The banking industry has interpreted the move as a step to ensure the success of the proposed Resurgent India Bond, scheduled to be launched on August 5. The waiver will be offered to those NRI depositors who wish to make premature withdrawals of FCNR(B) deposits to shift to five-year Resurgent India Bonds being floated by the State Bank of India.

The move will trigger large-scale cannibalisation of NRI deposits as there is bound to be a rush for the Resurgent India Bonds. "This will offer a tremendous arbitrage opportunity as the difference between three-year FCNR(B) deposits and the five-year bond is between 150 and 175 basis points. The corpus under various NRI schemes may drastically reduce," a senior banker said.

Confirming the RBI move, a senior official inthe exchange-control department of the Reserve Bank said the central bank was leaving the decision to waive the penalty for premature withdrawal on individual banks. "We are not forcing banks (to waive the penalty). If there is a rush for premature withdrawal from other banks to put money in the bonds -- which will essentially go to State Bank's resource pool -- they (those banks) stand to lose as they have to bear the swap cost on the FCNR (B) deposits. We are leaving this to their discretion," he clarified.

"For instance, if a depositor from Canara Bank wants to make a premature withdrawal and put it in the RIB, Canara bank is free to decide whether it wants to waive the penalty or not. If it does not impose the penalty, it stands to lose. We will refrain from imposing anything," the RBI executive pointed out.

At present, banks charge a penalty at their discretion from depositors for premature withdrawal of FCNR (B) deposits. A majority of banks charge between 150 to 200 basis points penalty forpremature withdrawal.

In April, the Reserve Bank had given banks freedom to charge penalty on premature withdrawals of NRI deposits. This enables banks -- which undertook the swap cost -- to recover the cost in case of a premature withdrawal and thus avoid booking losses.

"In the earlier directive, we allowed banks to fix the quantum of penalty to be charged on premature withdrawals. This time, we are giving the freedom to totally waive the penalty," the RBI source said.

Banks were expecting a steady growth of about 20 per cent in NRI deposits under the major heads of FCNR(B) and NRE schemes this year, which is threatened now.

In March 1997, there was an incremental increase of $1.8 billion through FCNR (B) deposits, while it was around $1.3 billion through the NRE schemes.

According to RBI officials, there was a dip in the flow of NRI deposits when a similar drive to tap NRI funds was commenced in 1992 with the launch of India Development Fund. State Bank accounts for the largest NRI deposit baseof around $2 billion, followed by Bank of Baroda and Bank of India. Some private sector banks like IndusInd Bank also has relatively large FCNR(B) deposits base.

As on March 1997, all the Indian banks put together had cumulative NRI deposits worth $20.5 billion, with an incremental deposits to the tune of 3.4 billion. These are accounted for by FCNR(A), FCNR(B), NR(E)RA and NR(NR)D schemes, with the largest chunk coming from FCNR(B) scheme at $7 billion.