FCNR(B) Deposits: A Viable Boost for Indian Banks Amidst Tight Funding Pressures

Systematix Research shows that RBI's concessional swap facility for FCNR(B) deposits enhances banks' net interest margins by 60 basis points, aiding in easing funding pressures. These deposits are exempted from SLR and CRR requirements, increasing profitability despite forming a small fraction of total deposits.

In a recent report from Systematix Research, India's banking sector is set to experience a moderate enhancement in net interest margins (NIMs) thanks to the Reserve Bank of India's latest measures concerning Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits. The concessional swap facility, introduced by the RBI, is poised to alleviate funding pressures significantly, offering a noteworthy boost to bank profitability.

The report highlights that banks have responded to these measures by increasing FCNR(B) deposit rates, which now range between 5.25% and 7.1%. This strategic move is anticipated to push the NIM on these deposits to be 60 basis points higher compared to traditional domestic deposits. A key factor contributing to this margin improvement is the exemption of fresh FCNR(B) deposits from statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements, unlike their domestic counterparts that mandate an 18% SLR and 3% CRR, thereby enhancing earning potential.

Despite the positive outlook, the report cautions that the direct impact on sector profitability might be contained due to FCNR(B) deposits making up only 1-3% of the overall deposit base for most banks. Moreover, the expected modest contribution to NIM of 2-4 bps underscores this limited impact. Yet, the broader implications are promising; FCNR(B) deposits are forecasted to constitute 10-15% of new deposit mobilizations, reducing reliance on the high-cost certificates of deposit (CD) market, benefiting banks with elevated credit-deposit ratios, such as HDFC Bank, Axis Bank, and Bank of Baroda.