First, some background. The entire NRI community is now aware of the high-interest-rate Foreign Currency Non-Resident deposit scheme enabled by the Reserve Bank of India. Many banks have raised interest rates on these deposits after the RBI decided to cover hedging costs for 3 to 5-year FCNR Bank accounts until September 30, 2026.
Although a lot of details and clarification is awaited from RBI, I am writing this based on the circulated information.
You will not receive any interest payout during the entire tenure of the scheme and will receive your principal and accumulated interest after the end of the tenure. These FDs are locked in for the entire period; therefore, they offer no liquidity.
I came across the yields offered in the UAE by two Indian banks, among others.
Document received from SBI mentioned net yield of 13.83%/annum for a 5-year tenure FD with 9x leverage.
Axis quoted a net yield of 17.30%/annum for a 3-year tenure FD with 19x leverage.
You would believe that you are getting the above-mentioned interest rate every year. Right? Wrong!
Here is the calculation provided by the SBI bank.
On a deposit of USD 100,000, with 9x leverage, the total amount you will receive after 5 years is USD 169,162. Since you do not get any interest payout, any interest accumulated in year one should also generate interest for you the next year. Here is a simple example:
If you get 10% returns every year on USD 100, the end of the year value becomes USD 110 [100*(1+10%)]. Since you do not receive USD 10 but added to your original principal, in the second year, 10% is applied on USD 110, the value becomes USD 121 [110*(1+10%)]. In the third year, the value becomes USD 133.1 [121*(1+10%)] and so on.
Based on the above calculation, the returns or yield on the leveraged FCNR SBI scheme is 11.09%/annum for 5 years and not 13.83%/annum. You can use the XIRR or Rate formula on the Excel sheet to calculate for 3 years and 4 years as well.
Publicised yield of 13.83% came after dividing the total interest of USD 69,162 by tenure of 5 years, which is USD 13,832.40/year, and then dividing by the original principal of USD 100,000 [13,832.40/100,000 = 13.83%], which doesn’t account for the time value of money and therefore is an incorrect calculation of yield that you are made to assume.
Similarly, the yield on 3 years leveraged FCNR deposit of Axis Bank is 15.17% and not 17.30%.
Many investors are not well versed in mathematical formulas to calculate the compounded annual growth rate and hence believe the numbers mentioned in the marketing material. You should always ask in writing what the compounded annual growth rate or IRR (internal rate of return) is to understand the actual and correct returns you are getting every year.
This is not to single out SBI or Axis Bank. All the banks do the same misleading marketing everywhere. I just happened to get the information first from these banks. RBI and other central banks should make it mandatory to mention IRR or compounded annual returns in the marketing material so that investors get to know the true numbers.
In no way am I saying these schemes are not attractive for the NRIs, based on current information. Getting even 11%/annum fixed and secure USD returns is quite attractive. But you should know the exact returns, terms and risk involved before applying to it.
Important Points to Consider
- Although it is claimed that the interest paid on the leveraged amount is fixed, you must still verify it in writing somewhere on the form because a variable return can be extremely harmful. This scheme should only be considered when the borrowing costs are fixed.
- Apply these schemes only to strategically strong and important banks like SBI, ICICI, and HDFC. You may consider other banks as well, but the risk could be higher in an extreme economic situation.
- In a highly uncertain world, 5 years is a long time. Given the illiquid nature of this scheme, I would suggest not putting more than 25-30% of your financial assets in such schemes.
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