Large inflows under the Foreign Currency Non-Resident (Bank) deposit scheme weighed on net interest margins at HDFC Bank, ICICI Bank and Axis Bank in Q2 FY27. Lenders expect some improvement as they deploy the funds and replace higher-cost liabilities.
India’s leading private sector banks faced pressure on their net interest margins (NIMs) during the September quarter of FY2026-27, as substantial inflows under the Foreign Currency Non-Resident (Bank), or FCNR(B), deposit scheme affected their funding mix and quarterly profitability metrics.
HDFC Bank, ICICI Bank and Axis Bank all reported sequential declines in NIM, according to the figures provided. However, their management teams indicated that the impact could ease over the coming quarters as the funds are deployed, expensive deposits are retired and lending activity supports interest income.
The developments highlight the balance banks must maintain between securing stable funding and protecting the spread between interest earned on loans and investments and the cost of deposits and borrowings.
Key Highlights: Private Bank NIMs in Q2 FY27
- HDFC Bank: NIM declined to 3.16% from 3.26% in the preceding quarter.
- ICICI Bank: NIM fell to 4.18% from 4.36%.
- Axis Bank: NIM decreased to 3.36% from 3.46%.
- Funding strategy: Banks are deploying FCNR(B) funds through lending activities and, in some cases, using them to replace higher-cost deposits.
- Outlook: Management teams expect margins to improve, although the timing and extent of any recovery remain uncertain.
Why FCNR(B) Deposits Put Pressure on Bank Margins
FCNR(B) deposits allow eligible non-resident Indians to maintain fixed-term deposits in permitted foreign currencies with authorised Indian banks. These deposits can provide banks with access to foreign-currency funding, subject to applicable regulatory requirements and the terms of the deposit.
Large deposit inflows can affect reported margins depending on their pricing, the returns generated from deploying the funds and the timing of that deployment. If funding costs are incurred before the proceeds generate sufficient interest income, NIM can face temporary pressure.
The effect also depends on how banks use the funds. Lending through overseas branches, issuing eligible credit facilities and replacing more expensive liabilities can influence the eventual contribution to earnings.
For lenders, the objective is to deploy the funds efficiently while managing currency, liquidity, interest-rate and credit risks. Consequently, the timing of deployment can be just as important as the amount of deposits mobilised.
HDFC Bank NIM Falls to 3.16%
HDFC Bank reported a 10-basis-point sequential decline in its net interest margin to 3.16% in Q2 FY27, compared with 3.26% in the previous quarter.
Management has previously highlighted the pressure that can arise when lending assets reprice faster than the bank’s funding costs adjust during a declining interest-rate cycle. Such a mismatch can compress the difference between interest income and interest expense.
According to the supplied account of management commentary, Managing Director and Chief Executive Officer Sashidhar Jagdishan expects conditions to become more supportive as the interest-rate cycle changes.
The composition of the loan book could also influence margins. A greater contribution from retail and micro, small and medium enterprises (MSME) lending, relative to some lower-yielding corporate exposures, may support returns, depending on pricing, credit quality and funding costs.
The extent of any improvement will depend on how quickly funding expenses adjust, how the bank deploys FCNR(B) proceeds and the pricing of new loans.
ICICI Bank NIM Declines to 4.18%
ICICI Bank’s NIM fell by 18 basis points to 4.18% in the September quarter, from 4.36% in the preceding quarter.
Executive Director Sandeep Batra attributed the contraction largely to FCNR(B) deposits, according to the supplied report. He indicated that the impact would continue to be reflected in the December quarter, with margins expected to begin improving thereafter, assuming the prevailing policy-rate environment.
The bank has reportedly mobilised $17.88 billion in gross FCNR(B) deposits. Its international branches and subsidiaries extended approximately $9 billion in loans against these deposits and issued $3.63 billion in standby letters of credit (SBLCs).
These figures describe different uses and forms of exposure and should not be treated as equivalent to recognised interest income. The ultimate contribution to earnings depends on the terms of the transactions, associated costs, utilisation and applicable accounting treatment.
ICICI Bank has also reportedly used part of the funds to repay existing deposits and support loan growth. Further deployment over subsequent quarters could help the bank manage its funding structure and improve the contribution from the funds.
However, a recovery in NIM is not automatic. Loan demand, deposit pricing, interest-rate movements and the pace of deployment will remain important variables.
Axis Bank NIM Slips to 3.36%
Axis Bank reported a sequential NIM decline of 10 basis points to 3.36% in Q2 FY27, compared with 3.46% in the previous quarter.
The bank attributed some of the pressure to FCNR(B) deposits. Management has indicated that it remains focused on its stated NIM guidance of 3.8%, although investors should confirm the precise guidance period and conditions in the official earnings-call transcript.
Axis Bank reportedly used a portion of the funds towards the end of the September quarter to retire higher-cost non-retail term deposits (NRTDs). Replacing more expensive funding with lower-cost alternatives can reduce interest expenses, potentially supporting margins once the benefit flows through the accounts.
Because the deposits were retired towards the end of the quarter, the full effect may not have appeared in the September-quarter numbers. Management expects some benefit to become visible in the following quarter.
The actual improvement will depend on the relative costs of the funding sources, the timing of the transactions and the returns earned on assets financed by the remaining funds.
How the Three Banks Compare
| Bank | Q2 FY27 NIM | Previous-quarter NIM | Sequential change |
|---|---|---|---|
| HDFC Bank | 3.16% | 3.26% | -10 bps |
| ICICI Bank | 4.18% | 4.36% | -18 bps |
| Axis Bank | 3.36% | 3.46% | -10 bps |
Source: Figures supplied for this report. Verify against each bank’s official quarterly disclosures before publication. One basis point equals 0.01 percentage point.
ICICI Bank recorded the largest sequential decline among the three banks in the figures provided. However, NIM levels should not be compared in isolation because banks have different loan mixes, funding structures, overseas operations and accounting considerations.
A bank with a higher NIM does not necessarily generate higher overall profitability or offer a more attractive investment. Investors should also assess asset quality, credit costs, operating expenses, capital adequacy and growth in advances and deposits.
What Could Drive a Margin Recovery?
The outlook for private bank margins will depend on several factors.
Deployment of FCNR(B) funds: As banks put deposits to productive use, the interest income generated may offset the cost of funding. The speed and profitability of deployment will determine the benefit.
Repayment of expensive deposits: Using funds to replace higher-cost liabilities can reduce interest expenses. The impact may become more visible in subsequent quarters if transactions occur late in a reporting period.
Loan growth and portfolio mix: Growth in retail, MSME and corporate lending can support interest income, but returns depend on loan pricing, competition, credit quality and funding costs.
Interest-rate movements: Changes in policy rates affect lending yields and deposit costs at different speeds. The net effect on margins will depend on each bank’s repricing profile and funding structure.
Execution and liquidity management: Banks must balance profitability with liquidity, regulatory compliance and risk management when deploying foreign-currency funds.
These factors may support a recovery, but the timing and magnitude remain uncertain. Management guidance should be treated as an outlook rather than a guarantee.
What Investors Should Watch Next
Investors tracking HDFC Bank, ICICI Bank and Axis Bank should focus on their December-quarter results and subsequent disclosures for evidence that margin pressure is easing.
Important indicators include sequential NIM movements, deposit costs, loan growth, the composition of advances, the use of FCNR(B) funds and the cost of replacing existing liabilities. Changes in asset quality and credit costs will also be relevant when assessing whether improved margins translate into stronger earnings.
The banks’ stated expectations suggest that at least part of the pressure may be temporary. Nevertheless, the outcome will depend on how efficiently they deploy the funds and how the broader interest-rate environment develops.
Conclusion
FCNR(B) deposit inflows contributed to sequential NIM declines at HDFC Bank, ICICI Bank and Axis Bank in Q2 FY27, according to the figures provided. All three lenders are looking for ways to improve the contribution from these funds, including deploying them into lending and replacing more expensive deposits.
The next few quarters should provide a clearer picture of whether these measures translate into sustained margin improvement. Until then, investors should distinguish management expectations from reported results and assess each bank’s broader earnings, funding and asset-quality trends.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Verify all figures, quotations and management guidance against official bank disclosures before publication.
