The sectoral performance was the result of improvement in operating earnings with net interest income, the difference between interest earned and interest paid, growing 37.35 per cent.

The top-line growth was mainly driven by higher credit growth, less margin compression as banks raised rates and bond yields staying firm compared with July-September 2007. While the prime lending rates went up by 75-100 basis points, deposit rates were 50-75 basis points higher.

What makes the second-quarter show more striking is the performance of public-sector banks, which have done better than their private-sector counterparts on a cumulative basis.

During the first quarter of the current financial year, the banking sector reported a 1.10 per cent rise in net profits as provisions for the bond portfolio and lower treasury income ate into the bottom line.

In the second quarter, bond yields came down by 75 basis points to 8.46 per cent, helping banks to recover some of the money they had set aside for the April-June quarter. The reversal in mark-to-market provisions boosted bank bottom lines, especially in the case of public-sector banks. The extent of the write-backs, however, varied depending on the duration of the "available for sale" (AFS) portfolio.

On the flip side, non-tax provisions and contingencies rose by 88 per cent to Rs 5,221 crore (Rs 52.21 billion) in the quarter ended September 2008, and accounted for 20.13 per cent of the net interest income. In the first quarter, provision and contingencies went up by 170 per cent to Rs 7,040.14 crore (Rs 70.40 billion).

A part of the provisions were on account of the rise in the non-performing assets and the farm loan debt relief scheme. For the sector, gross NPAs went up by 6.97 per cent to Rs 51,839 crore (Rs 518.39 billion), while on a net basis, that is, after factoring in the provisions, the rise was almost 10 per cent to Rs 22,234 crore (Rs 222.34 billion) at the end of September 2008.

State Bank of [Get Quote] India [Get Quote] (SBI) made a provisioning of Rs 611 crore, of which Rs 400 crore (Rs 4 billion) was towards farm loans and Rs 206 crore (Rs 2.06 billion) for State Bank of Saurashtra's merger with the parent bank.

Bank of India reported a 79.39 per cent rise in net profit to Rs 762.86 crore (Rs 7.62 billion) for the quarter ended September 30, 2008, compared to Rs 425.27 crore in the corresponding quarter last year on improvement in margins and non-interest income.

However, riding on higher interest and fee income, SBI's standalone net profit (after minority interest) grew by a whopping 40 per cent at Rs 2,260 crore during the July-September quarter compared with Rs 1,611 crore in the corresponding period last year. The lower growth in profit was mainly on account of higher provisioning towards bad loans.

Seven banks - Allahabad Bank [Get Quote], Bank of Maharashtra [Get Quote], Central Bank of India, DCB, Kotak Mahindra Bank [Get Quote], State Bank of Mysore [Get Quote] and Vijaya Bank [Get Quote] - have, however, reported a decline in their net profits for the quarter ended September 2008.

The aggregate credit and deposits of commercial banks registered a healthy growth of 24.80 per cent and 19.80 per cent respectively in the second quarter.

The interest income on advances and investment rose by 29.31 per cent to Rs 82,567 crore (Rs 825.67 billion), while interest payments were 25.95 per cent higher at Rs 56,634 crore (Rs 566.34 billion). During the quarter, employee cost went up 12 per cent to Rs 9,406 crore (Rs 94.06 billion).