A JM Financial report projects that India's banking sector will post solid after-tax profit gains in Q2FY27, even as financing-cost pressures are expected to persist despite adequate liquidity across the broader system.

Banking data in the report pointed to a quickening pace of lending, with loans expanding at 19.1 per cent on a year-on-year basis while deposits climbed 15.8 per cent over the same period, a trend underpinned by stronger inflows into Foreign Currency Non-Resident (Bank) — or FCNR(B) — accounts. On a quarterly basis, deposit growth came in at 5.8 per cent during Q2FY27, a pace that lifted the aggregate credit-deposit ratio by roughly 70 basis points, bringing it to 86.7 per cent.

The report identified FCNR(B) as a primary contributor to the pattern it described, with growth momentum in Q2FY27 having built upon the pace set in the preceding quarter. Provisional updates from large private lenders pointed to robust expansion in their loan books, while deposit accumulation at those institutions — running at 18.7 per cent year-on-year — outpaced the 13.1 per cent pace recorded at state-owned banks.

Separately, fortnightly data published by the Reserve Bank of India as of 15 September 2026 placed system-wide credit growth at 18.1 per cent and deposit growth at 17.3 per cent on a year-on-year basis, with the aggregate credit-to-deposit ratio hovering near 81 per cent. Liquidity across the banking system held at ease through that period, with the aggregate surplus climbing to Rs 4.7 trillion as September 2026 drew to a close.

JM Financial noted that persistently high credit-deposit ratios point to funding strains that are unlikely to ease once inflows tied to FCNR(B) deposit schemes begin to slow, with the firm stating that a tapering of those inflows would leave the underlying pressure on bank funding largely unresolved.

Healthy balance sheet expansion and contained credit costs are forecast by JM Financial to underpin banking sector profitability throughout Q2FY27, even as margin compression persists. Operating expenses are forecast to climb roughly 7 per cent against the prior year, a pace that trails balance sheet expansion and positions pre-provision operating profit to advance by close to 8 per cent.

Net interest margins across most banks faced a sequential squeeze, the report indicated, driven by the lag between receiving large FCNR-B deposit inflows and finding suitable avenues to deploy that capital, compounded by subdued growth in current and savings account balances. Treasury income was also flagged as vulnerable to upward yield movements, while asset quality across the broader banking sector held broadly steady, with stress in unsecured retail and microfinance books showing a gradual easing trend.

Loan disbursements held up well enough to keep collection efficiency near the 99 per cent mark, and the ratio of non-performing assets to gross advances edged lower over the period.