Banking on borrowed time: India’s FCNR(B) maturity wall looms

The FCNR(B) deposits mobilised in 2026 do not vanish into thin air. They are contracts. They mature. And when they do - in a concentrated window running from 2027 through 2031 - they will return, with interest, as foreign currency liabilities on Indian bank balance sheets. This is the maturity wall. And it is the part of the story that has not yet been written

The Reserve Bank of India’s concessional FCNR(B) swap facility has been a textbook example of crisis-era central banking. By offering banks a cheap, three-to-five-year US dollar-rupee swap that absorbed their hedging costs, the RBI succeeded in attracting tens of billions of dollars in foreign currency deposits. The rupee found a floor. Reserves swelled. Market sentiment stabilised. The immediate objective was achieved with uncommon precision.

But the Crisil observation is a quiet warning, not a victory chant.

Over the longer term, the facility’s success will depend on effective liquidity management, the resilience of bank profitability and prudent preparation for the significant foreign currency liabilities that will emerge when these deposits mature between 2027 and 2031. That single sentence carries the weight of India’s next banking test.

The Triumph, in Brief

The concessional swap window was opened in June 2026 for fresh FCNR(B) deposits of three-to-five-year maturities. Banks raised their highest deposit rates - some above 7 per cent - to attract non-resident Indian funds. The response was overwhelming: nearly $127 billion in deposits were mobilised under the scheme by end-August 2026, prompting the RBI to advance its closing date from September 30 to August 31. Roughly half of these deposits carry a five-year tenor, with another large chunk in the three-to-four-year bracket. For the RBI, thearithmetic looked attractive. By recycling part of these inflows back into foreign-currency assets, the central bank could earn returns of 4.5–5 per cent - comfortably offsetting an estimated hedging cost of 3 per cent per annum. For the banks, the swap transferred what would otherwise have been an unbearable currency risk to the central bank’s balance sheet. For the markets, the rupee got a breather.

That was the easy part.

The Test Ahead

The deposits mobilised in 2026 do not vanish into thin air. They are contracts. They mature. And when they do - in a concentrated window running from 2027 through 2031 - they will return, with interest, as foreign currency liabilities on Indian bank balance sheets. This is the maturity wall. And it is the part of the story that has not yet been written.

Three concrete challenges will define whether the FCNR(B) swap is remembered as a clever stabilisation tool or as the seed of a refinancing crunch.

First, liquidity management. When these deposits mature, depositors will expect to be paid back in foreign currency. Banks will need either fresh foreign-currency inflows or access to the forex market to meet these obligations. If global conditions tighten - a US rate hike cycle, a dollar squeeze, or a sudden risk-off in emerging markets - banks could find themselves paying a steep premium for dollars precisely when they need them most. The RBI cannot run a swap window of this scale indefinitely. It must allow orderly, market-driven refinancing.

Second, the resilience of bank profitability. FCNR(B) deposits were priced aggressively - at over 7 per cent in some cases - to attract funds in a competitive rush. Banks locked in these high rates for three to five years, while deploying the swapped rupees into domestic assets at narrowing spreads. If credit growth slows, if deposit competition intensifies, or if asset quality comes under stress, the net interest margins earned on these funds will erode. Profitability will be the canary in the coal mine.

Third, prudent preparation for foreign currency liabilities. Most banks do not have natural hedges for a sudden bulge of foreign currency outflows. The RBI absorbed the principal-level risk via the swap, but interest servicing and ultimate repayment still expose the banking system to currency volatility. Banks that fail to build robust forex asset-liability management frameworks, internal dollar pools, and forward-book capacity will be the most vulnerable when the wall arrives.

A five-point guidance for the Indian banking sector

Map your maturity buckets, today. Every bank should build a detailed liability profile for FCNR(B) deposits across the 2027–2031 window - quarter by quarter - and align it with corresponding asset maturities and expected forex inflows. There is no substitute for granular preparation.

Build liquidity buffers in foreign currency, not just in rupees. Banks must actively cultivate correspondent banking relationships, diversify forex funding sources, and pre-arranged credit lines. The RBI will not, and should not, be a permanent backstop for individual bank liquidity needs.

Hedge interest rate and currency risk together. Forward contracts, cross-currency swaps, and natural hedges from foreign-currency lending must be calibrated to the maturity profile. Banks should not assume that 2027–2031 will be a benign global rate environment.

Resist the temptation of yield-chasing domestic lending. High-cost FCNR(B) funds must be deployed prudently, not into marginal or risky credit. The discipline of matching cost of funds with asset quality is non-negotiable.

Engage the RBI on a glide path. The central bank should signal, well in advance, the conditions under which any future swap assistance might be available. Predictability reduces panic. Banks and the RBI should start the conversation now, not when the first maturity hits in 2027.

The Bottom Line

The concessional FCNR(B) swap facility bought India time and stability. It did not buy immunity. Between 2027 and 2031, the foreign currency liabilities it created will come due, and the banking sector will be tested on three fronts simultaneously - liquidity, profitability, and currency risk.

The RBI has done its job with impressive skill. Now it is the turn of India’s banks to do theirs. The maturity wall is not a crisis yet. It is a forecast. And the best time to prepare for a forecast is well before it arrives.

(The writer is with the Cholleti BlackRobe Chambers, Hyderabad, and writes on economy, politics and law)

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Cholleti

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