How do Banks Make Money and Ways to Save It

Have you ever wondered why banks pamper you with great infrastructure, amazing service support, dedicated Relationship Managers, Treasury managers, Trade managers and so on and so forth. Do you think banks provide these personalized services free of cost or at nominal cost? How much are you paying for these services?  To make it easy for understanding, the revenues that banks generate from clients like you are broadly categorized as Net interest income (NII), Net Fee Income (NFI) or both together. Income from current account balances, cash credit /over draft utilization interests are generally categorized as NII. Charges related to Import/Export transactions, Foreign Exchange margins, Guarantee Issuance commission/LC issuance commission, processing fees, etc. will form a  part of NFI. Do you know, banks in India have garnered overall revenue of $172Bn last year and these numbers are growing to the least by 8-10% YoY.  For instance, a client having a lending facility, typically pay anywhere between 9-14% in today’s scenario upon utilization. This basically means, there is a base rate or MCLR which is nothing but the cost of funds for the bank, added with a margin of 1-4%(NII), depending on risk assessment of the client. The way pricing is done by banks are driven by various factors like cash flows, financial strength of company, collateral offered to the bank, external ratings if any and above all, it depends on your understanding of your working capital requirement, structuring relevant working capital limit, understanding cost associated specific to each of the facility and transactions out of it. You typically tend to pay 1-4% as margins and there is always room to negotiate and reduce it by 20-30%. Now about NFI, Corporates who are into international trade (Export/Import of Goods/services) are vulnerable to pay up to 3.5% only as exchange margins if Foreign Exchange is not meticulously managed. Complex hedging products attract even higher costs and you can possibly pay 5-6% of your transaction value as premiums/commissions or exchange margins. In other terms, for exporters, you may not have received the right premium which are available and receive 3-5% lesser which otherwise you should have received .Other transaction specific costs apart from exchange margins such as processing fees ,import commission, SWIFT charges, Export handling Charges, Collection charges, Guarantee commission, LC issuance, Retirement charges etc. are classified as NFI.  The moment we hear about bank charges, you may think that we don’t pay much for our operations and we would refer to our reconciled statements which clearly shows all the charges that are directly debited to your statement. These are far lesser than your actual charges. Do you know that some of the above charges do not get reflected in your statements or are hidden in nature? Why do you think you should know about the direct/hidden banking costs? With our experience, we analyzed many financials and their facilities associated with their transactional level banking cost. It was well established that these corporates could save some of these charges which could add 5-7% on their bottom line numbers. First things first, “what gets measured gets managed well”. Understand what you are currently paying your bank for every transactions that you do with them. Be vigilant and understand the current market dynamics when it comes to foreign exchange transactions. This is an area you could always save on. Ask your bankers as to what margins you are paying and monitor it when there is an exchange involved. To give you a perspective on absolute numbers, if you are buying/selling $100,000, you could save anywhere between 25k to 180k depending on the bank you deal with. In case you have any specific question relating your company’s banking cost (Interest, Foreign Exchange) optimization, please write to Bhaskar@savedesk.co to unravel your overall banking cost. Author understands & writes about Foreign Exchange, International Trade Finance, Liquidity management for corporates.
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How do Banks Make Money and Ways to Save It

Saravana Bhaskar
News Article
21st Jul, 2017
How do Banks Make Money and Ways to Save It

Have you ever wondered why banks pamper you with great infrastructure, amazing service support, dedicated Relationship Managers, Treasury managers, Trade managers and so on and so forth. Do you think banks provide these personalized services free of cost or at nominal cost? How much are you paying for these services? 

To make it easy for understanding, the revenues that banks generate from clients like you are broadly categorized as Net interest income (NII), Net Fee Income (NFI) or both together. Income from current account balances, cash credit /over draft utilization interests are generally categorized as NII. Charges related to Import/Export transactions, Foreign Exchange margins, Guarantee Issuance commission/LC issuance commission, processing fees, etc. will form a  part of NFI.

Do you know, banks in India have garnered overall revenue of $172Bn last year and these numbers are growing to the least by 8-10% YoY. 

For instance, a client having a lending facility, typically pay anywhere between 9-14% in today’s scenario upon utilization. This basically means, there is a base rate or MCLR which is nothing but the cost of funds for the bank, added with a margin of 1-4%(NII), depending on risk assessment of the client. The way pricing is done by banks are driven by various factors like cash flows, financial strength of company, collateral offered to the bank, external ratings if any and above all, it depends on your understanding of your working capital requirement, structuring relevant working capital limit, understanding cost associated specific to each of the facility and transactions out of it. You typically tend to pay 1-4% as margins and there is always room to negotiate and reduce it by 20-30%.

Now about NFI, Corporates who are into international trade (Export/Import of Goods/services) are vulnerable to pay up to 3.5% only as exchange margins if Foreign Exchange is not meticulously managed. Complex hedging products attract even higher costs and you can possibly pay 5-6% of your transaction value as premiums/commissions or exchange margins. In other terms, for exporters, you may not have received the right premium which are available and receive 3-5% lesser which otherwise you should have received .Other transaction specific costs apart from exchange margins such as processing fees ,import commission, SWIFT charges, Export handling Charges, Collection charges, Guarantee commission, LC issuance, Retirement charges etc. are classified as NFI. 

The moment we hear about bank charges, you may think that we don’t pay much for our operations and we would refer to our reconciled statements which clearly shows all the charges that are directly debited to your statement. These are far lesser than your actual charges. Do you know that some of the above charges do not get reflected in your statements or are hidden in nature?

Why do you think you should know about the direct/hidden banking costs?

With our experience, we analyzed many financials and their facilities associated with their transactional level banking cost. It was well established that these corporates could save some of these charges which could add 5-7% on their bottom line numbers.

First things first, “what gets measured gets managed well”. Understand what you are currently paying your bank for every transactions that you do with them. Be vigilant and understand the current market dynamics when it comes to foreign exchange transactions. This is an area you could always save on. Ask your bankers as to what margins you are paying and monitor it when there is an exchange involved. To give you a perspective on absolute numbers, if you are buying/selling $100,000, you could save anywhere between 25k to 180k depending on the bank you deal with.

In case you have any specific question relating your company’s banking cost (Interest, Foreign Exchange) optimization, please write to Bhaskar@savedesk.co to unravel your overall banking cost.

Author understands & writes about Foreign Exchange, International Trade Finance, Liquidity management for corporates.

Saravana
Blog Author

Saravana Bhaskar is the Brain Child behind incubation of White Matter. With over a decade of rich banking experience, he has handled many eminent positions in bank from Global Gateway Coordinator to Portfolio Head -South India. He is catalyst in steering White Matters’ association globally, with his proven abilities of leadership; his vision is to achieve transformational changes at White Matter. Bhaskar is true Car enthusiast, who has an insatiable interest in cars. He is an avid reader, and has ear for Music.

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