Industry Odisha Bureau, Oct 06: A surge in FCNR(B) deposits has given banks a sizeable funding boost. Credit growth stays strong, but lending cannot absorb the cash fast enough. Margins face near-term pressure as a result.
Funding was once the main constraint on Indian banks’ loan growth. That constraint has now eased, thanks to a surge in dollar deposits. But the money is arriving faster than banks can lend it. The result is a near-term squeeze on margins.
Where the money came from
FCNR(B) stands for Foreign Currency Non-Resident (Bank) deposits. Non-residents place these with Indian banks in foreign currency. They bring dollar funding straight into the banking system.
The RBI opened subsidised windows on June 5 to draw dollars and support the rupee. By September 18, the three windows had attracted $143.6 billion. About 93% came through FCNR(B) deposits. Part of that money flowed back to banks, swelling surplus liquidity.
The cost of parked money
Deposits are not free. Banks pay interest on them from the day they arrive. Ideally, that money goes straight into loans at healthy spreads. Lending, however, takes time to arrange.
Meanwhile, banks park the surplus in short-term money-market instruments. Those yield less than the deposits cost, said Sanjay Agarwal of Care Ratings. This gap is called negative carry. It does not mean banks are losing money overall. It simply dilutes margins until the funds reach borrowers.
Motilal Oswal expects private-bank margins to fall 8–20 basis points in the September quarter. Nomura also sees net interest margins under pressure while surplus funds sit in low-yielding assets.
A surplus that is shrinking
System liquidity surplus peaked at ₹9.85 trillion on September 15, Nomura said. It eased to ₹4.7 trillion by September 30. The RBI has been draining part of the surplus through its operations. Heavy FCNR(B) mobilisation drove much of that surplus.
Loans keep growing
Strong lending offers an eventual outlet. As of September 15, bank credit grew over 18% year on year. Deposits rose more than 17%. The credit-to-deposit ratio slipped to 81% from 82% in August.
Motilal Oswal says deposit growth accelerated to 17% from 11–12%. FCNR(B) deposits now make up about 4.5% of system deposits. The brokerage forecasts FY27 credit growth of about 15.5%. It cites retail demand, MSME utilisation, corporate borrowing and FCNR(B) flows.
Private lenders feel it more
The pressure is uneven. Private banks are expected to bear more of it. State-run banks should see steadier, range-bound margins. FCNR(B) forms a smaller share of their deposits. They are also retiring high-cost liabilities, Motilal Oswal says.
Among mid-sized lenders, RBL Bank may see margins widen. Emirates NBD’s capital infusion is expected to help it. IDFC First Bank is expected to report a sharper sequential decline.
A repo-rate hike, which analysts expect this week, could support margins, Nomura said. Banks with more floating-rate loans could gain most.
Earnings still look healthy
Asset quality remains benign, analysts say. A below-normal monsoon and macro uncertainty remain risks. Motilal Oswal forecasts private-bank profit to rise 24% year on year. It sees PSU-bank profit growing 27%. Across its coverage, it expects 25% annual and 9.5% sequential profit growth.
A timing problem
Banks have gained what they once lacked: ample funding. The task now is lending it at decent spreads. How quickly credit absorbs the surplus will shape how long the margin squeeze lasts.
