Banks, Loans and its Mediators


Historically, the story of banks also represents the story of exchange. The concept of banking came into being when ancient empires had to purchase foreign goods and services. Instead of paying in the form of counter-services or goods, its value was compensated with something that could be exchanged far more efficiently, money, either in the form of precious metals or today, as we know it, paper bills. 

While modern banking is a multi-profit institution, at its very centre, they are essentially lenders. The major source of a bank’s income comes through the borrowing of money from depositors for a rate of interest. At the same time, the same is borrowed by borrowers, who have to pay a higher rate of interest. Essentially, the profit a bank earns is the difference between the rates of interest. 

In the following article, let us consider the three ways in which banks earn a profit and how this process, in turn, benefits agents. 

Diversification of Banks

The idea of diversification of banks was introduced by Harry M. Markowitz, an American economist, as well as the Nobel Prize winner for his paper on ‘portfolio selection’. Banks generate income through several means, including depositors, debts, equity holders, loans, mortgages, commodities, etc. By allocating funds for various products such as stocks, bonds, currencies etc., a diversified selection of portfolios allows banks to enhance the quality of the services they are putting forth and reduces the need for external financing.

How Banks Generate an Income Through Loans

Despite the diversification of banks, the most income-generating practices of a bank may be divided into two basic processes:

Interest Income: The generation of an interest income is most likely the primary means of how banks earn money. The process is relatively simple. Depositors who do not have an immediate need for cash entrust their money with the bank. In return for the deposit, the bank compensates the depositor with a specific rate of interest and assured security for their deposit.

In turn, the bank uses this money to fund borrowers, who pay higher rates of interest to the bank in comparison to what the depositor receives from the bank. 

How Important are the Interest Rates 

As clarified above, the rate of interest is the primary driver of the income of a bank. Essentially, on a short-term basis, the rate of interest helps maintain a healthy economy and is associated with controlling inflation. On a long-term basis, the interest rates are determined by supply needs. However, the balance remains where a bank can extract a higher rate of interest from its borrowers than what is paid to the depositors. 

The Mediators: The Loan Officers 

A loan officer is a mediator, they represent a bank or a financial institution and assist borrowers, helping them acquire a loan. Their responsibilities include reviewing applications for loans in order to determine who is eligible and who is not. They are also involved in educating and making consumers aware of their financial responsibilities and the stipulations of the agreements, verifying information provided by them and mediating between the institution and the client. 

How Do Agents Earn From Loans 

Before addressing the salary of a loan officer or a DSA (Direct Selling Agent), it is necessary to highlight that banks provide different kinds of loans. These include loans against property, gold and car loan and home loan. The salary of an agent is not fixed and is dependent on the type of loan that the consumer is interested in and the amount. An approximate share of the total amount loan agents receive as commission is charted below:

  1. Agents often make a fair amount by selling loans against property. In the Indian market, for selling loans worth Rs. 1 Cr, they receive 0.30% payout, and for those above Rs. 1 Cr, 0.50% is offered as commission. 
  2. If the financial institution works with gold and vehicles as assets, the loan agents can make about 0.20% commission for all deals worth Rs 1 Cr and 0.30% for anything more than Rs. 1 Cr. 
  3. Of the three types of loans available, the home loan is the most sought-after loan. Agents generally make large profits from these, which includes about 020% commission for deals up to Rs 1 Cr and 0.25% for anything thereafter. 

Thus, it is safe to assume that the primary source of income in any financial institution, including diversified banks, is the selling of loans, which may be against property, gold or vehicle and home loans. While the process involved is rather simple in theory, it requires the expert counsel of direct selling agents or loan agents who are responsible for assuring the quality of the clients’ experience, the smooth running of the process, as well as mediating between the financial institution and the client.