Page 36 - Banking Finance March 2019

ARTICLE

In addition, the more a bank generates in fees, the more it to expand fee income sources on existing and new products
may concentrate on activities that carry high fixed costs and services.
(and thus create worse efficiency ratios). The degree to
which a bank is able to leverage its fixed costs also affects If non-interest income to non-interest expenses are matched
its efficiency ratio; that is, the more scalable a bank is, the or equal, the positive spread of the bank i.e., net interest
more efficient it can become. For these reasons, comparison margin or (yield on advances minus cost of deposit) is a
of efficiency ratios is generally most meaningful among profit to the bank after providing provisions on NPAs etc.
banks within the same model, and the definition of a "high" This is low in Dena Bank when compared to Bank of Baroda
or "low" ratio should be made within this context. and Vijaya Bank.

In Dena Bank efficiency ratio is high and it is low in Bank of To match the non-interest income and non-interest
Baroda. The two ways the banks should focus to fulfil this expenses, banks should make efforts or to focus either to
issue i.e., to control the non-interest expenses or to increase increase the non-interest income (Commission and Exchange
spread and other income. Due to increase in alternate Business) or to decrease non-interest expenses (Controllable
delivery channels, there is a possibility to the bank to costs like overheads). This strategy to be followed from
decrease further in non-interest expenses as alternative Branch to Region and bank as a whole.
delivery channels per transaction cost is low when compared
to the branch channel. Advantages of Bank Mergers to various
stakeholders:
(x) Burden Ratio (%) = (Non-Interest Income /
 Rationalization of Branches - It reduces overheads and
Non-Interest Expenses) * 100 also capital expenditure.

Name of the Bank 2018 Rank  Rationalization of Regional & Zonal offices / Business
Bank of Baroda 65.44 1 Networks - It reduces overheads.
Vijaya Bank 57.08 2  Manpower Adjustments with existing manpower (By
deploying surplus to needy branches).
Dena Bank 47.16 3
 Minimization in Recruitment Costs (By following
ANALYSIS: productivity norms).

The Burden Ratio is the measure of the difference between  Minimization of overall Overheads (Focus on
Non-Interest Income and Non-Interest Expenses. Breaking Controllable Costs).
it down, the Burden Ratio measures how the Net Asset Yield  Control of wastages in Advertisement Costs.
(Net Interest Income / Total Assets) will be burdened by the  Benefits through Large Scale Economies.
net expenses of the Bank. How much of Net Interest Margin
 Better NPA Management (By initiation of SARFAESI,
must you give up to run the Bank?
DRT, IBC, 2016 etc.)
While many Banks have the benefit of constrained  Better Asset Liabilities Management (ALM).
infrastructure and costs, most will not be able to "cut their  Better Treasury Management (By minimizing borrowing
way to greatness" to improve this ratio. The options to lever costs and Non-performing Investments).
impact upon the Burden Ratio most often will lead to the
 Better Implementation of Basel III (Through reduction
need for expanded Non-Interest Income.
of Credit, Market and Operational Risks).
In the current and evolving regulatory environment, fee  Technology up-gradation with less Capital Expenditure
through Cloud Computing.
income sources from deposit and loan accounts have
become restrained and they will seemingly continue to  Optimum utilization of existing Alternate Delivery
decline as consumerist policies, competition in the market Channels (Identify strategic locations to shift ATMs,
etc. The answer to improve the Burden Ratio lies in the need CDMs etc).

36 | 2019 | MARCH | BANKING FINANCE