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Monday, July 11, 2005

Boosting fee-based income— Allow banksto hard-sell priced services(Business Line)

Boosting fee-based income � Allow banks to hard-sell priced
services (Business Line) K. Vijayraghavan Various strategies can
be thought of to boost fee-based income. Perhaps, the ideal one will be
that where for every service in a bank there can be two different
channels; the faster and guaranteed one, which can be at a higher cost,
and the ordinary one, where no extra cost is involved. TO THE astute
reader of an organisation's balance-sheet, the quantum of income per se
is less important than its constituents. This is true of commercial
banks too. The purpose of this article is to draw attention to the trend
in the growth of income of banks and to some of its main
constituents. The income of scheduled commercial banks is broadly
classifiable into interest and non-interest income. The interest earned
on loans and advances, besides income from investments are interest
income. Non-interest income comprises fees, income from trading, and
foreign exchange operations. It also includes miscellaneous
income. In the current soft interest regime, growth of bank income
has witnessed a slowdown. In 2003-04, rate of growth of income of
scheduled commercial banks was 6.6 per cent, compared to 14 per cent,
the previous year. The total income in absolute terms increased from Rs
1,72,345.02 crore in 2002-03 to Rs 1,83,767.24 crore in 2003-04.
Interest accounts for 78 per cent of the income of scheduled commercial
banks. Under this head, income from loans and advances grew, in the same
period, from Rs 68,570.10 crore to Rs 70,050.92 crore � a 2.33 per
cent. Meanwhile, income from investments increased from Rs 62,411.17
crore to Rs 65,797.84 crore, or by 5.43 per cent. During 2002-03 and
2003-04, interest on loans and advances as percentage to interest income
remained constant, at 49 per cent. Income from investments as a
percentage of interest income, however, increased from 44.3 per cent,
during 2002-03, to 45.6 per cent, during 2003-04. The changing
constitution of banks' income is the result of sharp variation in their
asset pattern. Published data reveal that between 1997 and 2003,
investments recorded a compounded annual growth rate of 20.7 per cent,
while interest-earning advances increased only at a 18 per cent. Over
the years, investment of scheduled commercial banks in government
securities has increased massively. It went up from Rs 2,30,687 crore in
1999 to Rs 5,02,498 crore in 2003; the percentage of investment in
government securities to total investments increased from 69 per cent to
76 per cent. The Reserve Bank of India has conceded in the report on
Trend and Progress of Banking in India, 2002-03 that "the fall in the
interest income has been to a large extent compensated by the rise in
income from investments". The writing on the wall is clear: Banks
prefer to invest money in government securities than undertake lending
per se. Another issue to be examined is the composition of the
non-interest income. Fee-income, trading income from sale and
purchase of securities, forex-income and miscellaneous income account
for roughly 30 per cent, 49 per cent, 9 per cent and 12 per cent
respectively. Income from fees and commissions, which was 70-90 per cent
of non-interest income in 1991-92 declined to 25-30 per cent during
2003-04. Data show that the fee-based income of scheduled commercial
banks increased from Rs 10,594.54 crore in 2002-03 to Rs 11,825.01 crore
in 2003-04, that is, by 11.6 per cent. But trading income went up
from Rs 13,211crore to Rs19,532 crore � 48 per cent � during the same
period. Analysts say that by keeping large chunk of their resources in
government securities, banks have indirectly and silently become a
conduit in raising public debt. They also warn that "reckless"
investment in government securities can result in complacency among
banks because it is a risk-free operation and involves no appraisal or
supervision after investment (post-credit supervision), as in the case
of advances. In the long run, they add, this might result in erosion
of appraising ability and supervising acumen in banks. Prima facie,
this view may sound a little far-fetched; nevertheless, the warning
needs to be heeded to and the decline in the growth rate of fee-based
income arrested on a priority basis. Simultaneously, strategies to
boost fee-based income should be urgently devised. More so, because of
the near perfect competition in the interest rate scenario, which makes
it difficult for banks to earn more by charging higher interest on
loans. Interest on government securities has also come down over the
years. The correlation between fee-based income and quality of customer
service is quite high. Unmistakably, banks have to concentrate more on
providing better, faster and more efficient customer service. Any
service provided by banks has to earn the satisfaction of the customer �
the ultimate judge of quality. Nevertheless, the close relationship
between service and customer is more relevant in the case of services,
which reach the larger cross-section of public. In this context,
fee-based income assumes greater significance because the clientele is
broader. Better and faster customer service will entail more cost to
banks and, under the current dispensation, their capacity to absorb
additional cost is quite limited. It would, therefore, be in the fitness
of things to permit banks to charge higher rates for better and faster
service. Various strategies can be thought of to boost fee-based
income. Perhaps, the ideal situation will be one where for every service
in a bank there can be two different channels; the faster and guaranteed
one, which can be at a higher cost, and the ordinary one, where no extra
cost is involved. Guarantee is important because many instances have
to come to light when people were made to run from pillar to post when
money was sent but did not reach the destination. Banks could consider
taking instructions on telephone or e-mail for issue of drafts and have
them delivered to the customer. People who want such quality services
will be ready to pay more. If this view is accepted, it may not be
necessary for the Indian Banks Association to prescribe service charges.
Competition and quality of service will take care of the pricing
mechanism. It may not be possible for banks to provide two service
channels everywhere, but a beginning can be made. Bank marketing has
to go beyond loans and deposits. Banks should seriously consider
launching aggressive marketing of specially priced services. For
example, people who purchase a large number of drafts in a month and
frequently make remittances can be given concessions. This approach can
be considered for other channels of services also. There is, however, a
rider to focusing on non-interest income. The RBI has quoted
international studies that caution against over-dependence on
non-interest income because of its volatility. It would be reasonable
to assume that the risk of volatility applies more to trading and
treasury income. This is because trading income derived from buying and
selling of securities and treasury income earned mainly from lending in
the call money market, are subject to unpredictable variations. On
the other hand, as the economy grows, the demand for fee-based services
of banks services is certain to go up. Hence, initiating
well-thought-out steps to enhance fee-based income may not be fraught
with risk. (The author is a former chief general manager, Reserve
Bank of India.)


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