FCNR-B Inflows Mask Softer Underlying Bank Deposit Growth
A Jefferies report reveals that while Indian banks show strong Q2 growth, FCNR-B inflows are masking a slower underlying deposit expansion.
The recent surge in loan and deposit figures reported by major Indian banks for the September quarter may be more complex than they appear at first glance. While headline numbers suggest robust expansion, a new report from Jefferies indicates that a significant portion of this growth is being driven by FCNR-B inflows, leaving the underlying deposit momentum looking considerably more moderate.
The FCNR-B Effect on Bank Numbers
According to the Jefferies analysis, the buoyant growth seen in several large private lenders is partly a result of foreign-currency deposits. While these inflows have provided a much-needed boost to the balance sheets, they paint a different picture when stripped away. The brokerage noted that core loan growth remains stable, but the adjusted deposit growth—once the FCNR-B impact is removed—is softer, albeit of a better quality.
Banks appear to be strategically using these foreign-currency deposits to manage their liquidity. By leveraging FCNR-B funds, lenders are able to:
- Repay high-cost domestic deposits.
- Improve their Liquidity Coverage Ratio (LCR).
- Optimize the overall cost of funds.
Deep Dive: How Major Banks Performed
The report provides a detailed breakdown of how the FCNR-B factor has influenced the reported growth of India's leading private lenders. The discrepancy between reported figures and "adjusted" figures is stark across the board:
Axis Bank
Axis Bank reported a year-on-year loan growth of 23 per cent and deposit growth of 21 per cent. However, Jefferies estimates that once FCNR-B is excluded, loan growth stands at 19 per cent and deposit growth drops significantly to 12 per cent.
Kotak Mahindra Bank
While the headline figures for Kotak Mahindra Bank showed 25 per cent loan growth and 23 per cent deposit growth, the adjusted estimates suggest a more moderate 21 per cent for loans and 13 per cent for deposits.
IDFC First Bank
IDFC First Bank showed the most dramatic shift. Reported growth stood at 30 per cent for loans and 26 per cent for deposits. After adjusting for the FCNR-B effect, these figures were estimated at 20 per cent and 14 per cent, respectively. The bank has successfully used these inflows to boost its LCR from 116 per cent in June to 125%.
HDFC Bank
For the banking giant HDFC Bank, reported loan growth was 16 per cent and deposit growth was 19 per cent. Jefferies estimates the adjusted growth at 14 per cent for loans and 15 per cent for deposits.
Challenges in Low-Cost Deposits
Beyond the FCNR-B impact, the Jefferies report highlights other structural trends within the banking sector. While certain segments are seeing rapid expansion, others are struggling to keep pace.
The report flags a specific weakness in CASA (Current Account Savings Account) deposit growth, which continues to lag. In contrast, other sectors are seeing high activity:
- Gold Loans: Continuing to see fast growth.
- Corporate Working Capital (WC) Loans: Also showing rapid expansion.
- MFI & SME Collections: Trends in Microfinance Institutions and Small and Medium Enterprises remain largely stable.
Ultimately, the findings suggest that while the Indian banking sector is showing strength, the reliance on foreign-currency inflows to bolster deposit numbers is a critical factor that investors and analysts must consider when evaluating the true pace of domestic deposit mobilization.