Indian banks are poised to benefit from recent changes in how Foreign Currency Non-Resident (Bank) or FCNR(B) deposits are treated under Liquidity Coverage Ratio (LCR) rules. A report by YES Securities highlights that these deposits, particularly those collected under a recent swap window, are now considered akin to retail deposits, significantly reducing the liquidity banks must hold against them.
Understanding the LCR Advantage for FCNR(B) Deposits
The key to this advantage lies in the run-off rate assigned to different types of deposits. Retail deposits typically have a low run-off rate, ranging from 5% to 12.5%, meaning a small fraction is expected to be withdrawn quickly. In contrast, wholesale deposits can have a run-off rate as high as 100%. By classifying FCNR(B) deposits more like retail ones, banks are required to maintain a smaller amount of high-quality liquid assets (HQLA) as a buffer.
This reclassification makes FCNR(B) deposits "LCR-accretive," freeing up significant liquidity that banks can then deploy into higher-yielding assets, primarily loans. Loans generally offer better returns than the HQLA banks are mandated to hold, creating a direct path to improved net interest margins (NIMs).
Impact on Bank Margins and Specific Beneficiaries
The ability to convert freed-up liquidity into loans is a crucial factor in enhancing bank profitability. While other elements like lower wholesale deposit rates and the replacement of expensive bulk deposits with FCNR(B) funds also contribute, the LCR benefit is a substantial driver for margin expansion.
Banks with a higher reliance on wholesale funding stand to gain the most from this shift. YES Securities identified institutions such as RBL Bank, CSB Bank, IndusInd Bank, and Axis Bank as potential major beneficiaries due to their larger share of LCR wholesale deposits.
Wholesale Funding Costs Decline
Adding to the positive outlook, the broader trend shows a decline in wholesale funding costs. Certificate of Deposit rates, for instance, have fallen from a peak of 7.96% in May 2026 to a current range of 7%-7.2%. Private-sector banks also experienced a 22 basis point month-on-month expansion in their spread in July, driven by lower fresh domestic term-deposit rates.
Near-Term Challenges: Managing Excess Liquidity
Despite the long-term benefits, the immediate impact may present a challenge. The banking system has seen a dramatic increase in surplus liquidity, rising from approximately ₹1 lakh crore in July to over ₹11 lakh crore. This substantial excess liquidity could put temporary pressure on bank yields and NIMs as banks cannot instantly deploy all FCNR(B) funds into loans.
The ultimate improvement in bank margins will depend on how efficiently and quickly banks can channel these newly acquired funds into productive, higher-yielding assets.