Page 42 - Banking Finance July 2022

ARTICLE

of the Committee headed by Shri Sukhamoy Chakravarty in Non Interest Income: Income generated from appreciation
1985 to Review the working of monetary system and later in value of assets held due to change in yield, income from
in 1987 by the Working Group headed by Chairman Shri N. arbitrage and dividend received on shares are treated as
Vaghul on Money Market, RBI had initiated various non interest income.
measures to reform the money market and to develop the
necessary institutional infrastructure and instruments In most of the commercial banks in India deposits are
needed to widen and deepen the money market. maintained at higher level than advances. So after fulfilling
the minimum regulatory investment criteria in CRR & SLR,
Entering into New Era: banks deploy the rest of the fund in income generating
advances and investments. Let us understand this with one
Later the inroads to different kinds of other profit making
illustrative example.
businesses opened for banks with RBI intervention and
liberalization of the Indian economy. Slowly but steadily banks
Suppose a bank is having Rs 100 in deposit portfolio. Now
started venturing into new markets and dealing in different
after maintaining Rs 4 (assuming CRR @ 4%) in CRR and Rs
instruments like capital market, money market, foreign
18 (assuming SLR @18%) in SLR (which is also maintained
exchange market, bond market and derivatives market
by treasury only), bank is left with Rs 78. Now this Rs 78
instruments to garner profit.
may fully be deployed as advances during high growth of
economy for consumption purpose or a part of it may only
Further, steps such as increasing the number of instruments
be lent out when the economy is not doing so good. So in
by introducing commercial paper and certificate of deposits
the second case there is excess liquidity in the system with
greatly contributed to the development of money market.
less demand of loan like the situation of this Covid-19
pandemic. Let us assume that out of Rs 78, Rs 60 is lent to
Delivery versus Payment (DVP) system that involves
customers. Now Rs 18 is left idle with the bank which must
simultaneous transfer of securities and funds in government
be deployed in most effective manner as bank has to bear a
securities transactions was introduced with effect from July
cost of deposit on total Rs 100 which has to be recovered
1995 to alleviate counterparty settlement risk and this also
and profits to be made.
infused confidence into the bank treasuries to trade
aggressively.
After all banks are profit making organizations. So this
amount lands at treasury for making the most of it. Apart
The central bank then began using tools to monitor and
from it bank may borrow from market for profitable
control the liquidity in the economy and monetary flow, such
investments as well. Let us keep that aside to keep it simple.
as repos and open market operations (OMOs) to manage
Now treasury has many options like investing this Rs 18 in
liquidity in the financial system and to make the
SLR (excess over minimum requirements), Non-SLR bonds,
determination of interest rates on government securities
in Reverse REPO, Capital Market, Forex Market etc. to
more transparent and competitive by holding auctions.
maximize the return on asset. Now these investments are
leveraged to optimum level by treasuries and generate a
Treasury as Profit Centre:
good amount of profit to strengthen the balance financials
For banks, investments are now viewed as an alternative to of the banks.
credit; the traditional premier source of profits till
sometimes back. Further investments, being easily tradable We have already discussed earlier that with time various
assets, offer both interest spread as well as capital markets, instruments became available for banks. Now we
appreciation. So treasury's income can be divided into two will see how these markets are being used by bank treasuries
parts, interest income and non-interest income. to generate profit.

Interest Income: Income received half yearly or annually Post liberalization and financial market reforms, a vibrant
in the form of interest rate (coupon) on long term bond market has evolved in our country. This has enhanced
investments (bond) mainly kept in held to maturity category the relative importance of investments and the investment
are treated as interest income. portfolio in the balance sheets of the banks.

42 | 2022 | JULY | BANKING FINANCE