Cost of Funds Vs Return on Advances – A Comparative Study of Scheduled Commercial Banks in India

In the light of shrinking gap between interest income and interest cost, this paper examines the trend in interest cost and income ratios, and also the differences among three groups of scheduled commercial banks viz., public sector banks, private sector banks and branches of foreign banks in India. For this purpose, data for 16 years from 2004-05 to 2019-20 are used and analysed with descriptive statistics besides t-test and Levene’s test. The study finds that the cost of fund ratios are lower for branches of foreign banks followed by private sector banks and public sector banks. As far as the return on advances/investment ratios are concerned, private sector banks have improved their performance more than the public sector banks and branches of foreign banks. Further, in terms of return on advances and investments adjusted to cost of funds, the branches of foreign banks are more profitable among three groups of scheduled commercial banks, and between two groups of domestic scheduled commercial banks, private sector banks are more profitable than the public sector banks.