Banks are increasingly prioritizing FCNR(B) deposits from NRIs with over $1 million as rising overseas funding costs and tighter credit limits make it harder to justify extending nine-times leverage on smaller transactions. According to Mint, banks are keen to offer FCNR deposits only to customers with very high-ticket deposits, with the credit risk decreasing with the customer's net worth. Dhiraj Nim, foreign exchange strategist at ANZ, noted that banks are facing teething troubles, including getting leverage and credit arrangements sorted out, while funding costs are rising. The shift represents a departure from the optimism that followed RBI's 5 June announcement, when banks and analysts expected around $40 billion to flow into India, drawing comparisons with the 2013 FCNR mobilization scheme that brought in $26 billion. Under leveraged FCNR deposits, an NRI holding a dollar deposit at a foreign bank can pledge the deposit and borrow up to nine times the amount, with the original deposit and borrowed amount combined for investment in an Indian FCNR account.
In a bid to attract foreign currency deposits by Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs) and Persons of Indian Origin (PIOs), the Reserve Bank of India last month withdrew, till September 30, interest rate ceiling on fresh Foreign Currency Non-Resident (Bank) deposits of 3-5 years' maturity. According to Business Standard, under the new arrangement, the RBI is offering a concessional foreign exchange swap facility to banks for FCNR(B) deposits with maturities ranging from three to five years. This significantly reduces the cost banks incur in hedging foreign currency exposure and provides a 3 per cent cost advantage for banks to encourage mobilisation of foreign currency deposits. The move came at a time when FCNR(B) deposit inflows weakened sharply, with net inflows dropping to just USD 946 million in FY26 from USD 7.1 billion in FY25. Fresh FCNR(B) inflows have remained modest so far, with banks mobilizing only $166 million in April 2026, according to latest RBI data, while the outstanding FCNR(B) deposit base stood at $33.92 billion at April-end.
Funding costs are squeezing the economics of the FCNR scheme as banks now borrow dollars at around the Secured Overnight Financing Rate (SOFR) plus 120-130 basis points, up from around SOFR plus 90 basis points just a few weeks ago. According to Mint, most banks continue to offer around 6.5% on FCNR deposits, leaving little room to absorb the higher funding costs without squeezing margins. Ajay Marwaha, president and head of fixed income at Nuvama Group, warned that the returns could fall to 5.00-6.00% if global rates rise by 100 basis points, noting that what looks like a 14% return today could fall to 5.00-6.00%. The rise in funding costs is already affecting banks' overseas fundraising plans, with State Bank of India shelving its planned dollar bond issuance after investors demanded higher borrowing costs. Even if the FCNR scheme succeeds in attracting $30-40 billion, Marwaha questioned whether it would meaningfully strengthen India's external position, suggesting that a sovereign dollar bond would be more effective.
Indian banks are increasingly seeking international credit ratings to enhance foreign-currency funding capabilities, with Federal Bank receiving its first-ever international issuer credit ratings from S&P Global Ratings — BBB-/Stable for the long term and A-3 for the short term on Wednesday. The investment-grade rating is expected to strengthen the bank's access to global debt markets and diversify its foreign-currency funding sources. YES Bank also secured a fresh international rating from S&P Global Ratings, which assigned the lender a BB+/Stable long-term issuer credit rating and a B short-term rating, with S&P citing improving asset quality and strategic support from shareholder SMBC as key factors. According to a senior industry official, global ratings are increasingly becoming a prerequisite for accessing overseas investors, issuing foreign-currency bonds and mobilising FCNR deposits from non-resident Indians. Overall, NRI deposits across FCNR(B), NRE and NRO accounts stood at $165.59 billion, indicating that FCNR(B) deposits account for roughly one-fifth of the total NRI deposit base.
As India's banking sector enters Q1FY27 earnings season, private banks are expected to outperform public sector banks with profit after tax (PAT) projected to climb 10% year-on-year compared to 9% for PSU banks, according to Motilal Oswal. Net interest income (NII) is estimated to rise 10.4% YoY, with HDFC Bank at 8.5% YoY, ICICI Bank at 10.5% YoY, Axis Bank at 10.6% YoY, and Kotak Mahindra Bank at 10.1% YoY. However, pre-provision operating profit (PPoP) for private banks under coverage is expected to decline 8% YoY, as noted by Bernstein. Sector credit growth stood at 17.7% year-on-year as of 15 June, but the divergence runs deeper than just private versus PSU, with Nomura highlighting that incremental growth came from lower-yielding segments like gold loans and corporate credit. Private banks have demonstrated stronger balance sheet growth, with deposit expansion of 14% YoY in the June quarter versus 11% for PSU banks, while PSU banks led in loan book expansion at 16.4% YoY versus 15.9% for private banks.
