FCNR(B) deposits need less liquidity buffer: How LCR rules could improve bank margins

The surge in FCNR(B) deposits could give Indian banks a liquidity advantage and help their margins when these funds are deployed as loans. According to YES Securities’ September 11 banking sector report, FCNR(B) deposits are LCR-accretive because banks have to keep less liquidity against them compared with wholesale deposits.

Why FCNR(B) deposits need less liquidity

The report says FCNR(B) deposits collected under the recent swap window are treated more like retail deposits for calculating the Liquidity Coverage Ratio (LCR). This means banks need to keep a smaller amount of high-quality liquid assets (HQLA) against these deposits to meet the same liquidity requirement.

The difference is large when compared with wholesale deposits. YES Securities says the run-off rate for retail deposits is between 5% and 12.5%, while it can be as high as 100% for wholesale deposits. A lower run-off rate means banks need to hold less HQLA against the deposits.

How this could help bank margins

The benefit comes from the liquidity that banks can free up. YES Securities says banks can eventually use this liquidity to give loans, which typically earn more than HQLA. This could improve banks’ net interest margins (NIMs), all else being equal.

This is one reason the brokerage says the FCNR(B) move will not necessarily hurt NIMs for all banks. Other factors that could support margins include lower wholesale deposit rates and the ability to replace expensive bulk deposits with FCNR(B) deposits.

Wholesale-funded banks could gain more

Banks that rely more on wholesale funding could benefit more from the change. YES Securities identifies RBL Bank, CSB Bank, IndusInd Bank and Axis Bank as banks with a higher share of LCR wholesale deposits.

The report also points to a broader fall in wholesale funding costs. Certificate of Deposit rates have declined from a peak of 7.96% in May 2026 to 7%-7.2% currently. For private-sector banks, lower fresh domestic term-deposit rates helped their spread expand by 22 basis points month-on-month in July.

But excess liquidity is a concern

The benefit may not come immediately. Banks cannot deploy all the FCNR(B) deposits into loans at once. YES Securities says banking-system surplus liquidity has increased about 11 times, from around ₹1 lakh crore in July to more than ₹11 lakh crore.

This excess liquidity could put pressure on bank yields and NIMs in the near term. The eventual benefit will depend on how quickly banks can deploy the FCNR(B) funds into loans and other higher-yielding assets.