Smaller private lenders are pursuing partnerships with larger banks in GIFT City to attract FCNR(B) deposits from NRIs. By utilizing Stand-by Letters of Credit, these banks aim to overcome their lack of overseas branches and offer competitive interest rates to capture dollar liquidity.
Detailed Coverage
Smaller and mid-sized private sector banks in India are actively looking to expand their foreign currency deposit base by partnering with International Banking Units (IBUs) located in GIFT City. Because these smaller lenders often lack their own branches in overseas markets, they are unable to directly offer leverage to Non-Resident Indian (NRI) clients. To bridge this gap, they are exploring tie-ups with larger financial institutions that already have a significant footprint in Gujarat International Finance Tec-City.
The proposed strategy involves the use of Stand-by Letters of Credit (SBLC). Under these arrangements, a smaller bank would issue an SBLC to its NRI client, which then acts as collateral for the client to secure loans from the IBU of a larger bank within GIFT City. The money borrowed is then reinvested as fresh Foreign Currency Non-Resident (Bank) or FCNR(B) deposits with the original, smaller lender. This structure effectively allows smaller banks to compete for international funds that would otherwise flow toward larger, globalized lenders.
Interest Rate Strategy and Competitive Edge
To attract depositors, many of these mid-sized and small banks are currently offering interest rates between 7% and 7.50% on FCNR(B) deposits. This pricing is notably higher than the rates offered by major public and private sector banks, which are typically closer to 6%. Large banks generally do not need to offer such aggressive rates because they can provide direct leverage to their clients through their own international offices. The higher interest rates serve as a tool for smaller banks to compensate for the complexity of their indirect leverage offerings.
Regulatory Context and Market Potential
These efforts are occurring under a specific, limited-period scheme introduced by the Reserve Bank of India (RBI). The scheme is designed to strengthen India's dollar liquidity and provide support to the rupee. Key benefits of this initiative include the RBI covering the full hedging costs for participating banks and exempting these specific deposits from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements. This provides a significant relief to banks, as it allows them to deploy a larger portion of these funds into productive assets without locking them up in mandatory reserves.
Industry estimates suggest that the banking sector could mobilize between $30 billion and $50 billion in fresh FCNR(B) deposits by September 2026. While institutions such as Equitas Small Finance Bank have confirmed they are in preliminary discussions regarding potential partnerships in GIFT City and West Asia, these arrangements remain in early stages. No definitive agreements have been finalized as of late July 2026.
For investors, the key monitorable will be the actual execution of these partnerships and the ability of these smaller banks to manage the risks associated with SBLC-backed lending. Future updates will likely focus on whether these banks successfully formalize these deals and if they can effectively convert these opportunities into sustained growth in their deposit base while maintaining asset quality.