Small and mid-size banks in India are now competing hard to attract Foreign Currency Non-Resident (Bank) or FCNR (B) deposits. These are fixed deposits held in foreign currency by Non-Resident Indians (NRIs), where the bank bears the risk of exchange rate changes. Since smaller banks cannot easily offer 'leverage' (loans given to NRIs to invest in these deposits), they are using higher interest rates as a primary tool to woo customers. On average, these smaller banks are offering rates that are about 150 basis points (1.5%) higher than those offered by large lenders like State Bank of India (SBI), HDFC Bank, and ICICI Bank.

Specific banks have already updated their rate charts to stay competitive. Equitas Small Finance Bank (SFB) has increased its interest rate for FCNR (B) deposits of $10,000 and above for a 3-5 year period. Their rate moved up from 7.13% to 7.52%. Similarly, AU Small Finance Bank has raised its rates to 7.40% for the 3 to 4-year tenure. Tamilnad Mercantile Bank is also in the race, increasing its rates from 7% to 7.25% for a 3-5 year duration. These moves ensure that NRI customers do not shift their funds to larger rivals.

The Managing Director of Equitas SFB, PN Vasudevan, explained that while large banks often require a minimum deposit of $500,000 to $1 million to provide benefits, not every NRI has that much money. Smaller banks are targeting regular NRI savers who have smaller amounts to invest. This strategy is helping these banks support their credit growth (the ability to give out more loans). For example, Equitas SFB has already collected $42 million since launching this product late last year.

The Reserve Bank of India (RBI) is also supporting this trend. To protect the Rupee and attract foreign money during global tensions like the West Asia war, the RBI announced a special swap facility on June 5. Under this rule, the RBI will bear the full hedging cost (the cost of protecting against currency value changes) for banks raising fresh 3–5 year FCNR (B) deposits until September 30. Additionally, the RBI has exempted these specific deposits from CRR (Cash Reserve Ratio - the portion of deposits banks must keep with RBI) and SLR (Statutory Liquidity Ratio - the portion banks must keep in safe liquid assets), making it cheaper for banks to accept this money.

According to RBI data, these measures are working well. Between June 8 and late July, banks in India have raised nearly $32 billion, with most of it coming through FCNR (B) deposits. This influx of foreign money helps stable the Indian economy and provides banks with the necessary funds to expand their lending operations.

For Indian bank officers, it is important to note that small banks are finding creative ways to bypass their limitations. Since many small banks do not have branches abroad or in GIFT City (India's international financial hub), they are talking to foreign banks to help their NRI clients get loans. These foreign banks give loans to NRIs, who then place that money as FCNR (B) deposits in the Indian small finance banks. Bankers should watch the September 30 deadline closely, as the RBI's current support for these rates depends on that date.