A surge in foreign currency deposits has narrowed the gap between bank lending and deposits, but high funding costs and limited demand for credit could restrict profitability
Indian banks have received a substantial boost from non-resident Indian (NRI) deposits, easing a prolonged shortage of funds. However, the influx of foreign currency has created a fresh challenge: banks must find profitable ways to deploy the money while meeting the high cost of raising it.
According to an analysis published by Upstox on October 12, deposits in the Indian banking system rose by ₹9.5 trillion between August 16 and 31, 2026, while bank lending increased by ₹3.8 trillion. The Reserve Bank of India (RBI) recorded its fastest deposit growth in 15 years during the period.
The sharp increase was attributed largely to the central bank’s special window for Foreign Currency Non-Resident (FCNR) deposits, which encouraged NRIs to place foreign currency funds with Indian banks.
For several years, banks had struggled to keep deposit growth in line with credit demand. At the peak in May 2026, they were lending approximately ₹114 for every ₹100 of fresh deposits, forcing them to rely on expensive market borrowings and large corporate deposits.
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The new inflows have helped narrow the gap between credit and deposit growth to around 1% by mid-September, according to the report
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As FCNR deposits are generally held for three to five years, they also offer banks a relatively stable source of funding
However, the money comes at a price. Banks are paying NRIs around 6.5% on these dollar deposits, with currency-risk protection on the principal but not the interest component. Including the additional cost, the effective funding rate is estimated at approximately 6.65%.
This compares with an average cost of 5.9% for fresh rupee fixed deposits in July, making the FCNR funds considerably more expensive than conventional domestic deposits.
The challenge is finding suitable borrowers. During the second half of August, banks lent only 63% of their fresh deposits, compared with 92% two weeks earlier. The remaining funds had to be deployed elsewhere, including with the RBI, potentially at returns below their funding costs.
Banks can use the money to repay expensive borrowings, extend corporate and retail loans, or purchase government bonds. However, intense competition for creditworthy borrowers could push lending rates down, while cautious lending practices may limit growth in more profitable retail segments.
The influx has therefore eased banks’ immediate funding pressures without fully resolving the underlying imbalance. Their ability to turn the additional deposits into sustainable earnings will depend on credit demand, lending rates and how efficiently they manage the cost of funds.
