Banks run on a profit-based business model. Similar to any other business, they have their sources of income and expenses. Their operations primarily involve borrowing and lending money.
Here is a detailed guide to answer all queries about how banks make money in India.
How Do Banks Earn Profit?
There are various avenues through which banks earn money. These include the following:
While banks borrow funds at a lower interest rate, they tend to charge comparatively higher interest rates on loans that they disburse. The difference in these interest rates is called net interest margin, which acts as a significant source of income for banks.
The money that customers deposit in their savings and/or current accounts is the money that banks borrow. Moreover, banks borrow by offering fixed deposits or recurring deposits.
On the other hand, banks earn by charging interest on financial products such as home loans, personal loans, car loans and others.
The difference between these two interest rates is what banks focus on maximising.
Interchange fees are another major source of income for banks. It is the charge that financial institutions levy for carrying out transactions withdebit cardsorcredit cards.
Whenever a customer makes a purchase and swipes their cards, a specific charge is levied on the merchant. The majority of the interchange fees go towards the customer’s bank. The rest goes towards the merchant’s bank.
Account and ATM-related Fees
In addition to interchange fees, a bank levies a wide range of charges, such as the following:
Customers are allowed to carry out a certain number of ATM transactions per month from ATMs belonging to banks other than the issuing financial institution. Customers have to pay a certain fee if they make ATM transactions beyond that limit.
Moreover, some banks charge another type of fee for performing transactions at home ATMs beyond the set limit.
You may want to know The Evolution of Banking in India
Certain banks require their customers to maintain a minimum balance in their accounts. If the balance drops below this limit, one has to pay a specific fine.
Customers who miss the deadline for payment of credit card bills have to pay a late fine. This fine will, however, vary from one bank to another.
Banks that offer investment services might also levy investment fees. They will levy such fees for handling client investments and other related services.
The other sources include-
Sometimes financial institutions invest in different government and rated securities. They earn significant interest through these investments.
Financial institutions are also involved in foreign exchange operations, where they act as brokers. These operations also bring income to banks.
Banks also earn specific commissions through distributing mutual funds or insurance products to their consumers.
Typically banks earn their profits by acting as a bridge between borrowers and depositors. At the same time, they incur various expenses for carrying out operations. In case borrowers default on loan repayments, banks have to cover the losses by utilising their earnings.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.
FAQs
The money that customers deposit in their savings and/or current accounts is the money that banks borrow. Moreover, banks borrow by offering fixed deposits or recurring deposits. On the other hand, banks earn by charging interest on financial products such as home loans, personal loans, car loans and others.
How is Groww making money? ›
Groww mainly earns revenue from brokerage and other allied services, and other operating revenue from interest on deposits. Costs for Groww include employee-benefit expenses, followed by advertising and marketing, and technology.
How do banks make money from trading? ›
Proprietary trading is an effort to make profits by trading the firm's own capital. Investment banks earn commissions and fees on underwriting new issues of securities via bond offerings or stock IPOs. Investment banks often serve as asset managers for their clients as well.
How do banks make money from mutual funds? ›
Mutual funds make money by charging investors a percentage of assets under management and may also charge a sales commission (load) upon fund purchase or redemption. Fund fees, called the expense ratio, can range from close to 0% to more than 2% depending on the fund's operating costs and investment style.
How do banks make money from investment accounts? ›
Investment banks earn revenue through fees charged for their services. Typically, there are two types of fees they earn: Underwriting fees for arranging the sale of securities (debt or equity) on behalf of clients. Advisory fees for providing strategic guidance.
Who are the major investors of Groww? ›
Groww's existing investors, including Tiger Global, Sequoia Capital India, and Propel Venture Partners too participated in this round. Nextbillion Technology's net worth stood at ₹590 crore as on March 2023 and it remains comfortable for the current scale of operations and the near-term growth plans, say ICRA ratings.
What are the disadvantages of Groww app? ›
However, online trading with Groww has several set of disadvantages also such as follows;
- Limited investment offerings as commodity and currency derivative products are unavailable.
- Delivery trading with Groww is not free.
- No branch offices to offer offline customer support.
- No customer care number.
They earn interest on the securities they hold. They earn fees for customer services, such as checking accounts, financial counseling, loan servicing and the sales of other financial products (e.g., insurance and mutual funds).
Is it better to invest in mutual funds through banks? ›
Disadvantages. Banks don't generally specialize in investing since they are more about savings, day-to-day financial transactions, and loans. That means that a bank might have a more limited pool of mutual fund families—multiple funds managed by the same company—for their customers to choose from.
Why do financial advisors push mutual funds? ›
Advisors also steer their clients toward certain investments and may execute trades in the financial markets by proxy for their clients. Advisors who are also brokers get paid commissions by a mutual fund in exchange for getting their clients to purchase the funds.
Commercial banks make money by providing and earning interest from loans [...]. Customer deposits provide banks with the capital to make these loans. Traditionally, money earned in the form of interest from loans often accounts for up to 65% of a banks' revenue model.
Why are investment bankers so rich? ›
At the heart of an investment banker's earning potential lies their involvement in high-value deals and transactions. These professionals facilitate mergers, acquisitions, and IPOs for corporations, reaping substantial fees in the process.
Do banks use your money to make investments? ›
Banks offer their customers a place to stash their cash safely, usually for a very modest rate of interest. In turn, the banks invest that cash, aiming to earn more money than they pay out to customers. They lend it to businesses and consumers as loans, making a profit from the interest payments.
How much brokerage is charged by Groww? ›
Account opening = Rs 0 Annual maintenance charge (AMC) = Rs 0 Brokerage = Rs 20 or 0.05% per order (whichever is lower) Regulatory & statutory charges, penalties, and GST is extra and depends on the type of order. You can use the brokerage calculator to get an estimate of all the charges involved.
How much does the Groww app earn? ›
Synopsis. At Rs 1,294 crore, Groww's total revenue shot up 252%, while profits increased to Rs 73 crore. Wealth management-focused startup Groww reported total revenue of Rs 1,294 crore for financial year 2023, up 252% from Rs 367.4 crore the previous year. Net profit jumped to Rs 73 crore from Rs 6.8 crore.
Is it safe to invest through Groww? ›
Groww is a CDSL Depository Participant and Stock Broker registered with the Securities and Exchange Board of India (SEBI). It is also a prominent member of stock exchanges like NSE, BSE, etc. We have all the legal memberships and are accredited with the required licenses making us a secure platform for investment.
Where does money go after selling stock on Groww? ›
As per SEBI regulations, only 80% of the delivery sell amount is made available to invest after 30 mins after a sell transaction, while the remaining 20% will be added to your Groww balance and made available to invest by the end of the day.
