PRODUCTIVITY AND

PRICING

SOURCES OF INCOME FOR BANKS

Interest income
earned
Interest on loans
and advances
Discount on bills

Non-interest
income

Indicators of Profitability
Net Interest Margin (NIM) = Total Interest income
Less: Total interest expenses
-----------------------------Total Assets
Return on Equity = Net profit / Equity

Cost of Funds = Interest expenses / Interest bearing deposits

+ Borrowings

Return on funds =

Interest on advances +
Interest on investments
Interest on advances +
Interest on investments

OTHER INCOME
Income on investments
and treasury operations
Profit/loss on sale of
securities and
investment
Profit/loss on sale of
fixed assets
Income earned from
subsidiaries
Dividends from
subsidiaries and joint
ventures

Miscellaneous
income
From own
property/rentals/go
downs

New Approaches to Improve Profitability

Source

Interest Income
Non-interest Income

Use

Interest on deposits
Operational expenses

Potential Sources for Non-interest Income (NII)

Standing Instructions for payment of bills.

Traveller cheques.
Gift cheques.
Online customer services
Dematerialization if /shares
Foreign exchange services
Safe deposit lockers/custody of documents
Intermediary services in capital market
Depository services
Merchant banking
Leasing/Hire purchase
Factoring Services

Potential Sources for Non-interest Income (NII)

Issuing the letter of credit.

Issuing bank guarantee.
Remittance products ECS/NEFT/RTGS
Forward exchange contracts and derivatives.
Credit Cards/Debit Cards.
Wealth Management services/Investment advisory/Tax
Planning
Cross selling of products refers to
either combining asset and liability Products
Selling third party such as insurance policies, mutual funds
to existing customers. This reduces the cost per customer,
NII accrues on selling insurance, mutual funds etc.
New payment products/services

Productivity Indicators

Deposit Accounts per Employee

Deposit Amount per Employee
Advances per Employee
Profit per Employee

Pricing of Bank Products

Customer centric
Low pricing for volumes

Cost pricing
based
on explicit and implicit costs.

Predatory
or
Teaser
or
MAT
Penetration.

Conditional pricing
Min deposit

Differential Pricing

Relationship Pricing
Rated Customers

Upscale Targeting
HNI

Rating Parameters
(Domestic Banking)

C Capital Adequacy Ratio ( 9% and above)

A Asset Quality ------ (Net NPA < 9% ideal < 4%)
M - Management Effectiveness
E - Earning (profitability)
L - Liquidity (Asset-Liability Management)
S - Systems and Controls

Bank Rating

A Sound
B Sound with Moderate Weakness
C Weak Supervisory Concerns

 RBI Prompt Corrective Action (PCA)

BFS Board for Financial Supervision
Signals of Sickness
Trigger Points
CAR < 9%
Net NPAs > 10%
Return on Assets < 0.25%