FCNR(B) Deposits Impact Private Banks’ Margins in Q2FY27

Several leading private banks in India experienced a dip in their net interest margins (NIM) during the second quarter of the financial year 2027. This margin pressure primarily resulted from the substantial inflows of Foreign Currency Non-Resident (Bank) deposits, commonly known as FCNR(B), channeled through the Reserve Bank of India’s special window.

Despite the short-term contraction in margins, these lenders are optimistic about a rebound in the coming quarters. The reason lies in the deployment of these funds into productive assets and the upward movement in the interest-rate cycle, which is expected to support stronger lending yields.

HDFC Bank, India’s largest private sector bank, reported a NIM of 3.16 percent in the September quarter, down by 10 basis points compared to 3.26 percent in the previous quarter. Sashidhar Jagdishan, Managing Director and CEO of HDFC Bank, explained that the margin pressure stemmed from a faster rate adjustment on the asset side relative to the lagging cost of funds during the period of declining interest rates. However, he noted that the bank is well-positioned for a margin recovery as interest rates begin to rise.

Jagdishan also highlighted the strategic shift in the bank’s loan portfolio towards retail and micro, small and medium enterprises (MSMEs). This transition away from corporate and home loans is projected to offer better margin support over time, aligning with the bank’s long-term growth strategy.

ICICI Bank, the country’s second-largest private lender, saw its NIM fall by 18 basis points to 4.18 percent in Q2FY27 from 4.36 percent in the previous quarter. Executive Director Sandeep Batra attributed this decline largely to the impact of FCNR(B) deposits. He indicated that the full effect of these deposits on margins would be more apparent in the December quarter.

Batra remains confident, stating that margins are expected to improve after the third quarter even if the policy rates remain at current levels. He emphasized the bank’s focus on the optimal deployment of these funds, which provide a stable funding base for three to five years. During the quarter, ICICI Bank utilized some of the FCNR(B) deposits to repay existing liabilities and to support loan growth. The balance is earmarked for deployment over the next two quarters.

Axis Bank, the third-largest private lender, also reported a 10 basis point reduction in its NIM, which dropped to 3.36 percent in Q2FY27 from 3.46 percent in the previous quarter. The bank partly attributed this to FCNR(B) deposits but reaffirmed its commitment to meeting its NIM guidance of 3.8 percent.

During the earnings call, Axis Bank’s management revealed that a portion of the FCNR(B) funds was used late in the quarter to retire higher-cost non-retail term deposits. This strategic move is expected to yield a positive margin impact in the current quarter.

On the scale of FCNR(B) deposit mobilization, ICICI Bank led with $17.88 billion in gross inflows. Its international branches and subsidiaries deployed about $9 billion in loans against these deposits and issued $3.63 billion in standby letters of credit (SBLCs).

HDFC Bank followed closely, mobilizing around $11.5 billion, the second-highest among private banks. Its overseas units extended approximately $5.7 billion in loans linked to these deposits and issued $3.1 billion in SBLCs.

Axis Bank mobilized $10.62 billion in FCNR(B) deposits, directing $4.57 billion to support lending through its international branches. The remaining funds have been strategically used to retire expensive non-retail term deposits, reinforcing the bank’s margin management efforts.

The FCNR(B) deposit scheme, introduced by the Reserve Bank of India, aims to attract foreign currency deposits from non-resident Indians and other eligible entities. These deposits typically offer banks a stable and relatively low-cost source of funds over a multi-year horizon, helping to enhance liquidity and support credit growth.

With interest rates showing signs of an upward cycle, private banks are focused on deploying these funds effectively to restore and potentially improve their margins. The sector’s ability to adapt to shifting interest rate dynamics and optimize its deposit base will be key to sustaining profitability in the near term.