FCNR (B) inflows to help replace costly bulk deposits, aid bank margins

Expected inflows could help narrow the credit-deposit gap

Inflows expected under the Reserve Bank of India’s (RBI’s) Foreign Currency Non-Resident (Bank) deposit scheme could provide a boost to domestic banks by helping them narrow the credit-deposit growth gap, which had widened to more than 550 basis points (bps) by the end of May.

 

The deposits would also allow lenders to replace a portion of the high-cost bulk deposits. That will lower the cost of funds and potentially supporting net interest margins (NIMs).

 

Estimates of potential inflows vary widely from $20 billion to over $40 billion. 

 

“Since these deposits do not carry the requirements of the cash reserve ratio or statutory liquidity ratio, they can lower the cost of funds. As wholesale deposits mature, banks may choose not to renew them and instead replace them with deposits under the Foreign Currency Non-Resident (Bank), or FCNR (B), deposits. That improves balance-sheet efficiency,” said a senior banker at a large private sector bank, adding that, in theory, margins should improve because banks are replacing higher-cost liabilities. 

 

“However, for a large bank, the impact will be marginal. When your deposit base runs into trillions of rupees, even raising ₹15,000 crore-20,000 crore through this route is relatively small. It helps, but it is not transformational,” he added. The banker also said FCNR(B) deposits could help bridge the gap between credit and deposit growth.

 

According to the banker, one key uncertainty is leverage — whether customers can only bring external leverage or whether banks can also support leverage through their overseas operations.

 

“There will definitely be decent inflows, but if one is saying $60 billion and another $25 billion, the final number is probably somewhere in the middle,” the banker said. 

 

Domestic banks, including State Bank of India (SBI), HDFC Bank, ICICI Bank and Axis Bank, have raised their interest rates on FCNR(B) deposits to 6 per cent or more, with some smaller lenders offering above 7 per cent.

 

Market rates have begun to reflect expectations of stronger liquidity, another banker at a mid-sized private bank said, adding that rates for certificates of deposits (CDs) have fallen below 7 per cent. 

 

“Once banks raise funds, they can either use them for incremental lending or replace existing high-cost liabilities. The easiest liabilities to replace are high-value deposits raised at premium rates and CDs. As a result, both CD rates and high-value deposit rates should come down, which will help margins by lowering funding costs,” he said. The banker added that the inflows should help narrow the gap between credit and deposit growth.

 

“If liquidity improves meaningfully, lending rates at the shorter end could also ease somewhat over time,” he said.

 

Following the launch of the FCNR(B) scheme in 2013, deposit growth accelerated by 2.9 percentage points between August and December, while expansion in credit remained broadly stable, narrowing the credit-deposit gap. Banks’ investment in government securities also rose by 4 percentage points during the period.

 

In a report, Nomura said India’s banking system had been grappling with an elevated credit-deposit ratio in recent years. As banks swap FCNR(B) dollar deposits with the RBI, rupee liquidity should improve over the next four months, reducing reliance on higher-cost CDs. However, the impact may be uneven because liquidity is typically concentrated among a handful of banks.