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Banks' Profit Margins Under Pressure From FCNR(B) Deposits
29 Jul
Summary
- FCNR(B) deposits could pressure bank profit margins due to lower overseas interest rates.
- Banks like ICICI and HDFC face challenges with competitive lending and attractive deposit rates.
- Over $32 billion mobilized by FCNR(B) scheme by mid-July requires profitable fund deployment.
Banks leveraging FCNR(B) deposits face potential pressure on their profit margins, according to analysts. This situation arises because overseas interest rates are lower, and lending spreads remain thin. The FCNR(B) scheme, available until September 30, 2026, had mobilized over $32 billion by mid-July 2026.
Banks with lower funding costs, such as ICICI Bank and HDFC Bank, are particularly affected. They must offer competitive lending rates abroad while keeping deposit rates attractive. This delicate balance can lead to a higher cost of funds, potentially impacting net interest margins. For instance, a bank offering eight or nine times leverage on deposits means a significant portion of deposits could be loans at thin margins of 80 to 90 basis points.
While the Reserve Bank of India's swap covers only the principal, additional costs like interest swaps and insurance can make FCNR(B) deposit costs comparable to domestic term deposits. However, not having to maintain CRR or SLR on these deposits offers some benefit. Ultimately, the success of this scheme hinges on banks' ability to deploy these funds profitably, especially for lending within India where higher yields are possible.
