OFCB Swap Facility: RBI Cheaper Funding for Banks
Why in the news
With domestic deposits growing slowly, RBI’s concessional swap window for foreign currency borrowings is expected to give banks a cheaper way to fund themselves.
Key facts
- Eligible banks: all Authorised Dealer Category-I (AD-I) banks, private lenders included.
- Minimum maturity of the OFCB: 3 years.
- Swap rate: fixed 1.5% per annum, compounded semi-annually, available until 31 December 2026.
- Limit: up to 100% of a bank’s Tier 1 capital.
- Estimate: SBI expects banks to raise USD 5-8 billion via this route in FY27.
Cost comparison
| Item | Figure |
|---|---|
| Market hedging cost | 3.5-4% |
| RBI swap rate | 1.5% p.a. |
| Saving for banks | 200-250 bps |
| OFCB vs domestic deposits (similar maturity) | 40-50 bps cheaper |
Background concepts
- OFCB: foreign currency borrowing by Indian banks from overseas markets; External Commercial Borrowings (ECBs), governed by RBI’s ECB framework, fall within this wider space.
- ECB: a foreign currency loan raised by Indian residents from foreign lenders under RBI’s Master Directions. Automatic route needs no prior approval; approval route needs RBI nod. Lenders include foreign banks, capital markets and multilateral institutions. Uses such as on-lending, working capital and real estate are restricted, with some exceptions.
- Currency swap: a derivative in which two parties exchange currencies for a set period and swap back at a pre-agreed rate; used to hedge currency risk. Its cost depends on interest differentials, forward premium and counterparty risk.
- AD-I banks: under FEMA, 1999, they can handle all current and capital account transactions; AD-II banks handle limited transactions.
- Tier 1 capital: top-quality capital, made of Common Equity Tier 1 (equity, retained earnings, reserves) and Additional Tier 1 (perpetual debt). It is the main Basel III gauge of strength.
- CD and CP: wholesale short-term instruments, typically 7 days to 1 year. CDs are issued by banks; CPs are unsecured notes issued by corporates, primary dealers and all-India financial institutions.
Exam angle
- Fixed swap rate 1.5% till 31 December 2026; minimum maturity 3 years.
- Eligible: AD-I banks; limit 100% of Tier 1 capital.
- Related terms: ECB, AD-I, CET-1, AT-1, forward premium.