The Reserve Bank of India on Tuesday asked banks to remain alert for maintaining their profits as their net interest margins have come under pressure.
MUMBAI: The Reserve Bank of India on Tuesday asked banks to remain alert for maintaining their profits as their net interest margins have come under pressure and said the banking sector faces the challenge of raising capital from the market continuously to sustain operations.
In its report on Trend and Progress of Banking in India, 2006-07 released on Tuesday, RBI said banks would have to contain operating costs, and search for non-interest sources of income to maintain profitability in future.
"To raise capital from the market continuously to sustain their operations in a fast growing economy is a challenge for banks. They also need to be vigilant about maintaining theirprofitability in future. Banks' net interest margins have come under pressure in recent years," the report said.
RBI attributed the pressure on net interest margins to increased competition, which reflects an improvement in the efficiency of the banking sector. However, the impact of reduced margins on the banks' profitability has been disguised by strong volume growth in the last few years, it said.
RBI noted that loans and advances of banks remained robust for the third year in a row during 2006-07, registering a growth of 30.6 per cent on top of the high growth 31.8 per cent during 2005-06 and 33.2 per cent in 2004-05.
Among the major components of bank credit, term loans, which constituted the major component of loans and advances portfolio, continued to grow at a strong pace of 34.9 per cent during the year. As a result, the share of term loans in both total advances and gross domestic capital formation (GDCF) increased further during the year.
The other components of loans and advances portfolio like cash credit, overdrafts and bill purchased and discounted grew at a slower rate as compared to the growth of overall credit.
Net profit of banks increased by 27 per cent in 2006-07 as compared to 17.3 per cent in 2005-06 despite a sharp increase in provisions and contingencies.
The strong credit growth for the third year in succession continued to be underpinned by significant improvement in asset quality, the report said.
Continuing the recent trend, gross non-performing assets (NPAs) declined in absolute terms during 2006-07, albeit marginally as bad debts recovered and written-off loans exceeded the fresh addition of NPAs during the year.
The trend was, however, divergent across bank groups. The absolute gross NPAs of public sector banks, excluding State Bank of India, and old private sector banks declined during the year. However, gross NPAs of new private sector banks, foreign lenders and the SBI group of banks increased.
Overall gross NPAs, which had declined sharply by Rs 8,276 crore during 2005-06, fell by only Rs 611 crore in 2006-07. Gross NPAs as percentage of gross advances declined to 2.5 per cent from 3.3 per cent in the same period, the RBI report said.
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