Systems & Control: This test projects the Systems and Control mechanism of Bank’s

functioning in terms of adhering to the regulator’s guidelines as well as to understand the

effects of the Cost of Funds as well as Burden on Interest Income etc., The ratios chosen to
274 assess the Systems & Control of the Banks are (i) Priority Sector Lending Ratio, (ii) Cost of
Funds, (iii) Burden to Interest Income & (iv) Spread to Working Fund Ratio.

(i) Priority Sector Lending Ratio: This ratio indicates the amount of advances made to
address the priority sector requirements and the extent of their adherence to
regulator’s guidelines in terms of stipulated minimum percentage of advances that
needs to be issued to the segment of people into the Priority Sector.
(ii) (ii) Cost of Funds: This ratio indicates the cost of getting the funds to the banks so
that it can have a bearing on the profitability of the banks. This ratio is inversely
proportional to the profitability of the banks and as the ratio increase it leads to
decrease in the profitability of the banks. The formula to calculate: Cost of Funds =
(Interest Paid on Deposits + Interest Paid on Borrowings) / (Deposits +
Borrowings).
(iii) (iii) Burden to Interest Income: This ratio indicates the extent of burden on Interest
Income with the rise in either establishment expenses or in decrease in the non-
interest income. With judicious practices of containing the establishment expenses
and in the similar way taking measures to increase the scope for non-interest
income could bring down the burden on interest income. The formula to calculate:
Burden to Interest Income = (Establishment Expenses – Non-Interest Income) /
Interest Income.
(iv) (iv) Spread to Working Fund Ratio: This ratio indicates the extent of optimum
utilisation of working fund of the banks towards generating income and the
efficiency of the Bank in 275 offering secured as well as profitable Advances along
with efficiency of the Bank in generating the cost-effective deposits so that the gap
in the interest earned and interest paid will scale up the profitability of the Banks.
The formula to calculate: Spread to Average Working Fund Ratio = (Interest Earned
– Interest Paid)/ Average Working Fund.