Date:05/09/2008 URL: http://www.thehindu.com/2008/09/05/stories/2008090553571800.htm

Business

Need to bring down operating cost in banks

Special Correspondent

RBI releases Report on Currency and Finance 2006-08

Net interest margins are likely to
come under further pressure
Low business per employee in
public sector banks

MUMBAI: The challenge in future for the banking sector in India is to bring down the intermediation cost and at the same time maintain high profitability, opined the Reserve Bank of India (RBI) on Thursday.

This can be achieved only by improving efficiency and tapping non-interest sources of income, it added

“The intermediation cost in India, driven largely by the high operating costs, is still high by global standards. There is, therefore, a need to bring down the operating cost,” the RBI stated in its Report on Currency and Finance 2006-08. The report was focussed on ‘The banking sector in India: Emerging issues and challenges’.

As competition intensifies, net interest margins of banks are likely to come under further pressure in the future. Banks, therefore, need to seek new non-interest sources of income to sustain their profitability. “Although the cost of funds for foreign banks is significantly lower, the benefit of low cost funds was not passed on to the borrowers, as was reflected in the high net interest margin,” the RBI stated.

Although overall efficiency and productivity improved, there was evidence to suggest that resources were not being utilised in the most efficient manner. “In the case of public sector banks, one area of concern is the low business per employee, which is almost one half of that of new private sector banks. Public sector banks, therefore, have to strive further to improve labour productivity and bring it on a par with new private sector banks,” the RBI report stated.

Similarly, there is a need for increased absorption of enhanced technological capability (innovation) by several banks to further augment productivity of the banking sector through changes in processes and improvement in human resource skills.

The challenge for the banking industry would be to provide competitive products and services and if they fail to do so, they will lose the market share to other segments, the RBI stated. The process of mergers and acquisitions in the Indian banking sector, which has gained momentum in 1999, is expected to accelerate further. Though consolidation in the public sector banking segment, which accounts for a major share of total assets of the banking system, is still a work-in-progress, there are enabling legal provisions for the purpose in the respective statutes of public sector banks.