RBI and Banks' NIM

This refers to the article' RBI must not dictate Bank Margins ( Et, Dt, June 9, 2011). The Reserve Bank has been harping for quite some time to bring down the Net Interest Margin of banks from the present level of around 3 percent and the author has argued aginst it citing a number of reasons. The net interest margin though , is a key driver of profitability of banks, it does not mean that banks have to keep a very high margin between deposit rates and interest rates on loans to maintain their profitability There are umpteen ways for banks to reduce their cost of funds and reduce the interest rates on advances. The non performing advances of banks and the cost of operations of Indian banks are very high compared to international standards and the productivity is also not of comparable levels.

The banks, public sector banks in particular have to increase their volume of business, improve productivity, reduce cost of funds, churn out the assets and liabilities optimally to minimise cost and maximise profit. They have also to review their nomenclature of loans portfolio which is at variance with international standrads. Financial inclusion should be viewd as an opportunity to raise funds at minimum cost and expand loans portfolio appropriately. Making profit through high NIM presently followed by Indian banks needs to be curbed and the Reseve Bank's approach only sounds healthy and worth pursuing seriously.

T.V. Gopalakrishnan