External borrowings to meet capital needs putting pressure on bank's net interest margins, says a report by SBI Securities

The banks in the country are facing challenges due to a slowdown in deposit growth, according to a recent report by SBI Securities. The slowdown in deposit growth has forced the banks to rely more heavily on external market borrowings to meet their capital needs.

The report also highlighted that this growing dependence on market borrowings, combined with intensified competition among banks to attract deposits, has put significant pressure on their Net Interest Margins (NIMs).

"Slowdown in deposit growth has led to banks increasingly relying on external market borrowings for their capital requirements. This coupled with the fight for deposits has created pressure on bank's Net Interest Margins (NIMs)" said the report.

NIM (Net Interest Margin) represents the difference between the interest income generated by banks and the interest paid out to depositors, it is a key indicator of a bank's profitability. The current scenario suggests that banks may struggle to maintain their margins as the cost of funds rises.

The report also provided insights into sectoral credit deployment for June 2024. Notably, credit growth to agriculture and allied activities has reduced, with growth declining to 17.4% in June 2024 from 19.7% in June 2023.

This slowdown indicates a cautious approach by banks towards lending in this sector, potentially due to concerns over repayment risks or reduced demand for credit. In contrast the report data indicated that the industrial credit witnessed a modest increase, growing by 8.1 % year-on-year (YoY).

"Sectoral deployment data for June'24 Credit growth to agriculture and allied activities declined to 17.4% in Jun'24 v/s 19.7% in Jun'23. Industrial credit grew 8.1 % YoY" the report added.

In the digital payments space, the report noted that the Unified Payment Interface (UPI) continues to demonstrate strong performance. In July 2024, UPI transactions reached 14.4 billion, representing a substantial 45% YoY growth.

The value of these transactions also remained robust, exceeding Rs 20.0 trillion and registering a 35% YoY increase.

However, the report also added that the YoY growth in both transaction value and volume has been slowing since March 2024, a trend attributed to the normalization of the base as UPI has already achieved widespread adoption.

"The YoY growth in both transaction value and volume has been slowing down since Mar'24 driven by normalization of the base" said the report.