India’s banks expect healthy Q2FY27 profits driven by strong loan growth. However, a JM Financial report warns of persistent funding pressures from high credit-deposit ratios and tapering FCNR(B) inflows, despite comfortable system liquidity.
India’s banking sector is expected to report healthy profit after tax (PAT) growth in Q2FY27, but funding pressures could persist despite comfortable system liquidity, according to a report by JM Financial.
Robust Growth and Funding Dynamics
The report noted that banks recorded an acceleration in loan growth to 19.1 per cent and deposit growth to 15.8 per cent year-on-year, supported by increased mobilisation of Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits. Quarterly, deposit growth stood at 5.8 per cent in Q2FY27, pushing the aggregate credit-deposit (CD) ratio up by around 70 basis points to 86.7 per cent, it said.
Highlighting FCNR (B) as a “key driver,” the report noted, “Growth momentum strengthened further in Q2FY27. Large private banks reported strong loan growth in their provisional updates,” adding, “Private bank deposit growth (18.7% YoY) continued to outpace PSU banks (13.1% YoY).”
According to the Reserve Bank of India’s fortnightly data as of September 15, 2026, banking system credit and deposit growth stood at 18.1 per cent and 17.3 per cent year-on-year, respectively, with the system-wide CD ratio at around 81 per cent, it noted.
Meanwhile, banking system liquidity remained comfortable, with the surplus rising to Rs 4.7 trillion by the end of September 2026. However, the brokerage cautioned that elevated credit-deposit ratios could keep funding pressures high as inflows from FCNR(B) deposits begin to moderate. “Nonetheless, the elevated CD ratios suggest funding pressures are likely to persist once FCNR-B inflows taper,” it said.
Profitability Outlook and Margin Headwinds
On profitability, JM Financial expects strong balance sheet growth and low credit costs to support banking sector earnings during Q2FY27, despite continued pressure on margins. The brokerage projects operating expenses to rise by around 7 per cent year-on-year, significantly below balance sheet growth, helping drive pre-provision operating profit (PPoP) growth of approximately 8 per cent.
However, the report expects net interest margins (NIMs) to remain under pressure due to the time required to deploy increased FCNR(B) deposits and subdued growth in current account and savings account (CASA) deposits. “We expect NIMs to decline sequentially across most banks for two reasons: Huge FCNR-B inflows, deployment of which will take time and muted CASA growth,” it said, stressing, “Treasury income could come under pressure due to rising yields.”
Asset Quality Remains Stable
On asset quality, the report noted that conditions across the banking sector remained stable, with stress in unsecured retail and microfinance portfolios continuing to ease. Additionally, gross non-performing assets (GNPAs) improved, while collection efficiency remained strong at around 99 per cent, supported by healthy loan disbursements, it said. (ANI)
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