be able to offset the interest on loan as an expense?

    Thanks
    Sanjiv

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      1. I am almost 100% (I said almost), that currency risk between USD and GBP is less than 11% per year. I don’t think exchange rate would go unfavorable by 33% in 3 years.
      2. Please contact your tax attorney in UK. However, I would think only the difference of GBP 11,360 would be taxable. But, please contact your CA in UK. Thanks,

  24. B S says:

    Foreign banks like Citi, Standard Chartered etc have stopped offering this. Are any Indian banks still offering leveraged FCNR deposits/accounts?

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      HDFC, Axis, SBI, BOB were offering the product but with effectively shorter window as explained in previous post. Thanks.

  25. arvind says:

    Any idea which banks in UAE are still offering this product?

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      Lot of banks in UAE – BOB, SBI, HDFC, etc. were offering. However, they had smaller window. For example, they would say I need US$100 million, if they get the required funds in 1-2 days, they would close the window and not offer the product.

  26. Kunaal says:

    Hello, I have been offered this product at a 6 x Leverage, 4.77% FCNR Deposit rate, 3% Fixed interest cost on debt, min USD 250K client equity, 1.25% set up costs equating to an approx 11% return (compounded annually over 3 years). I am worried about the ‘worst case scenario’ of HDFC being unable to payback the principal on a 3 Year term deposit on maturity, as my total net worth is less than the leveraged amount. Is their any backing from RBI or any governmental authority to safeguard my deposit if the bank is unable to pay? Especially as this is a phenomenon or investment environment initiated by the RBI? As an individual, does it make sense to undertake an investment whereby I cannot survive the worst case scenario, no matter how unlikely the worst case of bank default may be in the foreseeable short term future? Your guidance would be appreciated.

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      There is no backing by RBI. RBI backing is that they would honour the swap @ 3.5% premium per year with bank (HDFC). Whether HDFC pays you or not, is the risk. However, I consider HDFC as a sound bank and the risk would be minimal, close to zero (not zero). Thanks.

  27. Ruby says:

    Which bank would be a good bank to invest with?Is HDFC reasonably dependable?

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      It depends on what how much money and where you want to invest and what is your definition of “reasonable dependable”. I would consider HDFC reasonably dependable. However, I would suggest you to do some research, inquire and satisfy yourself with the level of customer service.

      • Rahul says:

        Dear Jigar,
        We have a bank through their DIFC branch is offering this product at 19 times leverage yeilding 15%, I would like to understand the risk that i may be asked to settle the leveraged amount , say
        If RBI restricts the FCNR funds to be repatriated at maturity, could it happen that investor needs to settle the say 19 times leverage first ? I am Ok with the risk that my capital invested (without leverage) is not permitted to be repartriated, but i cannot settle/repay 19 times of my invested capital first in any instance.
        Appreciate your comments

  28. kishore says:

    Can you please list few foreign banks that are providing this service

    • Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) says:

      I have listed few in the blog. Banks also depend on which country you are from. Local banks in your country may also offer the same provided they have some affiliation with the banks in India. However, the processing fees are usually higher for foreign banks. I think Citi, DBS, Standard Chartered are offering this product to their elite NRI customers.

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