First Abu Dhabi Bank PJSC is offering funding up to $1.5 billion to non-resident Indians investing in their home country’s foreign-currency deposit program, according to people familiar with the matter.
The United Arab Emirates’ largest lender is targeting customers based in the Middle East and is in talks with banks in India that could issue standby letters of credit to back the financing, the people said, asking not to be identified because the discussions are private. A standby letter of credit is a bank guarantee that ensures payment if the borrower defaults.
The move by FAB alongside other foreign and Indian banks offering so-called leverage facilities, is a key part of New Delhi’s efforts to replenish foreign-exchange reserves and slow the rupee’s sharp decline. Analysts estimate the program could attract an estimated $50 billion in deposits.
Representatives of FAB declined to comment.
FAB’s facility would allow its non-resident Indian customers to borrow against their foreign-currency deposits, while taking advantage of higher interest rates offered by banks in India. FAB is providing leverage of nine times, said the people. If a customer invests $1 million into a deposit plan offered by any bank, he or she can get a $9 million loan from the UAE bank, thus boosting the total deposit sum to $10 million.
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The UAE is a key market for Indian lenders to raise the overseas deposits as the region accounts for about one-fifth of remittances to the country.
Officials from the Reserve Bank of India and the Central Bank of the UAE held meetings in Dubai earlier this month to resolve issues hampering the South Asian nation’s efforts to boost foreign-currency deposits, people had said.
Under the special scheme announced in June, the central bank is absorbing the full cost of hedging for lenders in India lenders raising three- to five-year foreign-currency deposits. The RBI had deployed a similar strategy during the “taper tantrum” of 2013 when fears of tighter US monetary policy triggered heavy capital outflows from emerging markets.
The program is aimed at the 35-million-strong Indian diaspora, one of the world’s largest expatriate communities. Lenders including HSBC Holdings Plc, Standard Charterd Plc and State Bank of India are vying for those funds, with some offering interest rates of as much as 7.75% on five-year deposits.
