Product Pricing

PRICING OF PRODUCT
WHY PRICING
• Deregulation of Administered Interest
Rates
• Introduction of PLR
• Competition in the Market
• Profit Margin
• Introduction of Prudential Norms
 PRICING POLICY

Market Oriented Pricing Policy

Reflect the Actual Cost

Leakages of Revenue be least

Regulatory Compliance

Proper Risk Assessment

FACTORS AFFECTING PRICING
• Cost of Funds
– Average Deposits Cost
– Average Borrowings Cost
• Operational/ Transaction Cost
– Staff Cost
– Other Operating Cost
• Regulatory Cost
– Cost of Capital Adequacy
– Risk Weightage
– NPA
• Competition
• Profit Margin
• Volume of Business
 METHODS OF PRICING
 Cost Plus Pricing Methods
Fund Cost
Operational Cost
Prudential Cost
Profit Margin

 Price Leadership Method

Follow the Market Leader

 Cost- Benefit Method

Compared the Discounted Cash flows
with the present Cost
 RECENT TECHNIQUES…..
Customer Profitability
 Cross-selling of Product
Other Sources of Income from
Customers
Risk-Adjusted Return on Capital
Risk Adjusted Income as a
Percentage to Economic Capital
 MEASUREMENT
COST OF FUNDS
 Average Cost of Deposits
 Average Cost of Borrowings
OPERATIONAL COST
 Staff Cost % to AWF
 Other transaction Cost % to AWF
PROFIT MARGIN
 Return on Average Assets
REGULATORY COST
 CRAR ( 9% minimum)
 NPA & TAX ( provisions as a % to AWF)
 EXAMPLE
Average Cost of Funds: 5.75%

Operational Cost to AWF 1.75%

CRAR (9%): (Cost of Tier-II Bond) 0.65%

NPA & Tax: Provs. To AWF 0.85%

Profit Margin: (ROA) 0.75%

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9.75%
 BASE RATE & BPLR
Base Rate estimation: Addition of
1. Cost of funds
2. Negative carry on SLR & CRR
3. Overhead cost
4. Average return on Networth

BPLR estimation: Addition of

5. Cost of funds
6. CRR cost
7. Overhead cost
8. Provision cost
9. CRAR Cost
 Risk-Based Pricing

• Estimate the Cost of Regulatory Capital

• Estimate the EL using PD and LGD
• Estimate the Risk Premium using
– EL
– Required CRAR
– Regulatory RW

• Risk Price for each category of assets is the addition of risk

premium, cost of funds, overhead cost and profit margin
 Fundamentals of RAROC

Risk-Adjusted Income
RAROC =
Economic Capital at Risk