Axis Bank’s latest business update offers a useful warning about reading a deposit boom: a change in funding can expand both sides of a balance sheet. In its October 5 provisional filing, the bank disclosed $10.62 billion of Foreign Currency Non-Resident (Bank), or FCNR(B), deposits mobilized as of September 30 under the RBI’s swap facility. It also disclosed lending used to help customers place such deposits.
The figures make the distinction between raising funds and generating earnings unusually visible. Foreign-currency funding can replace another liability and change the bank’s financing options. Associated lending can also affect reported loan and deposit growth. Neither observation establishes the ultimate profitability or durability of the arrangement.
The broader backdrop is The Economic Times’ report that banks reduced outstanding certificates of deposit after swap-related liquidity increased. Axis’s disclosure provides a direct company-level view of funding substitution, although its non-retail term deposits are not the same measure as the system’s outstanding CDs.
Replacement funding changes the liability mix
Axis says part of its FCNR(B) flows was used to reduce non-retail term deposits, which declined 8.6% during the quarter. This is concrete evidence that mobilized funds did not simply sit alongside an unchanged financing base. Some replaced another source of liabilities. ET’s separate coverage of the bank’s update corroborates the disclosure.
Substitution can matter even without a dramatic expansion of lending. A bank with alternative funding can decide whether to renew maturing liabilities, what price to accept for new funds and how much liquidity to retain. The value depends on the cost and stability of the replacement, rather than the gross amount raised alone.
The CD backdrop also requires a stock-flow distinction. The original ET report describes declining outstanding balances while reporting a recovery in fresh issuance in the latest period. Those observations are compatible: maturities can exceed new issuance. A shrinking outstanding stock should not be translated into a claim that no new certificates are being sold or that every institution has the same funding position.
A currency swap does not erase the cost of a deposit
The RBI’s June 8 circular, reproduced here as a PDF, describes the original FCNR(B) swap mechanics. Eligible underlying deposits had three-to-five-year tenors, with the swap aligned to their maturity. Banks could sell dollars to the RBI and simultaneously agree to repurchase the same amount at maturity at the same exchange rate.
That arrangement addresses a particular currency conversion across time. It does not turn a deposit liability into equity or remove the obligation to pay the depositor under the relevant contract. Assessing the financing benefit still requires the deposit’s interest cost, any associated expenses and the return on the assets funded. The original circular also says the swaps cannot be cancelled, a reminder that maturity structure matters alongside the initial liquidity inflow.
The dates prevent another misleading inference. Indian Express and Business Standard report that the special window for fresh FCNR(B) deposits closed on August 31, earlier than originally planned, with swaps against already contracted deposits allowed until September 11. September-end balances therefore should not be described as evidence that the same fresh-deposit window remains open today.
The growth figures contain a linked lending channel
Axis disclosed $4.57 billion of loans from its international branches to customers as a leveraging facility for placing the deposits. Its reported year-on-year gross-advances growth was 22.7%; excluding those loans, the bank says it would have been 18.8%. The corresponding total-deposit growth figures were 20.7% and 17.0% under the disclosed adjustment.
Those adjusted figures answer a narrower question than a complete measure of “organic” growth. They remove the identified lending channel; they do not isolate every influence on the business. Both the assets and the liabilities remain reported balances, and the adjustment is not evidence by itself that the loans are impaired or the deposits are fictitious.
For an investor, the important point is composition. Loan growth connected to financing a deposit placement has a different analytical meaning from a broad increase in unrelated customer credit demand. It requires examination of collateral, maturity, repayment capacity and the economics of the combined relationship. A headline loan-growth percentage cannot supply those answers.
Nor should the two disclosed dollar amounts simply be subtracted to produce a supposedly complete measure of net new external money. The filing also identifies standby letters of credit relating to other banks’ loans against FCNR(B) deposits. Without a fully reconciled account of exposures and flows, combining funded balances and contingent commitments would create more apparent precision than the information supports.
The earnings test comes after the funding inflow
The constructive case is that longer-dated alternative funding can give a bank more flexibility and reduce its immediate need to accept expensive replacement liabilities. Axis’s explicit disclosure of linked lending makes the balance-sheet change easier to assess. These are reasons to examine the arrangement seriously, rather than dismiss all of the growth because some is connected to the scheme.
The missing bridge is the earnings effect. The bank labels the figures provisional and says the September-end results will be subject to auditors’ limited review. The update is not a full explanation of the arrangement’s contribution to margins, credit costs or future renewals. A deposit balance alone cannot establish any of those outcomes.
A stronger investment case would require disclosed all-in funding costs, asset yields and evidence that the resulting relationships remain valuable after the special mobilization period. Adverse credit performance, costly replacement funding or a weaker return on the linked lending would undermine it. The lesson from this filing is precise: liquidity, growth and profit are connected through a bank’s operating choices, but they are not interchangeable results.