Private Banks Face Margin Pressure As Higher FCNR(B) Deposit Costs Weigh On Lending Profitability In The September Quarter

India’s leading private sector banks are facing pressure on their lending profitability as the cost of raising funds increases. FCNR(B) deposits have added to the funding burden for private banks. While these deposits help banks raise foreign currency, the cost of securing the funds has put pressure on their margins.

The effect showed up in the July–September quarter of FY 2026–27. Axis Bank, ICICI Bank and HDFC Bank each recorded a lower net interest margin (NIM) than in the corresponding quarter last year.

How The Three Banks Have Been Affected

The decline varied across the lenders, reflecting differences in their funding structures and the effect of FCNR(B) deposits on their balance sheets.

Axis Bank’s NIM dropped to 3.46% in September 2026, down from 3.80% a year earlier. The bank raised US$10.62 billion through FCNR(B) deposits. These deposits accounted for 11 basis points of the margin decline, according to the bank’s management.

ICICI Bank reported a NIM of 4.18%, compared with 4.30% in the corresponding period last year. Its large FCNR(B) deposit mobilisation has added to the pressure on margins. The full impact of these funds may continue to emerge in subsequent quarters.

HDFC Bank’s NIM also moved lower, falling to 3.16% from 3.27%. The lender raised US$11.5 billion through FCNR(B) deposits. The difference between funding costs and the returns generated by assets has affected its margin performance.

Why Banks’ Margins Are Under Pressure

The challenge is not simply the amount of money banks raise. It also depends on how much they pay for those funds and how quickly they can put them to work at profitable rates.

When lending rates fall, interest income from loans can decline before deposit costs adjust. This reduces the spread banks earn. Funds that have not yet been deployed into higher-yielding loans can add to the pressure.

FCNR(B) deposits allow eligible non-resident Indians to keep their savings in permitted foreign currencies with Indian banks. For lenders, they provide access to foreign currency funding. Their effect on profitability, however, depends on the cost of attracting the deposits and the returns earned from using the money.

HDFC Bank’s management expects margins to benefit as lending patterns change and more credit is directed towards retail borrowers and micro, small and medium-sized enterprises (MSMEs). The pace of any recovery will depend on funding costs, loan pricing and how efficiently banks deploy the money they have raised.

For now, the latest results highlight a key challenge for private lenders: growing their deposit base does not necessarily translate into stronger profitability when the cost of funding remains high.

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