The State Bank, which will launch the bonds on August 5, hopes to garner $3.5 billion through the five-year instrument.

"The earlier position stands. The State Bank is free to waive the penalty (on premature withdrawal) if it wants. But we are not imposing it on other banks. Other banks are free to charge the penalty," said a RBI official.

The State Bank had moved the central bank seeking permission to waive penalty on FCNR (B) deposits maturing between the second week of August and September 30.

"We cant extend (this waiver) to other banks as they have their own maturity portfolio (of NRI deposits) and it might be different from State Bank. It will not be correct to impose anything like thison other banks. Hence, we are not issuing any directive," a central bank source said.

This means that other banks are allowed to charge penalty on premature FCNR (B) withdrawals to stall any possible flight of NRI deposits to the State Bank kitty in the form of RIBs.

A majority of banks charge between 150-200 basis points penalty for premature withdrawal of FCNR(B) deposits. "We will charge the penalty even though we are one of the collecting banks for the RIBs," an official with a foreign bank said.

The move is likely to lead to large-scale cannibalisation of NRI deposits. Although State Bank officials deny that this will be widespread, a State Bank newsletter on international money and exchange--prepared by the banks treasury management group--says that the shifting of FCNR (B) deposits into RIBs will change the country's debt profile in favour of long-term borrowings.

"Even if a part of the FCRN(B) deposit corpus gets converted into RIBs, there is nothing to be worried about as the bond will onlymop up five-year funds," a Reserve Bank official said.

INSIGHT
Slew of FCNR conversions likely

If banks other than the SBI do not charge a penalty for premature withdrawal of FCNR(B) deposits, there is a likelihood that funds will flow into the RIBs, given the fact that while interest on FCNR(B) deposits are around Libor, the RIB interest rates are far above Libor. But other banks too are marketing RIBs on behalf of State Bank. For RIB deposits garnered by other banks, the banks will be receive 50 per cent of the funds in rupees at 9.50 per cent, apart from the commission. Other banks, especially foreign banks, which want rupee resources may, therefore, encourage the conversion of FCNR(B) deposit into RIBs.