The RBI's Report on Trend and Progress of Banking in India 2010-11 notes that net interest margins (NIMs), a key measure of efficiency for banks, have to be reduced for more efficient financial intermediation. For this to happen, banks have to offer attractive interest rates to depositors and lower lending rates for borrowers.
NIMs are the margins enjoyed by banks for doing their business and defined as interest earnings less interest expenses as a percentage of average total assets.
NIMs for the Indian banking system have been between 2.5 per cent and 3.1 per cent.
After seeing a declining trend for five years, NIMs once again moved up in 2010-11. NIMs in India are still high when compared to other emerging economies.
If NIMs are reduced, it will help raise the level of domestic savings and channel them into investment and sustain high and inclusive growth, the report said. While profitability of banks is important, efficient financial intermediation is important from the point of view of economic growth.
Increase ‘other income'
The report calls on banks to increase “other income” (this has declined over a decade when seen as a percentage of total assets) and reduce operating expenses (wages, transaction costs) to maintain profitability.
Technological advancements have already helped reduce operating expenses.
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