India’s banking sector is expected to report strong earnings growth for the July–September quarter of FY2026–27, supported by expanding credit, increased deposit mobilisation and relatively stable asset quality. According to a banking sector assessment by Emkay Global Financial Services, banks covered by the brokerage could record a 25.4% year-on-year increase in net profit, even as higher funding costs temporarily affect lending margins.
The research, published in October 2026 and subsequently highlighted by the India Brand Equity Foundation (IBEF) on 12 October, indicates that Indian banks continue to benefit from strong demand for loans across retail, micro, small and medium enterprises (MSMEs), and corporate segments.
The report identifies substantial inflows into Foreign Currency Non-Resident (Bank), or FCNR(B), deposits as an important factor behind the acceleration in banking activity. These deposits have increased the availability of funds for lending, although banks may require additional time to deploy the liquidity profitably.
The projected 25.4% increase represents Emkay’s estimate for banks within its research coverage, rather than an officially reported profit growth figure for the entire Indian banking system.
Indian Banking Sector Records Strong Credit and Deposit Growth
Indian banks experienced a notable acceleration in lending and deposit mobilisation during the September 2026 quarter.
Emkay Research reported that banking system credit growth reached 18.1% year-on-year as of 15 September 2026. Deposit growth increased to 17.3%, compared with approximately 12% in June.
The figures indicate substantial growth in both the demand for bank credit and the resources available to financial institutions.
Retail lending remained an important contributor, while MSME and corporate borrowing also supported credit expansion. Stronger lending activity can increase banks’ interest-earning assets and support revenue growth.
Deposit mobilisation is equally important because banks rely on customer deposits as a major source of funding for lending operations.
The September quarter saw an unusual contribution from foreign currency deposits, which helped accelerate reported banking system growth.
Emkay expects system-wide growth to moderate as these extraordinary funding inflows normalise. However, the brokerage believes underlying demand for credit remains healthy.
Foreign Currency Deposits Provide Additional Funding to Indian Banks
One of the distinguishing features of the September quarter was the substantial mobilisation of FCNR(B) deposits.
The FCNR(B) scheme allows eligible non-resident Indians and persons of Indian origin to maintain term deposits with authorised Indian banks in permitted foreign currencies.
These accounts enable depositors to hold savings in foreign currency while providing banks with an additional source of funding.
Banks can use the funds mobilised through such deposits for permitted banking activities, subject to applicable regulatory requirements and risk-management practices.
The September quarter witnessed unusually large inflows into these accounts. This contributed to stronger deposit growth and supported additional lending activity.
Emkay noted that advances against fixed deposits increased by approximately 43% year-on-year, reflecting the contribution of deposit-linked borrowing.
However, the brokerage cautioned that the exceptional scale of FCNR(B) mobilisation makes the September quarter different from normal banking periods.
Consequently, the reported acceleration in credit and deposit growth should not automatically be interpreted as a permanent increase in underlying banking activity.
Bank Profits May Increase 25.4% Despite Temporary Margin Pressure
Emkay expects the banks covered by its research to report approximately 25.4% year-on-year profit growth during the second quarter of FY27.
The forecast reflects a combination of stronger lending income, improved operating performance and lower provisions for potential loan losses.
The brokerage’s estimates indicate the following trends:
| Banking performance indicator | Emkay Research forecast |
|---|---|
| Overall net profit growth | 25.4% |
| Private sector bank profit growth | 24.6% |
| Public sector bank profit growth | 26.2% |
| Net interest income growth | 12.5% |
| Pre-provision operating profit growth | 17.2% |
| Change in provisions | 8.7% decline |
These estimates suggest that both public and private sector banks could report substantial earnings growth.
Public sector banks are expected to benefit from credit expansion, improving operating efficiency and relatively manageable credit costs.
Private sector banks could also record stronger profits, although the effects of higher-cost foreign currency deposits may vary according to their funding structures.
The estimates remain projections until individual banks publish their audited or reviewed financial results for the quarter.
Net Interest Margins Expected to Recover in the Second Half of FY27
Despite the anticipated growth in profits, banks could experience temporary pressure on their net interest margins during the September quarter.
Net interest margin (NIM) measures a bank’s net interest income relative to its average interest-earning assets. It is an important indicator of the profitability of lending and investment operations.
Large inflows into FCNR(B) accounts have increased available liquidity, but banks may not immediately convert these deposits into higher-yielding loans.
Some funds may initially remain in relatively low-yielding investments or other liquid assets. Meanwhile, the banks must continue paying interest on deposits, creating a temporary mismatch between funding costs and returns.
Emkay expects banks to take approximately two quarters to absorb the additional liquidity.
During this period, financial institutions can gradually replace expensive liabilities, expand lending and improve the deployment of available funds.
The brokerage anticipates that these adjustments will support a recovery in net interest margins during the second half of FY27.
Recent RBI Interest Rate Increase Could Support Lending Income
The Reserve Bank of India’s decision on 7 October 2026 to raise the policy repo rate by 25 basis points to 5.50% represents another factor influencing the banking outlook.
Changes in policy interest rates affect banks differently depending on the composition of their loan portfolios and deposit liabilities.
Banks holding a larger proportion of floating-rate loans may experience an increase in lending yields when benchmark rates rise.
However, the financial benefit depends on how quickly loan interest rates adjust compared with the cost of deposits and other borrowings.
Emkay expects the recent interest rate increase to contribute to margin recovery, particularly among banks with substantial floating-rate lending portfolios.
Higher policy rates can also increase funding costs and affect credit demand. Consequently, the overall impact will depend on individual banks’ asset-liability structures.
Public Sector Banks Expected to Maintain Healthy Profit Growth
Emkay Research projects approximately 26.2% year-on-year profit growth for the public sector banks included in its coverage.
The outlook reflects expectations of stronger operating income, controlled provisioning expenses and continued improvement in asset quality.
Several public sector banks have strengthened their balance sheets in recent years through improved recovery processes, better monitoring of stressed assets and more disciplined credit management.
The brokerage also expects institutions such as State Bank of India, Bank of Baroda and Indian Bank to benefit from additional non-interest income associated with stake sales.
Such income can support quarterly profitability, although it may not recur in subsequent reporting periods.
The projected improvement in public sector bank earnings therefore reflects both continuing banking operations and certain institution-specific developments.
Lower Provisions Could Strengthen Bank Earnings
Another important factor supporting the banking sector’s earnings outlook is the expected reduction in provisions for potential loan losses.
Banks make provisions to account for possible losses arising from borrowers who may be unable to repay their loans.
When asset quality improves and fewer loans require additional provisioning, banks can retain a larger share of their operating income as profit.
Emkay expects aggregate provisions across its coverage universe to decline by approximately 8.7% year-on-year.
The brokerage also anticipates relatively stable asset quality during the September quarter.
However, it continues to monitor risks associated with unsecured lending, changing economic conditions and agricultural activity.
Weather-related disruptions, including drought conditions, can affect rural incomes and the repayment capacity of borrowers engaged in agriculture and related businesses.
Similarly, higher borrowing costs may influence the financial position of households and smaller enterprises.
Maintaining effective credit monitoring and prudent lending standards will therefore remain important as banking activity expands.
Expanding Bank Credit Supports India’s Economic Activity
Growth in bank lending plays an important role in financing industrial development, business investment and household consumption.
Companies use bank credit to purchase machinery, expand production facilities, manage working capital and develop infrastructure.
MSMEs depend on financial institutions for short-term business requirements and longer-term investment in equipment and technology.
Retail borrowing also supports activities such as housing construction, vehicle purchases and education.
The reported 18.1% year-on-year expansion in banking system credit indicates that lending continued to grow strongly during the September quarter.
However, part of this acceleration resulted from unusually large FCNR(B)-linked borrowing activity. This distinction is important when assessing the strength of underlying credit demand.
Sustained banking growth will depend on banks’ ability to convert available liquidity into productive lending while maintaining sound asset quality.
Banking Sector Enters Second Half of FY27 with Prospects for Margin Improvement
The outlook for India’s banking sector reflects an unusual combination of rapid deposit mobilisation, strong lending growth and temporary pressure on interest margins.
Emkay Research expects profitability to improve during the September quarter, supported by higher net interest income, stronger operating performance and lower provisions.
The brokerage also anticipates that banks will gradually deploy the additional funds mobilised through FCNR(B) deposits, reducing the temporary pressure on margins.
Its forecast of 25.4% profit growth remains subject to confirmation through the financial results of individual banks.
The September quarter’s exceptional foreign currency deposit inflows may also make comparisons with subsequent quarters less straightforward.
Nevertheless, continued demand for credit across households, businesses and industry provides an important foundation for banking activity.
As Indian banks enter the second half of FY2026–27, improved utilisation of deposits, disciplined lending and effective management of funding costs will support the sector’s ability to finance economic expansion while maintaining financial stability.
References
- Emkay Global Financial Services Limited – Banking Sector Update, October 2026.
FCNR(B) Flows Accelerate Growth, but Weigh on 2Q Margins. Original research commentary containing the 25.4% profit-growth forecast, credit and deposit growth estimates, and expectations for net interest margins.
www.emkayglobal.com/research
investmentguruindia.com/newsdetail/bfsi—banking-sector-update-fcnr-b-flows-accelerate-growth-but-weigh-on-2q-margins-by-emkay-global-financial-services-ltd512153 - Reserve Bank of India – Weekly Statistical Supplement.
Official statistical publications covering banking system deposits, credit and other monetary indicators.
www.rbi.org.in/scripts/WSSView.aspx - Reserve Bank of India – Database on Indian Economy.
Official statistical series covering the business of scheduled commercial banks, banking credit and deposits.
dbie.rbi.org.in - Reserve Bank of India – Monetary Policy Statement, 7 October 2026.
Policy repo rate decision and monetary policy assessment.
www.rbi.org.in - India Brand Equity Foundation – Indian Economy News, 12 October 2026.
Bank Profits May Rise 25% in Q2 FY27, Margins to Recover Gradually in Second Half.
www.ibef.org/news/bank-profits-may-rise-25-in-q2-fy27-margins-to-recover-gradually-in-second-half
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