The past few years have seen a monumental rise in technology and impacted the lives of individuals and businesses alike. The banking and NBFC industry is no exception to this. Globalization and competition from fintech startups and alternative credit providers have accelerated the adoption of technology by the BFSI sector.
Incorporating technology into banking offers a host of advantages such as operational efficiency, better customer service, and lower operational costs. Let’s focus on the lower operational costs and how technological advancements impact the net interest margin (NIM) of banks and NBFCs.
What is the Net Interest Margin?
The net interest margin (NIM) represents the difference between the interest received by banks and the interest amount paid to its customers. In the case of NBFCs that solely engage in lending activities, NIM is the difference between the interest received from loans and the amount spent to finance these loans. In both cases, a higher NIM means a bank or NBFC is earning more than it is spending, denoting profitability.
How Technology Impacts the NIM?
Reduction Of Operational Costs
Leveraging the latest technology like Robotic Process Automation (RPA) and Machine Learning (ML) can streamline operations. The automation of repetitive tasks can save banks and financial institutions up to 50% of processing time and costs. To add to it, technology can help reduce human errors. So, by reducing operational costs, banks and NBFCs can potentially increase their net interest margin.
Product Innovation With A Consumer-centric Approach
Banks and NBFCs must adopt the latest technologies to provide top-notch customer service. After all, customer retention and loyalty are critical to any business’s success. For this, they can take adopt digital platforms and mobile applications. Through this, they can provide convenience and accessibility to their customers, allowing them to easily manage their finances and access banking services anytime, anywhere.
For instance, Poonawalla Fincorp, a leading NBFC in India, has taken an end-to-end digital approach for most of its loan offerings. Abhay Bhutada, Poonawalla Fincorp’s MD, said that this digital approach has led to many pleased customers, and is sure of maintaining NIM above 10%.
Better Fraud Detection And Prevention
Fraud can significantly impact a lending institution’s net interest margin (NIM) by causing financial losses and damaging its reputation. These losses reduce the bank’s profitability and can lead to a decrease in the NIM. In fact, banks in India saw a total of 9,102 frauds involving an underlying amount of Rs 60,389 crore in FY 2022.
This is where technology can come in. By examining customer data in real-time, spotting suspicious patterns, and unusual behavior to quickly identify potential fraud, banks and NBFCs can reduce potential fraud. With this, they can protect themselves against financial losses while also ensuring customer trust.
The Other Side Of Technology Adoption
Reading all of the above may make it seem like technology adoption is the way to go for lending institutions. However, it is a bit of a double-edged sword. For instance, the implementation and maintenance of advanced technology solutions can be expensive. Banks may need to invest in hardware, software, infrastructure upgrades, and cybersecurity measures. A senior official from the State Bank of India has stated that the change in the banks’ business models, increasing cost of capital, cost of compliance, and cost of adopting new technologies all have been shrinking the NIM.
So, while adopting the latest technology may look like the way forward for banks and NBFCs, they may still have to make a delicate balance between the NIM and technology.