FCNR(B) deposits may pressure bank margins, benefit NBFCs: Nuvama

Banks with high FCNR(B) mobilisation may see margin pressure in Q2FY27, while increased liquidity could benefit NBFCs by containing funding costs, a Nuvama report said. This liquidity is expected to eventually support credit growth.

Representative image (Photo/ANI)

Banks with higher FCNR(B) mobilisation could face sharper margin pressure in the second quarter of FY27, while increased banking-system liquidity could help contain funding costs and cushion margins for NBFCs according to a report by Nuvama.

According to the report, the Foreign Currency Non-Resident (Bank) deposit (FCNR(B)-driven liquidity has emerged as a “key near-term catalyst” for the banking sector.

Banks are currently using much of the additional liquidity to replace bulk deposits and park surplus funds with the RBI or in government securities.

However, “this liquidity will eventually find its way into lending, providing further support to systemic credit growth,” Nuvama noted in its report.

Impact on Banks and NBFCs

Accordingly, “Banks with higher FCNR(B) mobilisation could witness sharper margin compression in 2QFY27,” it said, however, it “although this should gradually reverse as incremental liquidity is deployed into loans.”

At the same time, Nuvama said several NBFCs expect to remain key beneficiaries of additional liquidity in the banking system, which could help keep their incremental funding costs in check. “This, in turn, could delay and/or cushion any margin impact from a potential shallow repo-rate hike cycle,” it said.

Upcoming Regulatory Changes

Apart from this, most banks are preparing to transition to the Expected Credit Loss (ECL) framework from April 1, 2027, which could increase annualised credit costs by 10–20 basis points and offset some of the margin gains from potential rate hikes.

Overall, Nuvama expects improved liquidity to provide meaningful support to credit growth and help ease funding costs in FY27.

Potential Headwinds

At the same time, the brokerage house highlighted the potential impact of the proposed insurance commission capping on fee income. As per Nuvama, “Earnings impact is likely to be felt predominantly from FY28E and will depend on final guidelines.”

Overall, it believes, “liquidity should provide meaningful boost to credit growth and funding costs in FY27E, while insurance commission capping could emerge as a more important earnings headwind in FY28E.” (ANI)

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