Banks may rush to tap short loans abroad
Bankers said some lenders now plan to borrow more short-term funds, possibly at a higher rate, to finance the promised leverage to FCNR(B) clients after the Reserve Bank of India advanced the deadline for swap support. These funds will have to be replaced with a long-term loan or bond later, leading to a temporary mismatch between banks' foreign deposits and borrowings.
On Friday, the Reserve Bank of India (RBI) shortened the window for overseas deposit swap support to enable banks to raise short-term loans abroad. This move comes as the FCNR-B programme deadline approaches, with the RBI advancing the deadline from September 30 to August 31. Banks are expected to raise short-term loans abroad, though total foreign borrowings may remain lower than earlier estimates, due to temporary mismatches in foreign deposits and borrowings.
Some banks plan to borrow more short-term funds, possibly at higher rates, to finance leverage on FCNR-B clients. The RBI's decision exposed banks to potential liquidity risks and higher payouts immediately, with uncertain future outcomes for overseas market liquidity.
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