Axis Bank warns FCNR flood may trigger ‘abnormal lending’

Mumbai: India’s record inflow of foreign-currency deposits has left banks with a wall of liquidity to deploy, raising the risk of “abnormal lending,” Axis Bank managing director Amitabh Chaudhry warned.

“FCNR deposits (foreign currency non-resident) could lead to some abnormal lending, because we’ll have to deploy this. I hope they don’t do that,” Chaudhry said at a fireside chat at the Global Fintech Fest 2026 on Wednesday here.

Banks raised a record $127.22 billion through FCNR(B) deposits under the Reserve Bank of India’s foreign-exchange swap facility before the window closed on 31 August, a month ahead of schedule. That compares with $26 billion raised through a similar scheme in 2013.

Including $5.26 billion through offshore foreign-currency borrowings and $3.89 billion via external commercial borrowings, the facility attracted $136.37 billion.

Most of the dollar funds were swapped with the RBI for rupees, leaving banks with a large pool of cash to deploy.

Surplus liquidity

Surplus liquidity in the banking system stood at more than ₹10 trillion as of 8 September, creating a challenge for the central bank to absorb the excess without disrupting bond markets.

Chaudhry’s warning comes as bank credit is already expanding rapidly. Credit, excluding food loans, rose 18% from a year earlier to ₹218 trillion as of 15 August, according to the latest RBI data. He cautioned that the reported 18-19% growth also reflects a favorable base effect and should not be taken as evidence of sustained private investment.

On interest rates, Chaudhry said India may eventually need to raise borrowing costs as the gap with US rates narrows. Economists are looking at October or December for a possible increase, he said.

Chaudhry also expects consolidation among Indian banks to accelerate as differences in scale widen. Larger lenders will have a greater ability to use customer data to personalize products and services, he said, potentially widening the gap with smaller rivals.

“I do believe that India needs bigger banks,” Chaudhry said, adding that more consolidation could emerge over the next four or five years as smaller lenders decide whether to compete or merge.

Axis Bank has already started experimenting with personalized customer journeys, though not yet at scale. Chaudhry said the bank expects the approach to become part of its broader business model within the next four quarters.

“It’s already happening,” he said. “If we don’t do it, someone else will.”