Reading Comprehension For Upcoming Exams Like SBI PO/Clerk, UIIC, and SSC

Directions for questions 1 to 5: Read the following passages carefully and answer the questions given below it. Certain words/phrases are printed in bold to help you to locate them while answering some of the questions.

In October last year, after burning their fingers dealing with the ‘new economy’, large funds and small investors were looking for more defensive investment opportunities. It was then that bank stocks came into the limelight, after a gap of almost three years. In terms of numbers, a majority of banks recorded stupendous performance in the first quarter of the current fiscal in contrast to profit warnings from a high-visibility sector like information technology. But will they sustain this performance in the future as well?

The year, so far, has seen exceptional growth in deposits mainly due to the UTI crisis and uncertain capital market conditions. Aggregate deposits grew by 5.2 per cent in 3 months to June 2009 compared to 4.6 per cent in the year before. This is unlike the normal trend where growth in deposits is sluggish in the first quarter and starts picking up in the subsequent quarters. The trend is continuing with a 6.5 per cent increase in the latest available fortnight numbers as against 5.3 per cent in fiscal year 2009.

However, credit offtake is not picking up at a similar pace. Slower credit growth has resulted from investments by banks in debt instruments especially government securities. Another reason for banks to shy away from lending is the sluggish market condition, which exposes them to a higher default risk and Non-Performing Assets (NPAs). Advance to deposit ratio is not picking up because they are not finding good lending avenues and they continue to invest in government securities. This is evident from the fact that banks invested 46.43 per cent of incremental deposits (over LRF of March 2009) in government securities and lent 14.3 per cent in the period up to June 2009.

Subject to regulatory requirements, banks can deploy their funds in credits and investments. Depending on the duration and mix, the average cost of deposits ranges between 7 per cent and 8 per cent, which is further enhanced by 1 per cent to 2.5 per cent on account of reserve and servicing costs. Investment in the call market fetches below 7 per cent, resulting in a negative spread. Due to a fall the in interest rates, spreads from lending have already come under pressure.

From a business point of view, it makes sense to go in for assets, which provide higher yields. Currently, a 10 year government paper offers an yield of 9.05 per cent compared to 10.26 per cent at the beginning of the fiscal. Bonds offer 100 to 125 basis points higher yield. Falling yields in debt instrument offer an opportunity to book capital gains by selling investments.

This has certainly helped a large number of banks to book gains and show better profits in the first quarter. However, they would not only earn lesser interest income on investments but also run the risk of depreciation in case of an upward movement in the interest rates and asset-liability mismatch. Considering the investment portfolio of banks ranging between Rs.2,000 croreto Rs.10,000 crore, even a conservative estimate would translate into depreciation between Rs.10 crore to Rs.500 crore.

Q-1 What seems to be the impact of the new economy on small investors?

A) They could get wider and more beneficial investment opportunities.

B) Information technology was available to them at a relatively cheaper cost.

C) They could get easy access to various credit facilities at lower interest rates.

D) Their investments came in jeopardy and suffered a blow.

E) None of these

Q-2 It can be inferred from the passage that the performance of the banks in the last three years had been -

A) stupendous

B) lackluster

C) good beyond explanation

D) abysmal as expected

E) None of these

Q-3 The UTI crisis and uncertain market conditions have resulted into -

A) a sluggish growth in bank deposits.

B) a sudden spurt in deposits in the second and third quarters.

C) a breach of the usual trend of growth in deposits.

D) a recurrence of the normal trend of growth in deposits.

E) None of these

Q-4 Which of the following is/are the reason(s) for low credit-off take from banks?
(A) Banks’ legal obligation to invest most of the funds in Government securities.
(B) Unfavourable market conditions.
(C) Lack of Iucrative lending avenues.

A) B and C only

B) A and C only

C) A and B only

D) All the three

E) None of these

Q-5 How could most of the banks show better profits in the first quarter?

A) By mobilizing optimum deposits.

B) By increasing their lending portfolio.

C) By investing more and more funds in Government securities.

D) By claiming higher depreciation.

E) None of thes