According to latest RBI figures, outstanding balance under various NRI deposit schemes has dropped from $20.4 billion in March, 1998, to $19.97 billion in July, 1998. The deposits have reported a sharper fall in the succeeding months of August and September, due to switch of many accounts to Resurgent India Bonds issue. The official RBI figures for August and September is not yet out. Foreign currency non-resident (FCNR-B) deposits, the most important NRI deposit scheme, alone witnessed a contraction of around 12 per cent on account of RIB issue.

Large-scale leveraged subscriptions in RIBs will affect the future cash flows into banks' NRI deposit schemes, bankers say. A major portion of NRI subscriptions to RIBs has come from borrowed funds. Big NRI investors, who had subscribed to RIBs through theliberal loans extended by foreign banks, will now use their cash flow to pay back the loans rather than put it in new deposits schemes, a PSU bank official said.

Another factor is the reduction in deposit rates by banks since the last couple of weeks. Major public sector banks like State Bank of India, Bank of Baroda and Bank of India have announced major reduction of 75 basis points to 50 basis points on deposit rates for their FCNR(B) deposit scheme in the last two weeks.

Deposit rates in foreign bank accounts look more attractive in the context of prevailing domestic deposit rates. The 25 basis points cut in US treasuries announced last week will be of little consolation, bankers feel. On the other hand, this may force Indian banks to reduce rates still further, they feel.

The logic is simple. Indian banks are finding it increasingly difficult to deploy their foreign currency funds profitably. With the ECB and FCNR(B) loan market almost dead, they have no other option than deploying it in UStreasuries and other liquid and safe assets abroad. But the yields available there ranging from 5 per cent to 5.5 per cent leave for hardly any spread for the banks.

One consolation for Indian banks in the present context is the existence of an attractive secondary market for Indian corporate loans abroad. Many foreign banks are dumping their emerging market exposures, including that of India's blue chip companies, at large discounts ranging from 10 per cent to 20 per cent to their face value. All the big Indian banks like SBI, BoI and BoB are large buyers of these loans as it gives them a spread of around 300-400 basis points. While the spread is large enough to service their foreign currency NRI deposits, asset liability management will be a major headache. While foreign currency NRI deposits have a maximum maturity of three years, most of the secondary market Indian loans available at large discounts have a maturity of anywhere between 5 years to 7 years. So obviously, only a very small portion of banks'foreign currency funds can be invested in buying these loans.