Federal Bank taps leveraged FCNR deposits to support credit growth, prepares for overseas fundraising

Mumbai: Federal Bank is betting on the Reserve Bank of India’s relaxed foreign currency non-resident bank (FCNR-B) deposit scheme to bolster its funding base and support credit growth while reducing reliance on wholesale deposits, managing director and chief executive officer KVS Manian said.

“We have had early flows. Both leverage and unleveraged flows we have had,” Manian said during the bank’s post-earnings media call on Friday, adding that it has not yet disclosed the amount mobilized.

The bank is offering leverage in the range of 8-12 times for eligible customers under the scheme and is tying up additional funding lines to support the programme.

“We are in various stages of organizing leverage for our customers as well as leverage on our own IBU (ISFCA banking unit) balance sheet… We think we will get a fair share of our market share on that,” Manian said.

Federal Bank expects most FCNR inflows to come from West Asia, followed by Singapore and Hong Kong. Demand from the US, the UK and Australia is likely to remain limited because the product is less attractive from a tax perspective, he said.

The scheme, announced on 5 June and valid till 30 September, allows banks to raise FCNR-B deposits of three to five years and swap the dollars with the RBI at a concessional rate.

The bank has non-resident (NRE/NRO) deposits exceeding ₹1 trillion, or roughly 31% of its total deposits of ₹3.2 trillion. FCNR deposits would supplement, rather than replace, its existing funding strategy.

“There is opportunity to further reduce the reliance on wholesale deposits so we can always refinance part of our wholesale deposits… and partly, of course, we can also deploy them in asset growth,” Manian said. “If credit growth remains robust, we do not see a challenge in deploying the money raised through FCNR-B.”

Overseas borrowing

Federal Bank has also positioned itself to tap overseas funding markets after securing its inaugural ‘BBB-’ international issuer rating from S&P Global, making it the fifth Indian private sector bank with such a rating. While the lender is not committing to an issuance yet, Manian said it is prepared to raise funds under the RBI’s temporary relaxation on external commercial borrowings.

“We are ready in terms of rating… We will watch the market and watch the prices and see whether it makes economic sense for us. We will remain alert to that opportunity,” he said.

On growth, Federal Bank retained its mid-teen credit growth guidance for FY27, but Manian said the bank could revise it higher if market conditions remain favourable.

The lender reported a 15% year-on-year increase in gross advances to ₹2.81 trillion in Q1, while deposits rose 11.4% to ₹3.2 trillion. Net profit rose 37% year-on-year to ₹1,177 crore, while net interest income increased 26%.

Among business segments, commercial banking grew 23%, commercial vehicle and construction equipment finance 21%, corporate and institutional banking rose over 16%, gold loans 33%, loans against property 21%, and credit cards at 36% on year. Business banking expanded a relatively modest 7.1% as the bank prioritized portfolio quality over growth.

Net interest margin (NIM) was at 3.33% at the end of the June quarter, compared with 3.74% in the previous quarter and 2.94% a year earlier, driven by a faster decline in funding costs than lending yields.

Manian reiterated the bank’s earlier guidance of an average 5-6 basis point NIM expansion per quarter over the next three to four quarters, stopping short of committing to a 4% margin target.

Asset quality also strengthened, with the gross non-performing assets ratio improving to 1.52% from 1.62% a quarter ago and the net NPA to 0.18% from 0.37% a quarter ago.