New FCNR rules to boost bank deposits, credit growth seen at 14-15% in FY27: Report
New Delhi, July 1
New FCNR deposit rules are expected to lift bank deposit growth by 150-200 basis points, supporting stronger liquidity and driving credit growth of around 14-15 per cent in FY27, with industrial lending likely to emerge as a key demand driver amid government push to boost manufacturing in India, says Anand Rathi.
The RBI's recently announced twin forex swap facilities cover FCNR(B) deposits. Under this arrangement, the central bank will absorb hedging costs on FCNR(B) deposits with 3-5 year maturities raised until September 30, 2026, along with an exemption from CRR and SLR requirements on such deposits. This allows banks to offer more attractive FCNR(B) deposit rates of up to around 6-7.1 per cent.
Noting the banking sector's continued healthy performance, the report said system credit growth surged 17.7 per cent in May, marking its ninth consecutive month of acceleration. Notably, the public sector banks have outperformed the private sector banks for the seventh straight quarter.
However, "while deposit growth improved to ~12.2 per cent in May-26, it lagged credit growth," the report said. Gross slippage ratio improved by ~9bps q/q and ~35bps y/y to ~0.97 per cent in Q4FY26.
On profitability, the report said system net interest margins (NIMs) declined by around 5 basis points quarter-on-quarter in Q4FY26, as loan yields eased following a 25 basis point repo rate cut in December 2025. Public sector banks were more impacted, recording a fall of about 6 basis points quarter-on-quarter, compared with a decline of around 3 basis points for private banks.
In contrast, regional banks stood out, with NIMs improving by roughly 24 basis points quarter-on-quarter, driven by a higher share of gold loans.
Cost of funds (CoF) continued to moderate, with marginal weighted average domestic term deposit rates (WADTDR) easing by around 78 basis points since February 2025, indicating meaningful room for further decline into FY27 and offering incremental support to net interest margins (NIMs).
Additionally, "there is higher probability of rate hike in CY26, which can improve the NIM," the report said.
Oerall, Anand Rathi expects "new FCNR deposit rules to boost deposit growth by 150-200bps, which should lead to 14-15% credit growth in FY27e," the report said.
However, there are changes of higher slippages in FY27/28e, as "El Nino, crude prices and higher tariffs and muted white collar job growth could put some pressure on asset quality."
— ANI
Reader Comments
Impressive that PSBs have outperformed private banks for seven straight quarters. The government's focus on manufacturing seems to be paying off. But I'm a bit worried about the potential impact of El Nino on asset quality - agriculture loans could take a hit if monsoon is weak.
Wait, they think there's a "higher probability of rate hike in CY26" but the report also talks about CRR exemption and lower hedging costs. Won't a rate hike defeat the purpose of boosting deposits? 🤷♀️ Also, 14-15% credit growth sounds optimistic given global headwinds.
Good to see regional banks doing well with gold loans - that's where the real India lies. But the white collar job growth concern is real. With IT layoffs still happening, how will demand for housing and auto loans sustain? RBI needs to think beyond just NIMs and credit growth.
Finally some sanity! The FCNR scheme was long due for a revamp. Indian banks were losing out to Singapore and Dubai for NRI deposits. 6-7.1% rates are competitive now. But 150-200bps boost in deposits? Let's see - NRIs are cautious after the Hindenburg episode. 🧐
One concern: CRR and SLR exemption is good but it also means banks might become reckless with these deposits. Remember 2013 when FCNR deposits caused a sudden outflow? Hope banks manage the maturity mismatch properly.
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