External borrowings to cover capital requirements are exerting pressure on banks' net interest margins, according to SBI Securities

New Delhi [India], August 31: A recent report from SBI Securities reveals that banks in India are grappling with challenges due to a slowdown in deposit growth. This decline has compelled banks to increasingly depend on external market borrowings to meet their capital requirements.

The report highlights that this reliance on market borrowings, along with heightened competition for deposits, is putting substantial pressure on banks' Net Interest Margins (NIMs). NIM, which measures the difference between the interest income banks earn and the interest paid to depositors, is a critical indicator of a bank’s profitability. Rising costs of funds could further strain these margins.

Additionally, the report provides insights into credit sector trends for June 2024. It notes a decrease in credit growth to agriculture and allied sectors, falling to 17.4% from 19.7% in June 2023. This reduction suggests banks are adopting a cautious stance on lending in this sector, possibly due to repayment concerns or reduced credit demand. Conversely, industrial credit saw a modest increase, growing by 8.1% year-on-year.

In the realm of digital payments, the report notes that the Unified Payment Interface (UPI) continues to perform strongly. In July 2024, UPI transactions reached 14.4 billion, marking a 45% year-on-year growth. The value of these transactions also remained robust, surpassing Rs 20.0 trillion and showing a 35% year-on-year increase.

However, the report also indicates that the year-on-year growth rate in both transaction value and volume has been slowing since March 2024, a trend attributed to the normalization of the base as UPI adoption has become widespread.