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Introduction
Foreign Currency Non-Resident (Bank) [FCNR(B)] Deposit is a fixed deposit scheme of the authorized Indian banks for Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs). The FCNR(B) deposit holds money in a foreign currency, whereas a traditional fixed deposit is maintained in Indian Rupees (INR). One of the main features of the FCNR (B) account is that the depositor does not have to worry about any foreign currency fluctuations since the principal and the interest is repaid in the same foreign currency.
Though several benefits have been mentioned above, FCNR(B) deposits may not be the most suitable investment alternative for all the NRIs.
- Bank Credit Risk
FCNR(B) deposit is essentially a bank deposit and not an investment in the sovereign.The money is handed over to an authorized Indian bank, and the debt is to be repaid with the bank. As a result, investors continue to have credit risk and financial stability risk.
- Premature Withdrawal
FCNR(B) deposits offer flexibility of premature closure, but may earn lower or no interest if the deposits are withdrawn prematurely. Furthermore, banks would charge high penalties for withdrawing the money too early based on their in-house policies. Thereby reducing the overall return on the product.
- Missed INR Upside
The major advantage of FCNR(B) deposits is that they are not affected by the devaluation of the Indian Rupee. But this safeguard can be beneficial as well as a drawback in some market scenarios.
In case the value of the Indian Rupee (INR) rises against foreign currency or the fixed deposit rates in INR are still much higher than the FCNR(B) rates, an investor might not get the same returns by investing in INR denominations like NRE Fixed Deposits and may lose the opportunity.
Hence, FCNR(B) might not be an attractive choice for investors who hope to see the strengthening of the Indian Rupee or are seeking high interest rates in their home country.
- Limited Product Availability
While most of the major Indian Banks provide FCNR(B) Accounts, the choice of currencies, tenures, interest rates and other provisions varies from bank to bank.
Not all banks accept deposits in all the currencies allowed, and there can be significant differences in the interest rates offered. Consequently, investors may not have the choice of a bank that suits their investment needs.
5. Interest Rate Risk
FCNR(B) deposit rates are linked to international interest rate benchmarks and may fluctuate over time. During a long tenure of up to five years, prevailing interest rates may decline, resulting in lower returns on renewal or reducing the overall attractiveness of the investment as compared to alternative investment options.
6. Capital Control Risk
The implementation of capital controls, foreign exchange restrictions, or any regulatory measures by the Government of India or the Reserve Bank of India during the tenure of the deposit may adversely impact the movement or repatriation of funds. Such measures could affect the overall viability of the investment structure.
7. Policy and Funding Cost Risk
The viability of FCNR(B)-linked financing structures depends upon the prevailing regulatory framework and the cost of foreign currency funding. Any future change in Government or RBI policy affecting FCNR(B) deposits or overseas funding costs may increase the borrowing cost for banks, which could ultimately be passed on to investors, thereby reducing or eliminating the expected return from the investment.
Conclusion
FCNR(B) should be considered a capital protection and currency protection product and not a return maximization product. Its suitability will depend on the investor’s goals, needs for currency in the future, liquidity needs and risk appetite.
Besides, FCNR(B) deposits may disproportionately benefit High-Net-Worth Individuals, which is not good for the economy per se. Equal opportunities shall be created for everyone in the country, especially something like India that is still in the early stages of development. By introducing high leverage in the scheme, returns have been artificially magnified, but so is risk.
We want our NRI friends to be sure of all risks before they buy into this scheme.
Disclaimer: The opinions and views expressed in this article/column are those of the author(s) and do not necessarily reflect the views or positions of South Asian Herald.
