Foreign banks using NRIs to make money (Sunday Guardian)
MADHAV NALAPAT New Delhi | 11th May 2013
Bankers are worried RBI’s high interest rate regime is working on behalf of foreign banks.
he interest rate regime of the Reserve Bank of India (RBI) has resulted in a bonanza for both foreign banks as well as Indians holding offshore accounts. Bankers in India are concerned that the RBI's high interest rate regime is working on behalf of foreign banks, working through a section of the NRI community to make huge profits through the NRI deposit route. A central banker warned that "much of the money coming into NRI deposits is in fact money borrowed specifically from foreign banks, for placing in Indian banks as dollar deposits. He pointed out that foreign bank loans "seldom charge more than 4% interest, while the NRI depositor gets 7.5% on his dollar deposit with an Indian bank". Bankers in Dubai, Singapore and Hong Kong in particular said that it is becoming a common practice for some banks to make loans to NRIs, which are immediately placed as NRI deposits in India. "If the RBI were to simply ask if the money coming in were own funds or borrowed, the extent of the scam would become immediately clear", a senior banker in Mumbai said. A central banker claimed that "the top brass at the RBI is so deferential towards foreign banks that oversight of their arbitrage and speculative activities is minimal". Other RBI contacts refuted this, saying that no such bias (towards foreign banks) existed within the RBI leadership.
A senior banker, just retired, claimed that citizens of India having huge illegal offshore accounts "were now sending family members abroad as NRIs so that they could recycle the offshore funds in NRI accounts", thereby earning a high interest rate, in contrast to the much lower or even zero interest paid by many Swiss banks. An official in Delhi tracking money flows claimed that several of the NRIs, who are making huge deposits in Indian banks, do not have salaries enough to afford such deposits. He added that "an effort should be made by the RBI to have a Know Your Customer (KYC) for NRI accounts, so as to identify those who are not genuine investors but are merely conduits for foreign banks eager to make money out of the Indian banking system". Also, a scan needs to be made of Indian nationals recycling illegal cash through relatives sent abroad for the purpose. Of course, looking at recent Cobrapost exposes, it would appear that KYCs are largely a farce in India as well.
A retired official in an economic department of the government pointed towards the government's disinterest in introducing a scheme of Infra Bonds for those holding money abroad. "Is this because in such a case, the money would be locked up for five or ten years, but NRI deposits can be withdrawn at any time?" he asked, pointing out that "politicians and officials in India have much more money abroad than businesspersons and therefore tweak policy to favour themselves rather than the country." He added that much of the bulge in NRI deposits, despite hard times abroad, was because "banks operating in select financial centres abroad have discovered that the NRI deposit route is the perfect way to milk the Indian banking system because of the much higher interest paid as compared to their competitors abroad". Another official was apprehensive of "the instability caused by such hot money being treated as bona fide deposits by Indian banks, and used as justification to make loans, many of which may become non-performing assets (NPAs) because of economic woes". He pointed out that NPAs in India are on track "to cross Rs 550,000 cr before the next Lok Sabha elections in 2014".
A senior official said that Finance Minister P. Chidambaram is "fully aware of the devastation that a ratings downgrade would cause to the banking system in India, by leading to a huge surge in redemptions of NRI deposits". He credited the FM with "doing the best possible job to prevent a downgrade, given the RBI's blindness to foreign banks using loans to NRIs to create an artificial bulge in NRI deposits". He wanted clear KYC norms to be effected for such deposits "so that the scheme does not become a conduit for speculation by foreign banks or Indian holders of black money in foreign banks". As for the Prime Minister, the consensus of these sources was that Manmohan Singh shared the reported bias of the RBI top brass towards foreign banks, despite the many scandals that have come to light about them. Of course, should Singh shed his aversion to a disclosure scheme for Indian nationals holding offshore accounts, such a measure may bring grief to foreign banks, but would benefit the economy by bringing in money via infra and other bonds that are not subject to the risk of a sudden withdrawal. However, steeped as they are in the culture of the foreign financial institutions benefitting from the absence of such an amnesty, the prospect of the PM's economic team agreeing to such a step seems distant.