Millennium bonanza for NRIs

Sanjiv Shankaran

LAST week, the State Bank of India unveiled foreign currency denominated deposits for non-resident Indians (NRIs).

Called India Millennium Deposit (IMD), it is a five-year deposit denominated in the US dollar (USD), the pound sterling and the euro. The rates of interest offered are 8.50 per cent for dollar deposits, 7.85 per cent for pound sterling and 6.85 per cent for the euro. At the rate of interest offered by the SBI and the risk associated with the deposit, the IMD offers attractive returns for NRIs.

An important aspect of the IMD programme is that the scheme is not open to the US or people based in the US because of regulatory matters. So stringent is the norm excluding US-based NRIs that the IMD may not be resold, pledged, transferred, assigned or even delivered to a `US person'. It may be recalled that the Resurgent India Bonds (RIB) too were out of bounds for NRIs based in the US.

Comparative returns: The IMD's returns on the dollar-denominated deposit are attractive when compared with the investment benchmark -- US treasury notes -- of similar maturity. A cursory comparison shows that the IMD in dollars offers returns that are about 2.85 percentage points more than US treasury notes of similar maturity -- a significantly higher return.

Click here for Table

Exchange rate risk: Given the continuous decline in the rupee's exchange rate vis-a-vis the dollar, exchange rate risk assumes importance. As things stand, the SBI will bear the risk of exchange rate fluctuation, thereby making the deposits absolutely safe.

Tax liability: To add to the good tidings, NRIs who subscribe to IMDs are exempt from Indian tax liabilities. There will be no withholding tax or anything of similar nature. The benefit will also be extended to nominees of NRIs who are resident in India.

Default risk: On paper, the IMD constitutes obligations of the SBI and is covered by the provisions of the Deposit Insurance and Credit Guarantee Corporation. The SBI is the largest commercial bank in India and comfortably placed in terms of financial strength.

Realistically speaking, there is no default risk on IMD. The RBI is the largest shareholder in the SBI. Generally, the government raises foreign currency denominated deposits through a few of its bluechip public sector units and banks. Therefore, for all practical purposes, the default risk on the IMD does not exist.

Dispute redressal: The offer document for the IMD indicates that Indian courts would have jurisdiction over dollar denominated deposits as well as the euro series. Courts in the UK will have jurisdiction over the IMD denominated in pound sterling.

Eligibility: The IMD is aimed at raising deposits from the NRIs. Overseas corporate bodies (OCBs) and banks acting on behalf of the NRIs are also eligible to subscribe to the IMD. In the case of minors, if the minor is an NRI, the application must be made through his/her guardian.

The IMD scheme represents an attractive investment opportunity for the NRIs because of a significantly higher rate of return over benchmark instruments of similar tenure. When it comes to default, it seems implausible. To round off the list of positive factors, deposit-holders need not fret about exchange rate risks or withholding tax. All in all, the IMD appears to offer an attractive option to NRIs who seem to get better investment opportunities, compared to resident Indians, from quasi public undertakings.