Bumper FCNR(B) inflows may dilute banks' margins but boost earnings by up to Rs 11,000 crore: Jefferies

After foreign currency non-resident (bank) or FCNR(B) scheme closed in August with a bumper accretion of more than $127 billion, Jefferies said small private banks and NBFCs will benefit more while noting that the overall banking sector may see an earnings boost to the tune of Rs 10,000-11,000 crore.


The bumper collections have taken the total inflows from such special schemes so far to $136.4 billion, according to provisional data released by the RBI. The scheme was launched in June to boost dollar inflows and strengthen foreign exchange reserves, allowing banks to swap eligible overseas borrowings with the central bank at concessional rates, significantly lowering their cost of funds.


While fortnightly data on credit growth won't change much as it captures domestic credit, Jefferies noted that banks' balance sheet credit growth can improve by 3-4 ppt as it captures the leverage provided by banks from foreign branches. For the banking sector, Jefferies expects domestic credit growth to moderate from 18% now to 15% by March 2027 as base resets in December 2026 and supply from bonds and ECB normalise.

The strong FCNR(B) inflows meanwhile can lift deposit growth from 12% pre FCNR-B to 17% (currently at 15%), Jefferies said, adding that it expects slight normalisation by the end of March 2027 to 16%. Fortnightly LDR data meanwhile will likely fall from 83% pre-FCNR-B to 80% (82% now), the international brokerage said.

What happens to banks’ margins?

Net interest margins (NIM) for banks will likely fall in the second quarter due to a timing gap in the placement of banks' fund-raising, Jefferies said in its latest report. It added that banks are likely to quantify the short-term non-recurring impact on NIMs in their earnings print for Q2. Structurally, FCNR-B is a lower NIM business due to the double-counting of deposits and assets, and the first leg makes a 10-15 bps spread, the analysts added.

While FCNR-B deposits dilute NIMs and return on assets (ROA), they are accretive to net interest income (NII) and return on equity (ROE), Jefferies said. In fact, it estimates that at the sector level, it may boost earnings by Rs10,000-11,000 crore, annually, which is 2% of PBT. “We feel it's better to see from the lens of an incremental profit pool, instead of margins. We feel banks may be able to normalise margins over 2-4 quarters by reducing dependence on high cost wholesale deposits, reducing share G-Secs that is held towards LCR and lower share of low-margin overseas trade financing.

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Nomura says FCNR(B) scheme gives forex firepower to RBI

Nomura in its note said that the bumper finale to the FCNR(B) scheme has given the RBI ample foreign exchange reserves firepower, adding that the challenge now is how it will mop up the surplus liquidity. It expects this to boost the balance of payments surplus to $66 billion in FY27 from a deficit of $23.6 billion in FY26.

Motilal Oswal Financial Services meanwhile said that the record high FCNR(B) inflows have backed its estimates of a 150 bps increase in system credit growth to 15.5-16% for FY27. It noted that ICICI Bank mobilised $17.9 billion, capturing 14% market share of the total FCNR(B) inflows. SBI has garnered $9 billion a few days prior to the close and is expected to beat its $10 billion guidance. RBL Bank has added $3.4 billion, capturing 2.7% share, better than its deposit market share of nearly 0.5%.

“FIIs, who were on a selling spree before the FCNR(B) deposit scheme, have added net inflows of $4.8b in the last two months, while INR depreciation against USD has also stabilized,” Motilal noted. While net interest margins are expected to be under pressure in the near term on account of limited spread on the overseas leveraged portion of FCNR(B) deposits, the deployment of these deposits and an improving asset mix will drive faster balance sheet growth and support earnings, according to the domestic brokerage.

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