Mumbai: The Reserve Bank of India today 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 today, 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.

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 of 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.

 

Source : PTI