Banking on India

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Sensing a hunger for higher returns, Indian banks are wooing non-resident Indian investors around the globe, including Canada. The worldwide Indian diaspora exceeds 25 million, with more than a million in Canada. But the strategy of offering high interest rates – much higher than any available in this country – to that vast potential market also carries risks for investors


Neeraj Mehta likes saving money but is turned off by the ultra-low interest rates offered by Canadian banks.

The Richmond Hill resident is one of a growing number of Indo-Canadians seizing on more attractive savings rates at financial institutions in India. Instead of parking his money in a Canadian bank at a fraction of 1 per cent interest, he's getting higher returns in the country he left more than 30 years ago.

"There you can get 7, 8 per cent," said Mehta, who has a handful of Indian-based accounts. He declined to say how much he has parked abroad and with which banks. But he estimates that people in the community generally send sums in the thousands of dollars.

Banks operating in India, sensing that hunger for higher returns, are actively wooing non-resident Indian clients from all over the world, including Canada. The worldwide Indian diaspora numbers over 25 million with large populations in North America, the United Kingdom and the Middle East.

More than 1.3 million people of South Asian ethnicity live in Canada, with the bulk identifying themselves as East Indian. The community's biggest concentrations are in Vancouver and Greater Toronto.

Given the size of that potential market, many banks are building entire banking strategies around non-resident Indian, or NRI, clients that include services such as investing and wealth management. HSBC, Canada's largest foreign bank, recently launched an office in Mississauga dedicated to serving non-resident Indians through its global operations, including its Indian subsidiary, HSBC India.

"The bank, as a whole, is looking at a global Indian strategy as much more than just Indo-Canada or Indo-U.K.," Naina Lal Kidwai, group general manager and country head for India, said during a trip to Toronto. "It is about the Indian who could be anywhere, who could have a business which straddles many continents and the ability for us to provide that for him or her."

Some Indian-based banks are even urging the Reserve Bank of India, that country's central bank, to raise deposit rates on non-resident accounts more aggressively or to allow banks themselves to determine those rates, according to Indian press reports.

Some experts warn that such NRI savings schemes are not foolproof. Higher returns always entail higher risk, and they say Canadian-based consumers should be aware of that trade-off before sending their hard-earned money to banks overseas.

"They should not proceed down that road – period," said Wendy Dobson, a professor at University of Toronto's Rotman School of Management. Dobson has written about India's banking system and argues the average person cannot fully understand the risks posed by potential currency swings.

"The ordinary retail consumer needs a heck of a lot of sophistication to involve themselves in cross-border transactions," Dobson said, adding it would be "irresponsible" to encourage average consumers to partake in the trend.

Still, statistics suggest that growing numbers of non-resident Indians are taking the gamble even though interest rates have fallen during the global recession. Many have a bullish view of the Indian economy's growth prospects and believe interest rates will begin rising again by the end of this year.

Neeraj Mehta says he's aware of the risks, but says it's still worthwhile. He doubts the value of the rupee will fall against the Canadian dollar, especially since India's economy is forecast to grow by 7 to 9 per cent next year.

"Of course, some (currency) fluctuation is always there," he said, "but I don't think it will be devaluing as it used to do before."

Non-resident Indians use either their Indian citizenship or a document known as a Person of Indian Origin card as permits to build a deposit base back home. The Indian government first introduced the PIO card in 1999 to give former citizens, along with eligible spouses and children, certain advantages including investment opportunities. NRI accounts are open to both Indian citizens and PIO cardholders.

Recent data from the Reserve Bank of India show that non-resident Indians deposited $1.89 billion (U.S.) during the three months ended June 30, more than double the $813 million they deposited during the same period last year. Outstanding NRI deposits totalled $44.98 billion on June 30, compared with $42.38 billion at the end of April.

Some of the biggest players in the NRI market include State Bank of India, Bank of Baroda and State Bank of Travancore, along with foreign-based giants such as HSBC India and Citibank India. Others, such as Vijaya Bank and Union Bank of India, are also trying to increase their share of NRI deposits.

For its part, HSBC's NRI Services has seen more than a 45 per cent increase in deposits from non-resident Indians around the world from June 2008 to June 2009.

In addition to its newly opened Mississauga office for NRI business, HSBC plans to open a similar centre in Australia by year's end. It also has NRI centres throughout the Middle East, the U.K., the U.S., Hong Kong and Singapore, along with a network of 47 branches in India.

Blake Hellam, a senior vice-president at HSBC Bank Canada, refers to the target market for these services as "global cosmocrats," a trans-national citizenry whose business and personal interests span continents. He said the challenge is to "bank them" from start to finish, and NRI savings products are part of that strategy.

While there are many different types of NRI accounts, many opt for what is known as the non-residential external account, a savings account in Indian rupees. It is designed for clients who have a regular spending pattern in rupees, such as mortgage payments in India or other recurring expenses.

Account holders are able to deposit foreign currency earnings, such as those in Canadian dollars, into that type of account. Both the funds and interest are repatriable, meaning they can always be brought back to Canada. But even Kidwai suggests those account holders ought to be careful they are not doing it for the return alone.

"The person has to be very well-advised that, yes, you can get the high interest rate," she said. "But you also have to be conscious about the foreign exchange risks. And then you take the decision that you want to."

Foreign currency non-resident accounts, however, do not face those same exchange rate risks. Funds in those accounts can be held in foreign currencies.

HSBC also offers resident foreign currency deposits for expatriates moving back to India. Anecdotally, at least, there is some evidence that trend accelerated during the global recession.

"As the Indian economy continues to be vibrant, dare I say more vibrant than many parts of the world, it is attracting talent back far more so than in the past," Kidwai said.

And even though Canadian regulations prevent HSBC from offering Indian mutual funds and insurance directly to North American-based clients, it will readily sell those products to any NRI client who walks into an HSBC branch in India. For the most part, foreigners cannot readily invest in the Indian equity markets.

That's partly because the rupee is not a convertible currency. NRIs, however, have a "ticket" to invest by way of their ethnic origins.

Even so, Kidwai stresses this clientele is not so foolhardy as to base savings and investment decisions strictly on affection for the motherland.

"They see the rest of the world, they know where they can invest," she said. "They are not investing in India because they love India.

"They invest because the products make sense and because they have the ability to invest."