Every business is made to generate income. But every business has some limitations in sources of income. As we know, for IT companies their real asset is the talent their employees has. Hence, IT companies mostly deal into the knowledge based works only. Like an IT company, the core asset of the bank is the money they have. Just like an IT company, Bank has their limitations of income. In this article we are going to know how banks earn money, what are all income sources from through which banks can survive and grow their business.
How Banks earn Money?
All of us know that banks are the important part of the country’s economy because banks are responsible for flow of the money in the respective country. As an intelligent investor and responsible citizen it is our privilege to know what all are the income sources through which banks run their banking business.
Let us understand what are the main types of any business.
The income of any business is categorized between two types such as,
- Operating Income &
- Non-Operating Income
All the incomes are categorized among these two elements to make it simple and understood by everybody.
The income categorization into operating and non operating income is depended upon the business in which it deals.
For trading business, trading profit is their operating income but, income from rent is not their operating income because renting out property is not their normal course of business.
The relation of the same concept with the banking business helps us to understand what is their operating business.
Operating income for Banks:
Here is the list of some operating income of bank
Interest income on lending loans
Banks lend money to their customers as loans for different purposes such as, buying Home, Higher Education, New Car, starting a new Business and Personal loan for emergency purposes and much more.
Income from fees, commission or service charges
Here is the list of some incomes earned by the bank in the name of Fees, commission or service charges.
- Syndication / Consortium on Loans
- Accepting bills of exchange
- Cheque book issuance fees
- Penalties for defaulting ECS Mandate
- Penalties on delayed payment
- Loan processing fees
- EMI conversion fees
- Commission on POS Transaction
- Providing safety vaults (Locker facility)
- Annual Charges on Debit/Credit/ATM Cards
Non-Operating income for Banks:
Beside banking normal operations, banks deal in different income opportunities to grow their income marginally which also helps customer to get extra services from banks in house. Here is the list of some non-operating income of bank
Income on investments:
If the company has invested money to other companies and having many subsidiary companies under the bank then the bank is entitled to earn dividend distributed by the subsidiary company.
When the bank decides to sell out the company then the profit after selling called as Capital income is included under income on investments of Non-Operating income.
This income on investment does not limit to subsidiary company but also includes the income earned from Debentures and interest over the Sovereign Bonds (Government Securities) which considered as the safe source of investment.
Forex Income includes the commission earned after converting currency of different countries.
Commission on Third Party Products :
Bank’s Third party products are the financial products which managed by the other company but still it is distributed by the bank to earn commission from each sales and distribution. Those products are listed below.
- Hedge funds income
- Distributing insurance
- Selling Mutual Fund Products
- Stock Market Broking commission
I hope that you could have to understand in a better manner about the incomes earned by the banks.
There are many types of banks like merchant banks, hedge fund company, Investment Bank in which some parts of income vary by the categories.
I have shared this information in the general sense of banking.
But if you know more than this, feel free to suggest me down below in the comments section. Your suggestions and corrections both are appreciated and taken into consideration with an immediate effect.
Thank You for taking your time to read this article carefully.