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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