FCNR (B) flow to help Repala

The deposit fund will also allow lenders to replace a portion of high-cost bulk deposits. This will reduce the cost of funds and potentially support the net interest margin (NIM).

Estimates of potential flows vary widely, from $20 billion to $40 billion.

“Since these deposits do not meet the cash reserve ratio or statutory liquidity ratio requirements, they may reduce the cost of funds. As bulk deposits mature, banks may choose not to renew them and instead replace them with deposits under foreign currency non-resident (bank), or FCNR (B), deposits. This improves balance-sheet efficiency,” said a senior banker at a large private sector bank. Margins should improve as banks are replacing high-cost liabilities.

“However, for a large bank, the impact will be marginal. When your deposit base runs into trillions of rupees, raising even ₹15,000 crore-20,000 crore through this route is relatively small. It helps, but it is not transformative.” The banker also said that FCNR (B) can help bridge the gap between deposit credit and deposit growth.

According to the banker, a key uncertainty is leverage – whether clients can only bring in external leverage or whether banks can also support leverage through their overseas operations.

“There will definitely be good inflows, but if someone is saying $60 billion and another is saying $25 billion, the final number will probably be somewhere in the middle,” the banker said.

Domestic banks including State Bank of India (SBI), HDFC Bank, ICICI Bank and Axis Bank have increased their interest rates on FCNR (B) deposits to 6 per cent or more, while some small lenders are offering above 7 per cent.

Another banker at a medium-sized private bank said market rates have begun to reflect expectations of strong liquidity, and said certificate of deposit (CD) rates have fallen below 7 percent.

“Once banks have raised funds, they can either use them to make incremental lending or replace existing high-cost liabilities. The easiest liabilities to replace are high-value deposits raised at premium rates and CDs. As a result, both CD rates and high-value deposit rates should decline, helping margins by reducing funding costs,” he said. The banker said the inflows would help narrow the gap between credit and deposit growth.

“If there is a meaningful improvement in liquidity, short-term lending rates may also decline to some extent over time,” he said.

Following the launch of the FCNR(B) scheme in 2013, deposit growth accelerated by 2.9 percentage points between August and December, while credit expansion remained broadly stable, leading to a narrowing of the credit-deposit gap. Banks’ investment in government securities also increased by 4 percentage points during this period.