Discover key insights on Branch profitability, an important topic of JAIIB RBWM, in this post with summarised notes.

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Banking system

  1. The Banking System in India is governed by the Banking Regulation Act, of 1949, which came into force on 16 March 1949 and changed to the Banking Regulation Act of 1949 on 1 March 1966. 
  2. The development of the banking sector can be divided into three phases: the Early Phase (1970-1969), the Nationalisation Phase (1969-1991), and the Liberalization or Banking Sector Reforms Phase (1991-present). 
  3. During British rule, the three Presidential banks of India were established at Kolkata, Mumbai and Chennai, and the Imperial Bank of India was later nationalised in 1955. In 1969, 14 banks were nationalised, and in 1980, another 6 were. 
  4. The Narasimham Committee was set up to manage the major reforms in the banking sector. These reforms included opening the sector to private and foreign players, deregulating interest rates, and reducing the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).


Understanding profitability 

The difference between a company’s revenue and expenses determines its profitability. It is a measurement of efficiency and its success or failure. It can also be a business’s ability to produce a return on an investment based on its resources.

What’s profit?

Maximizing branch profitability through strategic cost management, revenue optimization, and customer-centric initiatives for sustainable growth.

Profit is the money that a company keeps after deducting its costs. Three major types of profit are gross, operating, and net, which can be found on the income statement. Each type provides more information about a company’s performance, especially when compared to other competitors and periods.

Gross profit, operating profit and net profit

  • Gross profit is the first profitability level, sales minus COGS. Sales are the first line item on the income statement, followed by COGS.
  • Using Company, A as an example, if sales are Rs. 1,00,00,000 and COGS are Rs. 60,00,000, the gross profit is Rs. 40,00,000 (i.e., Rs. 1,00,00,000 less Rs. 60,00,000).
  • For a 40% gross profit margin (i.e., Rs. 40,00,000/- divided by Rs. 1,00,00,000/- multiplied by 100), divide gross profit by sales.
  • Total Sales – Cost of Goods Sold equals gross profit.
  • Gross profit looks at profitability after direct expenses, while Operating Profit looks at profitability after operating expenses, such as selling, general, and administrative costs (SG&A).
  • Given that Company A (said above) has running expenses of Rs. 20,00,000/-, the operating profit is calculated as Rs. 40,00,000/- less Rs. 20,00,000/, which is equal to Rs. 20,00,000/. For the operating profit margin, which is 20%, divide operating profit by sales.
  • Operational profit is the difference between gross profit and operational costs.
  • The Operating Profit Margin is calculated as Operating Profit divided by Sales.
  • The third level of profit is net profit, which is the income left over after all expenses, including taxes and interest, have been paid.
  • Operating profit with fewer taxes and interest equals net profit


Difference between Profitability and Profit

  1. Profit and profitability are two crucial accounting variables used to evaluate a company’s financial performance. 
  2. The amount of money or revenue that an entity receives in excess of its costs or expenses is what determines its absolute profit. 
  3. Profitability is a comparative indicator that is used to estimate the extent of a company’s profit based on its market share. 
  4. Profitability is a gauge of effectiveness and ultimately determines whether something succeeds or fails. Even if a company may turn a profit, this does not necessarily mean that it is profitable.
Basis Profit Profitability
Commercial Interpretation A total sum is used to calculate profit. A percentage can be used to represent profitability.



Traditional measures of profitability 

The Return on Assets (ROA) and Return on Equity (ROE) of a company are the classic indicators of its profitability.

Assets = Liabilities + Bank Capital (Owners’ Equity)

An ROI indicator called return on assets (ROA) assesses a company’s profitability of all of its assets. The profit (net income) earned is compared to the capital invested in assets, and the higher the return, the more effectively and productively management is using available financial resources.

Return on equity (ROE) for banks 

The earnings, which are the money invested by the promoters/shareholders, are disclosed by this ratio. This formula can be used to compute the ratio:

              ROE = x 100 

Ques: The net profit of a firm is 40. It has a 400 tangible net value and a 400 long-term liability. 
Sol: Its return on equity is 10%.


Efficiency in Bank Operations: Why It Matters

Maximizing branch profitability is crucial for the success of any business, as it allows for the effective allocation of resources and investment in growth opportunities while also ensuring long-term sustainability.

For banks to maintain their competitiveness and maximise their legacy investments, they must invest in technology, marketing, automation, and self-service skills. This includes investing in technology, marketing, automation, and self-service capabilities.

Strategies for improving efficiencies of banking


The main strategic areas where banks are concentrating their efforts today are listed below.

Areas that need to be improved for greater operational efficiencies

  1. In order to boost bank profitability, business realignment entails leaving business lines with poor margins and switching to more affordable ones.
  2. A cost-effective combination that is suited to each bank’s client base is created through the process of channel optimisation, which analyses consumer interactions with banks.
  3. Each activity or transaction, such as opening an account, preparing a loan document package, or managing a particular kind of transaction, should have a lower unit cost-to-value ratio as its objective.
  4. Technology is not necessary for product development; instead, effective performance management strategies including setting clear expectations, increasing incentives and rewards, and improving supervision and training are needed.
  5. Reduce employee information-seeking time using technology and automation, and move work along more quickly and effectively with automated business rules and decision models.
  6. Vendor management is the process of managing suppliers, including selecting, negotiating contracts, controlling costs, reducing risks and ensuring service delivery.
  7. Banks need to think beyond a ‘one-size-fits-all’ strategy to cater to customers’ increasing demand. While relationship pricing bases service pricing on the customer’s overall business, bundle pricing is a business approach where corporations combine together many products and sell them at a single price.
  8. It is classified based on tenure, number of accounts, balances, frequency of interaction, channel preferences, and psychographic, behavioural, and demographic variables.
  9. Upselling encourages customers to purchase higher-end products, while cross-selling encourages customers to purchase related items.
  10. Expanding customer self-service, case management, dispute management, and event-based decision-making can improve customer care.

Factors that Have an Impact on Indian Banks’ Profitability 

  1. Macroeconomic factors: Bank profitability is positively correlated with GDP growth and adversely correlated with the rate of inflation growth.
  2. NPAs have the most detrimental effects on the profitability of banks among industry-specific factors. They lose money because their interest margins are declining and their operating costs are rising.
  3. Other bank-specific factors including Deposits and non-interest income are important factors in a bank’s profitability, as they provide more money for lending and other profitable activities. These include commission income, service charges and fees, guarantee fees, net profit, and foreign exchange earnings.

Steps to improve branch profitability

  1. The most important details in this text are that the best-performing banks balance profit, growth, and risk to maximize performance and build a sustainable earnings stream. 
  2. They assess the strategy fit and unique role for each branch in the network, analyze the current customer base for each branch, identify their best new prospect opportunities, analyze the competition, set specific goals by branch for business and consumer markets, execute effective marketing campaigns to drive customer origination, retention, and expansion, and redefine the bank model of the future. 
  3. The most important details in this text are the focus on NPA reduction, more quality loans, focus on non-interest income, low-cost deposits, holding minimum cash balance, cost management, good customer relationship, and courteous behaviour by the Branch Head. 
  4. To increase revenue and profit, branches need to focus on NPA reduction, more quality loans, cross-selling different products, low-cost deposits, holding minimum cash balance, cost management, good customer relationship, and courteous behaviour by the Branch Head. 
  5. These measures will help to increase revenue and profit, reduce NPA, increase quality loans, cross-sell different products, hold minimum cash balance, cost management, have a good customer relationship, and have courteous behaviour by the Branch Head.
  6. The most important details are to identify areas in your business that could be improved or made more efficient, use key performance indicators (KPIs) to analyze strengths and weaknesses, assess general business costs, reduce waste, review pricing, and improve profitability through up-selling, cross-selling, and diversifying techniques.
IE & IFS (Indian economy and Indian financial system) Click here
PPB (Principles and Practices of Banking) Click here
AFM (Accounting and financial management) Click here
RBWM (Retail banking and wealth management) Click here
IE & IFS ENGLISH (Indian economy and Indian financial system) Click here
PPB ENGLISH (Principles and Practices of Banking) Click here
AFM ENGLISH (Accounting and financial management) Click here
RBWM ENGLISH (Retail banking and wealth management) Click here


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