A Study on ‘Third Cost’ in Banks

Abstract

Banking is the lifeline of the economy of the country. The health of the banking sector is closely integrated to the health of the economy. The economy is traditionally subjected to the boom and recessionary cycles at frequent intervals. During the period of boom in the economy, the business of banking becomes relatively safer, profitable and robust. Conversely, during the period of recession, the business of banking undergoes stress with soaring impaired assets and reduced profitability.

The core business of banks is to accept the deposits for the purpose of lending. The deposits being the resources, carry a cost while the lending constitutes the assets of the banks and hence a source of income. Since the banks are commercial organizations, it is expected that their operations are profitable.

Sustainability, Competitiveness, Liquidity and profitability are the general performance indicators of the banks. In this background, it becomes imperative for the banks to undertake a cost-benefit-analysis of their activities, people, processes, products, infrastructure etc., to help determine the areas which are profitable and the areas which are less profitable. Such an exercise will enable the banks to undertake eliminating the wasteful costs, discontinue the loss making business propositions and lay more focus on profitable products and services.

Cost control in banks will be more of a strategic planning exercise, whereas, cost reduction will be both strategic and tactical. While introducing cost control strategies, banks would be taking steps to identify their major cost centers, identify major types of cost within each cost centre and choose the costs to focus on first.

On expenditure side the highest cost is “Cost of Deposits†followed by Payment to and Provisions for Employees and the Third Cost which is Rent, Taxes & Lighting – RTL (Other than operating expenses relating to insurance business and other expenditure). As spreads of the banking business is decreasing on account of increase in cost of deposits and decrease in yield on advances / investments and increase in NPAs. Control of every cost is essential, other-wise the rating of the banks will decrease and it is difficult to attract or mobilization of additional capital through public issue. If banks adopt good strategies, there is a lot of scope to control overheads by better utilization of alternate delivery channels instead of branch banking channel. This article is focused on how to minimize the Third Cost i.e., Rent, Taxes and Lighting overheads in Banking Sector.