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The asset quality of the banks has improved remarkably

The proficient performance of banking companies is also reflected in the stock markets as the Bombay Stock Exchange banking index- BANKEX rose by 16 per cent since the beginning of this fiscal whereas Sensex has mounted by 9.4 per cent. Comparing the year wise growth also, banking stocks have outperformed the market with 24 per cent growth during financial year 2006-07 as compared to 16 per cent growth in 30- companies based BSE indicator.

Private banks have proved to be more efficient as their operating profit increased by 52 per cent as compared to the public sector banks, which have reported rise of 27 per cent. Robust growth in the banking sector can also be explained by the surge in the average net interest income by 27 per cent, expressed as the difference between the interest earned and the interest paid by the banks.

At the aggregate level, average increase in interest expended for 27 banks is much higher at 53.6 per cent than the surge of 42 per cent in interest income for the banks. Unabated increase in interest cost of the banks can be partially attribute to increase in the deposit rates by the banks from 5.75-7.25 per cent to a level of 7.25-9.50 per cent on deposits of one-year maturity, in order to meet the credit demand.

The prime lending rates of the banks jumped from 10.25-11.25 per cent to 12.25 –12.75 per cent for public banks and from 11.00-14.00 per cent to a range of 12.00-16.50 per cent for private banks, following the hike in CRR and repo rates by RBI in order to squeeze the liquidity in the money market.

Total interest paid to the depositors by the scheduled commercial banks in last three months of FY2007 was Rs. 33951 crore as compared to short term and long term interest earnings of Rs. 54446 crore. The consolidation and aggressive market expansion of the private banks has led to decline in the share of public sector banks from 77 per cent to 75 per cent in last fiscal. Yes Bank, UTI Bank and ICICI have contributed maximum to the increase in private sector share. On the other hand, IDBI, Central Bank of India and Dena Bank are to be held much responsible for the fall in public banks’ share in total income of the banking sector.

Return on assets, a financial indicator of the efficiency with which the assets are employed to earn profit, has increased by 8 per cent during the period analyzed by the AEP. The scheduled commercial banks in the public sector recorded 11.8 per cent rise whereas the return on assets for the private banking companies has declined by 14.5 per cent.

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