Any kind of a organized financial model of borrowing and lending essentially has to keep three factors in mind; (i) efficient but low-cost running of the institution, (ii) a healthy balance of depositors and borrowers with lower chances of maturity mismatch and (iii) addressing the issues of faith (perceptions of risk, trust, timely repayment etc) of the targeted clientele to ensure steady business over time.

We may be critical about the high interest rates of the banking sector in India, but the Net Interest Margin (NIM) of banks has actually weakened ever since the crisis. NIM is a measure of the profitability of a bank and is calculated as the ratio between difference in the interest income earned on loan advances and average earning assets of the bank, and the amount of interest paid to depositors.

Do you have money lying idle in your bank account? It will earn a piffling 4%, perhaps even 6%, in a year. Put it in a fixed deposit or a debt fund and you can earn 9-9.5%. But given the high inflation, the real rate of such investments is barely above the zero mark.