What happens when Indian banks’ $127b deposit boost matures?

The deposits equal about 4.5% of the Indian banking system’s deposit base.

Indian banks have gained $127b in foreign currency deposits that can support lending and funding stability, but they could face pressure to replace the money when the deposits mature between 2029 and 2031, analysts said.

“Banks could face refinancing and repricing pressure if they make up a sizeable portion of overall deposits,” Geeta Chugh, a credit analyst at S&P Global Ratings Singapore Pte. Ltd., said in a 21 September report. She added that weaker lenders could face a financing squeeze.

Banks raised $127b between 8 June and 31 August through the Reserve Bank of India’s foreign currency nonresident bank accounts, S&P said. The amount was equivalent to about 4.5% of the banking system’s deposit base as of 31 March, giving lenders another source of funding.

S&P said in a July report that Indian banks viewed foreign currency deposits from nonresident Indians as a way to counter pressure on their net interest margins—the difference between what banks earn from loans and pay for funding.

Kotak Mahindra Bank Ltd. has seen strong demand for the deposits, according to S&P.

Anindya Banerjee, chief financial officer at ICICI Bank Ltd., said the deposits provide competitive funding and opportunities for more loan growth, according to the July report.

The risk emerges when the deposits mature. Chugh said another inflow on the same scale is unlikely, potentially forcing banks to replace the money with more expensive funding.

S&P said the benefits outweigh the risks for now because banks could retain some of the non-resident Indian customers attracted by the scheme.

“Banks with strong product suites, technological advantages, and strong parentage will also be able to hold on to a meaningful portion of newly acquired nonresident Indian customers,” Chugh said.

Questions to ponder