FCNR(B) Deposits with Leverage: What NRIs Should Know Before Using Borrowed Funds

Introduction

Deposits are generally straightforward: they are created from funds already held in the depositor’s account. The current FCNR(B) opportunity introduces an additional option, creating a fixed deposit through leverage.

In a leveraged USD FCNR(B) deposit arrangement, an eligible Non-Resident Indian [NRI] combines their own foreign currency funds with borrowed foreign currency funds to place a larger FCNR(B) deposit. The deposit earns interest. The borrowed portion has a cost. The return on the NRI’s own contribution depends on the differential between the deposit interest rate and the borrowing cost, after charges and conditions are considered. This differential is more than the difference between the two rates, since deposit rate is compounded every 180 days, while the annual interest on loan is a simple rate.

The structure, however, involves additional conditions that sit alongside the headline return: the eligible deposit tenure of 3 years, a lien on the deposit, tax treatment outside India, and customer eligibility requirements. This article explains the structure without treating the illustration as a guaranteed outcome.

Key Takeaways

• RBI's 2026 swap window is available to banks for fresh FCNR(B) deposits with tenures between 3 years to 5 years.
• A leveraged structure uses borrowed foreign currency funds along with the NRI's own funds to create a larger deposit base.
• The return can improve only if the USD FCNR(B) deposit rate remains higher than the borrowing cost after processing fees and other charges are considered.
• Availability of any leveraged arrangement is subject to bank policy, regulatory guidelines, customer eligibility, and documentation.

What An FCNR(B) Deposit Means for NRIs

An FCNR(B) deposit is a term deposit maintained in a permitted foreign currency by an eligible non-resident customer. At maturity, the principal and interest are payable in that foreign currency, subject to applicable rules. For an NRI who earns or saves in US dollars and may use the money outside India later, this matters. The NRI does not carry the exchange rate risk that arises from rupee depreciation during the deposit period.

Why USD FCNR(B) Deposits Are In Focus Now

RBI introduced a 2026 US Dollar-Rupee swap facility for banks against new FCNR(B) deposits with tenures between 3-year to 5-year. Under this facility, RBI assumes the hedging cost incurred by banks for holding USD FCNR deposits. As a result, banks can offer higher interest rates on eligible USD FCNR(B) deposits for deposits booked during the window period.

The swap window applies only to FCNR(B) deposits with tenures between 3 years and 5 years. As a result, banks have only revised FCNR(B) interest rates for deposits with tenures between 3 – 5 years.

How Leverage Can Affect Returns: An Illustration

The following illustration assumes a 3-year USD FCNR(B) deposit at 6.15% and a borrowing cost of 6.00%. The numbers are illustrative. Actual returns may vary based on the deposit rate, borrowing rate, charges, loan terms, customer eligibility, and the structure's availability.

As seen above, leveraged FCNR deposits offer significantly higher returns than the promised FCNR interest rates. However, do remember that the final outcome depends on the actual terms offered and maintained through the deposit period.

Risks NRIs Should Read Before Using Leverage

A leveraged FCNR(B) arrangement is not only a term deposit decision. It also includes a borrowing decision. The following are the risks associated:

· Borrowing Cost Risk

While returns shown above are a sum of the interest on the deposit from one’s own funds plus the spread between the returns and costs of the borrowed funds, the actual return may vary based on additional costs, such as SBLC charges.

· Liquidity And Lock-In Risk

Under an FCNR(B) deposit booked under the scheme, premature withdrawal is not allowed during the first year. Premature withdrawal of leveraged FCNR deposits may be restricted where a lien has been marked in favour of a lender. Any such restriction would depend on the financing arrangement and lender consent requirements.

· Availability And Documentation Risk

Leveraged FCNR(B) structures is not available to every NRI. Availability depends on the customer’s profile, his/her relationship with partner banks, and country of residence, among other things. The customer should confirm the exact structure with the bank before acting on any illustration.

· Tax And Reporting Risk

Although interest earned on FCNR(B) deposits is exempt from income tax in India for eligible customers, the NRI may have to pay tax on this income in the country where he or she holds tax residency.

What NRIs Should Confirm Before Considering Leverage

• Confirm whether a leveraged USD FCNR(B) arrangement is available as per the customer’s profile and banking relationship
• Understand the borrowing rate, reset frequency, processing charges, and all loan-related costs.
• Calculate the effective return after borrowing cost, charges, and taxes, not only the headline spread.
• Check whether the structure creates any reporting requirements in the country of residence.

About Kotak Mahindra Bank’s FCNR(B) Deposit

For NRIs interested in booking a USD FCNR(B) deposit, visit Kotak FCNR(B) interest rate page to check Kotak Mahindra Bank’s most recent FCNR(B) interest rates.