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New pvt banks' spreads dip

REPORT ON TREND AND PROGRESS OF BANKING IN INDIA 2005-06

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BS Reporter Mumbai
Last Updated : Feb 14 2013 | 7:42 PM IST
The competition for raising resources, including deposits, to meet the burgeoning credit demand has taken a toll on spreads (the difference between cost and return on funds) of the new private sector banks in 2005-06 over 2004-05.
 
The spreads for new private banks dipped to 3.5 per cent from 4.3 per cent in the previous financial year. For public sector banks, spreads improved to 2.9 per cent from 2.8 per cent and for foreign banks, they rose to 4.4 per cent from 4.2 per cent in 2004-05, according to an RBI report.
 
The new private banks borrowed funds by offering higher rate on the certificate of deposits (CDs) to corporate clients and also mopped up money through high-coupon rate bonds..
 
However, private banks were unable to pass on the rise in costs to customers in any substantial manner, as public, private and foreign banks were fighting in the marketplace to grab higher share, be it in retail space or corporate loans, analysts said.
 
The costs of borrowings (certificate of deposits and bonds) for new private banks more than doubled from 1.4 per cent to 3.1 per cent in 2005-06. The borrowing cost for scheduled commercial banks (SCBs) sector went up to 2.8 per cent from 1.7 per cent a year ago.
 
The cost of borrowings moved up somewhat mainly owing to tightening of liquidity conditions in the market.
 
The cost of funds (deposits plus borrowings) moved up to 3.5 per cent in 2005-06 from 3 per cent for new private banks. The deposit costs went up marginally to 3.6 per cent from 3.4 per cent a year ago, RBI said.
 
The overall cost of funds for SCBs remained unchanged at the previous year's (2004-05) level at 4 per cent, according to the RBI report.
 
Despite the rise in deposit rates of SCBs during the year, the cost of deposits declined marginally due to increase in the share of low-cost deposits in the form of current and savings deposits, the report said.
 
The movements in the cost of deposits reflect the average rate at which different deposits are contracted rather than the movement in deposit interest rates as such.
 
While the overall cost of funds for foreign banks and new private sector banks increased, the cost of funds for the public sector banks remained unchanged.
 
Return on advances of SCBs increased marginally during 2005-06, reflecting the increase in lending rates. The return on investment remained flat at 7.6 per cent in 2005-06. Overall return on funds, however, was slightly higher than the overall cost of funds, resulting in increase in spreads.

 
 

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First Published: Nov 15 2006 | 12:00 AM IST

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