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Branch Profitability

The document discusses transfer price mechanisms (TPM) for bank branches. TPM aims to balance branch profitability and efficiency by treating funds mobilized and deployed by branches as loans to and from the head office, priced at notional transfer rates. An effective TPM should incentivize branches to work towards organizational goals. It also discusses designing TPM using market rates, factoring incentives and penalties for branches, and calculating monthly transfer rates based on yield curves and targeted returns on assets.

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Nishant Jain
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183 views

Branch Profitability

The document discusses transfer price mechanisms (TPM) for bank branches. TPM aims to balance branch profitability and efficiency by treating funds mobilized and deployed by branches as loans to and from the head office, priced at notional transfer rates. An effective TPM should incentivize branches to work towards organizational goals. It also discusses designing TPM using market rates, factoring incentives and penalties for branches, and calculating monthly transfer rates based on yield curves and targeted returns on assets.

Uploaded by

Nishant Jain
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Branch Profitability

Transfer Price Mechanism


TRANSFER PRICE FOR BRANCH:WHY
 In a branch banking system: Multi-Functional-
Deposits, Advances, Fee-based services.

 Multi-layer functional system- each constituent


should be profitable.

 Profitability and efficiency- Effective transfer


price mechanism-
Objectives of TPM
 TPM should be designed to strike a balance between
profitability and efficiency.
 Evaluation of branch performance - TPM
– Funds mobilized by branches are treated as “Funds Lent
to HO”
– Funds deployed by branches are treated as “Funds
Borrowed from HO”.
– Head Office compensates branches for transferring
surplus funds and charges deficit branches which use
these resources at a notional rate. These notional rates /
prices are known as Transfer Price.
– TPM should act as a policy instrument on the part of Head
Office to signal goals of the organization.
– It should provide incentives to branches so as to motivate
them to work for organizational goals
TPM: In a Dynamic World
 In the present competitive environment, efficiency
has become the cornerstone of business,
particularly, in the banking business. Banks have
started thinking in terms of each branch becoming a
mini-profit centre which prompts for a more
dynamic Transfer Price Mechanism where in the
economic dynamic including interest rates, liquidity,
credit off-take, market potential, etc. have to be
factored into the system in order to enable the
management to direct its resources more efficiently.
TPM: Constraints
 Multiple functions of branches
– Deposits mobilisation
– Credit offtake
– Fee-based income generation
– Low cost deposits
– NPAs reduction
 Regulatory functions
– Agricultural credit
– Export credit
– SMEs credits
– Other directed credit
– Capital Cost
 Incentive functions
– Low cash-holding
– Low operating cost
– Cash recovery from NPAs
TPM: How to Design
 TPM :
– a Market Determined rate
– factor all incentives and penalties
– It should signal organizational objectives

Market determined rates are:


 Treasury bills rate
 Call Money rates
 CBLO Rates
 One month ZCYC rates
TPM: How to Design
What are the incentives?
– Low cost SB and Current Deposits
– Targeted Advances
– Retail Lendings
– Priority Sector lendings
– Export credit
– NPAs Recovery
– Overhead Efficiency
– Rural and Semi-urban Branches
– Credit/Kissan Card Business
What are the Penalties?
– Excess Cash-holding
– NPA
Yield Curve Based Monthly TPM
Avg. Deposit Rate :Min Yield in 1Yr Time Bucket of ZCYC

Intermediation Cost: Opt. Cost to Avg. Assets

Depository Insurance cost: Insurance Premium to Dep.

Cost of CRR Maintenance: Avg.dep.rate* CRR %

CRAR Cost (12%)= 12% * Tier-II Bond cost

Operating cost of Rural Branch: Opt.cost/avg.assets

Targeted ROAs

Average Projected Assets


Yield Curve Based Monthly TPM
Actual cost of Deposits:
– Minimum of Yield of ZCYC
– Intermediation cost
– Depository Insurance cost
– CRR Cost
HO-transfer rate:
– Actual Cost of Deposits
– Targeted ROA
– Less CRAR Cost
HO-Borrowing rate:
– Actual Cost of Deposits
– Targeted ROA
– CRAR Cost
HO-Borrowing rate for SLR:
– Actual Cost of Deposits
– Targeted ROA
Yield Curve Based Monthly TPM
Compensation & Penalties
FCLR Lendings= (HOBR- Avg.FLCR)*FCLR Amt
Agri.Lendings = (HOBR –Avg.Ar rate)* Agri.Lending
Rural Br. OH =(Rural Br.OH-Bank’s OH)*Rural Bus.
Excess Cash =( Branch Cash- Min.Cash)*HOBR
NPA = Incremental NPA * HOBR
Special Incentives
NPA Recovery = Cash Recovery * A1
SB Deposits = SB Deposits * A2
Current Deposits = Current Deposits * A3
Fee- Based Income = Fee Income * A4
A1+A2+A3+A4=1 & Total Incentive = HO Surplus

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