FCNR-B deposits are boosting bank growth — but could squeeze margins, says report

Foreign-currency deposits raised through the FCNR-B mobilisation drive have emerged as a key driver of Indian banks’ loan and deposit growth in Q2FY27. But the sharp increase in these deposits could also weigh on banks’ net interest margins (NIMs), as lenders may take time to deploy the funds profitably.

According to a Q2FY27 preview by JM Financial, provisional business updates from 30 banks showed loan growth accelerating to 19.1% year-on-year and 6.6% sequentially, while deposits grew 15.8% YoY and 5.8% QoQ. The brokerage said the FCNR-B mobilisation drive since June 2026 contributed meaningfully to this growth.

Why FCNR-B matters

FCNR-B, or Foreign Currency Non-Resident Bank deposits, have significantly changed the funding mix for banks. The influx of these deposits has helped lenders expand their balance sheets while reducing their dependence on other funding sources.
JM Financial noted that certificate of deposit issuances fell 16% QoQ during Q2FY27, with Axis Bank, ICICI Bank, Kotak Bank and IndusInd Bank reporting no CD issuances during the quarter.

Large private banks have been particularly active in mobilising FCNR-B deposits. HDFC Bank had mobilised ₹1.10 lakh crore, Axis Bank ₹1.02 lakh crore and Kotak Bank ₹55,300 crore on a gross basis, according to the report.

Key numbers

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The margin problem

The challenge is what happens after banks raise the money.

JM Financial expects NIMs to decline across most banks in Q2FY27, primarily because of large FCNR-B inflows and muted CASA growth. The brokerage expects NIM compression of 14–18 basis points QoQ at ICICI Bank, Axis Bank and Kotak Bank, which were among the largest FCNR-B mobilisers. HDFC Bank could see a roughly 5-bps decline, while SBI’s margin may fall around 3 bps.

The reason is that banks need time to deploy the additional liquidity into loans and other earning assets. Until that happens, the new deposits can increase the liability base faster than income-generating assets, putting pressure on margins.

The impact is already visible when FCNR-B flows are excluded. Kotak’s headline loan growth was 24.7% YoY, while growth excluding FCNR-B/KMIL was 18.8%. For Axis, the corresponding numbers were 22.7% and 18.8%, while HDFC’s loan growth moderated from 16.3% to 14.3% on the adjusted basis.

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What to watch next

For investors, the key question is whether banks can convert the FCNR-B funding advantage into sustained loan growth without sacrificing margins.

JM Financial expects overall NII growth of around 12% YoY for its coverage universe in Q2FY27, despite the anticipated NIM compression. It has flagged the deployment trajectory and yields on FCNR-B deposits as key metrics to monitor, along with any potential rate hike and funding pressures after FCNR-B inflows taper off.

The result is a banking-sector trade-off: FCNR-B money is helping banks grow faster today, but how quickly and profitably that money is deployed could determine whether the growth translates into stronger earnings tomorrow.

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