FCNR deposits weighed on lending margins at Axis Bank, ICICI Bank and HDFC Bank in the quarter ended September 30, 2026. Higher funding costs and thin margins on lending backed by foreign currency non-resident bank deposits reduced the profitability of that business, even as the inflows expanded banks' balance sheets.
Key Takeaways
- All three lenders reported lower net interest margins than a year earlier.
- Axis management attributed 11 basis points of its margin decline to FCNR(B) deposits.
- Bank executives and analysts expect further repricing to shape margins, but a recovery remains an outlook rather than a result.
Table of Contents
- Why FCNR deposits put pressure on margins
- Axis identifies a specific funding impact
- ICICI's earnings grew despite a narrower margin
- Recovery expectations depend on repricing
- Conclusion
Why FCNR deposits put pressure on margins
The deposit inflows brought a trade-off: more funding and associated lending, but relatively little additional interest income for the balance-sheet capacity used. Net interest margin measures net interest income relative to interest-earning assets, making the mix of new business important alongside its volume.
Siddharth Rajpurohit, lead banking analyst at Systematix Institutional Equities, said overseas lending associated with these deposits earned margins of only 50–60 basis points. He attributed the pressure to both deposit costs and the low margins on leveraged lending.
The inflows also increased the weight of term deposits in the funding mix relative to lower-cost current and savings accounts. ICICI Bank disclosed an average current and savings account ratio of 35.8%, reflecting the larger term-deposit base following FCNR(B) inflows.
| Item | Details |
|---|---|
| Axis Bank | September-quarter NIM: 3.46%, versus 3.80% a year earlier. |
| ICICI Bank | September-quarter NIM: 4.18%, versus 4.30% a year earlier. |
| HDFC Bank | September-quarter NIM: 3.16%, versus 3.27% a year earlier. |
Axis identifies a specific funding impact
Axis Bank collected $10.62 billion through FCNR(B) deposits. Its net interest margin declined by 34 basis points year over year, of which executive director Subrat Mohanty attributed 11 basis points to FCNR(B).
Mohanty said the effect included balance-sheet expansion from self-leveraged deposits and the cost of temporarily holding surplus funds in low-yielding securities before deploying them into suitable lending opportunities.
HDFC Bank raised $11.5 billion through FCNR(B) deposits. Its margin also narrowed, although chief executive Sashidhar Jagdishan identified faster asset repricing and a lag in funding-cost adjustments as additional pressures.
ICICI's earnings grew despite a narrower margin
ICICI Bank's September-quarter performance review showed that margin compression did not prevent earnings growth: standalone profit after tax rose 20.1% to ₹14,843 crore, while net interest income increased 17.7% to ₹25,339 crore.
The bank's total deposits grew 27.1% year over year, compared with 17.0% excluding FCNR(B) deposits. That difference illustrates how strongly the foreign-currency inflows contributed to headline funding growth.
Executive director Sandeep Batra nevertheless expected some continuing margin pressure because the full effect of FCNR(B) deposits had yet to emerge.
Recovery expectations depend on repricing
Jagdishan said HDFC Bank's margins should improve as the interest-rate cycle turns and lending shifts toward retail customers and micro, small and medium-sized enterprises. That was a management expectation, not a reported improvement.
Rajpurohit also expected loan repricing to support margins over the rest of the fiscal year, noting that more than 60% of these banks' loans were linked to external benchmarks. The timing and funding mix therefore remain important to whether stronger lending volumes translate into better margins.
Conclusion
The September-quarter results show that larger foreign-currency funding pools can coexist with narrower margins. The next quarterly results will provide the next test of whether loan repricing and deployment of those funds offset the continuing funding pressure.
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