HDFC Bank is targeting non-resident Indians (NRIs) with a fixed income product, exposing them to foreign currency fluctuations. If a customer loses money, he has to be blamed, of course, for falling for this hard-sell from his 'trusted' banker

Rupeemax is a product that HDFC Bank is targeting at non-resident Indians (NRIs) with the tagline “Earn better returns on your NRE Deposits: 12%.” A breathless email message, seeking appointments with well-heeled NRIs, draws attention “to a very interesting opportunity in the NR FD space.” The marketing pitch says: NRE FDs have earned 8.75% compounding quarterly over a 5-year period giving a tax free, repatriable interest of 10.83% over that period. For that same period, HDFC Banks claims, “we can enhance the rate from 8.75% to 9.5%, which with the compounding effect can deliver an annual yield of 11.9% to12.10% as against 10.83%.” The ‘key concern’ is a 5-year lock-in to maturity. The official goes on: “I believe this is an excellent opportunity and is short lived as this enhanced yield is a function of cross currency movements, which currently are in favor.!!!!!!!!!!!!! Also the interest rates are expected to head downwards in the near future wherein this makes a lot of sense.”

Dr KC Chakrabarty, deputy governor RBI, tells customers to be wary of higher returns offered by banks. The global consultant who received this was certainly sceptical and checked with a fund manager who, in turn, sent it to Moneylife with this comment: “Is this real or is HDFC Bank pulling a 3-card trick?” A simple reading of the email suggests it is pitching a fixed deposit with a 5-year lock-in. We asked the Bank if the email was genuine.

A response from HDFC Bank’s NRI team underscores the dangerous toxicity of the product. It says the product is built on the fact that RBI guidelines allow NRIs to “hedge their FCNR and NRE deposits.” It assumes that “NRIs are normally sophisticated investors with knowledge of cross currency risk. They compare the interest rates offered on FCNR and NRE deposits and other similar investments available across different geographies. Depending on the interest rates available on these deposits and forward premia prevailing at the time, NRIs tend to invest in FCNR deposits and sell foreign currency in the forward leg (with the maturity proceeds) thereby earning a better rate than on NRE deposit. Conversely, NRIs may tend to invest in NRE deposits and buy foreign currency in the forward leg (using the maturity proceeds) thereby earning a better rate than on FCNR deposit. These are, of course, permissible transactions in accordance with the above quoted provisions of law.”

Really? Most of our NRI friends and relatives, even in the finance industry don’t have a fraction of the base sophistication that HDFC Bank is assuming. Worse, it is pitched at people whose money is safely in tax-free NRE fixed deposits. HDFC Bank goes on to explain that “the rate of 12% quoted in the mail was indeed the maximum rate that a client could have earned by investing in this product yesterday. This yield was available by booking a 5-year Japanese Yen FCNR deposit and selling the Yen maturity proceeds in the forward leg. The risk factors and other aspects that need to be known by clients are shown in the emailer.” Is the vague line about the yield being a “function of cross currency movements” which are “currently in our favour” an indicator of product risk? In fact, the only risk flagged by the email is the 5-year lock-in, which skilfully suggests that the higher return is the reward for locking in his money for five years. There is no indication that a 12% return is not guaranteed. If a customer loses money, he has to be blamed, of course, for falling for this hard-sell from his trusted banker. Will RBI put in place any mechanism to check such blatant mis-selling of even fixed-income products? Globally, regulators are moving away from the principle of caveat emptor, which had left savers to the mercy of snake-oil salesmen in bankers’ garb. When will RBI start thinking along these lines and put in place a mechanism to report such products?