Premature Withdrawal Restrictions On New FCNR Dollar Deposits

In a bid to attract dollars into the country and arrest the fall of the rupee, the Reserve Bank of India recently facilitated a swap deal on Foreign Currency Non Resident (FCNR) dollar deposits. According to the deal, banks that bring in FCNR deposits for a tenure of over 3 years will be able to avail of a forward rate at a premium of 3.5% as against the current market rate of 7%. As a result, banks have started to heavily market FCNR deposits to Non Resident Indians (NRIs).

FCNR deposits do offer a lot of advantages to NRIs. It is a term deposit account that can be maintained byNRIs and PIOs in foreign currency and can be a good option for NRIs looking to invest in India without worrying about currency risks.

The interest rates vary between tenures and from currency to currency. Rates may also vary between banks. But today, thanks to the swap deal, banks are offering FCNR deposits at an interest rate of over 5% on dollar deposits over 3 years. Moreover, this interest is tax free in India. Balances in FCNR can be freely repatriated outside India.

Restrictions on premature withdrawal

However, there is one catch that NRIs need to be aware of. Since RBI's swap deal is available to banks on FCNR deposits over 3 years, banks are restricting partial or premature withdrawal on FCNR deposits opened for a term of 3 years and above. While premature withdrawal penalty is a regular feature of FCNR (B) deposits, banks today are levying higher penalties or completely disallowing premature withdrawal on newly opened FCNR (B) deposits of 3-year terms and above.

"It's important that full disclosure is made pro-actively and the consumer enters into the contract knowingly. At least in this particular case banks are more than pro-active in terms of specifying the pre-mature withdrawal penalty wherever applicable," says Harsh Roongta, CEO of ApnaPaisa.com.

Each bank has its own approach. According to the website of ICICI Bank, 'with effect from October 1, 2013, partial or premature withdrawals for all new and renewed FCNR (B) Deposits opened with a tenure of 3 years and above, is not permitted.'

Kotak Bank in turn has a higher penalty for premature withdrawal. For FCNR deposits over 3 years, no premature withdrawal will be allowed during the first year and the deposit will be locked for that term. Subsequently, if a premature withdrawal needs to be made, it will be subject to a penalty. According to the bank website, 'the penalty will be computed at 7.5 percent per annum plus the prevailing USD/INR swap rate in the market for the residual tenor of the original deposit, applied over the period for which the deposit is held. The Customer shall not challenge the calculation of penalty done by KMBL and such calculation shall be final and binding on the customer.'

State Bank of India has separate products - a regular FCNR (B) deposits and a special FCNR (B) deposit. The special FCNR (B) deposit does not allow premature withdrawal on deposits over 3 years but also offers a higher rate of interest.

Among foreign banks too, there are restrictions on premature withdrawal. While Standard Chartered BankIndia allows premature withdrawal on 3 year deposits, the penalty is variable. According to the bank website, 'the Bank shall recover penalty from the Depositor for all amounts equal to the total losses or costs incurred by the Bank (including, without limitation, any loss or cost incurred as a result of the Bank terminating, liquidating, obtaining or re-establishing any hedge or related position in connection with this Deposit) that are or would be incurred under then prevailing circumstances. The Bank shall be entitled to set-off such losses and costs incurred by the Bank against the Deposit and interest payable thereon.'

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