India’s banks have suddenly found themselves with more money to lend.

Non-resident Indians have parked $127.2 billion (about ​​Rs 12.2 lakh crore) with Indian banks through FCNR(B) deposits, giving lenders more room to expand credit after years in which deposit growth struggled to keep pace with loans.

This is good news for banks that have been struggling to balance robust credit growth with muted deposit growth — and will now have more headroom to grow.

The inflows have helped push system liquidity to Rs 7.8 lakh crore as of September 1 from Rs 6.7 lakh crore in mid-August.

However, FCNR(B) deposits are costing banks roughly 6.5% to 7%, compared with around 4% to 6% for conventional domestic deposits.

That creates pressure to put the money to work, preferably in loans that generate double-digit returns.

The obvious answer is unsecured credit. Experts said that it is also the area where banks have the most reason to remain cautious.

What Are FCNR(B) Deposits?

FCNR(B) is a swap facility offered by the Reserve Bank of India (RBI) that allows banks to raise foreign-currency deposits from NRIs.

The dollars are converted into rupees, while the RBI takes on the currency risk for the principal and provides dollars back to banks when depositors withdraw their money.

While the central aim of the facility is to improve foreign currency inflows, it’s also a boon for the Indian banking sector.

The deposit window, which was open between June 8 and August 31 of 2026, boosted the system liquidity to Rs 7.8 trillion by September 1 from Rs 6.7 trillion in mid-August. This also includes $5.3 billion raised by banks via Outstanding Foreign Currency Bonds (OFCBs) and $3.9 billion through External Commercial Borrowings (ECBs); the total foreign currency mobilisation by September stood at a massive $136.4 billion.

But this liquidity doesn’t automatically mean better margins.

These funds are more expensive than standard domestic deposits.

Banks have been offering 6.5% to 7% on some FCNR(B) deposits, above the roughly 4% to 6% they pay on normal domestic deposits. UBS estimates the inflows could push up banks’ funding costs by 15 to 20 basis points in FY27.

“Given the large inflows, we could expect some near-term compression in net interest margins (NIMs) as spreads on the overseas leverage are typically finer, and also deployment into margin-accretive segments could take time. Effective deployment of these deposits should help decide the margin trajectory,” Axis Bank said in a report.

The challenge, therefore, is to find borrowers who can generate enough return to justify the cost of the money without adding too much credit risk.

“The sizable inflows under FCNR(B) deposits have significantly augmented system liquidity, prompting banks to seek profitable deployment opportunities. However, ICRA does not expect the banks to be pursuing aggressive growth in unsecured lending segments to enhance their yields,” Sachin Sachdeva, VP and sector head of financial sector ratings at ICRA told The Core.

No Personal Loan Mela

Deploying these funds in loans that provide double-digit interest rates could be margin accretive, believe experts.

The avenues for such have been shrinking in the last few years.

Housing loans have long had relatively low yields. Prime corporate loans typically carry single-digit interest rates. Gold loans can fetch around 10%. Personal loans, by contrast, can carry interest rates above 20%, depending on the borrower’s credit profile.

But, banks might not rush into personal loans in a big way.

“Personal loan growth may rise marginally but not principally. Housing credit is long tenor and competitively priced, while prime corporate loans have thin spreads; this creates a temptation to seek yield in unsecured consumer loans, credit cards and small-business finance. But this would be imprudent,” Manoranjan Sharma, chief economist at Infomerics Ratings, told The Core.

Lending to riskier avenues might be the last resort of banks.

Banks have been on high alert ever since the RBI signalled concerns regarding unsecured retail-credit risk through higher risk weights. SBI chairman CS Setty also said that FCNR(B) inflows would not lead to ‘abnormal lending’.

“Banks face the classic danger of lending standards weakening precisely when liquidity is abundant. A likely outcome is sharper pricing competition in secured retail loans and corporate credit, not indiscriminate unsecured-personal-loan expansion,” Sharma said.

The question, then, is where the money goes instead.

The NBFC Loophole

Banks might be wary of unsecured personal loans, but it’s acknowledged as the most promising growth story for loans.

Unsecured loans include personal loans, microfinance, unsecured business loans and credit cards.

The unsecured loan book grew from 6% of GDP in FY19 to 10% in FY26, but fell from 11% in FY25. Gold loans, meanwhile, rose to 5% of GDP from 4%.

It already looks like it’s playing out.

CRIF Highmark data for August 2026 show personal-loan growth accelerating to around 30% at NBFCs and 9% at banks, both around two-year highs.

UBS sees the conditions for a renewed unsecured-credit cycle with healthy asset quality, relatively stable unsecured household leverage, abundant liquidity and a more risk-on stance among lenders.

But the FCNR(B) money does not necessarily be directly on banks’ own unsecured-loan books.

NBFCs could become an important channel for the liquidity. Banks can provide them with term loans, working-capital lines and co-lending arrangements, or buy their debt.

“Some funds are likely to reach NBFCs, both directly through bank term loans, working-capital lines and co-lending arrangements, and indirectly through purchases of NBFC paper. Market participants have explicitly identified NBFC lending as a deployment avenue. But flows will be selective: banks will favour highly rated, well-capitalised NBFCs with granular, well-seasoned collateral pools and sound asset-liability management,” Sharma said.

NBFCs borrow short or at floating rates while holding longer-duration or riskier assets. Over the last few years, their funding costs have already faced upward pressure as market yields rose. “FCNR(B)-enabled bank liquidity may lower or stabilise funding costs for stronger NBFCs, but it should not justify looser underwriting,” Sharma added.

The MSME Credit Story

Increased liquidity in the system can also help banks cater to the growing demand for loans by Micro, Small and Medium-sized Enterprises (MSMEs) – which also offers better yields than corporate loans.

Commercial credit outstanding to MSMEs has risen to Rs 65.8 lakh crore, growing at a 16% compound annual rate over three years, according to FlexiLoans.

“Over the past few years, retail and micro small and medium enterprises (MSME) have been the key growth drivers of the bank credit, while credit to large corporates and industries has also gained momentum in the last few months,” said Sachdeva.

The demand could get another boost from businesses stocking up for the festive season.

“The 2026 festive cycle is shaping up differently from previous years. Consumption is already underway, digital commerce is expanding deeper into non-metro markets, and MSMEs need to finance inventory ahead of the demand they expect to capture,” said Deepak Jain, co-founder of FlexiLoans.

Banks May Not Lend It At All

FCNR (B) inflows are also expected to aid banks in ways beyond lending as well. Initially, banks could use the liquidity to replace commercial paper, corporate deposits and other relatively costly sources of funds rather than immediately expanding their loan books.

“The interest rate offered on FCNR (B) deposits was still lower than other avenues such as bulk deposits and CP/CD rates, making it attractive for banks as well,” said Aditi Gupta, economist at Bank of Baroda, in a note.

That could also reduce the pressure on banks to raise domestic fixed-deposit rates.

“Banks can use the liquidity to replace existing expensive liabilities rather than necessarily increasing their overall borrowings. They also need not be in a hurry to increase Fixed Deposit rates, even if there is a rate hike. They could prolong the repricing of existing deposits for as long as possible. Banks could also look at increasing foreign currency lending to eligible borrowers, subject to the applicable regulatory framework,” said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap.

All the above can add to the margins in the long term, but these funds could flow into a variety of asset classes.

“FCNR(B) funds are unlikely to flow chiefly into a visibly high-margin asset class, rather a mix of replacement of costly bulk deposits/CDs, working-capital and term loans to well-rated companies, trade finance, supply-chain finance, loans against FCNR(B) deposits, and selective higher-yield secured MSME or retail credit is likely,” said Sharma.