FCNR(B) liquidity may squeeze bank margins, offer relief to NBFCs: Report

According to the report, the Foreign Currency Non-Resident (Bank) deposit (FCNR(B)-driven liquidity has emerged as a key near-term catalyst for the banking sector.

Banks are currently using much of the additional liquidity to replace bulk deposits and park surplus funds with the RBI or in government securities.

However, this liquidity will eventually find its way into lending, providing further support to systemic credit growth, Nuvama noted in its report.

Accordingly, Banks with higher FCNR(B) mobilisation could witness sharper margin compression in 2QFY27, it said, however, it although this should gradually reverse as incremental liquidity is deployed into loans.

At the same time, Nuvama said several NBFCs expect to remain key beneficiaries of additional liquidity in the banking system, which could help keep their incremental funding costs in check.

This, in turn, could delay and/or cushion any margin impact from a potential shallow repo-rate hike cycle, it said.

Apart from this, most banks are preparing to transition to the Expected Credit Loss (ECL) framework from April 1, 2027, which could increase annualised credit costs by 1020 basis points and offset some of the margin gains from potential rate hikes.

Overall, Nuvama expects improved liquidity to provide meaningful support to credit growth and help ease funding costs in FY27.

At the same time, the brokerage house highlighted the potential impact of the proposed insurance commission capping on fee income. As per Nuvama, Earnings impact is likely to be felt predominantly from FY28E and will depend on final guidelines.

Overall, it believes, liquidity should provide meaningful boost to credit growth and funding costs in FY27E, while insurance commission capping could emerge as a more important earnings headwind in FY28E. (ANI)