India’s banking sector is expected to show a 12.2% year-on-year profit growth for the June quarter, supported by strong loan demand. However, banks are facing pressure on profit margins due to rising funding costs and slower deposit growth compared to lending. Investors should track how narrowing margins and the loan-to-deposit ratio impact individual bank profitability in the coming quarters.
The Indian banking sector enters the first quarter of the 2027 fiscal year with expectations of robust annual profit growth, even as underlying challenges in funding costs persist. According to projections by Emkay Global Financial Services, banks under their coverage are expected to report a 12.2% increase in profit after tax compared to the same period last year. This growth is largely supported by sustained demand for credit across various sectors.
While annual growth figures appear strong, the quarter-on-quarter performance tells a different story. Sequential profits are projected to decline by approximately 2.3%. This dip highlights the current struggle with margin compression, a term used to describe when the gap between the interest banks earn on loans and the interest they pay on deposits narrows. This pressure is driven primarily by elevated funding costs and lower income from treasury operations.
The Challenge of Deposit Mobilization
A critical factor influencing bank performance this quarter is the widening gap between loan growth and deposit growth. System-wide credit growth remained strong at 17.7% year-on-year as of mid-June 2026, fueled by robust lending to corporations, non-banking financial companies, and retail segments including vehicle and gold loans. Conversely, deposit mobilization grew at a slower pace of 12%.
This disparity has pushed the system-wide loan-to-deposit ratio to nearly 83%. When deposits do not keep pace with loan growth, banks are often forced to rely on more expensive sources of funding, such as wholesale borrowings and higher-interest term deposits. This increase in the cost of funds is the primary reason for the anticipated pressure on net interest margins, or NIMs, during this period.
Asset Quality and Future Outlook
Despite the headwinds in funding, the asset quality of Indian banks remains relatively stable. Gross and net non-performing asset ratios—the measure of bad loans that are not being repaid—are expected to show continued improvement. While some seasonal stress has appeared in agriculture and specific government-linked loan schemes, it does not appear to be a systemic threat at this stage.
Looking ahead, analysts suggest that funding conditions may begin to improve from the second quarter of the 2027 fiscal year. Increased inflows from Foreign Currency Non-Resident deposits are expected to provide better liquidity to the banking system. As funding costs begin to moderate and deposit growth potentially catches up, banks may see a recovery in their profit margins. Investors should specifically monitor the loan-to-deposit ratio and management commentary regarding deposit growth strategies, as these will be the primary indicators of whether banks can successfully navigate the current cost pressures in the coming months.