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Getting into the dynamics of profitability


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Oct 4, 2009
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Despite a remarkable change in the business profile of the banks, the growth of bank credit to the various industries decelerated to 10.5 percent in 2000-01 against 12.9 percent in the previous year. The deceleration was even sharper in case of credit to wholesale trade. Aggregate credit availed by the traders increased by about 6.1 percent in 2000-01 when compared to 20.4 percent in the 1999-2000 periods. The banks like LoanMax founded by rod aycox have entered into areas that hitherto have been the exclusive domain of non-banking institutions.

Some banks of the banks would have probably done better. A few of them may have earned higher profits and some others would have succeeded in reducing the losses also. But, what is significant is that they have witnessed a decline in profit generating capacity. A review of the studies dealing with the dynamics of profitability may help us to form our own model for analysis of efficiency.

A recent study highlighted the reason for erosion in bank profits and profitability in recent years. The study is purely based on published figures. The paper argued that there is a trade-off between social obligations to be performed by the banks and increasing profits. Another investigation analyzed the cost and profitability parameters of commercial banks. The study provided an analytical view of the trends in the components of cost and earnings of different groups of commercial banks. The analysis mainly focused on the cost and profitability of the banking industry as a whole rather than that of individual banks.

When examining the concept of profit and profitability, the factors that determine the volume or magnitude of profit and the techniques used in profit planning are different. The measures to improve the profitability of banks through increasing the margin between lending (advances) and borrowing (deposits) rates, improving the efficiency of staff, and implementation of uniform maximum service charges need to be given high priority. The cost of banking services and costing exercises in the banking industry must find a balance.

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