Mumbai: A fancy financial product-a special deposit linked to Japanese yen (JPY)-has suffered a jolt in the wake of the IndusInd shakeout.
Banks peddled it to attract deposits from NRIs and impress analysts, while the diaspora members who parked money lapped up the higher-than-usual returns banks gave. That show is running out of steam. The Reserve Bank of India (RBI) is understood to have told a few banks to align the rates on JPY special deposits with the market, senior bankers told ET.
Yes Bank, one of the lenders which aggressively marketed special JPY deposits, though at a scale far smaller than what IndusInd did, has dramatically lowered the interest rate on the FDs from well over 2% two months ago (before the IndusInd story broke) to less than 0.4% now.
The RBI spokesman did not comment on the matter. When asked whether Yes was instructed by the regulator, a bank spokesperson said, "The bank continues to look for ways to further improve its deposit costs and align with market dynamics by regularly reviewing interest rates in comparison to peers. In addition, the bank has adjusted its foreign currency deposit rates, including for JPY, to stay in line with industry norms and evolving interest rate conditions."
An explainer: What's the nature of these special JPY deposits?
Coined as 'premium rupee plans' (PRPs), NRIs gave foreign currency to banks who paid them back in rupees-with the amount of rupee to be repaid on maturity decided upfront. And in generating a higher return than the regular foreign currency FDs sold to NRIs, banks did something different: they sold JPY in the inter-bank forward market. Neither Indian banks had earnings in JPY nor did NRIs usually deposit yen. The forward deal was simply aimed to generate a higher return.
The NRI depositors weren't bothered what banks did with their money-whether the funds were converted to JPY or any other currency-as long as they received a good return.
What really was the deal? What's the regulator's point?
Here's what happens with PRPs: An NRI going for PRP in JPY deposit would place dollar or rupee (lying in her rupee account). The bank offers a return that's better than the interest on regular foreign currency non-resident (FCNR) JPY deposits for NRIs, and promises to repay a certain amount in rupee after 3 or 5 years depending on the FD tenure.
What does the bank do with the money? It sells the dollars in the spot forex market to buy JPY. Why? Since the bank has accepted JPY deposits, it should reflect as JPY balance in its nostro account-a foreign currency account a local bank has with an overseas bank. But the JPY does not sit in the nostro for long. The bank converts the JPY into dollars and then into rupees to lend to domestic borrowers.
The forward deals and true cost of deposit
The bank then 'sells JPY forward' to get rupees after three years. (Since there is no rupee-yen market, the forward happens in two legs-rupee to dolllar, and dollar to yen). Under this, the bank agrees to give JPY and receive rupees from another bank after 3/5 years.
As it sells JPY forward, the bank receives a premium, which at one point was around --6%. (It has come down since then). The premium (or most of it) is passed on to the depositor who ends up receiving around 8% (i.e, 2% on yen deposit and 6% as premium.)
But, how would the bank get JPY after 3 years? It doesn't earn in JPY. So it simultaneously does a 3-year forward purchase of JPY. On this transaction, it pays a premium. (This is a balance-sheet hedge, where the bank's liability desk does a forward deal with the treasury which in turn enters into a forward deal with another bank).
So, the bank's true cost of deposit is 2% plus the premium it pays to buy JPY forward. But, as is often the practice in banking, the premium a bank pays for hedging is not included in the cost of deposit. Therefore, the bank claims that its cost of deposit is just 2%-a number that thrills analysts and shareholders as it lowers the bank's overall fund cost.
What happens now?
PRPs will be available in dollars, but the charm of JPY special deposits would wane. JPY was the preferred currency for forward deals as it yielded a steeper premium, giving the banks headroom to offer higher returns on the special deposits. A currency's premium is a function of interest rate differentials with another country. Thanks to Japan's ultra-low interest rate, JPY usually has had a higher premium.
"Special deposits or PRPs would go on as authorities would also like to have forex inflows. But at the same time, we believe RBI is not comfortable if a bank offers a JPY return that is not in line with the rates prevailing in the market. First, it does not reflect the real cost of deposit. Second, it may not be a sustainable strategy in attracting NRI deposits. Premium, determined by the market, is the same for all banks. But it may be tough for a bank to offer too high a basic rate not aligned with the market."
Banks peddled it to attract deposits from NRIs and impress analysts, while the diaspora members who parked money lapped up the higher-than-usual returns banks gave. That show is running out of steam. The Reserve Bank of India (RBI) is understood to have told a few banks to align the rates on JPY special deposits with the market, senior bankers told ET.
Yes Bank, one of the lenders which aggressively marketed special JPY deposits, though at a scale far smaller than what IndusInd did, has dramatically lowered the interest rate on the FDs from well over 2% two months ago (before the IndusInd story broke) to less than 0.4% now.
The RBI spokesman did not comment on the matter. When asked whether Yes was instructed by the regulator, a bank spokesperson said, "The bank continues to look for ways to further improve its deposit costs and align with market dynamics by regularly reviewing interest rates in comparison to peers. In addition, the bank has adjusted its foreign currency deposit rates, including for JPY, to stay in line with industry norms and evolving interest rate conditions."
An explainer: What's the nature of these special JPY deposits?
Coined as 'premium rupee plans' (PRPs), NRIs gave foreign currency to banks who paid them back in rupees-with the amount of rupee to be repaid on maturity decided upfront. And in generating a higher return than the regular foreign currency FDs sold to NRIs, banks did something different: they sold JPY in the inter-bank forward market. Neither Indian banks had earnings in JPY nor did NRIs usually deposit yen. The forward deal was simply aimed to generate a higher return.
The NRI depositors weren't bothered what banks did with their money-whether the funds were converted to JPY or any other currency-as long as they received a good return.
What really was the deal? What's the regulator's point?
Here's what happens with PRPs: An NRI going for PRP in JPY deposit would place dollar or rupee (lying in her rupee account). The bank offers a return that's better than the interest on regular foreign currency non-resident (FCNR) JPY deposits for NRIs, and promises to repay a certain amount in rupee after 3 or 5 years depending on the FD tenure.
What does the bank do with the money? It sells the dollars in the spot forex market to buy JPY. Why? Since the bank has accepted JPY deposits, it should reflect as JPY balance in its nostro account-a foreign currency account a local bank has with an overseas bank. But the JPY does not sit in the nostro for long. The bank converts the JPY into dollars and then into rupees to lend to domestic borrowers.
The forward deals and true cost of deposit
The bank then 'sells JPY forward' to get rupees after three years. (Since there is no rupee-yen market, the forward happens in two legs-rupee to dolllar, and dollar to yen). Under this, the bank agrees to give JPY and receive rupees from another bank after 3/5 years.
As it sells JPY forward, the bank receives a premium, which at one point was around --6%. (It has come down since then). The premium (or most of it) is passed on to the depositor who ends up receiving around 8% (i.e, 2% on yen deposit and 6% as premium.)
But, how would the bank get JPY after 3 years? It doesn't earn in JPY. So it simultaneously does a 3-year forward purchase of JPY. On this transaction, it pays a premium. (This is a balance-sheet hedge, where the bank's liability desk does a forward deal with the treasury which in turn enters into a forward deal with another bank).
So, the bank's true cost of deposit is 2% plus the premium it pays to buy JPY forward. But, as is often the practice in banking, the premium a bank pays for hedging is not included in the cost of deposit. Therefore, the bank claims that its cost of deposit is just 2%-a number that thrills analysts and shareholders as it lowers the bank's overall fund cost.
What happens now?
PRPs will be available in dollars, but the charm of JPY special deposits would wane. JPY was the preferred currency for forward deals as it yielded a steeper premium, giving the banks headroom to offer higher returns on the special deposits. A currency's premium is a function of interest rate differentials with another country. Thanks to Japan's ultra-low interest rate, JPY usually has had a higher premium.
"Special deposits or PRPs would go on as authorities would also like to have forex inflows. But at the same time, we believe RBI is not comfortable if a bank offers a JPY return that is not in line with the rates prevailing in the market. First, it does not reflect the real cost of deposit. Second, it may not be a sustainable strategy in attracting NRI deposits. Premium, determined by the market, is the same for all banks. But it may be tough for a bank to offer too high a basic rate not aligned with the market."
You may also like
'Gabbars of India': BJP on Revanth Reddy's Rafale 'shot down' claim
What is water fasting? Know its advantages and disadvantages from experts.
JEE Main 2025: JEE Main special, supernumerary round counseling schedule released, seats are reserved in these colleges..
Book Train Tickets by Just Speaking: IRCTC Launches AI Chatbot AskDISHA 2.0 — Here's How It Works
Centre issues norms to curb illegal sale of radio equipment on E-com sites
