THE IMPACT OF TECHNOLOGY ON NIM

 The past few years have seen a monumental rise in technology and impacted the lives of individuals and businesses alike. In the BFSI sector, technology adoption has accelerated due to globalization and competition from fintech startups and alternative credit providers  abhay bhutada poonawalla fincorp.

By integrating technology into banking, banks can increase operational efficiency, provide better customer service, and cut operating costs. The focus should be on how technological advancements affect banks' and non-banking financial companies' net interest margins (NIMs) abhay bhutada .

How does the Net Interest Margin work?

NBFCs with solely lending activities are measured by their net interest margin (NIM), which is the difference between the interest they receive and the interest they pay their customers. If NBFCs only lend, their NIM is the difference between the interest they receive from loans and how much they spend on financing them. As a result of a higher NIM, a bank or NBFC is earning more than it spends, indicating profitability.

What is the impact of technology on NIM?

Operational Cost Reduction

Technology like Robotic Process Automation (RPA) and Machine Learning (ML) can streamline operations. Automating repetitive tasks can save banks and financial institutions up to 50% of processing time and costs, while reducing human error. By reducing operational costs, banks and NBFCs can potentially increase their net interest margins.

A consumer-centric approach to product innovation

A business's success depends on customer retention and loyalty, so banks and NBFCs must adopt the latest technologies. For this purpose, they can use digital platforms and mobile applications. By doing so, they can offer their customers convenience and accessibility, allowing them to manage their finances and access banking services anywhere and anytime.

According to Abhay Bhutada, Poonawalla Fincorp's MD, this end-to-end digital approach has resulted in many satisfied customers and has assured NIM above 10%.

Detection and prevention of fraud

Financial losses and reputation damage can significantly affect a lending institution's net interest margin (NIM) when fraud occurs. In the FY 2022, banks experienced 9,102 frauds involving an underlying amount of Rs 60,389 crore. These losses reduced the bank's profitability and resulted in a decrease in NIM.

By analyzing customer data in real-time, spotting suspicious patterns, and observing abnormal behavior, banks and NBFCs can identify potential fraud in a timely manner. In this way, they can protect themselves from financial losses and maintain customer trust at the same time.

Adoption of technology from the other side

Adopting new technology in lending institutions has both its advantages and drawbacks. For starters, the implementations and maintenance of advanced technological solutions can be costly, with banks needing to invest in hardware, software, infrastructure upgrades and cybersecurity measures. According to a senior official from the State Bank of India, the shift in banks’ business models, the heightened cost of capital, compliance and adoption of new tech all contribute to a decrease in NIM.

While banks and NBFCs may look forward to adopting the latest technology, they may still need to strike a delicate balance between NIMs and technology.