KOCHI: The extraordinary liquidity created by the Reserve Bank of India’s (RBI) special FCNR(B) mobilisation may have temporarily eased banks’ hunt for deposits. But with the window closed and credit continuing to grow faster than deposits, the underlying competition for deposits could return as the liquidity cushion fades.
The warning has come from Federal Bank, which has itself benefited significantly from the special FCNR(B) window.
“We also expect competition for deposits to intensify once the liquidity situation normalises,” Federal Bank MD & CEO KVS Manian said during the bank’s Q2 FY27 earnings call.
Federal Bank is the largest bank in Kerala in terms of deposits and advances. The bank also runs the largest network by any Kerala bank with 1,662 branchesz.
Manian’s comment assumes significance because Federal Bank’s own balance sheet continues to show a faster pace of credit expansion than deposit growth. Its gross advances grew 21 per cent year-on-year to Rs3,01,687 crore at the end of September, while deposits grew 18.6 per cent to Rs3,42,693 crore.
The bank was also a significant beneficiary of the RBI's special FCNR(B) facility. Federal mobilised Rs14,922 crore of FCNR(B) deposits under the special window and had Rs23,548 crore of FCNR(B) deposits outstanding at the end of September, up 239 per cent year-on-year.
It had also created Rs9,438 crore of loans against FCNR deposits, according to the bank.
The RBI had introduced the special facility on June 8, allowing banks to use a US dollar-rupee forex swap facility against fresh FCNR(B) deposits with maturities of three to five years.
The fresh mobilisation window for FCNR(B) deposits was subsequently closed on August 31 after the response proved much stronger than anticipated.
FCNR brought $127.23 bn
The facility brought an exceptional volume of foreign currency into the banking system. Provisional RBI data put FCNR(B) inflows under the special facility at $127.23 billion by August 31.
The effect was to provide banks with a large additional pool of foreign-currency funding which, through the RBI swap mechanism, also generated rupee liquidity. That has temporarily altered the normal deposit-funding equation.
That said, the banking system is not facing a deposit shortage today. Rather, an exceptional source of funding has temporarily reduced the pressure on banks to compete as aggressively for conventional domestic deposits.
That cushion, however, is already beginning to recede.
RBI Governor Sanjay Malhotra said the banking system's liquidity surplus had remained elevated following the large FCNR(B) inflows but was expected to moderate as ‘currency leakage’ and the central bank's liquidity operations absorbed the excess.
The RBI had already absorbed Rs2.10 lakh crore through two VRRR auctions on October 5 and had sold Rs1 lakh crore of government securities through OMOs in September.
The liquidity surplus is also not evenly distributed across banks. Some lenders have continued to borrow from the market despite the system-level surplus, while the FCNR inflows have been concentrated among larger banks.
That makes the end of the FCNR effect particularly relevant for banks whose deposit franchises have not benefited to the same extent.
Federal's CASA rose 23%
For Federal, the liability franchise has actually strengthened considerably. CASA deposits rose 22.6 per cent year-on-year to Rs1,09,803 crore, while NRE and NRO deposits increased 26.6 per cent to Rs1,19,055 crore, as per the new numbers released by the bank.
Yet Manian expects deposit competition to intensify once liquidity conditions normalise.
That suggests the FCNR inflows may have postponed some of the underlying funding pressure rather than eliminated it.
The pressure can be attributed to the continuing need to fund credit growth. Federal's advances grew 21 per cent in the September quarter, faster than its 18.6 per cent deposit growth. At the system level too, RBI data showed bank credit growing faster than deposits in September-ending quarter too.
The FCNR window therefore gave banks an unusual breathing space: they could tap a large pool of foreign-currency deposits, obtain rupee liquidity through the RBI swap facility and, in some cases, reduce reliance on more expensive market borrowings.
But FCNR(B) cannot become a permanent substitute for domestic deposit mobilisation.
Once the effect of the special window fades, banks will again have to rely primarily on their conventional liability franchises — CASA, retail term deposits and other domestic sources — to support incremental credit growth.
That could bring deposit pricing back into sharper focus. And Federal Bank's warning suggests that when the FCNR cushion disappears, the competition for deposits could become intense again.
