How Indian Banks Generate Revenue?
Indian banks, the mainstay of the country’s financial system, are profit-pursuing enterprises in the same mold as other types of businesses, and instead of trading material items, theirs is the currency of money itself. Let’s delve deeper into the key mechanisms that keep Indian banks humming with financial activity, using real-life examples to illustrate each concept:
- Interest Rate
Suppose you put INR 10,000 in your saving account and got an interest rate of 3%. It means ₹300 a year. Secondly, the bank on-lends all those deposits at a rate of, for instance, 8%. At a ₹1 crore home loan rate, the bank makes ₹8 lakhs of interest annually. This gap between the interest rate on borrowing and the rate on lending is the net interest margin (NIM). By creating low-cost deposits through senior citizen savings schemes that pay higher interests (say, 4%), and by the way of strategically pricing loans linked to factors such as the borrower’s credit score (somebody with a good credit score might get a home loan at 7.5% and somebody with a bad credit score might get one at 8.5%), the banks secure continuous inflow from the difference between
- Service Charges
Indian banks have the status of financial supermarkets, providing a broad range of services beyond the fundamentals of savings deposits and check cashing. This diverse range of services leads to different categories of fee-earning income streams. Through a monthly maintenance charge of ₹12 your savings account is being operated which is like providing the bank with a steady flow of income. Transaction charges affect you whenever you use an ATM which is not connected to your bank account (for instance, ₹20 per transaction), or online fund transfer (₹5 to ₹25 per transaction, this depends on the amount), or request for a paper cheque book (₹50 to ₹100). Loan processing fees, a percentage (approximately 1%-2%) of the total loan amount, are paid to offset the cost of processing loan applications and establishing a loan structure. Demat account charges which are applicable if you hold investments in electronic mode (nominal charges of ₹100 annually) also help banks earn income through fee income diversification.
- Commissions
Indian banks extend their reach into other firms’ products as they act as distributors for non-bank financial products. As an illustration, a bank could cooperate with an investment fund company in order to expand the scope of financial products. Through selling these third-party mutual funds, banks receive a commission (commonly a percentage of the invested amount) and thus they are getting an additional revenue channel, which supplements their banking incomes. This partnership is mutually beneficial – the bank gets a new source of income, and the mutual fund company gets a wider audience.
- Investment Income
Banks do not only provide loans; they are also efficient when it comes to financing their liquid assets. They do this by depositing their excess cash in different types of securities such as government bonds and treasury bills. Those investments bring in income by way of interest payments, which is a very constant and predictable source of revenue for the banks. For instance, a bank puts ₹100 crore in a government bond that pays it 7% interest per annum. This investment would yield an annual income of ₹7 crore for the bank which would be a secure and reliable source of income.
Additional Avenues
The profits of Indian banks also depend on the methods cited above. Here’s a deeper exploration of some additional avenues for income generation, with examples to illustrate each:
Foreign Exchange Transactions: Banks have a role of mediator for various currencies, namely rupees, dollars, or euro (and vice versa) and earn a commission when clients convert them. This income flow has a wide range of users starting with tourists purchasing foreign currencies (commissions on ₹1 lakh conversion) and companies engaged in international trade (commissions on foreign exchange for bulk transactions) to investors looking for foreign assets (fees for buying or selling foreign stocks and bonds).
Loan Restructuring Fees: Where the borrower faces financial hardship and fails to pay a loan back, banks will offer rescheduling of the loan. These alterations of the loan terms, which are common, are done by lengthening the repayment period or renegotiation of the interest rate, but they come with a fee. Likewise, a client who cannot pay a loan back for business in a given period might be given another opportunity for the fee of 1% of the remaining amount.
Sale of Non-Core Assets: Banks more often than sell assets not important for their core activity which may be land plots or shares of non-financial companies. Such sales may be like a surge of funds that can be used to upgrade capital reserve or finance new endeavors. For instance, a bank that has condensed its branches may sell a building it no longer needs to create revenue that could be used to invest in upgrading its digital banking channel.
Cash Management Services: Corporates that are contending with such large cash holdings are often found struggling with managing this cash responsibly. Banks carry out cash management services, such as centralizing corporate accounts, credit and debit transactions, and investment of surplus money. Some of these services attract additional fees that, in turn, help increase the bank’s revenue. Consider a corporate client who is offered a cash management pack with salary disbursement services, auto bill payments, sweep-in/sweep-out facilities for idle cash (where client’s surplus funds are automatically invested in money market instruments and redeemed when needed), all for a monthly fee.
It must be understood that the job of managing a bank is a multi-faceted exercise. Getting income is the primary goal of any bank but it always comes with expenses like payment of interest on deposits, employee wages, branch maintenance, technology infrastructure maintenance, etc. The profitability of financial institutions is substantially dependent on how well they can not only control costs but also maximize revenue streams via strategic interest rate management, a large fee structure, calculated investments, and close monitoring of additional income sources. Through this guidance and the help of actual scenarios, your knowledge base about the complex mechanisms of Indian banks and their coping strategies in a fast-changing financial landscape is enhanced.
