Bank margins narrow as FCNR(B) inflows weigh on private lenders

Bank margins came under greater pressure at major Indian private lenders than at several state-owned peers in the September 2026 quarter. Bank executives and an analyst attributed part of the squeeze to substantial Foreign Currency Non-Resident Bank, or FCNR(B), deposit inflows that incurred funding and hedging costs before being fully deployed.

Key Takeaways

• Kotak Mahindra Bank recorded the largest margin decline among the lenders compared, falling 44 basis points year on year.
• Private lenders raised more FCNR(B) funding relative to their deposit bases, a Systematix analyst said.
• Executives expect the funding drag to ease, but the timing remains an outlook rather than a reported result.

Bank margins diverge across private and state-owned lenders

Kotak Mahindra Bank’s net interest margin fell to 4.1%, while Axis Bank, ICICI Bank and HDFC Bank also reported declines. By contrast, Union Bank of India and Central Bank of India recorded expansion, and Bank of India reported a smaller contraction.

The comparison shows that stronger loan and deposit growth did not prevent private lenders from experiencing greater margin pressure. Raising deposits adds funding capacity, but the earnings benefit depends partly on how quickly those funds can be deployed into higher-yielding assets.

Why foreign-currency funding created a near-term cost

ICICI Bank’s explanation of FCNR(B) fixed deposits describes a product for non-resident customers in which principal and interest remain in the same foreign currency. That product structure provides background to the funding involved, rather than evidence of the banks’ quarterly margin performance.

Siddharth Rajpurohit, lead analyst for banking and non-lending financials at Systematix Group, said public-sector banks mobilised FCNR(B) deposits equivalent to roughly 2–2.5% of their deposit bases. For ICICI Bank, Kotak Mahindra Bank and Axis Bank, he put the proportion at about 7.5–10%.

Rajpurohit attributed the sharper private-bank squeeze to a larger pool of funds remaining in lower-yielding assets pending deployment. RBL Bank treasury head Anshul Chandak said the temporary pressure reflected the cost of raising and hedging the deposits before fully deploying them.

Management expects relief as excess liquidity is deployed

Kotak managing director and chief executive Ashok Vaswani said FCNR(B) inflows created near-term margin pressure because the bank carried excess liquidity during the quarter. He said the funds had been used to replace costlier borrowings and support growth opportunities.

Vaswani expects the impact to moderate as remaining liquidity moves into higher-yielding assets and repo-linked loans are repriced, with margins broadly stable through the second half of the financial year.

Chandak expects improvement from the following quarter. Rajpurohit was more qualified: some pressure could persist in the December 2026 quarter, with margins largely stabilising by the fourth fiscal quarter. These are expectations, not completed improvements.

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