IDFC First Bank's NRI dollar deposits swelled its balance sheet and thinned its margin

IDFC First Bank spent the September 2026 quarter taking in dollars. Under a Reserve Bank of India scheme for foreign-currency deposits from non-resident Indians, it raised about $3.6 billion, roughly a tenth of its deposits, and lent about ₹25,000 crore back to non-resident customers against that money. Those loans carry little credit risk, because each is secured by a deposit. They do, however, add a large block of assets to the base on which the bank's margin is measured, and the cost shows up first in the net interest margin, the gap between what the bank earns on loans and investments and what it pays for its funds. Excluding interest on a tax refund in the quarter before, that margin fell by about a third of a percentage point, to about 5.6% last quarter.

The filed balance sheet shows the scale. Total assets grew 17.7% in the six months to September. Borrowings rose faster still, helped by an offshore bond. Quarterly net interest income, the bank's main earnings line, rose 9.0% between the quarter to March and last quarter, less than the period-end balance sheet, which included dollar money that arrived only in late August. Strip the scheme out and the business grew at a calmer rate: the company said loans excluding the dollar-backed lending were up 22.2% on a year earlier, and customer deposits excluding the new money up 14.1%.

Management split the margin fall into four parts that add up to 32 basis points. Half of it came simply from the dollar-backed loans entering the denominator. The rest came from deposit money parked in low-yielding treasury instruments while it waited to be lent, from faster growth in wholesale and business banking loans, and from the quarter having one more day than the one before.

The parts do not behave alike. The parked cash is temporary: an executive said that the drag from holding it in treasury instruments had largely been dealt with as the money was put to work. The larger part, from the loans themselves, is different: it lasts as long as the loans do, and the deposits behind them were raised for several years. That is why management expects the margin to stay near its current level in the current quarter and to pick up only in the one after, when it sees a return to approximately 5.8% as surplus funds are deployed and as the rise in the repo rate it is assuming feeds through to loan rates.

Profit is where management makes its case. Profit before tax was ₹1,412 crore last quarter, against ₹424 crore a year earlier. The argument is that a bigger asset base also spreads operating costs and credit costs more thinly, so returns fall far less than the margin does; Vembu Vaidyanathan, the chief executive, put the effect at about 2 basis points. That figure is management's estimate. The filed numbers confirm the larger balance sheet and the profit, not the size of the offset.

The other side of the trade is the price of the money. The company estimated that the dollar deposits cost about one percentage point less than comparable domestic funding once statutory reserve costs are counted. On roughly ₹35,000 crore, Vaidyanathan called the saving "a material amount that is going to come to us, which is not in our plan at all". Because the deposits run for years, an executive said the benefit would reach profit in full from next year.

That leaves the margin guidance. In July the bank raised its full-year guidance to 5.8% from 5.75%. A simple average of the first two quarters, calculated from the reported figures, comes to about 5.7% excluding the tax-refund interest, and about 5.8%, still just under the 5.8% guide, using the reported margin for the quarter before. With the current quarter expected near last quarter's level, management's own path points to a full year a little below the figure it set in July, though the chief financial officer expects a return to that level in the following year. Whether the dollar money was worth taking will show in that later year, when the cheaper funding is meant to arrive.