Understanding of working of Banks and Important parameter- 28.03.2020

1. Banks in layman language, borrow money from different sources and lend to others. That means first they borrow money, then they lend(Advances) in the market. We all know that we need to give interest when we borrow money and we earn interest when we lend money. So, banks here also earn money accordingly.

2. The difference of Interest given on borrowing and Interest earned on lending ( Advances), is the total income of any Bank.

3. Source of Borrowing:

a) Saving Deposit and Current Deposit- The money we keep in banks.
b)  Capital Market( Bonds and Debentures)
c) From RBI ( Repo rate)
d) Other sources

So, the Bank’s cost of borrowings will depend upon at what rate, it is getting money from the above sources. We know, the cheapest source among the above is Saving Deposit and Current Deposit. Therefore, if the contribution of CASA(Current Account and Saving Account) is more, it will be good for banks. As more CASA leads to lower cost of borrowing, which ultimately increases the income of banks.

Repo Rate is the rate at which RBI gives loans to banks or the rate at which banks borrow money from RBI. If the Repo rate is decreasing that means banks’ cost of borrowings is also reducing. That is why to boost the economy, RBI always decreases the repo rate so that cheap loans can be given by banks in the economy to create more demand.

Now, as we have understood the functioning of banks, below is the comparison of India’s two leading banks i.e. HDFC Bank and Kotak Bank, here we have tried to explain the total size of borrowing and advances of both banks and how much money they earn from banking operation i.e Interest Income. Please note the numbers of FY2018-19 are taken for comparison.

Kotak Mahindra Bank

A) Total Borrowed Money = 2,91,262 Cr

B) Total Advance Given = 2,43,461 Cr

C) Interest given on Borrowed Money = 15,186 Cr

Cost of borrowing = 15,186/2,91,262= 5.21%

D) Interest Earned on Advances given = 22,486 Cr

Income on Advances = 22,486/2,43,461= 9.24%

E) Total Income = D-C= 7300 Cr.

F) CASA= 52.74%


A) Total Borrowed Money = 10,40,225 Cr

B) Total Advances Given = 8,19,401 Cr

C) Interest given on Borrowed Money = 50,278 Cr

Cost of borrowing = 50,278/10,40,225= 4.83%

D) Interest Earned on Advances given = 78,179 Cr

Income on Advances = 78,179/8,19,401= 9.54%

E) Total Income = D-C= 27,901 Cr.

F) CASA= 42.93%.

So, we can conclude that the size of the HDFC Bank is almost 3.35x times more in terms of loans given in the economy. However, the CASA of Kotak Bank is better than HDFC Bank.

Any questions and doubts can be asked in the comments section.

    Total Size of SBI advances in the market is 21,00,000 Cr. This is almost 2x size of HDFC Bank.