The banking business is all about Risk. How you manage is essential. The Biggest Risk is credit Risk for banks on both sides. Borrowed funds as debentures and bonds as well as deposits. The interest rate in the banking business plays a Key Role as it is the cost of the Fund at which the bank borrows. Whether or not the bank will survive depends on how bank management handles both rates.

There are some tools which are with banks for it. Current account and Savings account. They are also known as demand liability. The importance of them to banks is free cash flow. The bank is not paying any interest rate on the current account and only pays 4% to a savings account. That significantly affects the Weighted Average Cost of Capital for a Bank, also known as the Cost of Funds.

More the Demand liabilities lower the cost for banks.

But there is another side to it.

  • Whenever you decide to increase CASA for banks, You Need to set up either more ATMs or more branches or make a Centralised banking system for facilitating your account holders. That will affect your Efficiency Ratio by increasing your Non-Interest Expenditure, forcing you to make more money to make it under control. Sure, you Can set up other businesses like Mutual Fund houses and insurance for utilizing the branch network, or you can use the technology to reduce the need for ATMs and branches.
  • Among demand liabilities, USING the amount from the Current account is a little risky. Say one account is showing ₹5,00,000. Bank decided to use it for giving long-term loans. What if tomorrow account holders come to you and ask for ₹5,50,000? It’s possible that the people or businesses that use them often also have Cash credit facilities. Well-known in India as C.C., I entirely agree that there are other account holders. And the amount under cash credit is not long-term. So cash credit may be paid off. But there is the possibility that it makes Cashcrunch situation. That is why there is Equity and Tier one capital and CRR and SLR. But as I said, banking is all about Risk.

I am going to end it by saying.

Banking is a GOOD BUSINESS if you know how to handle it.

That is where Axis Bank and HDFCBANK come into the picture.