The Reserve Bank of India (RBI) in its report on ‘Trend and progress of banking in India, 2006-07’ released 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.
Net profit of banks increased by 27% during 2006-07 as compared with 17.3% during 2005-06 despite a sharp increase in provisions and contingencies.
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 their profitability 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.
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% 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. 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.