Private Banks Face Sharper Margin Declines After FCNR(B) Deposit Drive, With Repayments Potentially Reaching $170 Billion

India’s Foreign Currency Non-Resident Bank (FCNR(B)) deposit mobilisation has offered a financial buffer amid geopolitical uncertainty, but the funding drive has come at a cost for banks. Higher deposit expenses and surplus liquidity weighed on lending margins during the September quarter, with private lenders experiencing a sharper impact than public sector banks.

Speaking at the Business Standard BFSI Summit in Mumbai, veteran banker Uday Kotak said the repayment obligation could climb to $160-170 billion once interest costs are included, compared with the $130 billion raised. He backed the policy decision, describing the scheme as insurance against global macroeconomic and geopolitical risks, including the Middle East and Russia-Ukraine conflicts. He also highlighted its timing ahead of a surge in United States bond yields.

The pressure on bank profitability reflects the relatively high cost of raising these foreign currency deposits and the time required to deploy the funds. Private lenders mobilised significantly more FCNR(B) deposits relative to their existing deposit base, leaving larger pools of money temporarily invested in lower-yielding assets.

Bank Margins: Private Lenders Take The Bigger Hit

The September-quarter results showed a sharper contraction in net interest margins (NIMs) at several private banks, while some state-owned lenders reported improvements.

Private banks raised FCNR(B) deposits equivalent to around 7.5%-10% of their deposit base, compared with approximately 2%-2.5% for public sector banks. This difference helps explain the uneven impact on profitability.

Margin Recovery Hinges On Fund Deployment

Bank management expects the pressure to moderate as excess liquidity is deployed and borrowing costs are replaced with more efficient funding. Repricing of repo-linked loans and stabilising hedging costs could also support margins in the coming quarters.

The drag may persist through the December quarter for lenders that accumulated substantial FCNR(B) funds relative to their balance sheets. However, margins are expected to stabilise progressively by the March quarter as deployment improves.

Domestic Investment And External Balance

India’s foreign portfolio and foreign direct investments together amount to around $1.5 trillion. Domestic investors have increasingly absorbed selling by overseas investors, while differences in the taxation of capital gains and interest income have influenced investment preferences.

The margin pressure is expected to ease gradually as banks deploy the funds into higher-yielding assets and adjust their balance sheets. While some lenders may continue to feel the impact through the December quarter, improved fund utilisation and loan repricing are expected to support margin stabilisation by the March quarter.

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