Indian Banks Reduce Bulk Deposits Amid Surge in FCNR-B Inflows

New Delhi, India Aug 31, 2026 ALN: Kolkata: Indian lenders are aggressively shedding expensive bulk deposits as the record foreign currency non-resident (FCNR-B) mobilization reduces the requirement for costlier domestic funds. This strategic shift comes in the wake of significant inflows from non-resident Indians (NRIs), who are increasingly turning to FCNR-B deposits due to favorable interest rates and the stability of foreign currencies, particularly the US dollar. The FCNR-B scheme allows NRIs to deposit their earnings in foreign currency, which can then be converted into Indian rupees when necessary, providing both liquidity and currency stability.

Analysts believe this strategy is helping optimize funding costs and could potentially improve the second-quarter net interest margins (NIM), or core profitability, at several lenders. NIM is a key indicator of a bank's profitability, calculated as the difference between the interest income generated and the amount of interest paid out to lenders, expressed as a percentage of the average earning assets. As banks shift their funding sources towards lower-cost FCNR-B deposits, they are likely to see a positive impact on their NIM, enhancing their overall financial health.

Cost Savings from FCNR-B Inflows

Bigger banks could have saved about 25-60 basis points in terms of incremental cost of deposits in August as the shedding of bulk funds gained momentum. One basis point is a hundredth of a percentage point, and a saving of this magnitude can translate into significant financial benefits for banks. The reduction in reliance on bulk deposits, which typically carry higher interest rates, allows banks to lower their overall cost of funds.

Benefits for smaller banks, however, remain limited as they offered higher FCNR-B rates to depositors, according to senior industry executives. Smaller institutions often lack the same scale and bargaining power as their larger counterparts, which can lead to a higher cost of acquiring deposits. As a result, while larger banks may enjoy substantial savings, smaller banks may struggle to compete on rates, limiting their ability to capitalize on the influx of FCNR-B deposits.

“Large banks are saving 25-40 bps as they replace bulk deposits with 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 at PwC India. The absence of hedging costs is particularly significant, as banks often face currency risk when dealing with foreign currency deposits. By utilizing FCNR-B deposits, banks can mitigate this risk, further enhancing their profitability.

Bank of India managing director Rajneesh Karnatak mentioned last month that there could be savings of 50-60 bps as banks won't renew bulk deposits. Senior bankers confirmed that they are not renewing high-cost bulk deposits after FCNR-B inflows strengthened the medium- to long-term liquidity profile. This indicates a broader trend among Indian banks to reassess their funding strategies in light of changing market conditions and the increasing attractiveness of FCNR-B deposits.

“We are continuously reviewing the bulk deposit positions, and our endeavor is to partly replace the bulk deposits with the inflow of FCNR-B deposits,” a senior official at Canara Bank stated. Canara Bank, for instance, mobilized $4.8 billion under the special mobilization scheme, surpassing the $1.5 billion target. This success reflects a growing confidence among banks in their ability to attract foreign deposits and signals a shift in the banking landscape, where reliance on domestic deposits may be decreasing.

Record Haul Expected

All banks combined could end up mobilizing $80-85 billion through the FCNR-B window, surpassing expectations, according to Citi's India CEO K Balasubramanian. This anticipated record haul underscores the increasing importance of NRI deposits in the Indian banking system, particularly as domestic savings rates remain under pressure. The influx of foreign currency deposits can provide banks with a more stable and diversified funding base, reducing their vulnerability to fluctuations in domestic deposit growth.

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 indicates that the size of withdrawals surpassed the mobilization amount, reflecting a reduction in the bulk deposit kitty. Such trends may indicate a cautious approach by depositors, who are increasingly seeking better returns on their investments in a competitive interest rate environment.

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. They may find it challenging to attract FCNR-B deposits at competitive rates, which could hinder their ability to lower their funding costs. This disparity in access to cheaper funding sources may further widen the gap between larger and smaller banks, potentially leading to increased consolidation in the banking sector as smaller players seek partnerships or acquisitions to remain competitive.

In conclusion, the ongoing shift in funding strategies among Indian banks, driven by the influx of FCNR-B deposits, represents a significant development in the financial landscape. As banks optimize their funding costs and improve their profitability, the implications for the broader economy could be profound. Enhanced liquidity and lower borrowing costs may stimulate lending, supporting growth and investment. However, the challenges faced by smaller banks highlight the need for a more equitable banking environment that allows all institutions to benefit from the opportunities presented by the evolving market dynamics.