Pros and Cons of FCNR deposit

Foreign Currency Non Resident (FCNR) Fixed Deposit Account

Some of the advantages of the Foreign Currency Non Resident (FCNR) Fixed Deposit Account are as follows:

1. FCNR accounts are protected against forex rate risks (changes in the value of rupee vis-a-vis the currency in which the account is denominated) as they are maintained in a foreign currency. In other words, the principal and the interest are transferred in the currency in which the account is maintained sans any loss of exchange.
2. Interest earned on FCNR deposits in India is exempt from Income tax.
3. FCNR accounts can have two or more NRIs joint account holders. However, joint account with another person resident in India is not permitted.
4. FCNR accounts are denominated in several major currencies such as Pound Sterling, US Dollar, Yen and Euro.
5. In FCNR accounts, both principal and interest are freely repatriable. In other words, the interest earned and the deposit amount on the deposits are repatriable to the depositor's country of residence sans restrictions.
6. FCNR accounts are offered for not less than 1 year and not more than 3 years.
7. All authorized banks which offer FCNR accounts set the interest rates within the ceiling as announced by the Reserve Bank of India. Interest rates on FCNR term deposit accounts should, therefore, be set by the board of directors of a particular bank, under the broad mandate of RBI regulations.
8. Interest rates on FCNR term deposits are payable after the end of first year. Interest is compounded on a half-yearly basis subsequently.
9. Rupee loans against funds held in the FCNR accounts can be provided to account holder for any investment in India. Foreign currency loans outside India permitted to the account holder, can be repaid from the maturity proceeds. Some banks may also provide loans to firms or companies against the collateral of FCNR accounts.

Impact of FCNR Deposits on India’s Current Account Deficit

RBI, in a bid to attract more foreign exchange into the country, may announce a 'bonanza', as it were, for NRIs by offering high interest rates on FCNR deposits. According to experts, increased inward remittances from NRIs, lead to more forex reserves, which in turn, reduce the current account deficit (CAD) of the country.

The current account deficit is one of the main reasons of depreciation of the rupee. According to experts, any tapering of quantitative easing (QE) by the US Federal Reserve Bank, raises fears of less capital investment in India by foreign institutional investors (FIIs).

Attracting NRI deposits through FCNR deposits

While raising interest rates under the FCNR deposit scheme may prove beneficial for NRIs, RBI have certain protective measures for banks in India such as facility of swapping the US dollar funds at a fixed rate (usually 3.50%). The swap facility and the high interest rates offered on FCNR deposits can cease with prior notice since they reportedly expose the RBI to incur losses running to thousands of crores. The RBI, therefore, may discontinue the said facility and reduce interest rates if it attracts the desired forex reserves into the country.

Some of the disadvantages of the Foreign Currency Non Resident (FCNR) Fixed Deposit Account are as follows:

1. If FCNR deposits are held with a weak bank, it may be unable to pay back upon maturity. Credit guarantee in India covers accounts in India to around Rs. 100,000 or 1600 USD, which is considered low. Many experts, therefore, believe that deposit insurance is almost non-existent in India, which could be a concern for FCNR deposit account holders.
2. In the event of a financial meltdown, banks may not be able to repatriate funds. The Greek crisis is a case in point. In some cases, Greek citizens, were reportedly, restricted from withdrawing over 40 euros from their accounts.
3. If FCNR deposit is withdrawn in less than one year, no interest is payable.
4. Foreign currency loans in India against FCNR accounts can be taken by account holders only.
5. FCNR deposits are offered for term deposits only and not for current, savings and recurring accounts.
6. FCNR account can be transferred to other NRE accounts before maturity. However, penalties will apply for premature withdrawals. Also, swapping charges are fixed by the bank in which the FNCR account is held.
7. FCNR accounts can be renewed within 14 days after maturity, failing which, the bank will fix interest rate on renewal. If renewed accounts are withdrawn before a fixed period, banks can take back the interest paid.
8. While the interest earned on FCNR deposits is tax-free, it may be taxable in the country of residence of NRIs. Also, Non Resident Indians, should consult tax experts to understand the implications of investing in India.
9. While RBI, under the Foreign Exchange Management Act, formulates rules of investment for NRIs in India, the Government of India, under the Indian Income Tax Act frames the tax rules, which are subject to change.