Soul of Banking Awareness: I

Updated : Jun 6, 2016, 18:47
By : Avik Sarkar

Dear friends,

Many of you are tensed about the SBI Clerk, UIIC AO & last but not the least, the back bone of Indian banking sector SBI PO. As we all know, Banking industry is now evolving so banks does not need employees who knows only freaking definitions they need the soul out of the body of banking sector.

Don't be nervous just try to understand everything in a simplified way, try to relate it with your daily activities. Many of you are going to appear for for the first time, many had appeared earlier and gone through the tremendous pain of failure.

Remember my friends -



For SBI Clerk, UIIC AO & SBI PO Exam we are providing you various modules, which will surely help in your preparation.

Module 1 - In first module we will discuss on important issue - How the Bank functions? How will they get profit? 




So let us look into the first and foremost part, please look into the figure and here a  vertical line is given that vertical line basically it is interest percentage, when you go the banks there are primarily two things, either you are going to deposit money or to take some loan from bank.

So when we deposit money in the banking system, they are required to pay us interest, this vertical line you are seeing in the fig. is basically the interest rate, here if you look at

1. Current a/c Deposit -  the interest rate will be zero, the second one is the

2. Saving a/c Deposit some interest is paid around 4% , next comes

3. Fixed deposit a/c and Recurring deposit a/c, then one more category is there

4. Bulk deposits - Bank deposits primarily constitutes these 5 types in general and when we deposit money with the bank they are required to pay interest to us and that interest varies, the interest which they pay varies depending on the deposit. As banks are required to pay us interest the deposits with the banks are known as liabilities.

Now what is liability? What is asset?


Suppose you have a brother who always gives you money, he is your asset. Look at the other scenario you have a brother who always asks you money, he will be your liability. Similarly when you deposit money with the banking system they are required to pay us interest and the avg. interest of all these deposits put together is known as COST OF FUNDS for banks. The cost of funds should be as low as possible.

Now how to reduce this cost of funds?

Cost of funds can be reduced if banks have more current a/c and saving a/c deposits because -

1. In Current a/c banks are not required to pay any interest and

2. In Saving a/c the interest rate is very less around 4%.

But if banks have more fixed deposits, the cost of funds will be more. That’s why in the banking system banks requires more current a/c and saving a/c deposits, but the problem here is CASA deposits can be withdrawn at any point of time, they are unstable deposits, today he may deposit 10 crores , tomorrow he may withdraw all the 10 crores, that’s why they are volatile deposits.

But fixed deposits, they are for fixed terms, banks can plan their activities, so the advantage of having more fixed deposits is, these deposits are stable, banks can plan their loans. That’s why banks have to judiciously mix support these deposits.




Now we are looking at loan. There are several types of loans - house loans, mortgage loans, corporate loan,personal loans. We will discuss the salient features of these loans in subsequent modules. This vertical line shows the various interest rates.

Banks are giving loan to us we pay interest to the banks, that’s why they are assets for the banking system and the income which they are getting is known as YIELD OR INCOME. The avg. interest which bank get on loans is known as YIELD OR INCOME. Yield should be as high as possible, but because of the competition b/w various banks they cannot increase interest rate on loans. If one bank increases the customer will go to second bank, their difference is hardly 0.25% or  5%.



The gap b/w these two i.e COST OF FUNDS and YIELD/INCOME should be minimum 3% which is known as NET INTEREST MARGIN(NIM). With these gap banks have to pay- salary, rent on their  premises, banks have to pay for their operations and they have to get profit also. This banking is called viable banking. Banks require this NIM of 3% to ensure profitability.


Ex- Let us assume banks have Rs. 100 cr of money and cost of fund is 6%, that means they have to pay Rs. 6 cr per annum. If the yield is 9% they will get Rs. 9 cr per annum, that means the difference Rs.3 cr is the income which they get on Rs. 100 cr and they have to meet all their expenses within this Rs.3 cr and have to ensure profitability with this gap only. If the NIM is less than 3% then its not sufficient to ensure profitability.

CONSIDER CASE-1==Viable banking operation &  CASE-2==Strained banking operation

CASE-1 - NIM is greater than or equal to 3%. Is met by SBI, ICICI, HDFC, AXIS Bank 

CASE-2 - NIM is less than 3%. Small banks like ANDHRA BANK,UNITED BANK OF INDIA,STATE BANK OF MYSORE. NIM is around 2.5%.

Hence the core of the Banking Operations lies in

Keeping Cost of Funds as minimum as possible so as to keep High Net Interest Margins

Challenges for Public Sector Banks (Barring SBI)

  • Unable to attract current account deposits
  • Not matching with technological upgradation of private sector banks.
  • Bureaucratic apathy.
  • High Non Performing Assets (NPAs)
  • Lagging in personalised service.
  • Emphasis by government for opening zero balance accounts like BSBDA, PMJDY etc.

Most of the public sector banks are struggling with NIM’s of 2.2% to 2.7%. Hence these banks are not able to achieve desired levels of profitability. Smaller public sector banks are unable to attract current a/c deposits that is the main reason why their NIM is less than 3%.

My dear banking aspirants in the second module we will discuss about another vibrant topic.


Whatsoever may be the story,



Team GradeUp..!!

Jun 6Bank & Insurance

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Avik SarkarAvik SarkarPractice is key to success!
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