MUMBAI, July 8: The banking industry is set to book a substantial loss on the FCNR(A) scheme, the last tranche of which will be redeemed on August 15.Industry sources said banks might end up booking a loss of at least Rs 375 crore. This is because of the "sudden discovery" of a difference of $105 million between the banks' outstanding liabilities on account of the FCNR(A) schemes and receivables from Reserve Bank.

The implication of this development is tremendous as banks may be forced to buy foreign currency from the central bank at the market rate to redeem the accounts and book losses.

Moreover, Reserve Bank has the right to refuse permission for banks to purchase foreign currency from the market to redeem the liability in view of the serious "irregularities".

"The central bank has taken a serious view on the development. It can go even to the extent of penalising banks under Section 72/3(3) of the Foreign Exchange Control Regulation Act 1973 (46 of 1973)," sources said.

Reserve Bank withdrew the FCNR(A) schemes on August 15, 1994. It has already transferred Rs 4,538 crore in the last two years to meet the exchange loss on these accounts. The central bank will not provide any cover for FCNR(A) accounts after August 15 as these liabilities will stand redeemed.

All the deposits will, therefore, have to be repurchased from the Reserve Bank within the next five weeks as no exchange guarantee will be available thereafter for the principal amount.

Reserve Bank had, in the first week of June, directed all banks to submit all their principal and interest claims on account of FCNR(A) accounts before June 30. "The banks have submitted their claims, and there has been a shortfall of $105 million between the liability of banks and their receivables from the central bank. All banks, including State Bank of India, have found that there is a difference between their liability and the receivables. No one has been able to detect the missing link," sources said.

Over the past two decades-between the early '70s and August '94-when FCNR(A) accounts were in operation, banks kept on surrendering the forex proceeds to the Reserve Bank through their link offices. The procceds were surrendered at a "notional" rupee-dollar/pound sterling/yen parity. The banks will repurchase the forex from RBI before the deadline expires to settle the account-holders' claims.

"Collectively, all banks-including SBI-have shown much more liability than what they will receive from the Reserve Bank. This, in effect, means that the banks might not have surrendered their forex deposits. We do not know whether it is a fraud or a procedural lapse," a source close to the central bank said.

Clarifying the RBI policy on renewal of matured FCNR(A) deposits, the central bank has directed the CEOs of commercial banks that they can place FCNR(A) funds under FCNR(B) from a prospective date if instruments from customers are received after the maturity of FCNR(A) deposits.

The banks have been given freedom to pay "simple interest" on the reinvested amount in FCNR(B) deposits at a rate they may deem fit, keeping in view the return on deployment of such funds. However, the required foreign exchange should be purchased from the market and not claimed from RBI, the central bank has said.

Reserve Bank will allow reinvestment of funds under FCNR(B) with retrospective effect only in those cases where the banks have failed to carry out the instructions of the clients for redeployment of the funds. However, even in these cases, the central bank will not offer any exchange cover for the period beyond the maturity of the deposits.

Forex dealers feel the matured FCNR(A) deposits will find their way into bank accounts within the country and strengthen the rupee vis-a-vis dollar.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.