New Delhi, Sep 19: India’s recent dollar deposit mobilisation could provide a significant boost to the banking system by creating additional lending capacity and improving banks’ potential earnings over the coming years, according to an SBI Research assessment.
The Foreign Currency Non-Resident (Bank), or FCNR(B), deposit scheme mobilised around $127 billion in less than three months. SBI Research estimates that these funds could support nearly ₹25 lakh crore of additional bank credit and generate a notional benefit of around ₹5 lakh crore for banks over five years.
The estimate is based on the assumption that the deposits can support additional lending through a credit multiplier of around 2.5. Applying an effective lending yield of 7.5 per cent to the potential additional credit could generate approximately ₹1.8 lakh crore in annual lending income. After accounting for around ₹75,000 crore in annual interest payments on the deposits, SBI Research estimates a notional net benefit of about ₹1 lakh crore a year, or roughly ₹5 lakh crore over five years.
The assessment highlights how foreign-currency deposits can have an impact beyond simply strengthening banks’ deposit base. By providing banks with access to relatively stable dollar funding, the mobilisation could support additional credit creation and reduce dependence on other forms of wholesale funding.
Supporting Credit Growth
The large inflow could provide banks with greater room to finance businesses, infrastructure, housing, consumption and other productive economic activities, provided the liquidity is deployed prudently.
SBI Research estimates that the $127 billion mobilisation could support around ₹25 lakh crore of additional credit. Such an expansion in lending capacity could strengthen the transmission of funds into the wider economy by enabling banks to meet credit demand from businesses and households.
The report also noted that the additional liquidity does not necessarily have to enter the financial system all at once. Festive-season demand, loan disbursements, new credit sanctions, advance-tax payments and GST outflows could gradually absorb the excess liquidity.
Hedging Costs and Currency Risk
The potential benefit needs to be viewed alongside the cost of managing foreign-exchange risk.
SBI Research estimates the cumulative hedging cost of the mobilisation at around $15 billion, based on an average annual USD-INR hedging cost of 3 per cent across different maturity periods.
The research also disputes calculations that combine hedging expenses with a separate assumed loss from rupee depreciation. According to the report, once the foreign-currency liability is appropriately hedged, the subsequent movement in the rupee does not create an additional contractual loss on the principal in the manner suggested by such calculations.
Potential Benefit for RBI
The impact could extend beyond commercial banks.
SBI Research estimates that if around $100 billion of the funds were invested in globally permissible avenues at an average yield of 4 per cent over five years, the RBI could potentially generate about $20 billion in returns.
After taking the estimated $15 billion hedging cost into account, the potential surplus could be around $5 billion, or nearly ₹50,000 crore, according to the report. The actual returns, however, would depend on investment yields, market conditions and the RBI’s approved investment framework.
Strengthening India’s Financial System
The FCNR(B) mobilisation comes at a time when India is seeking to maintain adequate foreign-exchange buffers while ensuring that the banking system has sufficient liquidity to support economic activity.
The large dollar inflows have contributed to higher foreign-exchange reserves and increased liquidity in the domestic banking system. CRISIL has also noted that FCNR(B) inflows helped ease financial conditions, although elevated crude oil prices and global market uncertainty continue to pose challenges.
For banks, the opportunity lies in converting this additional funding into productive credit while maintaining prudent lending standards. For the wider economy, greater availability of credit could support business expansion, investment and consumption if demand for loans remains strong.
The SBI Research assessment therefore presents the FCNR(B) mobilisation as more than a foreign-currency funding exercise. It could potentially strengthen banks’ lending capacity, support liquidity management and contribute to economic activity, while also providing the RBI with an opportunity to earn returns on part of the mobilised funds.
Importantly, the ₹5 lakh crore figure is a notional projection based on assumptions about credit creation, lending yields, funding costs and the five-year period; it should not be interpreted as guaranteed realised profit for banks.