FCNR-B Fund Tug-of-War: How Indian Banks are Battling Margin Pressure
A Jefferies report reveals how HDFC, ICICI, Axis, and PNB are deploying FCNR-B deposits, impacting their lending margins differently.
Major Indian banks have taken wildly different paths in managing the funds raised through Foreign Currency Non-Resident Bank (FCNR-B) deposits, leading to a mixed bag of results for their lending margins. According to a recent research report by Jefferies, released after the September-quarter earnings, the way these funds are deployed is now a critical factor in determining profitability for the country's banking giants.
The Strategy Split: How the Big Four Handled the Cash
While several banks raised significant pools of FCNR-B deposits, they didn't agree on where to put the money. Jefferies analyzed four major players—HDFC Bank, ICICI Bank, Axis Bank, and Punjab National Bank (PNB)—finding divergent approaches to immediate fund deployment:
- ICICI Bank: Chose a balanced path, keeping a portion of the funds in bank balances while simultaneously pushing for growth in international lending.
- Axis Bank: Focused its efforts on increasing corporate lending.
- HDFC Bank: Opted for a diversified approach, spreading the deployment across various asset classes.
- Punjab National Bank (PNB): Took a more aggressive internal approach by using the funds to repay high-cost liabilities and cutting down its exposure to lower-yielding purchased retail loans.
The Impact on the Bottom Line
These strategic choices have had a direct impact on the Net Interest Margin (NIM)—the crucial gap between what a bank earns on its assets and what it pays for its funding. The report highlights a stark contrast between private and public sector banks.
For the private banks, deploying FCNR-B funds into lower-yielding assets, such as liquid deposits and certain corporate loans, acted as a drag on their margins. The numbers tell a clear story of compression:
- ICICI Bank: Margins dropped by 18 basis points.
- Axis Bank: Margins declined by 10 basis points.
- HDFC Bank: Margins fell by 8 basis points.
In contrast, PNB saw its margins expand by 8 basis points quarter-on-quarter, thanks to its strategy of clearing expensive liabilities.
Mobilization Scale: Who Raised the Most?
The scale of FCNR-B mobilization varied significantly across the institutions. Jefferies estimated the mobilization as a percentage of the banks' June-quarter deposits:
- ICICI Bank: ~9%
- Axis Bank: ~7%
- HDFC Bank: ~3%
- PNB: ~2%
The Road Ahead: When Will Margins Recover?
The outlook for the December quarter remains cautious for private lenders. Jefferies suggests that seasonal stress associated with agricultural loans might cancel out the benefits of better fund deployment.
However, there is a silver lining. The brokerage expects a gradual reallocation of funds over the next two quarters, which should eventually support profitability. Furthermore, the timing of benefits from the RBI’s repo rate hikes will vary based on how quickly each bank adjusts its loan interest rates. The expected order of benefit is:
- Punjab National Bank (PNB)
- HDFC Bank
- ICICI Bank
- Axis Bank
While public sector banks are expected to see margin improvements as early as the December quarter, private banks will likely have to wait until the March quarter to feel the full positive impact.