Indian banks gain $127b in foreign deposits but margin squeeze looms

The scheme could attract new business, said S&P Global Ratings.

India is seeing a huge inflow of deposits from foreign currencies, easing funding concerns amidst strong credit growth, although margins may suffer, said S&P Global Ratings.

Banks in India raised $127b deposits through foreign currency nonresident bank (FCNR (B)) accounts between 8 June to 31 August 2026—equivalent to about 4.5% of the system’s deposit base as of 31 March 2026.

Liquidity is the clearest benefit, according to S&P Global Ratings, as these deposits have tenors of three to five years and will likely improve banks’ funding stability, said S&P Global Ratings credit analyst Geeta Chugh.

Net interest margins could suffer, however, Chugh said. Effective costs for the FCNR (B) accounts can exceed those of traditional current and savings accounts and granular retail deposits.

The big test is bunched maturities in 2029 to 2031, Chugh said.

"Future growth of such deposits is unlikely to recur at this scale. Banks could face refinancing and repricing pressure, if they make up a sizable portion of overall deposits,” Chugh said.

Banks with a strong franchise should be able to refinance, but weaker ones could face a refinancing squeeze, Chugh said.

For now, the benefits of the central bank’s scheme outweigh the costs, as the scheme could also help banks attract future business.

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