Higher FCNR Deposits Will Support Higher Incremental Credit Growth In FY27
Credit growth to stay healthy with retail and micro, small and medium enterprises (MSMEs) as the key growth drivers along with credit demand from corporates shifting from bond markets to banks
Chennai: The measures taken by RBI to help banks raise sizable foreign currency non-resident (FCNR) deposits may lead to higher incremental credit by banks. ICRA has revised its incremental credit estimates up by Rs 5 lakh crore for FY2027 to Rs 28.75-30.25 lakh crore.
Credit growth to stay healthy with retail and micro, small and medium enterprises (MSMEs) as the key growth drivers along with credit demand from corporates shifting from bond markets to banks. In addition, the measures taken by the Reserve Bank of India (RBI) are likely to help banks raise sizable foreign currency non-resident (FCNR) deposits, which will boost fund availability and help enhance credit growth. Accordingly, ICRA has revised its incremental credit estimate for FY2027 to Rs 28.75-30.25 lakh crore from the previous estimate of Rs 23.50-25.00 lakh crore.
The Reserve Bank of India had launched a special US Dollar-Rupee forex swap window for FCNR (B) deposits, allowing banks to offer significantly higher interest rates of up to 7.1 per cent. According to reports, banks saw a spike in FCNR deposits in June.
Incremental credit expansion was high in FY2026 at Rs. 29.2 trillion compared to Rs. 18.0 trillion in FY2025. Credit growth picked up sharply towards the end of Q4 FY2026, supported by the shift in demand from the bonds market to banks as banks’ rates remained steady while bond yields stayed elevated and rose further in March 2026.
However, the ongoing West Asia conflict has introduced uncertainties, particularly for MSMEs, due to potential oil shocks, supply chain disruptions, and inflationary pressure. Moreover, the cost of funds is expected to stay high in this scenario, which would further keep the net interest margins (NIMs) under pressure. Prolonged disruptions may affect borrower cash flows as well, posing asset quality risks and additional pressure on profitability.
Absolute Gross Non-performing assets and net non-performing assets are expected to witness a YoY uptick amid the West Asia conflict. The GNPA percentage is likely to rise, while the NNPA percentage is projected to remain steady. Nonetheless, emergency credit line guarantee scheme (ECLGS) 5.0 would support borrowers’ cash flows.
Net Interest Margins could witness some pressure in FY2027, with the cost of deposits staying elevated. However, repo rate hikes going ahead, if any, would support the NIMs. Several banks reported treasury losses in Q4 FY2026, which impacted the profitability amid the pressure on NIMs.