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‘Banks’ profitability hit on shrinking interest margin amid tech adoption burden, falling rates’

Profitability of lenders is getting affected due to shrinking net interest margin (NIM), owing to falling rates as well as increasing burden of compliance and technology adoption, a senior SBI official said on Thursday. “Change in business models of the banks, increasing cost of capital, cost of compliance, cost of adopting new technologies, all these have been shrinking NIM as we have seen that the interest rates have been low.

“I think the Reserve Bank has not changed the repo and reverse repo since May 2020 and they have been having the accommodative stance. Accordingly, the lending rates are low, deposit rates are also low. So, the NIM (net interest margin) of the banks is shrinking,” Manju S Bolakani, chief general manager of State

(SBI), said.

So, the profitability of banks has been affected unless they have a large treasury like SBI, she said while speaking at a webinar on the ‘Indian Banking Sector-Resilience and Resurrection’ organised by the PHD Chamber of Commerce and Industry.

“We may be able to offset some of these costs with the treasury profits,” she added.

Bolakani said the increasing compliance burden has been causing a lot of strain on the resources. Nowadays, compliance comes before business.

About the disruption caused by the

players in the banking space, the official said the new entrants are forcing the banks to seek partnerships with the fintechs and introduce new products and also to convert themselves into fintech companies.

“The threat which is posed by fintech typically targets the most profitable area in financial services… They are better off because they do not have the brick-and-mortar structure, which is a source of cost for us,” she added.

Big technology companies like Google, Amazon and Facebook are entering digital financing because they have a substantial footprint in the payment system, she said.

“Because of this, traditional banks are facing a lot of competition,” Bolakani said.

Nidhu Saxena, general manager (retail banking, MSME and bancassurance business) at UCO Bank, said MSMEs have been badly affected due to the pandemic.

“There has been a mismatch in liquidity (for micro, small and medium enterprises),” he said.

Saxena added that the government and the RBI have been there to support the economy, and a lot of measures have been introduced to handhold the sector since the onset of the pandemic.

He said green shoots in the economy are now visible as firms are getting back to work and the GST collection is also rising.

Jana Small Finance Bank Managing Director and CEO Ajay Kanwal said MSMEs have faced the toughest challenges and it may pose threat to India’s USD 5-trillion economy goal.

Shivan J K, MD and CEO of

Bank, said non-banking financial companies are getting back to the growth path gradually as demand for vehicle and equipment finance is seen rising.

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