FCNR deposits weigh on private banks' margins

In the second quarter, major private banks in India experienced a decline in net interest margins (NIMs) as the expenses associated with raising funds through foreign currency non-resident (bank) deposits and the limited margins on loans backed by these funds impacted their profitability. NIM, which represents the difference between interest earned on loans and interest paid for deposits, serves as a crucial profit indicator for banks.

ICICI Bank, HDFC Bank, and Axis Bank all reported a year-on-year decline in NIMs despite other profitability metrics remaining steady. The primary reason for this drop was the significant amount of foreign currency non-resident (bank) deposits (FCNR (B) deposits) these banks collected. These deposits, which were heavily leveraged, offered low margins abroad (just 50 to 60 basis points), consequently affecting overall NIMs.

For instance, Axis Bank, which amassed $10.62 billion through the FCNR (B) scheme, saw a 34-basis-point impact on NIMs, dropping from 3.80% a year ago to 3.46% in September. Executive director Subrat Mohanty attributed 11 basis points of the decline to FCNR (B) deposits.

ICICI Bank, the largest collector of FCNR (B) deposits, also faced a 12-basis-point impact on margins, with NIMs falling from 4.30% to 4.18% in the same period. Sandeep Batra, executive director at ICICI Bank, expects some pressure on NIMs to persist as the full impact of FCNR (B) deposits is yet to materialize.

HDFC Bank, which gathered $11.5 billion through FCNR (B) deposits, also suffered a margin hit, with NIMs dropping from 3.27% to 3.16%. HDFC Bank CEO Sashidhar Jagdishan pointed to faster asset repricing and the lag in cost of funds during the declining interest rate cycle as additional factors contributing to the margin decline. He anticipates an improvement in margins as the loan portfolio shifts towards retail and micro, small, and medium enterprises during the changing interest rate landscape.