How Banks Make Profit

Topics: Deposit account, Asset, Investment Pages: 4 (508 words) Published: January 12, 2011
How a bank makes profit-an interesting primer by vinayak date.

‘Trust’ bank has opened 10 branches and has become operational on 1/4/2009.on 31/3/2010 it has total deposits of rs 1000 crores. Equity capital of rs. 100 crores divided in 10 crore shares of rs. 10 each. Given this basic data let us try working out basic parameters of banks business ,

with certain assumptions, to keep things simple.

Cost of funds-----

Analysis of Deposit mix-4o% casa deposits.

Of which 25%savings deposits. Int rate 3.50%p.a.

15%current deposits. No int.

60%time deposits of avg. maturity of 2 years. Int rate 8% p.a.

It has 100 crores capital--- no fixed cost payable.

Total funds available for deployment – 1100 crores.

Cost of deposits—

Savings-rs.250 crores@ 3.50%------------------------------------------------ 8.75 crores.

Current-------------------------------------------------------------------------------- no cost.

Time deposits 600 crores@8%---------------------------------------------- 48.00 crores

Total deposit cost ---------------------------------------------------------------56.75 crores.

Capital (int) cost-------------------------------------------------------------------000

Total funds 1100 crores---------------------cost ------------------------------56.75 crores.

Fund deployment------int. earned.

SLR securities-24%of rs 1000 crores= 240 crores- --@8%return----19.2 crores.

CRR maintained with RBI @6% of rs 1000 cr.-=60 crores.--------int. ---nil.

Balance left---1100-300=rs800 crores.—

100 crores capital part of funds invested in fixed assets.

=int earned on safe investment/preemption. -------------------------rs.19.2 crores.

Amount of lendable funds left----700 crores.

40%0f that rs.280 crores go to priority sector, of which18%=126 crores to go to direct agriculture.

Bal 154 crores go to small ind small borrowers.

Int earned on priority sector @an avg of...
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