Foreign banks in India see deposit slowdown; Indian lenders expand overseas

In recent years, a notable divergence has emerged in India’s banking landscape: foreign banks operating in India are witnessing slower deposit growth, while Indian banks are increasingly expanding their footprint abroad. This dichotomy carries implications for competition, capital flows, financial stability, and India’s integration with global banking systems. In this article, we examine the trends in deposit mobilization, credit growth, overseas expansion, and the underlying drivers and challenges shaping these developments. We also present key data in tabular form to highlight the contrast, and draw out implications for the banking sector and policymakers.

Slower Deposit Mobilization in Foreign Banks’ Indian Branches

Trend and Magnitude of Slowdown

Foreign banks with branches in India have experienced a marked deceleration in deposit growth in the fiscal year 2024–25. Deposit growth for such branches slowed to about 6.8 percent, down sharply from around 16.4 percent in the preceding year. In dollar terms, foreign bank branches in India mobilized around USD 129.5 billion in deposits in FY25, up from USD 121.2 billion the prior year. In rupee terms, this translates to approximately ₹11.08 lakh crore compared to ₹10.10 lakh crore.

Interestingly, their credit growth remained relatively robust—foreign bank branches in India posted credit growth of around 8.4 percent in FY25, marginally higher than the previous year’s 8.1 percent. This discrepancy—stronger lending growth versus weaker deposit growth—has implications for funding structures and cost of funds for these branches.

Fee income for foreign banks in India also grew, by about 9.4 percent, indicating that non-interest income sources (such as trade services, foreign exchange, advisory, payments, etc.) continue to contribute meaningfully to their revenue mix.

Possible Drivers of the Slowdown

Several interlocking factors appear to underlie the sluggish deposit growth:
 

1. Intensified Competition from Domestic Banks
   Indian banks, especially private sector and large public banks, continue to command strong retail outreach and brand presence. As they compete aggressively with deposit products (including digital offerings, higher interest rates on term deposits, zero-balance accounts, etc.), foreign banks may find it harder to attract incremental retail and small-business deposits.
    
2. Higher Interest Rate Environment and Cost Pressures
   With interest rates elevated globally and domestically, the cost of attracting deposits has increased. Foreign banks may be constrained in how aggressively they can bid up deposit rates without eroding net interest margins.
    
3. Risk and Perception Considerations
   Potential depositors might perceive local banks as more reliable or better capitalized, especially in times of stress or uncertainty. Foreign banks may also face liability constraints or regulatory perceptions (e.g. expectations of liquidity support, branch structure limitations) that temper deposit expansion.
    
4. High Base Effect
   The prior year had very strong deposit growth, hence a moderation is partly statistical. Achieving double-digit growth when base levels are high is more challenging.
    
5. Regulatory and Structural Barriers
   Foreign banks face certain regulatory requirements (such as minimum capital contributions, regulatory approval for branch expansion, foreign country evaluation) which may limit their agility in scaling deposit operations.
    

Overall, the slowdown reflects structural headwinds foreign banks face in India’s banking ecosystem.

Indian Banks Expanding Overseas: Strategy and Performance

Scale and Growth of Overseas Operations

In contrast to the deposit cooling in foreign banks in India, Indian banks are steadily expanding overseas through their subsidiaries, joint ventures, and branch networks. During FY25:
 

• The number of overseas branches (or equivalents) rose by about 1.9 percent, while employee count in these overseas entities increased by roughly 6.1 percent.
   
• In USD terms, Indian banks’ overseas deposit mobilization rose by approximately 9.4 percent, while credit (lending) growth abroad was around 5.6 percent.
   
• The consolidated offshore operations of Indian banks (combining branches and subsidiaries) saw their balance sheets grow, with branches increasing ~9.1 percent and subsidiaries ~4.2 percent.
   

The international operations generate diversified revenue sources. Interest income and expenses of overseas branches expanded by roughly 8 percent and 9 percent, respectively, albeit at a slower pace than in earlier years. The income-to-asset ratio for overseas branches remained somewhat compressed, reflecting the challenges in scaling profitability in foreign jurisdictions.

In terms of fee income, overseas operations saw a modest uptick (~4.3 percent) — though this pales compared to the stronger growth of fee income in domestic operations or that of foreign banks operating in India.

Hong Kong has emerged as a key hub for fee income among Indian banks abroad, overtaking traditional centers like the UK, with UAE and Singapore also playing significant roles.

Motivations, Strategies, and Constraints

The push abroad by Indian banks is motivated by several strategic and business considerations:
 

• Diversification of Revenue and Market Reach
  International operations provide exposure to growing economies, trade corridors, diaspora remittance flows, and cross-border corporate finance. They help balance the cyclicality of the Indian domestic market.
   
• Trade, Remittances, and Diaspora Linkages
  Indian banks often leverage relationships in countries with significant Indian diaspora or trade linkages, offering trade finance, remittance facilitation, and corporate banking. These built-in relationships give them a competitive edge.
   
• Regulatory and Capital Constraints at Home
  With domestic banking space becoming more crowded and margins under pressure, overseas expansion offers an alternative growth vector. Also, regulations at home (such as priority sector lending, local liquidity mandates) may push banks to seek freer operating environments.
   
• Brand, Soft Power, and Strategic Ambitions
  The expansion abroad reflects broader aspirations of Indian financial institutions to become global players and deepen India’s financial integration with global markets.
   

However, overseas forays come with challenges: regulatory compliance across jurisdictions, currency and macroeconomic risks, local competition (including established global and regional banks), and potentially slower profitability during the scaling phase.

Comparative Snapshot: Deposits and Lending Trends

Below is a comparative table highlighting key metrics of foreign banks in India vs. Indian banks abroad in the latest fiscal cycle.

Introductory Note: The following table contrasts growth rates and absolute levels of deposit mobilization, credit growth, and non-interest income in the two groupings (foreign banks in India and Indian banks overseas). The data illustrate how deposit constraints domestically contrast with more robust deposit growth abroad.
 

Following the table, it is clear that while foreign bank branches in India are struggling to maintain deposit momentum, Indian banks’ overseas arms are achieving comparatively stronger deposit growth, even if lending growth is more moderate. This suggests that Indian banks may be more effective at building liability franchises abroad compared to foreign banks in the Indian domestic market.

Implications, Challenges, and Strategic Lessons

Funding Structure and Margin Pressures

For foreign banks in India, slower deposit growth often means greater reliance on wholesale funding or internal capital allocations, which can raise their cost of funds and squeeze net interest margins. They must manage the trade-off between attracting deposits aggressively and maintaining profitability.

Indian banks operating abroad face a different set of pressures: they must invest in compliance, risk management, localized marketing, and platform building before reaping profitable scale. The return on assets and capital may take time to ramp up.

Regulatory and Policy Considerations

Policymakers must balance openness to foreign banks (which bring competition, technology, and global linkages) and the imperative of maintaining financial stability, depositor confidence, and level playing conditions. Encouraging foreign banks to deepen deposit franchises (especially in smaller cities) may require regulatory support or incentives.

For Indian banks abroad, regulatory frameworks in host jurisdictions, capital adequacy norms, and cross-border resolution regimes can significantly affect operations. Building stable, resilient overseas operations demands strong governance, risk controls, and local market understanding.

Role of Non-Interest Income and Innovations

Fee income has emerged as an important buffer. Foreign banks in India appear to leverage their strengths in trade finance, forex services, syndication, and payments to augment earnings. Indian banks overseas may similarly focus on trade, remittances, and transaction banking to bolster profitability.

Digital banking platforms, cross-border payment infrastructure, and synergy with fintech partners can help both groups deepen customer reach and reduce marginal cost of attracting liabilities.

Risk Diversification vs. Exposures

Cross-border operations expose banks to currency risk, geopolitical volatility, and macroeconomic shocks. A downturn in a foreign market may compound stress when combined with domestic pressures. On the flip side, international operations can reduce concentration risk tied to a single economy.

Thus, prudent hedging strategies, scenario stress testing, and local governance are critical.

Strategic Priority for Indian Banks

The overseas expansion of Indian banks signals an evolving paradigm: increasingly, Indian banks are scaling outward rather than just defending domestic turf. However, success will depend on balancing ambition with disciplined execution, forging deep local relationships, and mastering the dual challenges of cross-border banking.

Conclusion

The contrast between sluggish deposit growth in foreign banks’ Indian branches and the more dynamic overseas deposit mobilization by Indian banks underscores a shifting balance in India’s banking ecosystem. While foreign banks struggle to scale their local liability base amid stiff competition and structural constraints, Indian banks are actively pushing into global markets, leveraging diaspora links, trade corridors, and cross-border banking opportunities.

This dynamic holds several lessons. Foreign banks may need to evolve their product propositions, distribution strategies, and digital capabilities to compete more effectively. Indian banks must navigate the complexities of host markets with prudence. For regulators and policy architects, facilitating balanced competition, ensuring financial stability, and fostering global integration will be key priorities.

In an era of global capital flows and rising cross-border connectivity, the ability of banks to mobilize stable deposits across geographies—and to deploy them efficiently—will define their resilience, growth, and relevance in the evolving financial order.

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