GIFT City’s lenders are now banking on FDs to lure NRIs

Source: livemint

The non-resident Indian (NRI) diaspora has reason to be happy. Gujarat International Finance Tec (GIFT) City is wooing them with several investment ventures. For starters, one of India’s leading asset management company, HDFC AMC, has obtained approval to start six feeder funds that will allow both NRIs and foreign investors to invest in Indian mutual funds. Now, many banks located in GIFT City are welcoming NRIs with fixed deposit (FD) schemes that have more flexible tenors than what they offer in the rest of the country.

 Till now, NRIs needed to open FDs in India via their foreign currency non-resident (FCNR) accounts. These so-called FCNR deposits are denominated in a foreign currency and have a tenure of up to 5 years. Such deposits, however, had a minimum tenor of one year. And therein lies the advantage with the GIFT City schemes. FD schemes in GIFT City allow NRIs to earn interest on even shorter tenors, of just above seven days.

To put this in context, if NRIs decide to break their FCNR deposits before the minimum tenure of one year, they stand to lose the entire interest amount. With GIFT city banks, the minimum tenor is 7 days and the depositor is eligible for the interest amount if the deposit is held for more than seven days.

To be sure, an FCNR account can only be opened by either an NRI, a person of Indian origin, or an overseas citizen of India whereas a GIFT city account can be opened by even foreign nationals. However, that is subject to submission of the required documents and clearing the requisite KYC (know your customer) procedures. In a recent update by the International Financial Services Centres Authority (IFSCA), the regulator of GIFT City, NRIs and foreign companies can now open a bank account there without a PAN card but that is subject to their not having any income in India. This new rule made the account opening process slightly easier for them.    

 The fixed deposit offering in GIFT to NRIs comes on the back of banks located there wanting to shore up their retail deposits. As of now, there are 27 banks that operate from GIFT City. So, far all major banks—State Bank of India (SBI), HDFC, Kotak, and Federal Bank—are offering these schemes, as per the website of these lenders. SBI, for instance, offers 4.5% interest on deposits of up to $1 million for 7 to 31 days. Federal Bank offers 5.05% on deposits for 7 to 13 days. Spokespersons of Federal Bank and RBL Bank told Mint that the response to the scheme from NRIs has been overwhelmingly good.

   “The response from the customers is also very good and we see good traction getting built up, as customers have the flexibility of planning their short-term cash flows starting from 7 days, which is a unique feature that customers can’t get in the FCNR (B) deposits at the domestic branches," said the Federal Bank spokesperson.

Earlier, most of these banks relied mainly on institutional depositors and borrowings from their parent companies for capital requirements. But with new regulations coming up and streamlining the process, banks have started vying for individual deposits. Banking experts said that institutional money affects a bank’s business since the deposits and withdrawal are made in bulk whereas retail deposits are more sticky.

“Over the years, lending by banks has happened mostly from wholesale borrowings which means it was funded by its parent, other banks or institutions. It is only recently that banks have started focusing on getting more retail borrowings," said Lakshmanan V., executive vice president and head of treasury, at Federal Bank.

Banks began to obtain licences to set up shop at GIFT City in 2015. At that time, all GIFT entities were regulated by their respective regulators. For instance, banks were regulated by the Reserve Bank of India (RBI) and capital market participants by the Securities and Exchange Board of India. It was not until 2019 that the IFSCA took over as the unified regulator of GIFT city. The transition from RBI (for banks) to the new regulator happened in 2020. Post that, the new banking regulation for these banks came into effect and retail depositors were allowed to enter GIFT. Earlier, only institutions could deposit their funds with these lenders.

Typically, the GIFT city interest rates on deposits are higher than what banks in foreign countries offer. For instance, HDFC’s GIFT city branch offers 5.15% interest for dollar-denominated deposits held between 9 months and 12 months, whereas Wells Fargo in the US offers 1.5% for a one-year certificate of deposit.    

“GIFT needs more liabilities and to that extent, rates are likely to remain competitive and that, in turn, would draw in more deposits," said Lakshmanan.

Indian lenders currently cannot advertise these products directly in a foreign country as they need to register with the foreign country’s regulator before they are permitted to do that. While some banks have enabled online website facility for NRIs to transact in such products, some banks like IndusInd are still opening accounts using email or through a call mechanism.

“The banks are still in the process of evolution. If you have an account in India, you can operate it online but that feature is still to be enabled for most GIFT City banks. At this point, it is mostly through mail, fax, or physical instructions. While some banks have enabled certain instructions to be handled through Internet banking, it is not very efficient," said Lalit Jadhav, a banker who earlier worked as CEO of IndusInd’s Gift City unit.

To be sure, it is not just GIFT City lenders that are targeting NRI customers. Insurers are coming up with products designed for NRIs. Individuals residing outside India hesitate to buy insurance plans in India as the sum assured is denominated in Indian rupee which may be subject to depreciation and can lose value against foreign currency. The insurance products available in GIFT City solve this problem as the premiums and sum assured are denominated in a foreign currency.</p>    

Can resident Indians invest in GIFT City?

Indian citizens can park funds for a maximum of six months in GIFT City FDs and savings accounts to invest in GIFT City securities. Since RBI has a rule that idle funds cannot be kept in a foreign currency account in GIFT City for more than six months, they need to be invested in security i.e. Unsponsored Depository Receipts (UDR) for Indian citizens within the said period, or transferred back to an Indian account. UDR is a vehicle through which investors can invest in a few US stocks like Amazon and Apple.

What about taxes?

The interest earned in GIFT city fixed deposits is entirely tax-free. However, the interest amount earned can be taxed in the home country where the NRI is residing. FCNR accounts also enjoy similar tax benefits. Both accounts allow free repatriation of funds to the foreign country.

Three registered investment advisers that spoke to said that they have little understanding of how the GIFT City products work and hence are not recommending it to their NRI clients at the moment. However, they said that once there is more clarity on how the product works, they are open to exploring it.