Interest margin rises for third year in a row

REPORT ON TREND AND PROGRESS OF BANKING IN INDIA 2004-05

The net interest margin (NIM) of scheduled commercial banks increased for the third year in succession in 2004-05 to 2.93 per cent from 2.57 per cent in 2001-02.

State Bank of Bikaner and Jaipur had the highest NIM of 3.71 per cent, followed by Indian Overseas Bank's 3.65 per cent and Punjab and Sind Bank's 3.64 per cent.

The State Bank of India (SBI) group's NIM was at 3.06 per cent, slightly above SBI's standalone NIM of 3.03 per cent. Industrial Development Bank of India's NIM was almost negligible at 0.46 per cent.

The NIM of public, private and foreign banks were 2.92 per cent, 2.34 per cent and 3.33 per cent, respectively.

The cost of deposits of all banks declined significantly during 2004-05, reflecting largely the impact of a decline in deposit rates last year. In the recent period, the decline in cost of funds has emerged as a notable feature of operations of the banking sector, a trend which continued during 2004-05, RBI said.

Significantly, the cost of borrowings was much lower than the cost of deposits across all bank groups, barring foreign banks. The cost of funds across bank groups declined in the range of 60-70 basis points in 2004-05.

The decline in cost of funds was accompanied by a larger decline in return on advances, reflecting mainly the increased lending at sub-PLR (prime lending rates) rates on account of competitive pressures.

As a result, interest spread came under pressure, suggesting that the benefits of low interest rates have begun to percolate to banks' borrowers.