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The profitability ratio of bank has declined over the years due to
- a)Lower interest on government borrowings from banks.
- b)Subsidisation of credit to priority sector.
- c)High expenditure resulting from overstaffing and mushrooming of branches.
- d)All of the above.
Correct answer is option 'D'. Can you explain this answer?
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The profitability ratio of bank has declined over the years due toa)Lo...
Reasons for the decline in profitability ratio of banks
Lower interest on government borrowings from banks
- Banks earn interest income by lending money to the government.
- In recent years, the interest rates on government borrowings have decreased, leading to lower interest income for banks.
- This has contributed to the decline in profitability ratio of banks.
Subsidisation of credit to priority sector
- The government has mandated that banks provide a certain percentage of their loans to the priority sector, which includes agriculture, small and medium enterprises, and other weaker sections.
- These loans are often given at lower interest rates or with government subsidies.
- While this is a positive step towards inclusive growth, it has also resulted in lower interest income for banks, thereby impacting their profitability ratios.
High expenditure resulting from overstaffing and mushrooming of branches
- Banks often have a large workforce and multiple branches to cater to the needs of their customers.
- However, with the advent of technology and digital banking, the need for physical branches and staff has decreased.
- Despite this, banks continue to have a large workforce and multiple branches, leading to high expenditure and lower profitability ratios.
Conclusion
- The decline in profitability ratio of banks can be attributed to multiple factors, including lower interest on government borrowings, subsidisation of credit to the priority sector, and high expenditure resulting from overstaffing and mushrooming of branches.
- Banks need to adopt a more efficient and cost-effective approach to remain profitable in the long run.
Lower interest on government borrowings from banks
- Banks earn interest income by lending money to the government.
- In recent years, the interest rates on government borrowings have decreased, leading to lower interest income for banks.
- This has contributed to the decline in profitability ratio of banks.
Subsidisation of credit to priority sector
- The government has mandated that banks provide a certain percentage of their loans to the priority sector, which includes agriculture, small and medium enterprises, and other weaker sections.
- These loans are often given at lower interest rates or with government subsidies.
- While this is a positive step towards inclusive growth, it has also resulted in lower interest income for banks, thereby impacting their profitability ratios.
High expenditure resulting from overstaffing and mushrooming of branches
- Banks often have a large workforce and multiple branches to cater to the needs of their customers.
- However, with the advent of technology and digital banking, the need for physical branches and staff has decreased.
- Despite this, banks continue to have a large workforce and multiple branches, leading to high expenditure and lower profitability ratios.
Conclusion
- The decline in profitability ratio of banks can be attributed to multiple factors, including lower interest on government borrowings, subsidisation of credit to the priority sector, and high expenditure resulting from overstaffing and mushrooming of branches.
- Banks need to adopt a more efficient and cost-effective approach to remain profitable in the long run.
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The profitability ratio of bank has declined over the years due toa)Lower interest on government borrowings from banks.b)Subsidisation of credit to priority sector.c)High expenditure resulting from overstaffing and mushrooming of branches.d)All of the above.Correct answer is option 'D'. Can you explain this answer?
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