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Over the last few decades, the income sources for banks have changed. Outline the changes and...

Over the last few decades, the income sources for banks have changed. Outline the changes and discuss why non-interest income has become so important to banks?

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Answer:

Sources of income of banks- Are as following:

(1): Interest income- This is the most important source of income of banks. Interest is charged on the loan and received on the investment. There are two sources of interest income-

  • Interest on loan that bank lends to borrower
  • Interest on investment that bank receives by investing its money to the financial markets and by keeping its money with other banks and central bank.

(2): Non interest income- This income is generated other than interest.

These are as following:

Fee income- Bank charges Annual maintenance charges, service charges, alert charges, credit card charges, loan processing fee etc.

Forex income- Banks deal in Foreign exchange also, they exchange the currencies for customers and charge commission in return.

Commission on third party- Banks do cross selling and sell third party's products, in return they charge commission.

Non interest income is important because this is a competitive era, there are many banks operating in the country. Non interest income plays an important role in increasing bank's revenue. There are many other sources of non interest income such as: Transaction fee, insufficient fund charges, check and deposit slip fee, penalty on late payment etc.

When interest rate is lower on the loan then bank's interest income comes down, in that case, non interest income supports banks.

ekkarill92 answered 2 years ago
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