Banks do operate at the full level through both – funded and non-funded sources. While loan-based products are regarded as funded businesses, several non-funded businesses are being conducted by the banking industry too.
Today, banks no longer depend just on funded business. Non-funded businesses are making equal contributions towards their profit. Banks have been providing non-funded facilities to their customers against some charges and commissions. Non-funded business can be simply understood as those facilities where banks don’t receive direct funds around. It is important to realize the fact that banks don’t meet their liability for the payment towards their party.
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Following are the major non-funded products that banks do operate around.
Letter of Credits
Also known by the name of documentary credit, or banker’s commercial credit – it is the letter of an undertaking which has a payment mechanism that is used in international trade to provide an economic guarantee from a bank, which has a good reputation to the exporter of the goods. In a simple sense, it is the form of guaranteeing that buyer’s payment to the seller will be received on time and for the correct amount. Banks do take certain charges on this.
It is a kind of guarantee from some lending organization around. The bank guarantee will signify how the lending institution ensures that the liabilities of a debtor will be met. So, in other words, so that if the debtor fails to perform any obligation the bank will cover it. Bank Guarantee is rapidly used in various developmental projects, tenders, and other service-related tasks across the country.
Remittance can be understood as the process of transferring money from one place to another. Generally, it explains as the process of transferring money by a foreign worker, or the member of the diaspora community or citizen having familial ties abroad, for household income in their home country. In developing countries like Nepal, Bangladesh, Pakistan where a large number of human power works abroad – remittance is pretty common. They send their money from a nearby financial institution, which the beneficiary receives from the host nation. During this transaction, banks do get to make a certain level of earning.
Foreign Exchange is an important non-funded business that banks operate from their level. It is the commission or the fee charged by banks for exchange the foreign commission. So, the bank buys foreign currencies at one rate and sells them at other. The difference would be the income for banks. Every time, when banks operate through foreign currencies, customers need to buy them. This gain can be regarded as foreign exchange gain, which is indeed a great source of income for the bank. The higher the transactions of foreign currencies, the higher will be their gain.
Banks have been providing various IT-related products like Mobile Banking, Internet Banking, QR Codes, etc. Although, they have to pay to the service provider that is the software company, from whom they purchase, no doubt they have been obtaining some commissions from the differences too. Annual deduction of ATM card charges, mobile banking charges are the income that targets generated from customer’s account on regular basis. Though the charges seem to be nominal, there are large quantities who have been availing these services which ultimately ensure a bigger source of income for them.
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Meanwhile, banks also get involved in purchasing the shares – be that through primary investment or secondary investment. These forms of share trading do have restrictions, and cannot be invested as that of the individual investor, but do have some spaces around too. Banks, getting involved in all these will ultimately create income. Though there could be the possibility of losses too, a wise player earns. The Treasury department of the bank looks into these aspects.
That is not all limited to these. Banks have been providing other services as well like ASBA, bancassurance, etc. through which they do make some sort of income too. The charges that they take from providing services related to Government Transactions, Pension posting, SWIFT charges, etc are the additional income that they manage to generate through the banking operation-based task too. There are incomes that banks can obtain from forward too.
What has been perceived by large masses is that banks do make they are earnings just from buying and selling the money. However, the case is not limited to this, there are huge other potential spaces where banks can work out. Non-funded businesses are one important place for banking operation. Today, banks don’t limit themselves to the funded source of income but have been getting aggressively involved in various non-funded incomes too. Letter of Credit and Bank Guarantee has been providing huge income to banks and has been under the charm. Apart, there are other sources too through which banks do earn a huge sum – that probably was not known to others prior.
(Mr. Dwaipayan Regmi is a banker.)
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