FCNR(B) deposit drive could pressure banks’ profitability
The impact is likely to be greater for banks with lower funding costs, such as ICICI Bank, HDFC Bank and Kotak Mahindra Bank, because they may have to offer competitive lending rates overseas while keeping deposit rates attractive.
Tricky Trade-off The leverage banks offer likely to weigh as they try to keep lending rates competitive and deposit rates attractive
ICICI Bank executive director Sandeep Batra acknowledged that fresh deposits raised under the FCNR(B) scheme could come at a higher cost.”FCNR(B) deposits could be slightly NIM dilutive. However, we continue to optimise all the levers available to us while maintaining a risk-calibrated approach to profitability,” Batra said during the bank’s post-earnings media call.
Margins should remain within the current range assuming there is no change in domestic interest rates, he said.
“Banks are offering different leverage products to their clients with some offering even eight or nine times. In that case, for every $100 deposit, about $80 could be a loan from a bank. With overseas interest rates lower, these loans will be offered at a much cheaper rate at thin margins of typically between 80 to 90 basis point, which could have some impact on banks’ profitability,” said Rohan Mandora, analyst at Equirus Securities.
The amount of leverage offered will depend on a customer’s credit profile and relationship with the bank. The funds are also likely to be deployed for lending in India, where banks can earn higher yields. Analysts, however, cautioned that the benefits of the special FCNR(B) scheme will depend on banks’ ability to deploy the funds profitably.
In a note on July 21, Macquarie Capital Securities analyst Suresh Ganapathy said that because the Reserve Bank of India swap covers only the principal amount, the effective cost for a bank offering 6% on FCNR(B) deposits exceeds 6.5% after factoring in interest swap costs and rises further after insurance costs, making it comparable with domestic term deposit rates.
“Only thing is you don’t keep CRR (cash reserve ratio) or SLR (statutory liquidity ratio) on FCNR… so, in that sense, it becomes beneficial. If there are good deployment opportunities, you need deposits… so, effectively, it all depends on how well you can deploy them but the notion that this is ‘cheap’ money is now thrown out of the window,” Ganapathy said.
ICICI Bank reported a net interest margin of 4.36% for the quarter ended June 2026, compared with 4.34% a year earlier.
The bank is among lenders with the lowest cost of funds in the industry at 4.51%, alongside Bank of Maharashtra (4.01%), HDFC Bank (4.40%) and Kotak Mahindra Bank (4.46%). Analysts said aggressive leverage and pricing competition could increase the blended cost of funds for such banks.
“For banks with higher cost of funds, these incremental deposits will not come at a much more higher differential cost. The impact will be more for banks which have kept their cost of funds in check so far because there is a possibility that blended cost of funds will go up,” said Yuvraj Choudhary, research analyst at Anand Rathi Securities.
The FCNR(B) scheme, available until September 30, 2026, has mobilised more than $32 billion as of July 17, 2026, according to RBI data. Deposits can be made and withdrawn in foreign currencies, including the US dollar, Canadian dollar, Australian dollar, British pound, euro and Japanese yen. Interest earned on these deposits is exempt from tax in India.
