Foreign Currency (Non-resident) Accounts : NRE accounts are opened in Indian rupees and the amount is repatriable at the rate of exchange prevailing on the date of repatriation. The amount that the depositor receives may be more or less than the amount deposited by him and the interest expected thereon. If a depositor remits USD 1,000 for opening an NRE (Fixed Deposit) account for one year, the amount is converted into Indian rupees and the account is opened for the resultant rupee value. On the due date, the rupee balance and interest thereon are converted into US dollars at the rate prevailing on the date. While the depositor expects a repayment of USD 1,100 (assuming interest at 10% p.a.) the actual amount received by him may be less or more than this amount.
In other words, the exchange risk is borne by the depositor. Foreign Currency Non-Resident (FCNR) Account scheme was introduced in 1975 to afford protection to the depositors against the exchange risk and assure them repayment of the expected amount in foreign currency. The exchange risk under the Foreign Currency Non-Resident Account was borne by Reserve Bank of India. Deposits received by banks were sold to Reserve Bank at notional rates. Repayment of deposits and periodical payment of interest was made to depositors by banks by purchasing from RBI the requisite foreign exchange at the same notional rate. Foreign Currency (Non-Resident) Accounts (Banks) Scheme was introduced in May 1993 to shift the exchange risk from Reserve Bank to commercial banks. Now the deposits can be accepted only under the FCNR (Banks) Scheme.
Deposits mobilized under this scheme can be swapped either in the domestic market or with Reserve Bank of India. Banks may also lend these funds in the interbank market. The resources may also be used to grant foreign currency loans to resident customers towards imports or other purposes. The advantages to the banks are; (a) The deposits are exempt from CLR and SLR requirements; (b) Lending of resources mobilized under this scheme are not subject to lending rate stipulations and they arc not considered part of bank credit for determining priority sector lending.
FCNR account is a special scheme of NRE account and all regulations governing NRE accounts are applicable to FCNR account also. Similarly, all benefits available to NRE account holders are available to FCNR account holders also. However, FCNR accounts have certain features exclusive to it which are described below:
1. Currencies. Accounts can be opened in any of four designated currencies, viz., pound-sterling, US dollar, Japanese yen and Deutsche mark.
2. Opening of account. Account can be opened by foreign remittance in the designated currency in which the account is to be opened. However, if the remittance is received in a currency other than the designated currency, it would be converted into any of the designated currencies, at the option and cost of the depositor, and the account opened. Accounts may also be opened by transfer from NRE account of the account holder. In all the cases, conversion will be done at the TT rate prevailing on the date.
3. Type of account. Accounts are opened only in the form of term deposits. No savings or current account is allowed. The account may be opened under schemes providing for automatic investment of interest provided the compounding of interest is done at half-yearly or longer intervals.
4. Period of deposit. The periods for which FCNR accounts can be opened are notified by the Reserve Bank of India. At present such deposits can be opened for a minimum period of 6 months with a maximum of three years.
5. Payment of interest. A separate schedule of rates of interest for FCNR accounts is prescribed separately for each designated currency. These are based on the interest rates for the currency concerned in the international markets and changed frequently by Reserve Bank. On deposits for periods less than one year interest is payable on maturity date. On deposits for one year and above interest is payable at half-yearly or longer intervals as desired by the depositor.
6. Foreclosure of deposit. If the deposit is foreclosed, interest is payable at 1% less that the rate applicable for the period for which the deposit was with the bank.
7. Conversion to resident account. If the depositor returns to India for permanent settlement, the account should be converted into rupees and designated as resident account. The rate applied for conversion should be the TT buying rate prevalent on the date of conversion. However, the account would continue to get the rate of interest as originally agreed till the due date.
8. Limited risk cover. It should be noted that the exchange risk cover is avail-able only when the deposit is to be repaid in the same currency in which it was made. If the deposit is required to be repaid in Indian rupees or in any currency other than the currency of deposit, it would be paid after conversion at the ruling TT rate. Therefore, no exchange risk cover is available in such cases.
9. Loan. Lending of resources under the scheme will not be subject to interest rate stipulations. Advances outstanding against these accounts will not be considered a part of bank advance for the purpose of determining priority sector lending.
Effective from October 1996, out of the resources mobilized under the scheme, banks have been permitted to provide foreign currency denominated loans to their customers under which foreign exchange risk is borne by the customers for meeting either their foreign currency or rupee requirements. Funds representing inter-bank foreign currency deposits accepted at market related rates may also be used for such lending.
However , funding a foreign currency loan through a buy/sell swap would not be permitted. The purpose, tenor and interest rates on such loans may be decided by banks. Banks should ensure that, barring exceptional circumstances, mismatches do not arise on account of such lending.