Are public sector banks over dependent on interest income?

Are public sector banks over dependent on interest income?

New Delhi: Public sector banks depend excessively on their interest income as compared to their peers in the private sector. Also, their fee-based earnings coming from services remain quite low, as per findings of the latest Eco Pulse (AEP) Study on ‘Income sources of Indian banks ‘ brought out by Assocham.

In a banking regime marked by high interest rates, PSU banks are lagging behind in their fee based income which has dipped 10% compared to private sector banks which registered sizable growth of 29% in fiscal 2006-07.

Current high interest regime augmented interest income of public sector banks by 18% though less than a whopping rise of 44% was recorded by private sector banks in FY 2006- 07.

Key Findings

* Major PSU banks registered decline in fee-based income in FY 2006-07

* United Bank of India witnessed downward trend by 26.76% followed by SBI with decline of 22.41%, Allahabad Bank (21.98%), PNB (18.15%) Dena Bank (10.82%)

* Indian Bank increased its fee-based income by 58.29% in FY 2006-07 followed by Bank of India, recording growth of (31.96%), Andhra Bank (14.13%), Oriental Bank of Commerce (9.13%), Bank of Baroda (4.07%)

* Rise in net interest margin was attributed to interest rate increase

* Prime lending rate went up within range of 12.75% to 13.25% and rise in interest rates had major impact on public sector banks’ interest income, showing robust growth of 18% at 94763.50 crore in fiscal 2006-07 against 80162.77 crore in previous FY

* Bank of Baroda led with 30.68% rise in interest income in FY 2006-07, Bank of India posted 30.61% rise, Allahabad Bank (29.64%), Indian Bank (27.35%), OBC (39%), Andhra Bank (23.93%), United Bank of India (20.88%), PNB (20.38%), Dena Bank (20.36%) and SBI (9.76%)

* Among major banks, net interest margin of PNB was highest with 4.07% in FY 2006-07 as compared to 4.00% in previous year, while SBI went upto 3.31% in fiscal 2006-07 over and above 2.92% in FY 2005-06

* Compared to private sector banks, some public sector banks may not have been able to devise alternative non-interest, fee-based sources of earnings. Absence of direct customer service and requirement of innovative products/services as per customers’ expectations is one reason for decline in fee-based income of these banks

* Among private banks, Bank of Rajasthan recorded highest rise in fee income at 101.16%, Yes Bank showed growth of almost 100%, Centurion Bank of Punjab raised its fee based income by 89.30%

* Other banks registering sufficient rise were ICICI Bank (41.82%), ING Vysya Bank (39.63%), IndusInd Bank (29.29%) and Jammu and Kashmir Bank (24.18%).

* Collectively, banks in the private sector increased their interest income by a healthy 43.95% in FY 2006-07 in contrast with 18.21% for public sector banks. Among major banks, ICICI banks posted highest increase of 60.73% in interest income, Centurion Bank of Punjab rose income by 57.93%, Bank of Rajasthan (40.52%), Karur Vysya Bank (33.27%) and IndusInd Bank (26.25%)