The public sector banks, which have opted to be collecting bankers for the State Bank of India (SBI) scheme, are the worst sufferers because of their inability to offer such incentives for collecting funds.

According to sources, foreign banks, through their collecting agents, are offering cash incentives to depositors up to 3 per cent, which is much more than the arranger's fee of 1.5 per cent prescribed by SBI. Some of the proactive agents have even issued advertisements in the Gulf newspapers asking investors to collect upfront cash incentive on IMD scheme.

As per the IMD scheme, the arranger's fee is 0.50 per cent for deposits up to $5 million and 1.5 per cent for deposits exceeding $100 million. In addition, they are entitled to a collection charge of 0.25 per cent. The foreign banks are offering higher incentives to depositors through agents to gain access to the cheap rupee funds. As per the IMD scheme, SBI will give rupee funds to the collecting banks - up to 50 per cent of the amount mobilised at 10 per cent.

The sources said that the cost of rupee funds for the foreign banks, which have limited number of branches, is very high and hence they are paying incentives beyond the prescribed limit to collect IMD deposits and gain access to rupee resources. In the process, however, public sector and private Indian banks are left high and dry.

A bank official said that even regular clients of public sector banks have started investing in the IMD through agents of foreign banks because of the upfront cash incentive.

At first, it was pointed out, the public sector banks cannot dole out cash incentives to depositors even if they decided to pass on the arranger's fee to their regular clients. Probably the bank would have to seek the permission of board before passing on any cash incentive, which is not prohibited in Gulf countries.

Secondly, it does not make economic sense for the public sector or Indian banks to gain access to rupee funds at a cost which is lucrative for foreign banks. The public sector and Indian banks too will be given 50 per cent of the deposit mobilised by them at 10 per cent.

The sources pointed out that the cost of rupee fund for public sector and Indian banks is comparatively low and it is not possible for them to add to the cost by paying upfront cash incentives.

The IMD scheme, the sources add, has turned out to be a bonanza for the foreign banks which are making a killing even after paying higher incentives.

The participating foreign banks which are taking active role in the SBI scheme include ABN Amro, Abu Dabhi Commercial Bank, American Express, Bank of America, Citibank, Credit Lyonnais, Deutsche Bank, Standard Chartered Bank and Bank of Baharain and Kuwait.

The Indian banks, which are active but are unable to attract depositors because of the brokerage war, include Bank of Baroda, Bank of India, Punjab and Sind Bank, Punjab National Bank, Indian Overseas Bank and a host of other public and private sector banks.