Page 35 - Banking Finance March 2019

ARTICLE

foreign exchange business. The percentage of interest
expenditure of Dena Bank is more out of the income
generated by the bank. Among three, Bank of Baroda is
incurred 55.91% as Interest Expenses out of Total income
earned by the bank.

(ix) Efficiency Ratio (%) : (Non-Interest Expenses
/ Net Total Income ^) * 100

Name of the Bank 2018 Rank
Bank of Baroda 45.88 1
Vijaya Bank 47.52 2
(viii) Interest Expenses Ratio = (Interest Dena Bank 67.80 3
Expenses / Total Income^) * 100
^Net Total Income = Net Interest Income (Interest Income
Name of the Bank 2018 Rank - Interest Expense) + Other Income
Bank of Baroda 55.91 1
Vijaya Bank 58.40 2 ANALYSIS:
Dena Bank 63.95 3 This ratio really helps to understand how banks earn income
and from what sectors they earn from. The ratio also helps
^Total Income = Interest Income + Non-Interest Income to breakout the expenses that a bank can have and the
impact they can have on the bottom line.

ANALYSIS: The Efficiency Ratio is calculated by dividing the bank's Non-
Interest Expenses Ratio: Net Profit in turn is influenced by interest Expenses by their Net Income. Banks strive for lower
the interest and non-interest income and expenses of the Efficiency Ratios since a lower Efficiency Ratio indicates that
bank. Interest expenses ratio shows interest expenses to the bank is earning more than it is spending. A general rule
total income. Interest expenses means interest paid on of thumb is that 50 percent is the maximum optimal
deposits and funds borrowed by the banks through various Efficiency Ratio,
sources.
A bank's efficiency ratio is essentially equivalent to a regular
Interest expenses is to be minimized drastically by bank's operating margin, in that it measures how much the
developing new deposit products, focus more CASA Deposits. bank pays on operating expenses, like marketing and
On the other side the banks are to give more focus on salaries. By and large, lower is better.
increasing interest income i.e., on advances. If performing
assets are more, then performing assets will generates The efficiency ratio is a quick and easy measure of a bank's
interest to the bank. Slippages of Standard Assets to NPA ability to turn resources into revenue. The lower the ratio,
should be arrested through better NPA Management the better (50% is generally regarded as the maximum
strategies. optimal ratio). An increase in the efficiency ratio indicates
either increasing costs or decreasing revenues.
Increase in Non-Interest Income is also important to banks
due to decrease or thinning in interest spreads on account It is important to note that different business models can
of price war in the market. Sources of non-interest income generate different efficiency ratios for banks with similar
to the banks is Commission and Exchange income. revenues. For instance, a heavy emphasis on customer
service might lower a bank's efficiency ratio but improve its
Commission earns by the banks by offering various services net profit. Banks those focus more on cost control will
to their existing customers and non-customers. Banks are naturally have a higher efficiency ratio, but they may also
getting Exchange income by selling remittance products and have lower profit margins.

BANKING FINANCE | MARCH | 2019 | 35