THE ANNUAL FINANCIAL STATEMENT ANALYSIS OF YES BANK IN

VIEW OF INVESTMENT

PROJECT REPORT

Submitted to Mahatma Gandhi University in partial fulfilment of the

requirements for the award of the Degree of
MASTER OF BUSINESS ADMINISTRATION

Submitted By

DIVYA BINU

Reg. No. 190031000645

Under the guidance of

Mr. JIBUMON K . G
Faculty Guide

Accredited by NAAC with ‘A’ Grade

DEPARTMENT OF MANAGEMENT STUDIES
MAR ATHANASIOS COLLEGE FOR ADVANCED STUDIES
TIRUVALLA
2021

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 MAR ATHANASIOUS COLLEGE
FOR ADVANCED STUDIES
THIRUVALLA

Ph: 0469 2730323 Fax: 0469 2730317 www.macfast.org

CERTIFICATE

This is to certify that the project report entitled “ANNUAL FINANCIAL STATEMENT
ANALYSIS OF YES BANK IN VIEW OF INVESTMENT” is a bonafide report of the
project work undertaken by Ms.DIVYA BINU, fourth semester MBA student of our
college during the period from 27th April to 10th June, 2021

Jibumon K G Dr. Sudeep B. Chandramana

Faculty Guide Head of Dept. of management studies

Rev. Fr. Dr. Cherian J Kottayil Signature of the external examiner

Principal

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 DECLARATION

I hereby declare that this project report entitled “THE ANNUAL FINANCIAL
STATEMENT ANALYSIS OF YES BANK IN VIEW OF INVESTMENT” is a bonafide
report of the study undertaken by me, under the guidance Mr. Jibumon K.G , Department of
Management Studies, MACFAST, Tiruvalla.

I also declare that this project report has not been submitted to any other University or
Institute for the award of any degree or diploma.

Place: Thiruvalla

Date :

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 ACKNOWLEDGEMENT

First and foremost, I thank the Lord Almighty, for his perpetual shower of blessings, which led
to the successful completion of my project.

I take this opportunity to express my deep sense of gratitude to all those who have helped me
throughout this project. It gives me immense pleasure to acknowledge all those who have rented
encouragement and support for the successful completion of this work.

I express my profound gratitude and sincere thanks to Rev. Dr. Cherian J. Kottayil, principle of
MACFAST, Tiruvalla.

I express my heartfelt thanks to Dr. Sudeep B. Chandramana, head of department of management

studies, MACFAST, Tiruvalla for inspiration and valuable suggestions for carrying out this
endeavour.

I express my deep sense of gratitude to Mr.Jibumon K G, the faculty member of department of

management studies, MACFAST, for encouraging and inspiring me for developing the project.

My project work involves many people at different stages. I would like to thank all those who
have directly or indirectly contributed to the success of the project.

I also take this opportunity to express profound gratitude to my parents, family members and
several people who have contributed for the successful completion of the project. It is my duty
and pleasure to acknowledge them.

DIVYA BINU

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LIST OF TABLES

SI NO TITLE PAGE NO

5.1 Net Profit 55

5.2.1 Debt Equity Ratio 56

5.2.2 Debt Asset Ratio 58

5.3.1 Return On Asset 59

5.3.2 Return On Equity 60

5.4.1 Current Ratio 62

5.4.2 Absolute Liquidity Ratio 63

5.4.3 Quick Ratio 64

5.5 Trend Analysis 66

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LIST OF FIGURES

SI NO TITLE PAGE
NO

1 Banking services 17

2 Net profit 52

3 Debt Equity Ratio 57

4 Debt Asset Ratio 58

5 Return On Asset 60

6 Return On Equity 61

7 Current ratio 62

8 Absolute Liquidity Ratio 64

9 Quick Ratio 65

10 Trend analysisi of NPA 66

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CHAPTERS CONTENTS PAGE NO
i. Acknowledgement 4
ii. List of tables 5
iii. List of figures 6

INTRODUCTION 10- 19
01
1.1 Background of the study 10
1.2 Statement of the problem 11
1.3 Relevance and scope of the study 11
1.4 Objectives of the study 12

PROFILE OF BANKING INDUSTRY 20-40

2.1 Business process of the study 21

02 2.2 market demand supply-contribution to GDP- Revenue 23
generation
2.3 level and type of competition- firms operating in the 27
industry
2.4 pricing strategies in the industry 29
2.5 prospects and challenges of the industry 30
2.6 key drivers of the industry 38

REVIEW OF LITERATURE 40-44

03 3.1 Brief theoretical construct related to the problem 41

3.2 An overview of earlier studies 41
3.3 uniqueness of research study 43

METHODOLOGY OF THE STUDY 44-54

04 4.1 Research Approach and design 45

4.2 Sources of online data 46
4.3 Data collection methods 46
4.4 Data analysis tools 46
4.5 Report structure 52
4.6 Limitation of the study 53

05 DATA ANALYSIS, INTERPERATION, INFERENCE 55-68

06 FINDINGS 69-71

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07 CONCLUSION 73

BIBLOGRAPHY 74
ANNEXURES

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CHAPTER 1

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INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The study of financial statement is prepared for the purpose of presenting a periodical review or
report by the management of and deal with the state of investment in business and result
achieved during the period under review. They reflect the financial position and operating
strengths or weaknesses of the concern by properly establishing relationship between the items
of the balance sheet and remove statements.

Financial statement analysis can be under taken either by the management of the firm or by the
outside parties. The nature of analysis defers depending upon the purpose of the analysis. The
analyst is able to say how well the firm could utilize the resource of the society in generating
goods and services. Turnover ratios are the best tools in deciding these aspects. Hence it is
overall responsibility of the management to see that the resource of the firm is used most
efficiently and effectively and that the firm’s financial position is good. Financial statement
analysis does indicate what can be expected in future from the firm.

Financial statements refer to such statements which contains financial information about an
enterprise. They report profitability and the financial position of the business at the end of
accounting period. The team financial statement includes at least two statements which the
accountant prepares at the end of an accounting period. The two statements are: -

• The Balance Sheet

• Profit and Loss Account

They provide some extremely useful information to the extent that balance Sheet mirrors the
financial position on a particular date in terms of the structure of assets, liabilities and owner’s
equity, and so on and the Profit and Loss account shows the results of operations during a certain
period of time in terms of the revenues obtained and the cost incurred during the year. Thus the
financial statement provides a summarized view of financial position and operations of a firm.

Financial performance analysis can identify the financial strengths and weaknesses of the firm by
properly establishing the relationship between the items of balance sheet and profit and loss. It
helps a firm to identify short term and long term growth forecasting. This analysis can be

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undertaken by management of the firm or by parties outside the namely, owner, creditors,
investors. Financial statement analysis involves the re-organization of the entire financial data
contained the financial statements. It is the establishment of significant relationships between the
individual components of balance sheet and profit loss account. This is done through the
application tools of financial analysis like ratio analysis, trend analysis, common size balance
sheet and comparative balance sheet. This is used for determining the investment value of the
business, credit rating and for testing efficiency of operation. Every company need to analyse
financial statement to know the performance of a company.

Normally the financial statement analysis conducts for the purpose of investment, strategic
planning, etc. While considering the investors point of view the financial statement analysis
conducted by the investors, the share market intermediaries, Competitors and the company itself.
This analysis for the purpose of investment. It can be consider, it is for the investors and share
market intermediaries. This analysis conducted on the field of capital market of financial
industry and also the banking industry of India

1.2 STATEMENT OF THE PROBLEM

The project work is titled with regard to Financial Statement Analysis Of YES Bank In view of
Investment. The focus of financial analysis is on key figures in the financial statements and the
significant relationship that exists between them. The analysis of financial statements is a process
of evaluating relationship between component parts of financial statements to obtain a better
understanding of the firm’s position and performance for the purpose of investment.

1.3 SCOPE OF THE STUDY

Financial statement analysis (or financial analysis) is the process of reviewing and analysing a
company's financial statements to make better economic decisions. These statements include the
income statement, balance sheet, statement of cash flows, and a statement of retained earnings.

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The report is an important partial requirement of MBA program because knowledge and learning
become perfect when it is associated with theory and practice. That is, student can train and
prepare themselves for the job market. It also helps a lot to compare the theoretical knowledge
with the practical field.

1.4 OBJECTIVES OF THE STUDY

The study has the following objectives.

• To provide a strong theoretical framework for analysing financial statements.

• Find the net profit margins and operating profit margins of Yes Bank for five
• consecutive years To study the financial position of the company and operation of Yes
Bank
• To appraise financial soundness of the company
• Conduct ratio analysis with Current ratio, Debt-Equity ratio, Debt-Asset ratio,
• ROE and ROA

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CHAPTER 2

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INDUSTRY PROFILE
BANKING INDUSTRY
The banking services sector provides financial services to people and corporations. This segment
of the economy is made up of a variety of financial firms including banks, investment houses,
lenders, finance companies, real estate brokers, and insurance companies. As noted above, the
financial services industry is probably the most important sector of the economy, leading the
world in terms of earnings and equity market capitalization. Large conglomerates dominate this
sector, but it also includes a diverse range of smaller companies.

According to the finance and development department of the International Monetary

Fund (IMF), financial services are the processes by which consumers or businesses acquire
financial goods.1 For example, a payment system provider offers a financial service when it
accepts and transfers funds between payers and recipients. This includes accounts settled through
credit and debit cards, checks, and electronic funds transfers.Companies in the financial services
industry manage money. For instance, a financial advisor manages assets and offers advice on
behalf of a client. The advisor does not directly provide investments or any other product, rather,
they facilitate the movement of funds between savers and the issuers of securities and other
instruments. This service is a temporary task rather than a tangible asset.

Banking is part of financial system that provides different types of finance through various
credit instruments, financial products and services. In financial instruments, we come across
cheques, bills, promissory notes, debt instruments, letter of credit, etc. In financial products, we
come across different types of mutual funds. Extending various types of investment
opportunities. In addition, there are also products such as credit cards, debit cards, etc. In
services we have leasing, factoring, hire purchase finance etc., through which various types of
assets can be acquired either for ownership or on lease. There are different types of leases as well
as factoring too. Thus, financial services enable the user to obtain any asset on credit, according
to his convenience and at a reasonable interest rate.

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Importance

1. Promoting investment

2. Promoting savings

3. Minimizing the risks

4. Maximizing the Returns

5. Ensures greater Yield

6. Economic growth

7. Economic development

8. Benefit to Government

9. Expands activities of Financial Institutions

10. Capital Market

11. Promotion of Domestic and Foreign Trade

12. Balanced Regional development

BANKING FINANCIAL SERVICES

Banking refers to that process in which a bank which is a commercial or government institution
offers financial services that include lending money, collection of deposits, issue of currencies
and debit cards, and transaction processing etc. The majority of banks works as profit-seeking
enterprises, however, a few government banks work as non-profit organizations. Central banks
function as government agencies and they regulate the interest rates and circulation of money in
the total economy. Banking system plays a very significant role in the economy of a country. It is
central to a nation’s economy as it caters to the needs of credit for all the sections of the society.
Money lending in one form or the other has evolved along with the history of mankind. Even in

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the ancient times, there are references to the money-lenders, in the form of sahukars and
zamindars who lend money by mortgaging the land property of the borrowers.

A) Role of banking services

• The banks collect the savings of the individuals and lend them out to business-
people and manufacturers. Bank loans facilitate commerce.
• Manufacturers borrow from banks the money needed for the purchase of raw
materials and to meet other requirements such as working capital. It is safe to
keep money in banks. Interest is also earned thereby. Thus, the desire to save is
stimulated and the volume of savings increases.
• The savings can be utilised to produce new capital assets. Thus, the banks play an
important role in the creation of new capital (or capital formation) in a country
and thus help the growth process.
• Banks arrange for the sale of shares and debentures. Thus, business houses and
manufacturers can get fixed capital with the aid of banks. There are banks known
as industrial banks, which assist the formation of new companies and new
industrial enterprises and give long-term loans to manufacturers.
• The banking system can create money. When business expands, more money is
needed for exchange transactions.
• The legal tender money of a country cannot usually be expanded quickly. Bank
money can be increased quickly and used when there is need of more money. In a
developing economy (like that of India) banks play an important part as supplier
of money.
• The banking system facilitates internal and international trade. A large part of
trade is done on credit. Banks provide references and guarantees, on behalf of
their customers, on the basis of which sellers can supply goods on credit. This is
particularly important in international trade when the parties reside in different
countries and are very often unknown to one another.

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 • Trade is also assisted by the grant of loans by discounting bills of exchange and in
other ways. Foreign exchange transactions (the exchange of one currency for
another) are also done through banks.
• Finally, banks act as advisers, counsellors and agents of business and industrial
organisations. They help the development of trade and industry.

B) Functions of Banks

Figure 2.0 functions of bank

Primary Functions of Bank

All banks have to perform two major primary functions namely:

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 1. Accepting of deposits
2. Granting of loans and advances

Accepting of Deposits

A very basic yet important function of all the commercial banks is mobilising public funds,
providing safe custody of savings and interest on the savings to depositors. Bank accepts
different types of deposits from the public such as:

1. Saving Deposits: encourages saving habits among the public. It is suitable for salary and
wage earners. The rate of interest is low. There is no restriction on the number and
amount of withdrawals. The account for saving deposits can be opened in a single name
or in joint names. The depositors just need to maintain minimum balance which varies
across different banks. Also, Bank provides ATM cum debit card, cheque book, and
Internet banking facility. Candidates can know about the Types of Cheques at the linked
page.
2. Fixed Deposits: Also known as Term Deposits. Money is deposited for a fixed tenure.
No withdrawal money during this period allowed. In case depositors withdraw before
maturity, banks levy a penalty for premature withdrawal. As a lump-sum amount is paid
at one time for a specific period, the rate of interest is high but varies with the period of
deposit.
3. Current Deposits: They are opened by businessmen. The account holders get an
overdraft facility on this account. These deposits act as a short term loan to meet urgent
needs. Bank charges a high-interest rate along with the charges for overdraft facility in
order to maintain a reserve for unknown demands for the overdraft.
4. Recurring Deposits: A certain sum of money is deposited in the bank at a regular
interval. Money can be withdrawn only after the expiry of a certain period. A higher rate

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 of interest is paid on recurring deposits as it provides a benefit of compounded rate of
interest and enables depositors to collect a big sum of money. This type of account is
operated by salaried persons and petty traders.

Granting of Loans & Advances

The deposits accepted from the public are utilised by the banks to advance loans to the
businesses and individuals to meet their uncertainties. Bank charges a higher rate of interest on
loans and advances than what it pays on deposits. The difference between the lending interest
rate and interest rate for deposits is bank profit.

Bank offers the following types of Loans and Advances:

1. Bank Overdraft: This facility is for current account holders. It allows holders to
withdraw money anytime more than available in bank balance but up to the provided
limit. An overdraft facility is granted against collateral security. The interest for overdraft
is paid only on the borrowed amount for the period for which the loan is taken.
2. Cash Credits: a short term loan facility up to a specific limit fixed in advance. Banks
allow the customer to take a loan against a mortgage of certain property (tangible assets
and / guarantees). Cash credit is given to any type of account holders and also to those
who do not have an account with a bank. Interest is charged on the amount withdrawn in
excess of the limit. Through cash credit, a larger amount of loan is sanctioned than that of
overdraft for a longer period.
3. Loans: Banks lend money to the customer for short term or medium periods of say 1 to 5
years against tangible assets. Nowadays, banks do lend money for the long term. The
borrower repays the money either in a lump-sum amount or in the form of instalments
spread over a pre-decided time period. Bank charges interest on the actual amount of loan
sanctioned, whether withdrawn or not. The interest rate is lower than overdrafts and cash
credits facilities.

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 4. Discounting the Bill of Exchange: It is a type of short term loan, where the seller
discounts the bill from the bank for some fees. The bank advances money by discounting
or purchasing the bills of exchange. It pays the bill amount to the drawer(seller) on behalf
of the drawee (buyer) by deducting usual discount charges. On maturity, the bank
presents the bill to the drawee or acceptor to collect the bill amount.

Secondary Functions of Bank

Like Primary Functions of Bank, the secondary functions are also classified into two parts:

1. Agency functions
2. Utility Functions

1.Agency Functions of Bank

Banks are the agents for their customers, hence it has to perform various agency functions as
mentioned below:

1. Transfer of Funds: Transfering of funds from one branch/place to another.

2. Periodic Collections: Collecting dividend, salary, pension, and similar periodic

collections on the clients’ behalf.

3. Periodic Payments: Making periodic payments of rents, electricity bills, etc on behalf of
the client.

4. Collection of Cheques: Like collecting money from the bills of exchanges, the bank
collects the money of the cheques through the clearing section of its customers.

5. Portfolio Management: Banks manage the portfolio of their clients. It undertakes the
activity to purchase and sell the shares and debentures of the clients and debits or credits
the account.

6. Other Agency Functions: Under this bank act as a representative of its clients for other
institutions. It acts as an executor, trustee, administrators, advisers, etc. of the client.

2.Utility Functions of Bank

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 • Issuing letters of credit, traveller’s cheque, etc.

• Undertaking safe custody of valuables, important documents, and securities by providing

safe deposit vaults or lockers.

• Providing customers with facilities of foreign exchange dealings

• Underwriting of shares and debentures

• Dealing in foreign exchanges

• Social Welfare programmes

• Project reports

• Standing guarantee on behalf of its customers, etc.

2.1 BUSINESS PROCESS OF BANKING INDUSTRY

Machine learning, artificial intelligence and robotic processes automation (RPA) are some of the
significant automation technologies that are leading the smooth digital transformation within the
finance and banking sector. Biometrics and Blockchain are some other technologies that are
turned out to be transformative within the banking industry. Some of the major breakthroughs
that are introduced to the industry are because of these automated processes. Below we have
discussed few that we found most important.

1. KYC (Know-Your-Customer)
In the banking and financial sectors, the information related to the customers is of utmost
importance. Financial and banking services require customer data not only for account opening
but also for other banking processes. This information is required to be passed through the
internal banking process, to ensure its regulatory compliance with other regulatory agencies.
And, to ensure that, multiple checks such as ID Verification, Background Checks, Reference
Checks etc. are imposed. Applying the entire process step-by-step every time for every single
customer, whenever they open an account or request a loan, become a very heft task for banks.
This is where the efficient automated processing comes into play within the banking sector.
Modern banks are now using automated systems to create a centralized information network

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which allow quick and easy access and push and pull of the information. These systems are using
machine learning to extract information from disparate data sources.

2. Risk Analysis & Compliance

Audits are inevitable in banking operations, and this is why financial institutions and banks are
significantly investing in process automation technologies, in order to automate and improve
their operation that are potential to risk and compliance issues. These automation technologies
not only improve the overall performance and efficiency, but also reflect amazing adaptability in
relation to other IT platforms. This helps banks to better check the frauds, report risk, and check
quality etc.

3. Core Banking & Finance Operations

There are numerous automation technologies available now that are being efficiently used in
blend with BPA to modify and improve the back-office banking and financial operations such as
ID verifications, data updates, accounts reconciliation, documentation and much more.

4. Mortgage Loan & Credit Processing

Mortgage loan systems have been amplified by the technological transformations, but especially
by the process automation. The loan approval process used to take more than 60 days before the
process was automated. But now, as soon as the ID checks and employment status are checked
and verified, you get your loan approval. BPA has made the process a lot easier and simpler. The
entire loan approval procedure has been accelerated by BPA with reduced processing time and
quicker response.

5. Customer Request & Support Services

Customer service is amongst the top most priorities for banks. With scorching competition
within the banking industry, banks are continuously striving hard to provide exceptional
customer service to their customers. BPA has enabled banks to provide remarkable service and
customer experience. For example, with automated processes, banks are now capable of

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responding thousands of queries everyday while offering the best possible solutions at the
earliest.

6. Fraud Detection
Terrorist activities and fraud concerns have been significantly increased along with the
digitization. However, RPA (Robotic Process Automation) is amongst one of the process
automation technology which offer great fraud prevention by using predictive analysis and steps
any data breach.

2.2 DEMAND AND SUPPLY FOR BANKING SERVICES

Commercial banks may be described as institutions that engage in the following services.;

• processing of payments through e-money transfers,

• issuing of bank drafts and bank charges,
• accepting money on term deposits and lending by overdrafts,
• installments, provision of documents such as standby letter of credit, guarantees,
• performance bonds, securities underwriting,
• commitments and other forms of sheet exposures, safe keeping of
• documents and other documents in safety deposit boxes,
• sales, distribution of brokerage with or without advice, cash management and treasury,
merchant banking and private equity financing, etc.

In general, there are three broad categories of financial services/ banking services i.e. loans
(credit services), savings services such as deposit accounts and insurance services that retail
banking consumers may demand which are demanded for various reasons such as financial
smoothing ( Ellison et al., 2011) or for portfolio services such as the income life cycle hypothesis
explains (Ando A, 1963). Unsecured loans are monetary type loans that are not secured against
the borrowers assets. Such type of credits/ loans are most typically credit card debt, credit lines
and corporate credit lines, overdrafts among others which may be available under many different
guises and credit packages (Schindler, 2007). As previously discussed, different income groups
demand different financial services from commercial banks. For lower income group where cash

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flow management and consumption smoothing/ financial smoothing is a concern, it is typical that
their major utility in using commercial banking services would be for the sake of credit/ loan
facilities. For higher income groups interested in capital gains and equity banks offer a variety of
agency services such as advisory services to cater to that niche, thus the demand for banking
services may be perceived as a multivariate type of demand.

SUPPLY FOR BANKING SERVICES

GST is a consumption based destination tax. A tax payer has to be registered in all the states in
which he is supplying/selling. Now, most banks have a pan-India presence which means they are
required to register in ALL states. In addition to this, banks provide services to their own
branches and also to other banks. Transactions between branches are taxable under GST. Owing
to the nature and volume of other services (apart from normal banking services) provided by
banks and NBFCs such as lease transactions, hire purchase, actionable claims, fund and non-fund
based services etc., GST compliance will be complex. This article deals with the place of supply
of banking and financial services from the point of the customers and what they will be charged.
Please read our article on Impact of GST on Banks and NBFCs to know the bank’s perspective.

CONTRIBUTION TO GDP

The banking sector plays a significant role in lending financial support to the various
components of our economy – individuals and organisations alike. Without the banking
structure, the financial growth experienced by the Indian economy could have been
inconceivable.

Banks contribute to economic growth in more ways than one. They are significant credit
generators for the economy and work in interesting ways. People deposit their savings in banks,
which are then channelised to entities/individuals in need of funds in the form of different types
of loans. Further, people use the loan amount to make investments, which in turn generates more
income for the economy.

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Apart from income produced through credit-creation techniques, banks also generate revenue for
the economy in other ways. One example could be the income earned for lending services to the
people of the country. The income earned by bank employees in this case in the form of wages
and the like also contributes to the larger GDP pool. Besides, any expenditure incurred by banks
in the name of various bills, rent, stationery, internet cost, etc., also invariably contributes to the
country’s GDP.

• Contribution of the banking sector to GDP is about 7.7% of GDP

• Banking sector intermediation as measured by total loan as a % of GDP is 30%.
• Banking sector has generated employment to the tune of 1.5 million

Banking is the credit creating sector. Contributions of banks to the GDP of a country can be
looked in the following ways,

• Credit creation - In the simple model, income is either consumed or saved. Banks
channelize these savings where funds are needed, in the form of loans. These loans are
further used for investment purposes, generating more income.

• The income that they earn through their services. Banks nowadays perform various
operations, out of which it generates income for its functioning and survival (profits).

• Factor payments - banks while operating needs various factors to operate, and in return
payments are made. Profits were discussed in the earlier point, other factor payment
includes wages and salary paid to the employees, rent for the land on which they
operate, or the implicit rent if they own that land.

• Expenditure - while providing the various services banks incur expenditure which is
again contributing to the gdp of the country. Expenditure includes - water bills,
electricity bills, stationery, internet, telephone bills etc

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REVENUE GENERATION

The main operations and source of revenue for banks are their loan and deposit operations.
Customers deposit money at the bank for which they receive a relatively small amount of
interest. The bank then lends funds out at a much higher rate, profiting from the difference in
interest rates.

1. Profits from debt interest

When you deposit your money in a bank account, the bank uses that money to make loans to
other people and businesses to whom they charge interest. The bank pays you a certain amount
of interest in exchange for keeping your deposit. However, they collect more interest on the
loans they issue to others than the amount of interest they pay to account holders like you. This,
in turn, earns them a profit.

2. Banking fees
Another way banks make money is through regular or case-by-case fees. These might include:

• Account “maintenance” fees which are generally charged to your account monthly just
for being open. These are often avoidable and should be taken into consideration when
choosing a bank or a particular account.
• Inactivity fees for not using your account often enough. Be sure to look into this before
opening an account you plan to seldom use.
• Overdraft or insufficient fund charges when you spend more than you have in your
account. You can avoid these by staying on top of your budget.
• Excessive withdrawal fees from savings accounts, which have monthly caps mandated
by the federal government.
• Wire transfer fees if you want to send money to another bank or entity quickly. These
transfers typically happen on the same day. It is not the same as ACH transfers which can
take a few days etc.
• Charges for paper statements if you opt not to receive online statements. Going
paperless is more environmentally friendly, easier to track, and efficient anyway, so
definitely consider this option.

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 • Debit card replacement fees for lost or stolen debit cards.
• ATM fees if you use certain ATMs outside of your bank's network.
• Bad check penalties if you deposit someone else’s bad check, even if you do so
unknowingly.
• Minimum balance charges if your account balance falls below the minimum required
balance.

3. Interchange fees
While swiping your debit or credit card is generally free to you, a transaction or processing fee
called interchange is typically generated. This fee is charged by your bank to the merchant's bank
(merchant being the store where you made the purchase) as a percentage of your transaction. The
merchant's bank then deducts this fee and their own processing fee, from the cost of your
purchase.

2.3 LEVEL AND TYPE OF COMPETITION

Competition in the financial sector matters for a number of reasons. As in other industries, the
degree of competition in the financial sector can affect the efficiency of the production of
financial services. Also, again as in other industries, it can affect the quality of financial
products and the degree of innovation in the sector. Specific to the financial sector is the link
between competition and stability that has long been recognized in theoretical and empirical
research and, most importantly, in the actual conduct of prudential policy towards banks.
Importantly, it has also been shown, theoretically as well as empirically, that the degree of
competition in the financial sector can effect the access of firms and households to financial
services and external financing. The direction of the latter relationship is, however, unclear.
Less competitive systems may lead to more access to external financing since banks are more
inclined to invest in information acquisition and relationships with borrowers. When banking
systems are less competitive, however, hold-up problems may lead borrowers to be less willing
to enter such relationships. Furthermore, less competitive banking systems can be more costly
and exhibit a lower quality of services thus providing less financing and encouraging less

27
growth. These effects may further vary by the degree of a country’s financial sector
development.

The global financial crisis reignited the interest of policy makers and academics in bank
competition and the role of the state in competition policies (that is, policies and laws that affect
the extent to which banks compete). Some believe that increases in competition and financial
innovation in markets such as subprime lending contributed to the financial turmoil. Others
worry that the crisis and government support of the largest banks increased banking
concentration, reducing competition and access to finance, and potentially contributing to future
instability as a result of moral hazard problems associated with too-big-to-fail institutions.

As in other industries, competition in the banking system is desirable for efficiency and
maximization of social welfare. However, due to its roles and functions, there are some
properties that distinguish it from other industries. It is important to not only make sure that
banking sector is competitive and efficient, but also stable.

Competitors in banking industry

• HDFC
• ICICI
• SBI
• Bank of Baroda
• Indusind bank
• Bandhan bank
• Federal bank
• IDBI Bank
• RBL
• Punjab national bank
• Canara bank
• Central bank of india
• Kotak Mahindra bank

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 • Indian bank
• Union bank of india
• Indian overseas bank
• South Indian bank ltd

2.4 PRICING STRATEGIES IN BANKING INDUSTRY

demand for financial services is price sensitive, a lower price leads to a significant increase in
demand. However, where demand is greater than supply, as in most microfinance markets, price
is not the limiting factor. Neither for many microfinance institutions subject to achieving a stated
level of return, is profit maximisation a key driver

there are two things about pricing in the financial service sector, Firstly, the majority of
microfinance markets are immature and so institutions do not need to adopt aggressive pricing
strategies. Secondly, in many markets setting artificially high prices is often difficult for
microfinance programmes to justify to their customers or to external stakeholders. Thirdly, other
non-economic factors, such as mission to serve the poorest have led to heavy subsidies in some
donor-supported programmes. A thorough approach to pricing is given later, but two strategies
are worth considering now, penetration pricing and loss leaders.

• Penetration Pricing:
Transformed microfinance institutions that can accept deposits, or non-bank financial
institutions frequently offer higher interest rates on savings to attract deposits to finance
their loan portfolios. As illustrated by PRIDE Uganda, a transformed microfinance
institution and Stanhope a Non-Bank Financial Institution in Uganda, which offers
interest rates a few percentage points higher than those of larger banks.

• Loss Leaders:
Loss leaders are products deliberately priced at a loss making level. Such products
typically include children’s accounts, church accounts and lotteries. For example,
Cooperative Bank in Kenya offers a children’s deposit account call Jumbo Junior, on

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 which it is prepared to loose small amounts of money in order to generate lifetime loyalty
from future customers. Often larger institutions have offer a children’s account because it
is popular with parents or is seen as a must have account. Costing exercises show that
children’s accounts consistently loose money but that losses are modest.

Pricing a financial service is both an art and a science. The “art” of pricing is in choosing a
combination of fees and charges acceptable to customers, that are fair and transparent, and in
determining if the product has any unique attributes that deserve premium pricing. The “art” of
pricing is in careful and considered communication to and feedback from customers and staff to
ensure that pricing messages are appropriately and correctly delivered. The “science” of pricing
is in ensuring that the product is profitable and is competitive in the market, that aside from very
few specific and chosen loss leaders, that each products returns a profit.

In concept product pricing is simple, firstly, establish cost, secondly examine the fees charged
by the competition and finally determine whether the product or service has sufficient customer
value to deserve a premium price. In practice, pricing is complex, customers and institutions
alike find it difficult to track prices regularly and to understand the nuances of pricing
calculations. There is a role for regulators in promoting transparency, but a less clear role in
setting interest rate ceilings as these can act to restrict the supply of credit. Finally, where
possible, pricing should reflect levels of risk and not be an avenue for excessive returns or to
cover for inefficiencies in delivery of services.

2.5 PROSPECTS AND CHALLENGES OF BANKING

INDUSTRY

FUTURE PROSPECTS
A. Potential of Internet Banking

Personal computer sales in India are presently growing at a rate of 57% annually and
developments in information technology including internet access are also persistent. 35% of

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