Foreign currency deposits squeeze Indian bank margins

ICICI Bank and two major rivals raised a combined $40b through FCNR(B) accounts.

Indian banks face continued pressure on net interest margins (NIMs) after raising large amounts through foreign currency non-resident (bank) [FCNR(B)] deposits, although margins could recover by the fourth quarter of FY2027, according to CreditSights.

The research firm expects better deployment of the funds into higher-yielding assets and the full effect of the Reserve Bank of India’s October rate hike on loan books to support margin growth over the coming quarters.

Net interest income rose by 8.2% to 15.2% year on year in the first half of FY 2027 (H1 2027), with ICICI Bank leading on loan growth and margin resilience.

ICICI Bank, HDFC Bank and Axis Bank raised $17.9b, $11.5b and $10.6b, respectively, through FCNR(B) deposits.

The inflows supported funding but also pushed down NIMs and current account and savings account (CASA) ratios quarter-on-quarter (QoQ).

CreditSights expects loan growth to moderate in the second half of FY 2027 as higher interest rates, inflation and a weak monsoon weigh on economic activity.

Competition for low-cost household deposits is also expected to remain a constraint on lending growth.

Loan growth ranged from 5.2% to 12.3% QoQ during H1 2027, although FCNR(B)-related lending inflated the headline figures.

Underlying growth was between 3.4% and 7.3%, led mainly by corporate and micro, small and medium-sized enterprises (MSMEs), while retail lending remained weaker, particularly in credit cards.

Deposit growth ranged from 4.9% to 11.8% QoQ, also boosted by FCNR(B)-related activity. Underlying deposit growth was lower, at 2.6% to 7.1%.

Axis Bank’s loan-to-deposit ratio rose by 2.7 percentage points QoQ amid weaker deposit growth. HDFC Bank and Axis Bank continued to have elevated loan-to-deposit ratios, while ICICI Bank maintained the strongest liquidity position among the three lenders.

Non-interest income was mixed. Trading and foreign exchange income remained weak due to high base effects and higher interest rates. Fee income grew 21.7% year on year at ICICI Bank, compared with 10.4% at HDFC Bank and 6.4% at Axis Bank.

Asset quality remained stable during the period, with lower new bad loans and improved gross non-performing asset ratios both quarter on quarter and year on year. Credit costs stood at 43 basis points at HDFC Bank, 57 basis points at Axis Bank and 24 basis points at ICICI Bank.

Net profit growth ranged from 4.8% to 29.6% year on year. ICICI Bank recorded the highest return on assets (ROA) at 2.33%, ahead of HDFC Bank at 1.73% and Axis Bank at 1.44%.

Capital buffers remain comfortable, while bank management teams expect the adoption of expected credit loss (ECL)-based provisioning from 1 April 2027 to have a limited initial impact. Credit costs could rise slightly as the new framework takes effect.

CreditSights expects some normalisation in credit costs towards the end of FY2027, but said these should remain manageable.