Indian banks are set for healthy second-quarter profit growth, but elevated credit-deposit ratios and waning foreign currency inflows could keep funding pressures and margin risks in view.
India’s banking sector is on track to post healthy profit growth in the September quarter, even as funding strains are expected to linger, according to JM Financial. The brokerage said stronger lending and deposit momentum in the second quarter of FY27 should support earnings, but it warned that banks may still face pressure once a recent wave of foreign currency deposits begins to fade.
Loan growth accelerated to 19.1% year on year in the quarter, while deposits rose 15.8%, helped by a pickup in mobilisation of foreign currency non-resident bank deposits, the report said. On a quarterly basis, deposits increased 5.8%, lifting the industry’s credit-deposit ratio by about 70 basis points to 86.7%. JM Financial said large private-sector lenders reported particularly strong loan expansion in their provisional updates, while private banks kept deposit growth ahead of state-owned lenders at 18.7% versus 13.1%.
The Reserve Bank of India’s fortnightly data for September 15, 2026, showed credit growth of 18.1% and deposit growth of 17.3% year on year, with the system-wide credit-deposit ratio at roughly 81%. Banking system liquidity also remained comfortable, with a surplus of Rs 4.7 trillion at the end of September 2026, the report noted. Even so, JM Financial said elevated credit-deposit ratios suggest that funding pressures could remain in place once the foreign currency inflows ease.
Profitability should still benefit from robust balance-sheet expansion and low credit costs, according to the brokerage. It expects operating expenses to rise by about 7% year on year, well below the pace of balance-sheet growth, which should help pre-provision operating profit rise by around 8%. At the same time, the firm expects net interest margins to come under pressure because banks will need time to deploy the fresh foreign currency deposits, while current account and savings account growth remains muted. Treasury income may also face headwinds as yields climb.
JM Financial said asset quality remained broadly stable across the sector, with stress in unsecured retail and microfinance portfolios continuing to ease. Gross non-performing assets improved, and collection efficiency held near 99%, supported by healthy loan disbursements. Taken together, the report points to a banking sector that is still expanding profitably, even if the near-term funding environment remains tight beneath the surface.
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