Has the wheel turned a full circle? The competition injected by the new generation private banks to the moribund PSU dominated banking industry has now begun to pinch the new entrants. In their zeal to grab an increased market share, the banks have sacrificed most on their earnings, reveal RBI's statistics.

Released last week, the RBI's statistics for 2004-05 indicate that the new generation private bank group has recorded a steeper decline in its rate of return on advances (RoA) percentage as compared to other bank groups in the country.

While the RoA over the previous year of the group of public sector banks dropped by 0.9 per cent and 0.8 per cent for the old private sector banks group 1 0er cent for foreign banks 1.0 per cent, it was 1.5 per cent for the new generation private banks group.

Return on Advances is computed by dividing the total interest earned by banks on their advances by the total amount of advances. So, a higher RoA indicates a better earning capacity of the bank or the group concerned.

Thanks to liberalisation, Indian corporates have since started to look at alternative sources of raising money. With GDRs and FCCBs becoming quite prevalent in the corporate corridors, there was little demand for bank credit from corporate borrowers. However, to show growth in their advances portfolio, banks vied with one another and lent money to corporate bodies at sub-PLR rates. This resulted in a significant drop in the RoA for the industry as a whole.

1. Cost of Deposits = Interest paid on Deposits / Deposits
2. Cost of Borrowings = Interest paid on Borrowings / Borrowings
3. Cost of Funds = (1 + 2) / (Deposits + Borrowings).
4. Return on Advances = Interest earned on Advances / Advances
5. Return on Investments = Interest earned on Investments / Investments
6. Return on Funds = (4 + 5) / (Advances + Investments).

As a result of their RoA, the new private sector banks scored poorly in net realisations too, registering a relatively higher drop of 0.5 per cent. Spread refers to the net difference between the amount of interest received on funds deployed and the amount spent for acquiring such funds. Public sector banks maintained their spreads while the foreign banks registered the biggest fall of 0.6 per cent. Interestingly, the old private sector banks improved their net spread margin by 0.2 per cent.

Significantly, for all other bank groups, NPA recoveries during the year were much higher than the relative additions during the year. Only the new generation private banks lagged behind with lower recoveries against their NPA additions during the year, which in real terms meant that the additions to their NPA figures outnumbered recoveries by Rs155 crore.

On the other hand, the public sector banks effected a much higher recovery of Rs3,256 crore over their NPA additions, the old private banks recovered Rs116 crore more over the new NPAs and for the foreign banks group, the recoveries were Rs102 crore higher than its NPA accruals. May be the new private banks should concentrate more on their realisations, both in NPA recoveries as well as in its earnings front.

On the positive side, there was a reduction of 0.7 per cent in the cost of funds for all the bank groups except foreign banks (0.6 per cent) - a direct effect of the declining trend in the interest rate on deposits offered to public at large.