FCNR (B) Deposits Cross $127 Billion as Analysts Downplay Margin Concerns

Banks have collected $127.3 billion through FCNR (B) deposits since June, taking total inflows, including OFCBs and ECBs, to $136.4 billion. The strong response has sparked concerns in the market that the relatively higher cost of these deposits could put pressure on banks' net interest margins. However, analysts at Anand Rathi believe the impact is unlikely to be significant.  

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The FCNR (B) scheme was introduced on June 8, with the Reserve Bank of India bearing the cost of forex hedging. Since then, banks have seen substantial inflows under the scheme. FCNR (B) deposits now make up around 4.5% of the banking system's total deposits, according to Anand Rathi.  

While investors have focused on the higher funding cost associated with these deposits, the brokerage notes that FCNR (B) money still accounts for a relatively small share of overall deposits. After examining four different scenarios, Anand Rathi concluded that the effect on net interest margins is negligible.  

A large part of the argument comes down to how banks can use these funds. FCNR (B) deposits are exempt from CRR, SLR and PSL requirements. As a result, banks can put a larger portion of the money to work instead of setting it aside for regulatory obligations.  

The brokerage also highlighted another advantage. Banks are allowed to lend against FCNR (B) deposits pledged by customers. Because such loans are secured by the deposits themselves, the additional capital requirement remains low. Anand Rathi believes this creates an opportunity for banks to earn spreads while deploying comparatively less capital.  

That, in turn, could support return on equity even if margins see a small impact from the higher cost of funds.  

The tenure of these deposits may also work in banks' favour. FCNR (B) deposits generally carry a three-to-five-year maturity, meaning their cost remains fixed during that period. Many loans, on the other hand, are linked to floating rates and can be repriced if interest rates move higher. Under such conditions, banks could end up earning a wider spread over time.  

Anand Rathi noted that this advantage would depend on the interest-rate environment. A prolonged rate-cut cycle could reduce the benefit that banks gain from fixed-cost deposits and floating-rate lending.