JM Financial's analysis points to solid after-tax earnings growth for Indian banks in the second quarter of FY27, even as borrowing-cost strains are expected to persist despite ample liquidity across the broader financial system.

Lending activity at banks picked up pace over the measured period, with advances expanding at a year-on-year rate of 19.1 per cent and deposits climbing at 15.8 per cent, both trends underpinned by a broader inflow of Foreign Currency Non-Resident (Bank) — or FCNR(B) — funds drawn from overseas account holders. 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 pointed to FCNR(B) deposits as a contributing factor behind what it described as a further strengthening of growth momentum through the second quarter of FY27. Provisional updates from large private lenders pointed to healthy 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 settling at approximately 81 per cent. Liquidity conditions across the banking system held in positive territory through late September 2026, with the aggregate surplus reaching Rs 4.7 trillion by that point.

The brokerage noted that persistently high credit-deposit ratios point to funding strains that are unlikely to ease, particularly as inflows from FCNR(B) deposits begin to slow, with its statement observing that a tapering of those inflows would leave such pressures broadly intact.

According to JM Financial's outlook, banking sector earnings in Q2FY27 are forecast to draw support from a combination of balance sheet expansion and contained credit costs, even as pressure on net interest margins persists. Operating expenses are forecast to climb at a pace of roughly 7 per cent against the prior year — a rate that trails balance sheet expansion by a meaningful margin — with that gap between cost growth and asset growth underpinning a projected rise of around 8 per cent in pre-provision operating profit.

The report also flagged that net interest margins across most banks face a sequential decline, driven by the lag in deploying the influx of FCNR(B) deposits and by modest growth in current account and savings account balances, while treasury income faces headwinds from rising yields. Separately, asset quality across the sector held broadly steady, with strain in unsecured retail and microfinance books continuing to ease. Loan repayment rates held at roughly 99 per cent, gross non-performing assets edged lower, and disbursement volumes provided a further layer of support to the overall portfolio.