Question

Arjun deposits Rs.25,000 for an interest of 5% in SBI. His friend Deepak needs money to start a retail shop. Arjun recommends SBI. Deepak fulfills the requirement of the bank and gets Rs.15,000 as a loan for an interest rate of 8% per annum. Diya his sister also helps her brother by taking a loan of Rs,10,000 from the same bank. What is the profit of the bank from this transaction? For the bank to earn double the profit how much interest it must collect from the borrowers.

Answer 1

Arjun's deposit represents a liability for the bank and it must pay 25,000 x 5% = 1,250 per year in interests to Arjun.

Deepak's and Diya's loans represent assets for the bank and it should collect 25,000 x 8% = 2,000 per year in interest charges from them.

The bank's profit = 2,000 - 1,250 = 750 or 3%.

If the bank would like to earn double that profit (6%), it should charge 11% interest rate resulting in 2,750 interest charges per year. Bank's profit = 2,750 - 1,250 = 1,500.