Banking business is all about Risk. How you manage it is the importanart. Biggest Risk is credit Risk for Bank by both side. Borrowed funds as debentures and bonds as well as deposit. Interest rate in the business of Banking play a key Role as it is the cost of Fund at which the bank is borrowing. If the bank will survive or not is all depends how bank management handle both Rate.
There are some tools which are with banks for it. Current account and Savings account. Also known as demand liabilityThe importance of them to bank is free cash flow. Bank is not paying any interest rate on current account and only pays 4% to savings account. That make big difference to Weighted Average Cost of Capital for Bank also known as cost of Funds.
More the Demand liabilities, lower the cost for banks.
But there is another side of it.
- Whenever you decide to increase CASA for bank, You Need to set up either more ATM or more branches or make Centralised banking system for facilitating your account holders. That will affect your Efficiency Ratio by increasing your Non-Interest Expenditure forcing you to make more money to make it under control. Sure you Can set up other business like Mutual Fund house and insurance for utilising the branch network or you can use the technology for reducing the need of ATM and branches.
- Among demand liabilities, USING the amount from Current account is Little risky. Say one account is showing ₹5 lk. Bank decided to use it for giving loans which is long term. What if tomorrow account holders come to you and ask ₹5.5 lk? It’s possible as many time The people or business which use Them, also have Cash credit facility. Well-known in India as C.C. completely agree that there are other account holders. And the amount under cash credit is not long term. So that maybe paid of. But there is possibility that it make Cash crunch situation. Yes that is why there is Equity and Tier one capital and CRR and SLR. But as I said, banking is all about Risk.
Going to end it with saying.
Banking is GOOD BUSINESS if you know how to handle it.
That is where Axis Bank and HDFCBANK come into picture.
Reader Rating: 5 Votes