Business

Banks need to look at fee-based income

MUMBAI: The Report on Trend and Progress of Banking in India, released by the Reserve Bank of India on Tuesday, observes that 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 their profitability in future. Banks’ net interest margins have come under pressure in recent years. This is the outcome of increased competition and reflects an improvement in the efficiency of the banking sector.

However, the impact of reduced margins on the profitability of banks has been disguised by strong volume growth in the last few years. In order to maintain their profitability in future, therefore, banks would have to contain operating costs, apart from searching for non-interest sources of income, the RBI report says.

The RBI stated that the major challenge for banks in India in current times is to mobilise enough resources for meeting the demands of a growing economy. Most businesses of banks are still concentrated in a few urban centres.

To mitigate this problem, since 2006, opening of new branches for any bank is approved by the RBI only on condition that at least half of such new branches are opened in under-banked areas as notified by the RBI. Many banks now find that the branches in semi-urban and rural areas are also commercially viable.

The RBI stated that it had come to its notice that some banks while lending for housing were not fully transparent in indicating the circumstances and factors governing the benchmark in respect of floating rates as well as with regard to reset clauses.

“Banks were urged to review all practices which are less than fair or transparent. They were also urged to afford an opportunity to borrowers to obtain fair and transparent terms consistent with the legal requirements and fair practices,” the report says.

As noted in the report, there is also a need for the banking sector to increase the flow of credit to agriculture and small scale industries.

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