New Delhi, Sep 4: The strong response to India’s special Foreign Currency Non-Resident (FCNR-B) deposit scheme could provide a fresh boost to the banking sector, with the inflows expected to improve capital efficiency and support banks’ return on equity (RoE), according to a report by Anand Rathi Share and Stock Brokers.
The report said FCNR-B deposits give banks access to an additional pool of foreign-currency funds while creating scope for balance-sheet expansion. Certain regulatory benefits associated with these deposits can also allow banks to deploy capital more efficiently.
The special FCNR-B window attracted around $127.2 billion by August 31, far exceeding expectations. The sizeable mobilisation has strengthened banks’ access to foreign-currency funding and could provide greater flexibility to support lending and other productive activities.
While the deposits may lead to some pressure on banks’ net interest margins, the report believes the overall impact could remain positive. Better capital utilisation and balance-sheet growth could help banks improve RoE and offset the relatively mild pressure on margins.
The additional funding could also support credit expansion as banks deploy the resources into loans and other assets. This may benefit businesses across sectors by improving access to financing for expansion, investment and working-capital requirements.
The strong mobilisation has also added significantly to India’s foreign-currency resources. Total foreign-currency mobilisation under the special measures reached about $136.4 billion by August 31, with FCNR-B deposits accounting for the bulk of the inflows.
For investors, the report suggests that the impact of FCNR-B deposits should be assessed beyond net interest margins. Stronger capital efficiency, balance-sheet expansion and improved RoE could make the deposits a positive factor for banks over the medium term.
Overall, the FCNR-B inflows could give Indian banks a stronger funding base while supporting credit growth and improving the productive use of capital, making the development positive for both the banking sector and the wider economy.