Difference between FCNR (B) and NRE Deposits

FCNR (B) deposits and NRE deposits can be opened by Non-Resident Indians or persons of Indian Origin (PIO) or Overseas Citizens of India (OCI). The difference between FCNR (B) deposits and NRE deposits is that the FCNR-B (Bank) deposits are maintained only in Foreign Currencies term deposits and maturity of these deposits is payable in terms of Foreign currencies including interest accrued on those deposits. Whereas, NRE deposits are maintained in Indian Rupees and can be maintained in SB/CD/RD or term deposits. The conversion of the amount from NRE accounts to other permitted foreign currencies involves exchange risk. No such risk is involved in FCNR (B) deposits. The interest rate offered by Banks in India on FCNR deposits is more than the interest offered on deposits from their counterparts abroad. However, the interest offered on NRE deposits in India is much higher than the interest offered on FCNR-B (B=Bank) Deposits in India. The higher rate of interest offered on NRE deposits sometimes works as a cushion to offset the exchange loss in the eventuality of the Indian Rupee depreciating against a specific foreign currency at the time of maturity of the deposit. The non-resident bank customers who do not want to take exchange risk go for FCNR(B) deposits.

FCNR-B Deposits

The FCNR deposit accounts can be opened only as Term Deposits, for a period not less than 1 year and not more than 5 years. The deposit is allowed in any permitted currencies, such as US Dollar (USD), Great Britain Pound (GBP), EURO (EUR), Japanese Yen (JPY), Canadian Dollar (CAD), Australian Dollar (AUD), etc., which are freely convertible.

In view of the impending discontinuance of LIBOR (London Inter-Bank Offered Rate) as a benchmark rate, Reserve Bank of India has decided to permit banks to offer interest rates on FCNR (B) deposits using widely-accepted ‘Overnight Alternative Reference Rate (ARR) for the respective currency’ with an upward revision in the interest rates ceiling by 50 basis points (bps).

The RBI said the interest rates ceiling on FCNR (B) deposits of 1 year to less than 3 years shall be overnight ARR for the respective currency / Swap plus 250 bps against LIBOR/ Swap plus 200 bps now.

Further, the interest rates ceiling on FCNR (B) deposits of 3 years and above up to and including 5 years shall be overnight ARR for the respective currency / Swap plus 350 bps against LIBOR/ Swap plus 300 bps now.

Premature closure is allowed in FCNR deposits. Banks typically do not levy any penalty for premature FCNR Fixed Deposit withdrawals, so long as the withdrawal is made after one year of investment. If the deposit is withdrawn after the completion of one year, interest will be paid at the rate available on the date of deposit for the period deposit has remained with the Bank. Swap charges will be levied for the premature closure of large deposits. Loans against such deposits can be availed in Indian rupees as well as in foreign currency.

NRE accounts:

NRE accounts can be opened in the form of SB/CD/RD/Term deposits at commercial banks. The funds remitted for operating an NRE account should be from abroad to India through normal banking channels or by depositing foreign travelers’ cheques or foreign currency notes.  NRE account holders can remit personal cheques drawn from foreign currency accounts to their NRE accounts. The proceeds of Account payee cheques issued by AD category bank along with the encashment certificate are accepted by banks to credit the amount to the NRE account.  Other credits which are covered under general or special permission granted by Reserve Bank may also be credited to NRE accounts. The balance available in the NRE account can be freely repatriated outside India, without reference to RBI.  ‘Can be freely repatriated’ means buying or drawing foreign exchange from an authorised dealer in India out of the balance available in NRE Account and remitting it outside India through normal banking channels, for which prior permission from RBI is not required. The rate of interest payable on NRE is under the independent discretion of banks but interest rates offered by banks on NRE deposits cannot be higher than those offered by them on comparable domestic rupee deposits. Any income by way of interest earned on NRE deposits is exempt from tax. In case of premature closure of deposits, the interest shall be generally 0.50% or 1% below the rate applicable at the time of Deposits for the period Deposit has remained with the Bank or 0.50% or 1% below the contracted rate, whichever is lower.

The loan can be taken against the security of funds held in the NRE Account to carry out any business activities, for acquiring a flat / house in India, or for meeting emergency financial requirements. It cannot be granted for re-lending or carrying out agricultural / plantation activities or for investment in the real estate business. The loan amount cannot be repatriated abroad.

The Authorized Dealers/banks may at their discretion/commercial judgment allow overdraft up to a limit of Rs.50000.00 subject to the condition that such overdraft together with interest should be repaid within two weeks from the date of the overdraft, out of inward remittance or transfer of funds from other NRE/FCNR account.

 FCNR/NRE deposits in the name of two or more persons:

FCNR/NRE deposits can be opened in the names of two or more non-resident individuals provided all the account holders are persons of Indian nationality or origin; FCNR/NRE accounts can also be opened with resident close relatives (relative as defined in section 6 of the Companies Act 1956) on “Former or survivor” basis. The resident close relative may be allowed to operate the account as a Power of Attorney (POA) during the lifetime of NRI. Operations in the account in terms of Power of Attorney are restricted to withdrawals for permissible local payments or remittances to the account holder himself through normal banking channels.

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