“The process by which banks create money is so simple that the mind is repelled.”

John Kenneth Galbraith

Banks are known as the blood of the economy for the reason that it deals with the pecuniary matters of the country and connects it with the citizens and government. Banks also help in the creation of new money and capital which help in the growth of the country.

There are different types of banks such as industrial banks, agricultural banks, private banks, etc. which help in the development of various echelons of society. Not only in the expansion of the economy; but banks have also helped in facilitating international and internal trade.

Banks works as a business that provides the service of storing and circulating money. Like any other business, banks also need to earn an income for smooth running. There are different ways of how banks make money, but the primary source of income varies from bank to bank.

The three main types of bank in India are divided broadly into the following categories:

  1. Commercial banks
  2. Payments banks
  3. Co-operative banks

Here we will get insights about what is the primary source of income for each of the above-mentioned banks.

1. Commercial banks

Commercial banks are further classified into scheduled and non-scheduled banks which are regulated under the Banking regulation act, 1949. The main objective of these banks is to make profits. Commercial banks accept deposits and grant loans to corporates, the public and the government. The main source of income for commercial banks is receiving interest from the loans lent by them.

“Compound interest is the eighth wonder of the world. He, who understands it, earns it; he who doesn’t, pays it.”

Albert Einstein

There are four types of commercial banks presently running India which are:

  1. Public sector banks
  2. Private sector banks
  3. Foreign banks
  4. Regional rural banks (RRBs)
PUBLIC SECTOR BANKS (PSBs)

The majority of stakes in public sector bank is held by the government. Currently, there are 20 PSBs in India. Among these 20 PSBs; the State bank of India (SBI) is the largest PSB. The public sector banks need to earn profits, as it is a source of revenue for the government, the profits are later demanded by the stakeholders and for raising long term funds.

As mentioned before, interest is the main source of income for public sector banks. They are implementing various policies for boosting earnings. One such policy which was recently implemented was “PSB loans in 59 minutes” where a home or personal loan of up to Rs 10 crore was offered to salaried and self-employed customers in less than 59 minutes.

Public sector banks are made for serving the society. They offer interest on deposits and loans at low interest, for the betterment and easy access for customers. Even with this vision, PSBs have managed to grow the net interest income and net profit in recent financial years. With more than 75% of the total banking business of India handled by PSBs, they have turned out to one of the profitable financial institutions of the country.

PRIVATE SECTOR BANKS

The main characteristic of the private sector bank which differentiates it from other banks is that the majority of stakes are held by private stakeholders. These banks work on the basic rules and regulations of RBI. The main source of income for these banks includes the interest on loans offered and charging fees on various services and products provided by them.

The loans offered by private sector banks are made for long and fixed terms and interest rates. By giving loans, the bank creates credit which previously never existed. This gives an effect of money multiplier for the banks.

Services of credit and debit cards, checks, overdrafts, number of transactions per month are few of many kinds of services offered by banks on which they charge fees and it acts as an income. When a customer applies for a new credit or debit card processing fees, merchant service charge, internet banking charges and transaction charges are charged on him. Applying for a new chequebook also carries charges by the bank.

Whenever the limit of overdraft is crossed or delay in payment of the monthly installment happens, the bank charges money from its customers. This amounts to some major source of income for private banks.

FOREIGN BANKS

Foreign banks are a type of international banks who are obligated to follow the rules and regulations of host and home countries. They have their headquarters in a foreign country but operate in India as a private entity. The main reason for opening branches in a foreign country is to meet the needs of multinational companies and customers. The foreign banks make up to 7% of the total banking sector of the country.

In India, foreign banks focus mainly on external commercial borrowing, treasury services, investment banking, and trade finance. There are 45 foreign banks in India with 286 branches from 20 countries.

The major source of income for foreign banks is earning from forex. The earning also depends upon the GDP of the country and also trading and advisory activities from deals of mergers and acquisition. Foreign bank charge fees for exchanging of currencies and also lend loans on a higher interest which adds to their income.

REGIONAL RURAL BANKS (RRBs)

RRBs are Indian scheduled banks or government banks which operated at the regional level in different states of India. The main objective of these banks is to serve the rural areas of India with basic or below-average financial and banking services. RRBs provide credit to the weaker section of the society like the farmers, laborer or small businesses. These banks grant loans and advances to farmers and other agricultural laborers for purchasing raw materials and carrying out farming activities. They also encourage the habit of saving among the rural population.

The main source of income comes from the interest they charge on loans and mortgages. As the main motive of these banks is to assist the rural population with low-interest loans, their income is limited.

2. Payments bank

On 19th August 2015, 11 payments banks were given in-principal license under section 22 of the banking regulation act 1949 by the reserve bank of India (RBI) to start their operations. These banks were registered as a public led company under the companies act, 2013. Payments banks were made with an objective to ensure financial inclusion of the labor workforce, low-income households, unorganized sector, and small business holders by furnishing them with payments/remittance service and helping them to open a savings account.

The main source of income for every bank is more or less the same. They stockpile interest through lending loans, charge fees and earn from the deposits. But the contort for the payments bank is that they are restricted from lending loans and credits to its clients and also the deposits which they can accept should not exceed a mark of Rs1,00,000. This poses as the main challenge, as the road to earning income through conventional banking regime is a little bumpy for payments bank.

The creation of a payments bank was made with an intention to fill two needs with one deed. Firstly, with a motive to expand the digital payment infrastructure by giving an impetus to financial inclusion. Secondly, to stimulate financial technology or FinTech practices in the landscape of Indian banking. But the adjunct of additional restrictions made payments bank a tough nut to crack. However, payments bank managed to enter the green pasture by making its way through solutions to make money.

They are mending up the buckle of unwonted banking procedure to earn an income through tie-ups with banks, NBFCs, earning from the selling of mutual funds and insurance and data monetization to count as few solutions. Below are some detailed methods followed by payments bank to earn profits:

  • Payments banks are creating a symbiotic relationship with other commercial or public banks and NBFCs to sell their products through them as a part of the collaboration. Tie-ups with mutual funds and insurance companies to offer new services have also become the main source of income for payments bank.
  • Cross-selling fees are charges, which a bank can earn by partnering with other financial institutions, NBFCs, and companies to provide services and products such as insurance and loans.
  • Charging fees from customers for exceeding the number of times they are allowed to withdraw cash from the branch of the bank or charging for withdrawing over the limit from ATMs.
  • Data monetization is another source of income for these banks. However, this method is still at the infancy level. When the banks will manage to reach the mass, analyzing of data and collection of customer’s profile parameters will help the banks to get insights on the spending pattern of its clientele, which in turn will help the bank to scout new income opportunities.
  • Payments banks can earn money from the merchant’s side by charging them merchant discount rate (MDR) on the transactions they make while using the debit cards and other products or services by the bank.
  • The payments bank is yet to see the greener side of the field and explore new ways of earning income for itself. In the coming years, if the banks manage to get hold of strong data analytics by understanding the spending pattern of its clients and incorporating the use of technology to increase its reach among the customers; payments bank can definitely unlock more profitable ways of earning an income.

3. Co-operative banks

Co-operative banks are known for rendering its yeoman service of holding deposits, lending loans and helping its members with other financial services. These institutions are registered under the cooperative societies act, 1942. The cooperative banks have been playing an imperative role in the banking and financial system of India by deploying credit and services for productive economic activities. These banks are laying a strategic role in providing credit particularly to the rural part of India, where people are engaged in various primary economic activities like agriculture, processing, production, etc. The cooperative banks have come a long way in helping this echelon of society.

The management of a financial institution requires well-planned and developed provisions which should be adopted deliberately. These banks require resources to survive under the ever-changing environment of banking to optimize the operations with utmost efficiency and effectiveness. The sources of money for these banks can be obtained both internally and externally. When these banks get the funds internally, it is mobilized by either state government or individual members. When funds are allocated externally they are given by NABARD, RBI or other commercial banks. The cooperative banks have funds that can further be classified as borrowed and owned funds.

Borrowed funds are the deposits by the member and borrowings from various resources. Deposits are an important source of income as the strength and viability of the bank depends upon it. The collection of more deposits makes these cooperative banks self-reliant. Borrowings are the source of income which is given by the apex bank, commercial bank or through NABARD for a fixed tenure. Borrowings help the banks in expanding the earning assets. The cooperative banks take borrowings from different sources from time to time to meet the deficiencies which may arise. The cooperative banks in India heavily depend on the borrowings from higher organizations.

Owned funds are constituted of shared capital and reserves. The shared capital is contributed by the members of the bank. If the composition of share capital remains unchanged at the end of each financial year, it implies that the banks are in a good position and have earned better profits. The reserves are formed to meet unforeseen losses and to strengthen the position of the bank. These reserves also, earn the confidence of outside potential investors or clients. There are many types of reserves held by cooperative banks like statutory reserve fund, building fund, dividend equalization fund, and vehicle fund, etc.

The main aim of the cooperative bank is to provide its members with easy credit facilities and financial help. But these banks need some access to money for surviving in the competitive banking environment and increase their reach and gain the confidence of people. Unlike commercial banks or other small finance and forex bank, cooperative banks don’t lend loans to earn interest or charge fees on their products to earn profits.

Therefore the main source of income for these banks depends mainly upon the owned capital and the external borrowings and other sources of money.

Conclusion

India is a diverse country. People from different backgrounds reside in different parts of the country. The banks follow the same pattern and there are a variety of banks that offer disparate services and products for their targeted clientele. Their sources of income also vary and it depends mainly upon the type of clients and services they serve. In the above article, we learned how the objectives and visions of banks differ and so do their policies and plan to earn profits.

Categories: Banks income

0 Comments

Leave a Reply

Avatar placeholder

Your email address will not be published. Required fields are marked *