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SoulofBankingAwareness:I

Dearfriends,
ManyofyouaretensedabouttheSBIClerk,UIICAO&lastbutnottheleast,thebackboneofIndian
bankingsectorSBIPO.Asweallknow,Bankingindustryisnowevolvingsobanksdoesnotneedemployees
whoknowsonlyfreakingdefinitionstheyneedthesouloutofthebodyofbankingsector.
Dontbenervousjusttrytounderstandeverythinginasimplifiedway,trytorelateitwithyourdailyactivities.
Manyofyouaregoingtoappearforforthefirsttime,manyhadappearedearlierandgonethroughthe
tremendouspainoffailure.

RemembermyfriendsTREMENDOUSPAINISDIRECTLYPROPORTIONALTOTREMENDOUSGAIN
ForSBIClerk,UIICAO&SBIPOExamweareprovidingyouvariousmodules,whichwillsurelyhelpinyour
preparation.
Module1InfirstmodulewewilldiscussonimportantissueHowtheBankfunctions?Howwillthey
getprofit?

COSTOFFUNDSLIABILITIES
Soletuslookintothefirstandforemostpart,pleaselookintothefigureandhereaverticallineisgiven
thatverticallinebasicallyitisinterestpercentage,whenyougothebanksthereareprimarilytwothings,
eitheryouaregoingtodepositmoneyortotakesomeloanfrombank.
Sowhenwedepositmoneyinthebankingsystem,theyarerequiredtopayusinterest,thisverticalline
youareseeinginthefig.isbasicallytheinterestrate,hereifyoulookat
1.Currenta/cDeposittheinterestratewillbezero,thesecondoneisthe
2.Savinga/cDepositsomeinterestispaidaround4%,nextcomes
3.Fixeddeposita/candRecurringdeposita/c,thenonemorecategoryisthere
4.BulkdepositsBankdepositsprimarilyconstitutesthese5typesingeneralandwhenwedeposit
moneywiththebanktheyarerequiredtopayinteresttousandthatinterestvaries,theinterestwhichthey
payvariesdependingonthedeposit.Asbanksarerequiredtopayusinterestthedepositswiththe
banksareknownasliabilities.
Nowwhatisliability?Whatisasset?

Supposeyouhaveabrotherwhoalwaysgivesyoumoney,heisyourasset.Lookattheotherscenario
youhaveabrotherwhoalwaysasksyoumoney,hewillbeyourliability.Similarlywhenyoudeposit
moneywiththebankingsystemtheyarerequiredtopayusinterestandtheavg.interestofallthese
depositsputtogetherisknownasCOSTOFFUNDSforbanks.Thecostoffundsshouldbeaslowas
possible.
Nowhowtoreducethiscostoffunds?
Costoffundscanbereducedifbankshavemorecurrenta/candsavinga/cdepositsbecause
1.InCurrenta/cbanksarenotrequiredtopayanyinterestand
2.InSavinga/ctheinterestrateisverylessaround4%.
Butifbankshavemorefixeddeposits,thecostoffundswillbemore.Thatswhyinthebankingsystem
banksrequiresmorecurrenta/candsavinga/cdeposits,buttheproblemhereisCASAdepositscanbe
withdrawnatanypointoftime,theyareunstabledeposits,todayhemaydeposit10crores,tomorrowhe

maywithdrawallthe10crores,thatswhytheyarevolatiledeposits.
Butfixeddeposits,theyareforfixedterms,bankscanplantheiractivities,sotheadvantageofhaving
morefixeddepositsis,thesedepositsarestable,bankscanplantheirloans.Thatswhybankshaveto
judiciouslymixsupportthesedeposits.

YIELDORINCOMEASSETS
Nowwearelookingatloan.Thereareseveraltypesofloanshouseloans,mortgageloans,
corporateloan,personalloans.Wewilldiscussthesalientfeaturesoftheseloansinsubsequentmodules.
Thisverticallineshowsthevariousinterestrates.
Banksaregivingloantouswepayinteresttothebanks,thatswhytheyareassetsforthebankingsystem
andtheincomewhichtheyaregettingisknownasYIELDORINCOME.Theavg.interestwhichbankgeton
loansisknownasYIELDORINCOME.Yieldshouldbeashighaspossible,butbecauseofthecompetition
b/wvariousbankstheycannotincreaseinterestrateonloans.Ifonebankincreasesthecustomerwillgoto
secondbank,theirdifferenceishardly0.25%or5%.

NETINTERESTMARGIN
Thegapb/wthesetwoi.eCOSTOFFUNDSandYIELD/INCOMEshouldbeminimum3%whichisknown
asNETINTERESTMARGIN(NIM).Withthesegapbankshavetopaysalary,rentontheirpremises,
bankshavetopayfortheiroperationsandtheyhavetogetprofitalso.Thisbankingiscalledviable
banking.BanksrequirethisNIMof3%toensureprofitability.

ExLetusassumebankshaveRs.100crofmoneyandcostoffundis6%,thatmeanstheyhavetopay
Rs.6crperannum.Iftheyieldis9%theywillgetRs.9crperannum,thatmeansthedifferenceRs.3cr
istheincomewhichtheygetonRs.100crandtheyhavetomeetalltheirexpenseswithinthisRs.3crand
havetoensureprofitabilitywiththisgaponly.IftheNIMislessthan3%thenitsnotsufficienttoensure
profitability.
CONSIDERCASE1==Viablebankingoperation&CASE2==Strainedbankingoperation
CASE1NIMisgreaterthanorequalto3%.IsmetbySBI,ICICI,HDFC,AXISBank
CASE2NIMislessthan3%.SmallbankslikeANDHRABANK,UNITEDBANKOFINDIA,STATEBANK

OFMYSORE.NIMisaround2.5%.
HencethecoreoftheBankingOperationsliesinKeepingCostofFundsasminimumaspossibleso
astokeepHighNetInterestMarginsChallengesforPublicSectorBanks(BarringSBI)
Unabletoattractcurrentaccountdeposits
Notmatchingwithtechnologicalupgradationofprivatesectorbanks.
Bureaucraticapathy.
HighNonPerformingAssets(NPAs)
Lagginginpersonalisedservice.
EmphasisbygovernmentforopeningzerobalanceaccountslikeBSBDA,PMJDYetc.
MostofthepublicsectorbanksarestrugglingwithNIMsof2.2%to2.7%.Hencethesebanksarenot
abletoachievedesiredlevelsofprofitability.Smallerpublicsectorbanksareunabletoattractcurrenta/c
depositsthatisthemainreasonwhytheirNIMislessthan3%.
Mydearbankingaspirantsinthesecondmodulewewilldiscussaboutanothervibranttopic.
NOTEWhatsoevermaybethestory,DONTLOSEHOPEISTHEMORALOFTHESTORY
.Thanks,TeamGradeUp..!!