Business News | FCNR Inflows to Weigh on Bank NIMs but Drive EPS Upgrades: Report

New Delhi [India], September 1 (ANI): Foreign Currency Non-Resident (FCNR) inflows are expected to weigh on banks' Net Interest Margins (NIMs) by 3-15 bps, however, the additional funding and stronger loan growth could support a 1-3 per cent upgrade in EPS estimates, according to a report by IIFL Capital.

The brokerage house noted, in July, system loans grew 19.3 per cent year-on-year (YoY) and 0.7 per cent month-on-month (MoM) in July 2026. While YoY growth remained strong across most segments, excluding housing and unsecured loans--which are showing signs of improvement--MoM growth was primarily driven by the gold loan and micro, small and medium enterprise (MSME) segments.

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If we look at the numbers, as of August 15, system loan and deposit growth stood at 18.3 per cent and 14.7 per cent YoY, respectively, while the loan-to-deposit ratio (LDR) eased to 81.7 per cent from a recent peak of 83.4 per cent.

"We expect FCNR flows to add ~3ppt to system deposit gr. (13.5% in FY27E) and 3.7ppt to loan gr. (16.1%)," the brokerage house noted.

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The brokerage expects fresh spreads to widen for private sector banks (PVBs) but narrow for public sector banks (PSBs). It noted, outstanding spreads for public sector banks (PSBs) improved by 2 basis points (bps) against the first-quarter FY27 average, while fresh spreads declined by 6 bps, driven by a 10-bps increase in fresh weighted average term deposit rates (WATDR).

At the same time, private banks saw a 4-bps decline in outstanding spreads, led by a 5-bps decline in outstanding weighted average lending rates (WALR), while fresh spreads improved by 4 bps.

Going forward, IIFL Capital expect improving margins, excluding the impact of FCNR inflows, supported by 5-45 bps month-on-month increases in fresh lending rates across most segments, despite a 1-12 bps decline in retail lending rates, noting median marginal cost of funds-based lending rate (MCLR) also rose by 10 bps MoM, with around 5-35 per cent of banks' loans linked to MCLR, while select banks are yet to complete their term deposit (TD) repricing.

"We believe FCNR will be NIM dilutive (can contract 3-15bps), but drive EPS upgrades of 1-3%," it said. (ANI

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