A surge in foreign-currency deposits has bolstered Indian banks' liquidity and supported strong credit growth, but the funds have also squeezed net interest margins (NIMs) in the September quarter, particularly at private-sector lenders. According to reports from Mint and The Economic Times, the pressure was visible at HDFC Bank, ICICI Bank and Axis Bank, even as all three reported higher year-on-year net profit for the July-September quarter of FY27. ICICI Bank's NIM declined to 4.18% from 4.30% a year ago, while Axis Bank's fell to 3.46% from 3.80%. HDFC Bank reported a NIM of 3.16%, down from 3.27% a year earlier. As per The Economic Times, analysts noted that the drop in margins was largely an after-effect of FCNR(B) deposits, with the leveraged nature of these deposits significantly impacting profitability.
The margin compression reflects the impact of foreign-currency non-resident (bank) or FCNR(B) deposits, which banks have mobilized faster than they can deploy into loans at normal lending spreads. As reported by Mint, the Reserve Bank of India's efforts to attract dollar inflows have eased funding constraints, but the surplus liquidity is weighing on near-term profitability until the funds are deployed into higher-yielding assets. ICICI Bank attributed around 12 basis points of margin pressure to the change in its deposit mix following the mobilization of approximately $18 billion in FCNR(B) deposits. Axis Bank, which collected $10.62 billion through this scheme, saw a 34-basis-point impact as NIMs dropped to 3.46% in September from 3.80% a year ago, with executive director Subrat Mohanty stating 11 basis points of the decline can be attributed to FCNR(B). HDFC Bank, which mopped up $11.5 billion through FCNR(B) deposits, also took a hit as NIM dropped to 3.16% from 3.27% a year ago.
Axis Bank estimated that FCNR(B) deposits and their deployment reduced its NIM by around 11 basis points. According to Mint, excluding this impact, its core NIM improved marginally to 3.47% from 3.46% in the previous quarter. ICICI Bank also expects some pressure on NIMs to continue as the full impact of FCNR(B) deposits is yet to play out, with executive director Sandeep Batra stating during the post-earnings conference call that the full impact would largely get reflected in the third quarter. HDFC Bank CEO Sashidhar Jagdishan stated that the bank's margins faced pressure from faster repricing of assets and a lag in the cost of funds during the declining interest rate cycle, along with the impact of FCNR(B).
The margin pressure did not prevent the four banks from reporting year-on-year profit growth, although the drivers varied significantly. ICICI Bank delivered the strongest combination of core income and profit growth, with net profit rising more than 20% to ₹14,805 crore and NII growing 17.7% to ₹25,339 crore. Axis Bank's net profit increased 38% year-on-year to ₹7,003 crore, supported by 12% growth in NII to ₹15,371 crore. HDFC Bank reported standalone net profit of about ₹19,510 crore, up 5% year-on-year, while net interest income (NII) rose 9.7% to ₹34,619 crore.
According to Mint and The Economic Times, the drop in banks' margins is because of the impact of significant FCNR(B) flows, with analysts expecting some reversal in the December quarter after which margins should return to their normal trend. ICICI Bank's executive director Sandeep Batra stated during the post-earnings conference call that the full impact would largely get reflected in the third quarter, after which margins should start moving up. Axis Bank CFO Rajeev Mantri indicated the bank was working to improve margins through changes in its asset and liability mix, including deploying FCNR(B) funds to support advances and replace higher-cost deposits and borrowings. HDFC Bank CEO Sashidhar Jagdishan stated that as the rate cycle turns and the loan portfolio shifts towards retail and micro, small and medium enterprises, margins would improve.
