Giving A Cold Shoulder, Why Are International Banks Forcing HNI Indians To Close Overseas Accounts

Major international banks are urging numerous affluent Indian high-net-worth individuals (HNIs) to close their accounts. 

Typically, when individuals achieve HNI status, banks extend red-carpet treatment, offering tailored services and preferential rates on deposits and loans. Exclusive privileges, manifested through premium banking programs, are granted to HNIs for maintaining substantial assets with the bank.

However, currently, a reversal of this trend is being observed. 

Several prosperous Indians are experiencing a lack of enthusiasm from large international banks. 

These banks are imposing a higher minimum balance requirement for foreign clients, and the Reserve Bank of India’s (RBI) restrictions on holding idle funds abroad are contributing to the closure of overseas bank accounts. 

In the past two months alone, at least two major British banks, a Swiss lender, and a prominent Emirates financial institution have terminated relationships with over two dozen resident Indians, as reported by service providers and tax practitioners advising these individuals.

These individuals initially opened their bank accounts by transferring funds overseas under the RBI’s Liberalised Remittance Scheme (LRS), which permits a local person to invest up to $250,000 annually in stocks, properties, and for the maintenance of relatives, among other purposes. 

With the minimum balance set by some significant offshore banks exceeding $1 million, these banks are unwilling to serve clients unless they agree to utilize the bank’s wealth management arm for investments in stocks and listed debt instruments. 

Given that banks earn fees from such investments, they are inclined to retain clients, even if the remaining money in the account decreases.

However, when funds are withdrawn for property purchases, a common investment under LRS, or transferred to a customer’s relative, banks are quick to dismiss the client. 

In certain cases, such as the mentioned UAE bank, accounts have been recently closed, and drafts have been handed over to customers who may not have another overseas account to encash the instrument.

Tightening The Grants

Amidst an overarching decline in fee income, the strategies employed by certain foreign banks have heightened the challenges faced by Indian residents with overseas accounts. 

These banks have raised the minimum threshold for onboarding new clients and existing ones, creating a predicament for Indian residents who, due to the restricted Liberalised Remittance Scheme (LRS) quota, are unable to remit additional funds. 

This has resulted in a surge in account closures, prompting banks to request customers to provide details of alternative bank accounts for transferring balances. 

Rajesh P Shah, a partner at the CA firm Jayantilal Thakkar and Company, emphasized the urgency of complying with such requests promptly.

Complicating matters further is the Reserve Bank of India’s (RBI) mandate to either invest or repatriate idle funds within 180 days. 

Recently, a Singapore bank contacted some of its Indian clients, urging them to invest their funds, as leaving unused funds in the account could potentially violate Indian regulations.

Why The Rush

An increasing number of banks are explicitly expressing their reluctance to bear the cost of maintaining accounts with low balances. 

Moin Ladha, a partner at the law firm Khaitan & Co, noted the difficulty in investing the balance, especially when private wealth teams of banks set high minimum ticket sizes for investments. 

The new LRS regulations, prohibiting investment in unlisted debt securities, have led to divided opinions among banks and practitioners regarding whether fixed deposits with overseas banks qualify as permitted investments under the scheme. 

The ambiguity in the RBI FAQ on this matter has prompted cautious behavior among individuals, with many opting to repatriate uninvested funds to avoid potential penalties and legal consequences.

In the event of violations, the Enforcement Directorate (ED) possesses the authority to seize an equivalent amount of assets in India. Interestingly, the policies adopted by multinational banks in this regard could inadvertently align with the government’s efforts to curb outflows. 

There is a widely shared perception that the government has been discouraging significant outflows by residents, as evidenced by the stringent tax collected at source, which reportedly contributed to a 37% reduction in LRS outflows in October.

The recent regulatory measures and account closures may intensify calls for an increased LRS limit, although the prospect of a swift revision remains uncertain. 

The annual limit, initially reduced to $75,000 from $200,000 during the taper tantrum in 2013, was subsequently raised to $250,000 in 2015 and has since remained unchanged.

How Banks Make Money From HNIs

Banks have several avenues to generate revenue from High Net Worth Individuals (HNWIs):

1. Investment Deals: Banks can facilitate investment opportunities by connecting HNWIs with startups, profiting from the ensuing deals.

2. Direct Investment: Banks may choose to invest alongside HNWIs, participating directly in investment ventures.

3. Fees: Banks derive income from fees associated with HNWI investments, incentivizing them to retain HNWI clients even in the face of declining account balances.

4. Tailored Services: Banks extend preferential rates on loans and deposits to HNWIs, providing customized financial services.

5. Premium Banking: Banks offer exclusive benefits to HNWIs through premium banking services, encompassing preferential loan pricing, locker privileges, fee waivers, and insurance perks.

Given the intricate nature of managing HNWIs, private wealth managers often seek them out, as they entail substantial efforts to maintain. 

Wealth managers typically earn a percentage of the total assets they oversee.

Additionally, HNWIs have the option to collaborate with wealth managers or private bankers for personalized investment guidance and management. 

These professionals offer a range of services, including crafting customized investment portfolios, advising on tax matters, assisting with estate planning, and managing risks.

The Viewpoint

The practice of foreign banks closing accounts of High Net Worth Individuals (HNIs) poses several considerations, both for the banks and the affected customers. 

Hence, why are some foreign banks closing accounts – 

1. Risk Mitigation – From the perspective of foreign banks, imposing higher minimum balance requirements and closing accounts may be a strategic move to mitigate risk. 

Since it allows banks to maintain a more stable and secure customer base, reducing exposure to potential financial downturns.

2. Cost Management – Banks may argue that maintaining accounts with low balances is economically unsustainable; hence by closing such accounts, foreign banks may aim to optimize operational costs and allocate resources more efficiently.

The Last Bit, while there may be reasons such as risk management and operational efficiency that prompt foreign banks to close HNI accounts, the potential negative consequences, including damage to customer relations, reputational harm, and competitive disadvantages, suggest that this practice should be approached with caution.

Banks should carefully weigh the short-term gains against the long-term consequences and explore alternative strategies to manage their financial risks while maintaining a positive customer experience.

As for the sustained success of any financial institution, balancing the need for risk mitigation with a commitment to maintaining positive customer relationships remains a crucial aspect.