The special Reserve Bank of India (RBI) window brought in a record $127 billion, or around Rs 10.6 lakh crore, through Foreign Currency Non-Resident (Bank) or FCNR(B) deposits before it closed on August 31. As a result, banks are now sitting on a much larger pool of foreign-currency deposits than the market had expected.

According to domestic brokerage house Motilal Oswal, faster deployment of these funds could support credit growth and change the earnings outlook for lenders.The brokerage has picked ICICI Bank, State Bank of India, Kotak Mahindra Bank and AU Small Finance Bank as its preferred financial stocks.

Let’s a look at what the brokerage houses are saying and the rationale behind it –

Banks attracted $127 billion, or around Rs 10.6 lakh crore, in FCNR(B) deposits before the special window closed on August 31.

These deposits were part of a RBI scheme that allowed banks to raise 3-5 year FCNR(B) deposits and convert the foreign currency into rupees through swaps.

The RBI also exempted these deposits from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements, making them more attractive for lenders.

Motilal Oswal said, “$127 billion of FCNR (B) deposit accretion tops street expectations by a mile.”

The inflows have helped push banking-system surplus liquidity above Rs 6 lakh crore by August 31.

Motilal Oswal report further added that ICICI Bank mobilised around Rs 1.70 lakh crore, accounting for 14% of total FCNR(B) inflows. State Bank of India garnered around Rs 85,000 crore and is expected to exceed its Rs 94,000-crore guidance.

Kotak Mahindra Bank, meanwhile, mobilised around Rs 32,000 crore, giving it a 2.7% share of total FCNR(B) inflows.

The brokerage also noted that foreign banks such as HSBC and Standard Chartered were among the largest mobilisers, helped by higher leverage offered on their overseas balance sheets.

Deposit growth has already improved to around 14.7% year-on-year as of August 15, compared with the 12-13% range seen earlier in the year.

Motilal Oswal believes the improved funding environment could allow banks to expand loans faster.

It said, “We estimate a 150bp increase in system credit growth to ~15.5-16.0% for FY27E.”

The brokerage’s earlier system-credit-growth estimate stood at 14.3% year-on-year.

Motilal Oswal expects net interest margins (NIMs) to remain under pressure in the near term because banks may earn only a limited spread on the leveraged overseas portion of FCNR(B) deposits.

However, it expects this pressure to ease as banks deploy the deposits into loans and improve their asset mix.

The brokerage said, “NIMs are expected to be under pressure in the near term on account of limited spread on the overseas leveraged portion of FCNR (B) deposits, though the deployment of these deposits and an improving asset mix will drive faster balance sheet growth and support earnings.”

ICICI Bank stands out for its large share of FCNR(B) mobilisation and its ability to convert funding into loan growth.

State Bank of India also remains on the list after raising a substantial amount before the special window closed.

Kotak Mahindra Bank attracted more FCNR(B) deposits than its overall deposit market share, according to the brokerage, indicating stronger traction under the scheme.

AU Small Finance Bank rounds out the preferred list, giving investors exposure to a smaller lender that could benefit if system credit growth accelerates.

Motilal Oswal said, “We remain positive about systemic credit growth.”

The immediate benefit from FCNR(B) deposits is improved liquidity. The bigger test will be what banks do with that money.

Motilal Oswal expects the banking sector to move into a stronger credit-growth phase, although the margin benefit may not appear immediately.