Kotak Mahindra Bank, HSBC Deploy Surplus Liquidity Through Semi-Fixed Home Loans

Banks Look for Ways to Put Surplus Funds to Work

Indian banks are sitting on an unusually large pool of surplus liquidity following a record inflow of foreign-currency deposits through the Reserve Bank of India’s FCNR(B) scheme. The excess funds are now prompting lenders to look for ways to deploy capital while protecting their margins.

Kotak Mahindra Bank and HSBC have emerged among the lenders adapting their mortgage products to put some of these funds to work. Both banks are offering semi-fixed home loans, which provide borrowers with a fixed interest rate for an initial period before switching to a floating rate.

The structure gives banks greater visibility over lending returns while allowing them to manage interest-rate uncertainty.

Record Liquidity Creates a New Banking Challenge

India’s banking-system liquidity surplus reached around ₹9.7 lakh crore ($102.7 billion) by September 3, according to Reuters, surpassing the previous post-pandemic peak. The surge followed an unexpectedly large mobilisation of FCNR(B) deposits, which brought $127.23 billion into the system.

While abundant liquidity can support credit growth, too much money can push short-term interest rates below the RBI’s policy rate and complicate monetary-policy transmission.

The RBI is therefore considering various measures to absorb excess liquidity, including variable-rate reverse repo operations, forex swaps and other sterilisation tools.

For banks such as Kotak Mahindra Bank and HSBC, semi-fixed mortgages offer one avenue to convert excess liquidity into longer-duration assets while managing interest-rate risks.

The development highlights how India’s banking sector is adapting to an unprecedented liquidity surplus created by the country’s successful foreign-currency deposit mobilisation pr