Indian banks are seeing a substantial boost in their loan and deposit growth, primarily fueled by the recent mobilization of Foreign Currency Non-Resident Bank (FCNR-B) deposits. According to a Q2FY27 preview by JM Financial, provisional updates from 30 banks indicate loan growth accelerating to 19.1% year-on-year, with deposits growing 15.8% YoY.
However, this rapid influx of foreign currency funds presents a dual challenge: while it expands balance sheets and reduces reliance on other funding sources, it also poses a risk to banks' net interest margins (NIMs). Analysts suggest that the time lag in deploying these low-cost funds into profitable assets could lead to a compression of margins.
Understanding FCNR-B Deposits
FCNR-B deposits are foreign currency deposits held by Non-Resident Indians (NRIs) in Indian banks. These deposits have significantly altered the funding mix for lenders, enabling them to expand operations and reduce dependence on alternative funding, such as certificate of deposit issuances, which fell 16% quarter-on-quarter in Q2FY27.
Several large private banks have been particularly active in this mobilization drive. HDFC Bank reportedly garnered ₹1.10 lakh crore, Axis Bank ₹1.02 lakh crore, and Kotak Bank ₹55,300 crore in FCNR-B deposits on a gross basis during the period.
The Looming Margin Problem
Despite the robust growth in loans and deposits, JM Financial anticipates a decline in NIMs across most banks for Q2FY27. This is primarily attributed to the substantial FCNR-B inflows and subdued growth in Current Account Savings Account (CASA) deposits.
- ICICI Bank, Axis Bank, and Kotak Bank, among the largest FCNR-B mobilizers, could see NIM compression of 14–18 basis points quarter-on-quarter.
- HDFC Bank's margin might decline by approximately 5 bps.
- State Bank of India (SBI) could experience a roughly 3 bps fall.
The core issue is that banks require time to channel this additional liquidity into income-generating loans and other assets. Until these funds are effectively deployed, the expanded liability base can grow faster than income, thereby exerting downward pressure on margins. This impact is already evident when FCNR-B flows are excluded from loan growth calculations, showing a moderation in adjusted growth figures for several banks.
What Investors Should Monitor
For investors, the critical question is whether banks can successfully convert the FCNR-B funding advantage into sustained, profitable loan growth without compromising their margins. JM Financial projects an overall Net Interest Income (NII) growth of about 12% year-on-year for its covered banks in Q2FY27, even with the expected NIM compression.
Key metrics to watch include the deployment trajectory and yields on FCNR-B deposits, as well as any potential rate hikes or funding pressures once the FCNR-B inflows begin to taper off. The current scenario presents a significant trade-off for the Indian banking sector: while FCNR-B funds are accelerating growth today, the speed and profitability of their deployment will dictate future earnings strength.