Banks feel pinch on interest margins

Down 10 basis points to 3.14 per cent in 2005-06.

Net interest margins (NIM) of public sector banks have declined marginally by 10 basis points from 3.24 per cent in 2004-05 to 3.14 per cent in 2005-06, indicating pressure on interest spreads. One basis point is one hundredth of a percentage point.

The NIM is the difference between interest earned and interest expended as a proportion of average total assets. This is one of the key parameters that measure the efficiency of banks.

Interest earned on working funds by 25 public sector banks increased by 12.52 per cent or by Rs 14,436 crore to Rs 1,29,757 crore in 2005-06 from Rs 115,321 crore in 2004-05.

The slower growth in NIM despite higher interest income from advances (up over 30 per cent in 2005-06) was largely owing to the decline in banks' income from investments.

With the firming up of interest rate in 2005-06, bond prices fell and consequently public sector banks registered 6.84 per cent drop in income from investments.

The average assets base of 25 PSBs studied here moved up at higher pace of 14.41 per cent to Rs 177,62,91 crore.

With housing loans growing at a past pace (up 95 per cent), the advance portfolios of these banks rose 30.1 per cent. The yield on advances rose by 6 basis points to 7.96 per cent and, overall, interest earned on advances rose by 30.16 per cent. Twelve PSU banks reported declined in yield on advances.

State Bank of India showed a marginal improvement in its NIM from 3.39 per cent to 3.40 per cent, largely on account of growth in interest income on advances and lower cost of deposits.

Average assets of SBI rose 9.62 per cent and total interest income rose 10.38 per cent. Total advances of SBI rose 29.29 per cent and income from advances rose at higher pace of 35.6 per cent.

Bank of Baroda, a large public sector bank, has shown a decline in its NIM to 3.31 per cent in 2005-06 from 3.40 per cent in 2004-05. The bank's average interest earnings assets rose 11.12 per cent and interest earned on assets increased by 10.40 per cent.

Total advances of the bank rose 38.04 per cent and interest on advances increased 30.14 per cent. Despite the rising rates, the average yield on advances for BoB declined from 7.34 per cent to 7.30 per cent.