This really got over my head! Now blame for me being a layman or simply my ignorance!!!
Recently my debit card got expired and I was issued a new one. The bank had sent me an OTP for pin change as well. Now being a lazy guy or maybe because the bank own ATM was not in my immediate neighborhood (read within 250m!), the OTP expired. Within a couple of weeks my ‘cash at hand’ expired and I grudgingly trudged to the bank ATM some 500m away only to see that the OTP is no longer valid!
So I have already spent some 10-20 bucks in my travel, wasted 20-30 minutes….all because I am lazy. I was badly frustrated, not only blaming myself for being lazy but also looking at my purse which was precariously showing ‘cash out’ and was already in deep red zone! My wife as usual happily added salt to my wound by giving a sound lecture on ‘need of discipline’. I will soon be creating a #needofdiscipline in Twitter just to understand whether I am in majority!
But the problem has to be solved….right? So I again logged into my bank a/c and with a little surfing could realize that there is an immediate fix but it will be costly (50 + taxes). There will be a new OTP that will get generated instantly and I can use that to generate my PIN. Courtesy #Lazy, #needofdisciplince, #wifelecture, #cashinred; I was not having any option and grudgingly paid up the money, got new OTP, went back to the ATM and got everything fixed.
Now there is a basic tenet of human nature, we look at a problem differently based on ‘whether the problem is still unresolved’ or ‘the problem is already solved’. So while #cashinred, I was blaming myself for being lazy and maybe the ATM at a distance, post the resolution, I was blaming the bank for deducting 50 INR. To a layman like me ‘why did they charge me 50 INR, when they had no paper needed to print or no money spent on courier!…..all it took for some software to generate a random OTP to be send as an SMS (which is cheap anyway!)’
To understand the above, let us dig a little deeper in the realm of bank financial analysis. Being a layman, I will keep this simple but surely interesting!
Banks have generally two main sources of income:
- Net Interest Income (NII): Interest earned from assets (e.g. Loans etc) or from investments net off interest paid on liabilities (e.g. interest on CASA)
- Fee/ commission income: Fees / brokerage etc banks collects from customer. Examples includes the situation I spoke earlier and also fees on drafts, ATM withdrawals, electronic transaction feeds, income from POS etc
A decade or so back, banks used to primarily focus on NII as it was nearly the sole income driver. But things slowly started to change thereafter. NII is significantly impacted by state of economy.
- For example when the economy is down (i.e. not really growing that much, general lack of confidence etc), people starts to save more & credit demand slows down. This adversely impacts NII.
- Again after RBI liberalized interest rate, a few banks have started to leverage higher interest rates on savings account to attract new customer/ deposits. But this adversely impacts NII again
- Again in a state of high inflation, RBI increases CRR in order to suck off cash from the system and as well increase repo rate to incentivize savings. This also squeezes the interest spread of the banks.
- Even in a relatively better economy, Gov/ RBI in order to push growth, may lower the repo rates and expect the banks to pass on the impact of the lower rates to the customers. Generally banks does it but with a lag (so that they maximize the spread income for at least some time). Once the loan rates goes down, there is a adverse impact on the interest spread
So we see, that in general, the bank’s net interest spread and hence thus net interest income remains under pressure and open to impact of overall economic conditions. The growing realization of the same and negative impact of it, made the banks to start looking out to means of stabilizing their P&L as well. At the end, the banks are publicly listed institution and have to show robust growth to their shareholders as well.
This is where the ‘fee/ commission’ income plays an important role. There are a few reasons for it:
- A major part of the fee income is from daily transactions/ normal banking operations and is much more immune to the variability of the economy in general
- Banks are more free to set the ‘fees/ charges’ and have greater control of it. For interest income, CRR & repo rates set by RBI significantly influences the interest rate
Question is whether the 50 INR really can contribute to the bank P&L. The answer is a resounding YES.
To remove any doubt, have a look at the following graph which shows the %age contribution of fee/ commission income to the ‘Total Net Income’ of a few Indian banks.
So we have established that ‘fee/ commission’ income thus earned from customers have a significant contribution to the bank’s P&L. A good ‘fee/ commission’ income actually helps in covering the ‘operating expense’ to a significant extent and thus brings in a more ‘stabilizing’ effect on the overall profitability of the bank. A quick glance to the following graph highlights this effect.
Hope this clarifies that the 50 INR, I paid, did not go waste (pun intended) but quite to contrary had a significant impact on the bottom line of the banks:)
Source: Respective banks Annual reports for the corresponding years. Calculations are all done by Randomwalks
Image Source: Microsoft Cliparts (grouped together)