ECONOMIC WISDOM FOR BABIES 20

By W.A. WIJEWARDENA

WHERE HAS ALL THE INCOME OF BANKS GONE?

All the members of the Chamber were vociferous and unanimous. Banks were
making profits at the expense of business and industry. When they were struggling
very hard to survive in a market where profits have thinned, banks have been making
profits, not in millions, but in billions. How could that be explained, unless one
assumes an immoral drive on the part of banks to exploit customers? These agitated
sentiments were expressed aloud and in a bitter tone at the annual conference of the
Chamber.
I was a panellist at the main conference and all the other members of the panel
were sympathetic toward businesses. “Every year, profitwise, banks boast of their
doing better than the previous year. But, we observe that their customers have either
reduced profits or made losses. This is mainly due to the high interest rates they
charge from and exorbitant commissions and charges they levy on customers” One
panellist said.
He was joined by another panellist. “The authorities should control banks’
profits, charges and commissions. They should not be given a free hand in
determining their own rates”
The third panellist said that in such and such country, the authorities have
controlled the commissions and charges. He questioned why the authorities in his
home country did not pay attention to that vital requirement.
When my turn came, I asked the simple question, “Do you think that banks
should not charge interest or other charges for their services?”
“No. We don’t say so” One of the panellists answered. “All we say is that they
should be reasonable. When they charge interest or commissions, they should not
exploit customers”
“Why do you say that banks exploit their customers?” I asked again. Another
panellist answered that question.
“That’s because bank charges are very high. Why can’t they reduce charges
and earn only a reasonable amount of profits?”
“What’s your reasonable rate of profits?” I asked again.
“That is, when we businessmen make a given rate of profits, banks should not
make more than that rate”
“What’s the rate of return on assets in business and industry?” I asked. “Zero
percent? Five percent? Ten percent?”
“On average it’s between ten to fifteen percent” Somebody from the audience
said.
“OK” I said. “But, do you know that the return on assets of a bank is about
one percent. Percentagewise, their rate of profits per unit of assets is very low. In
absolute terms, they are billions. They make those billions using a vast asset base, in
most cases, several percentage points of GDP. So, as a percent of the assets, it’s very
much less than what the businesses make”
This was a revelation to both panellists and those in the audience. They cast a
puzzled look at me, as if I spoke some alien language.
“Banks make money through a number of ways. The largest segment is the
interest income. In Sri Lanka, this amounts to 85 to 90 percent” I explained. “But to
earn interest, they’ve to pay interest, either to depositors or investors in bonds. Interest

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expenses account for about 55 percent of their gross income. So, we can roughly say
that depositors take about 55 percent of the income of banks”
“Then, what happens to the balance 45 percent?” Somebody asked. “Is it not
taken by the owners of the bank?”
“Out of the balance 45 percent, employees take about 10 percent” I continued.
“Of the balance 35 percent, about 20 percent is paid as costs of supplies, as rents for
buildings, as electricity charges, as water charges, as costs of stationery and papers,
and as legal fees etc”
“Then, what happens to the balance 15 percent?” The member who asked the
previous question asked.
“Banks are taxed in numerous ways by the government. Of the net profits,
they have to pay a profit tax of 35 percent. In addition, they have to pay a value added
tax of 20 percent on the value they have added. That covers wages and profits. In this
manner, banks altogether pay about 10 percent of their income to the government. It is
only the balance five percent which is truly owned by shareholders. So, if the
exploitation drive is correct, then, the exploiters are the depositors, employees, other
service providers and the government. That can’t be the case. Can it be?”
“But banks charge high commissions, fees and charges. They make profits out
of that” A panellist commented.
“The commission income is a very minor item in the income statement of a
bank. It’s not more than two percent in most cases” I said.
“But, then, why are all the people critical of banks?” Somebody in the
audience asked.
“Mainly because, banks are large, can use their discretion to give us a loan or
not to give and, at the end, when we default, take over our assets even without going
before courts. So, we’re normally scared of banks. But, it’s the banks which
ultimately help us to do business or recover from a business mishap” I explained.