The Reserve Bank today cautioned rising interest rate and high cost of funds could hurt the profitability of the banking sector.

"Going ahead, with hardening interest rates and the imminent increase in cost of funds, the credit growth is expected to slow down, which could adversely affect the profitability," RBI said in Financial Stability Report released today.

The hike in savings account interest rate, amortisations of pension liabilities and potentially enhanced provisioning requirements for NPAs may also impact profitability, it said.

The report noted that banks' profitability improved, buoyed by increased net interest income though non-interest income remained stagnant.

An increase in net interest income (NII) facilitated growth of around 20 per cent in aggregate net profit of the banking system, even with an almost stagnant non-interest income and increase in risk provisions, it said.

Interest income increased by 18.6 per cent over 7. (PTI)