Banking for Beginners

As we wrap up 2016, and reflect on issues affecting Indian Banking industry during the year (apart from Demonetization), Profitability of Banks crops up as one of the most outstanding issues. The subject got into focus in the face of write-offs of doubtful or bad loans, requiring a provision to be made out of profits. For the uninitiated it presented a strange scenario whereby Banks continued to register ‘operational profits’, but the bottom line showed ‘net losses’ mainly on account of additional provisioning for doubtful debts. In this context, for a layman, it is relevant to understand nuances in fixation of loan pricing, as provisioning for doubtful debts and its impact on profitability shall continue to shadow Banks in 2017 as well. Let us first understand Bank’s profitability model. Bank’s profits are mainly driven by the difference in interest it earns on loans as against interest it pays out on deposits, with the margin getting squeezed by administrative expenses. Bu...