Letters: Look beyond NIM too

This refers to Abheek Barua’s article “Look beyond the repo rate” (September 4). It is true that a small rate cut will make no difference to the interest rates available to most borrowers. It has been observed that the 50-basis points reduction in the repo rate in April, although beyond market expectations of 25 basis points, had no significant effect on borrowing costs. In fact, we cannot expect a significant interest-rate cut for corporate borrowers in the medium and large-scale segments unless the repo rate is brought down by at least 200 basis points from the present level. This is because of the inefficiency of financial intermediation in the country, as indicated by the prevailing high net interest margins (NIMs). Most Indian banks have NIMs in the range of three to four per cent, which is quite high by global standards.

 

The excessive dependence of banks on NIMs for maintaining profitability levels prohibits them from reducing lending rates, especially in the present situation in which the cost of deposits are high. But banks should consider the fact that the NIM is not the only contributing factor to profitability. There are two other critical factors: non-interest income and operating expenses. Banks should explore ways and means to increase non-interest income from fee-based services like syndication, merchant banking and treasury management and, at the same time, reduce operating expenses by shutting down loss-making branches, making efficient use of technology and so on.

V Sridhar Kolkata

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