Efficiency Ratio : key ratio…

Banking is different from Manufacturing. The reasons are many. Out of one is Raw material and Final output in manufacturing is different for manufacturing but in bank its same. So when deciding efficiency, the Ratio is different. But when talking about the banking business, it is different.

There is no Topline in Bank, but there is Loan book. For that Loan book the bank is lending Money either in form of  debentures, or Savings account or deposit from its account holders. So maybe it’s possible to calculate operating profit for bank but that is not right if we choose the same Formula which is used in manufacturing business. So for deciding weather Bank is efficient or Not, We need to check noninterest expense. There are many. From payment of Employees, light bill, rent etc. The question is how much is the part of them in Total Expenditure. Generally you wil Not see big difference all of sudden but heavy expansion plans may affect it as not always branches are owned by bank. There are some more expenses like maintaining ATM, payment for Website and applications if there are any. Yes they are helping in Making money but also cost is There.

In simple word the Ratio explain like for earning ₹1 how much the bank is spending. Lower the better.

When you realise that what is the importance and meaning of the Ratio, then you Will realize Why banks are trying everything to make FEE BASED INCOME.

That Income which are generated from Mutual fund company, insurance subsidiary, Fee from advisory, Capital Market operations and the fee earn from Them, dividend declare from a company in which Bank is keeping Stake. All of them are increasing Revenues. As the Bank balance sheet is extremely leverage, Slight change in ROA, will make big difference is earning.

Going end with saying

Choose the stock wisely as sometimes there is of no use to keep cost low if there is no Demand growth.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter