Emkay Projects H2 FY27 NIM Recovery for Indian Lenders

According to a report by Emkay Research, Indian banks are projected to record a 25.4% year-on-year surge in net profit for the July–September quarter (Q2 FY27), driven by robust credit expansion, solid core banking revenues, and lower loan-loss provisions, despite reduced treasury income. The brokerage characterized Q2 as a "one-off quarter" marked by substantial inflows of Foreign Currency Non-Resident (FCNR-B) deposits, which catalyzed systemic credit growth to 18.1% year-on-year as of mid-September and accelerated deposit growth to 17.3% from 12% in June. Although this influx of foreign currency liabilities is expected to temporarily weigh on lending margins, overall profitability across the banking sector remains strong. To manage the surge in liquidity, banks are anticipated to take about two quarters to fully deploy the additional capital—initially using funds to retire high-cost liabilities and allocate toward secondary assets before rechanneling them into primary credit lines. While net interest margins (NIMs) face compressed pressure during the second quarter due to FCNR-B funding costs, Emkay forecasts a structural recovery in the second half of FY27. This margin expansion will be bolstered by the repayment of expensive debt, full loan-book deployment, and yield benefits from recent rate hikes for lenders holding significant floating-rate portfolios, alongside the eventual normalization of foreign currency deposit flows.