FCNR(B) deposits to pressure bank NIMs, but support earnings: Report

Banks may face near-term pressure on their net interest margins (NIMs) due to FCNR(B) deposits, but their deployment and an improving asset mix are expected to support faster balance sheet growth and earnings, according to a Motilal Oswal report.

Pressure on Net Interest Margins

Banks may face near-term pressure on their net interest margins (NIMs) due to limited spreads on the overseas leveraged portion of FCNR(B) deposits, although the deployment of these deposits and an improving asset mix are expected to support faster balance sheet growth and earnings, Motilal Oswal Financial Services said in a report. NIM refers to the difference between the interest a bank earns and the interest it pays on deposits.

According to the report, the limited spread on the overseas leveraged portion of FCNR(B) deposits could weigh on NIMs in the near term. However, the deployment of these deposits, along with an improving asset mix, is expected to drive faster balance sheet growth and support earnings. The report said, “NIMs are expected to be under pressure in the near term on account of limited spread on the overseas leveraged portion of FCNR (B) deposits”.

Systemic Credit Growth Outlook

The brokerage remains positive on systemic credit growth and has recently increased its growth projection to 14.3 per cent YoY, while acknowledging that there is an upside risk to its estimates. It expects system credit growth to increase by around 150 basis points to 15.5-16.0 per cent for FY27E.

Impact of Forex Inflows and Liquidity

Banks have garnered forex inflows of USD136.4 billion, topping street estimates, under the twin forex swap facilities announced by the RBI in Jun’26. These inflows include FCNR(B) deposits of USD127.2 billion and OFCB and ECBs of USD9.1 billion. The FCNR(B) deposit flows formed around 4.5 per cent of outstanding deposits as of 15th Aug’26.

The large foreign exchange inflows have also resulted in surplus net banking system liquidity of over Rs 6 trillion as on 31-Aug-26, the highest in the last four months. Deposit growth has also picked up. As per the recent fortnight print, deposit growth increased to 14.7 per cent YoY, compared with 12-13 per cent earlier.

Forex Reserves Hit All-Time High

The foreign exchange inflows have also helped strengthen India’s forex reserves. Reserves increased from USD 672 billion as of 12th Jun’26 to USD 729 billion as of 21st Aug’26, an all-time high. This represents a total net addition of USD 58 billion during the period.

Improved Investor Confidence

The report also noted a change in foreign investor flows. FIIs, who had been on a selling spree before the FCNR(B) deposit scheme, recorded net inflows of USD 4.8 billion in the last two months. At the same time, the depreciation of the rupee against the US dollar has stabilised.

Overall, Motilal Oswal expects the FCNR(B) inflows to create some near-term pressure on banks’ NIMs because of limited spreads on the overseas leveraged portion. At the same time, the deployment of these deposits, improving asset mix and stronger deposit growth are expected to support faster balance sheet growth and a positive credit-growth outlook. (ANI)

(Except for the headline, this story has not been edited by Asianet Newsable English staff and is published from a syndicated feed.)