Indian banks reduce costly bulk deposits amid strong FCNR-B inflows

Indian banks are actively reducing costly bulk deposits after strong foreign currency inflows. This strategy helps optimize funding costs and potentially boost profitability for lenders. Larger banks are realizing significant savings by replacing these expensive funds. Overall, banks are expected to mobilize substantial amounts through the FCNR-B window. This shift reflects a strategic move to strengthen liquidity profiles.

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Kolkata: Indian lenders are aggressively shedding expensive bulk deposits as the record foreign currency non-resident (FCNR-B) mobilisation reduced the requirement for costlier domestic funds.

Analysts believe doing so is helping optimise funding costs and could potentially improve the second-quarter net interest margins (NIM), or core profitability, at several lenders.

Also read: NRI deposit inflows dip 23%; FCNR draws 124% more

Bigger banks could have saved about 25-60 basis points in terms of incremental cost of deposits in August as shedding of bulk funds gained momentum. One basis point is a hundredth of a percentage point.

Benefits for smaller banks would, however, remain limited as they offered higher FCNR-B rates to depositors, senior industry executives said.

"Large banks are saving 25-40 bps as they replace bulk deposits by the FCNR-B deposits as there are no hedging costs and CRR and SLR requirements. This could also lead to an improvement in NIM if banks can maintain their lending rates," said Kuntal Sur, partner, financial services at PwC India

Bank of India managing director Rajneesh Karnatak told ET last month that there could be savings of 50-60 bps as banks won't renew bulk deposits. ET spoke to a cross-section of senior bankers and everyone confirmed not renewing high-cost bulk deposits after FCNR-B inflows strengthened the medium- to long-term liquidity profile. "We are continuously reviewing the bulk deposit positions and our endeavour is to partly replace the bulk deposits with the inflow of FCNR-B deposits," a senior official at Canara Bank said. Canara Bank, for instance, mobilised $4.8 billion under the special mobilisation scheme, surpassing the $1.5 billion target.

Also read: Full flow FCNR deposits could hit $100 billion, beat estimates

Record Haul

All banks taken together could end up mobilising $80-85 billion through the FCNR-B window, surpassing expectations, Citi's India CEO K Balasubramanian said last week.

In the first 15 days of August, outstanding deposits with the banking sector contracted by about ₹6,500 crore despite the massive inflows from overseas. This in other words means the size of withdrawal surpassed the mobilisation amount as a reflection of the reduction in bulk deposit kitty, officials said. Banks had added a net ₹6.61 lakh crore of deposits in the preceding fortnight.

Larger banks, with relatively lower pricing and substantial FCNR-B inflows, enjoy a bigger window to substitute expensive bulk deposits. For mid size and smaller banks, the equation is different.

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