FCNR(B) deposit inflows weigh on private banks' margins in Q2FY27 results

The large mobilisation of Foreign Currency Non-Resident (Bank), or FCNR(B), deposits under the Reserve Bank of India’s (RBI’s) concessional swap window weighed on margins at leading private sector banks in Q2FY27. However, lenders expect margins to recover over the coming quarters as the funds are deployed and the turnaround in the interest rate cycle supports lending yields.

HDFC Bank, the country’s largest private sector lender, reported a 10-basis-point decline in net interest margin (NIM) to 3.16 per cent in the September quarter from 3.26 per cent in the preceding quarter.

According to HDFC Bank MD & CEO Sashidhar Jagdishan, the bank’s margins, which had faced pressure from faster repricing of assets and a lag in the cost of funds during the declining interest rate cycle, were positioned for a reversal as the rate cycle turned upwards. A shift in the loan portfolio towards retail and micro, small and medium enterprises (MSMEs), relative to corporate loans and home loans, would further support margins over time, he said.

ICICI Bank, the country’s second-largest private sector lender, saw its NIM decline by 18 basis points to 4.18 per cent in Q2FY27 from 4.36 per cent in the previous quarter.

Sandeep Batra, executive director at ICICI Bank, attributed the contraction largely to FCNR(B) deposits and said the full impact would be reflected in the December quarter.

“The full impact would actually get reflected in the third quarter, after which we expect the margins to start moving up, even based on the current level of policy rates,” Batra said, adding that the bank was focused on deploying the funds optimally.

The deposits have provided the bank with a stable source of funding for three to five years. ICICI Bank has used a portion of the funds to repay existing deposits and support loan growth during the quarter, while the remaining amount will be deployed over the next two quarters, Batra said.

Axis Bank, the country’s third-largest private sector lender, reported a 10-basis-point decline in NIM to 3.36 per cent in Q2FY27 from 3.46 per cent in the previous quarter. The bank attributed the pressure, in part, to FCNR(B) deposits mobilised under the RBI’s special window, but said it remained on track to meet its NIM guidance of 3.8 per cent.

During the analyst call, the bank’s management said it had used a portion of the funds towards the end of the September quarter to retire higher-cost non-retail term deposits (NRTDs), with the benefit expected to flow through to margins in the current quarter.

“In the last quarter, we have utilised some portion of these funds to retire the more expensive NRTDs (Non-Retail Term Deposits), that was done towards the end of the quarter. We should be able to see some benefit of that come through in the next quarter in terms of NIM uplift,” the management said.