The banking sector's profitability has been impressive, with many financial institutions reporting robust earnings in recent years. Factors such as prudent risk management, increased focus on operational efficiency, and regulatory reforms have contributed to this positive trend.
In an interview with CNBC-TV18, Nilesh Shah, Managing Director of Kotak Mahindra AMC, said that the sector may face challenges ahead due to a high base effect.
He said, “Sectors like IT, pharma, and consumption will get affected by global as well as local factors, whereas sectors like banking because of the higher base may see subduedness from a growth point of view, whereas the absolute numbers will still be impressive.”
The high base effect refers to the challenge of maintaining the same level of growth when the starting point is already elevated.
Elaborating on the factors affecting subdued growth, Shah said that the post-pandemic recovery phase might witness a slowdown, affecting various economic sectors, including banking. Moreover, the challenges posed by rising inflation, interest rate fluctuations, and regulatory changes may further dampen the growth prospects for banks. These factors, coupled with the high base effect, pose a formidable challenge to sustaining the impressive profitability numbers seen in recent years.
Recognising the evolving landscape, he emphasised the need for banks to adapt and diversify their revenue streams. The traditional banking model, heavily reliant on interest income and credit-based operations, may no longer be sufficient to maintain profitability levels. Shah suggested that banks explore innovative avenues such as digital transformation, technology-driven services, and exploring new markets to expand their revenue base.
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