The document discusses economies of scale and scope in banking. It provides examples of State Bank of India utilizing economies of scale and scope. For economies of scale, SBI provides different ways for consumers to use banking services like deposits and payments, which increases efficiency. For economies of scope, SBI offers multiple financial services at one location like deposits, loans, and accounts, which reduces costs by spreading them across product lines. Both scale and scope allow banks to maximize profits.
2. Overview of Economics
Ever wonder why food costs rise when gas prices hike?
Ever wonder why you can’t get a good interest rate on your savings account?
All of these phenomena can be explained through economics.
A study of economics can describe all aspects of a country’s economy, such as how a country uses
its resources, how much time laborers devote to work and why businesses succeed or fail.
Economics is the study of the production and consumption of goods and the transfer of wealth to
produce and obtain those goods.
Economics explains how people interact within markets to get what they want or accomplish certain
goals. Since economics is a driving force of human interaction, studying it often reveals why people
and governments behave in particular ways.
There are two main types of economics: Microeconomics and Macroeconomics. Microeconomics
focuses on the actions of individuals and industries, like the dynamics between buyers and sellers,
Macroeconomics, on the other hand, is concerned with the economic activity of an entire country
or the international marketplace
3. BANKING IN INDIA
Banking in India in the modern sense originated in the last decades of the 18th century. The first
banks were Bank of Hindustan (1770-1829) and The General Bank of India, established 1786.
The largest bank, and the oldest still in existence, is the State Bank of India, which originated
in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal.
This was one of the three presidency banks, the other two being the Bank of Bombay and the
Bank of Madras, all three of which were established under charters from the British East
India Company.
4. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India in 1955.
In 1969 the Indian government nationalized all the major banks that it did not already own and
these have remained under government ownership.
They are run under a structure known as 'profit-making public sector undertaking' (PSU) and
Are allowed to compete and operate as commercial banks.
The Indian banking sector is made up of four types of banks, as well as the PSUs and the
State banks, they have been joined since the 1990s by new private commercial banks and a
number of foreign banks.
Generally banking in India was fairly mature in terms of supply, product range and reach-even
Though reach in rural India and to the poor still remains a challenge.
The government has developed initiatives to address this through the State Bank of India
expanding its branch network and through the National Bank for Agriculture and Rural
Development with things like microfinance.
This also included the 2014 plan by the then prime minister to bring bank accounts to the estimated
40% of the population that were still unbanked.
5. Economies of Scope
Economies of scope are conceptually similar to economies of scale. Economies of scope refers to
lowering the average cost for a firm in producing two or more products.
There are two types of economies of scope, Global and Product-Specific.
To define global economies of scope it is necessary to compare the cost of both joint production
and separate production, assuming a given scale for each product. For a given product mix, if the
total cost from joint production of all products in the product mix are less than the sum of the
cost of producing each product independently.
Product-specific economies of scope refers to economies that arise from the joint production of a
particular product with other product. If production efficiency can be enhance by adding a
particular product to a given product mix, than product-specific economies of scope exist.
Think "produce/deliver a differentiation or varied products/services
By using much of what you already have." Diversification
6. Economies of Scope in Banking Industry
Banks have economies of scope when they offer multiple financial services at one place. Offering
checking accounts, loans, and investment services together allows a bank to spread the cost of its
branches, staff, automatic teller machines, and its Internet site over all products instead of having
a separate infrastructure for each product. The costs of providing each of these services
individually would be much greater than the costs of providing all services together.
Real life example
State Bank of India (SBI) provides multiple financial services at one place only like.
Acceptance of deposits (on term or at demand etc.) with or
without the interest rate
Purchase and Sale of money (including foreign currency
exchange)
Advancement of Loan
Opening and management of accounts
Providing services on the securities market via the Treasury
Department
Providing services of keeping, cashing and transportation of
money and values
Contracts of issuance and service of banking cards
Acceptance of payments in favor of beneficiaries (utilities,
State taxes, etc.)
As these such services are provide at one place only. Through the SBI is able minimize its cost of
providing services to the consumer and this helps in profit maximization.
7. Economies of Scale
Economies of scale is doing things more efficiently with increasing size or speed of operation.
Or we can say This refers to how an organization can focus on reducing the average per unit cost
of its products/services by increasing the scale of production for a single product type.
Economies of scale often originate with fixed capital, which is lowered per unit of production as
design capacity increases. In wholesale and retail distribution, increasing the speed of operations,
such as order fulfillment, lowers the cost of both fixed and working capital.
Other common sources of economies of scale are purchasing (bulk buying of materials through
(long-term contracts), managerial (increasing the specialization of managers), financial
(obtaining lower-interest charges when borrowing from banks and having access to a greater
range of financial instruments), marketing (spreading the cost of advertising over a greater
Range of output in media markets), and technological (taking advantage of returns to scale in the
production function).
Each of these factors reduces the long run average costs (LRAC) of production by shifting the
short-run average total cost (SRATC) curve down and to the right.
Think "produce/deliver more of a given product or service
By utilizing fewer or same amount of resources." Efficiency
8. Economies of Scale in Banking Industry
Banks have economies of scale when they provide different ways for consumer to use a particular
financial service. Like cash deposits, transfer of payments etc.
Real life example
State Bank of India provide different ways to do banking like Internet banking, Phone banking,
Mobile banking etc.
SBI accepts cash deposits by different ways like direct cash deposits, through cheque, e-transfer
(NEFT& RTGS), Cash deposit machines.
SBI also provide different ways of transfer of payments like direct cash payout, Cheque payment,
internet banking, debit card, credit card.
As these services provide comfort to public to do banking transactions easily and this leads
increase in inflow and outflow of cash in banks. When there is increase in inflow of cash then the
bank can lend more money in form of loans to public and this leads to profit maximization.
9. Conclusion
Both economies of scale and economies of scope are conceptually the same, and the nature
of these two can change the structure of the competition in the industry over a time,
as well as the profitability of supplying to consumers. They both provide companies ways of
increasing the market share and being competitive. But the basic difference in both of
them is Economies of scale focuses on Efficiency while the Economies of scope focuses on
Diversification of product or services.
11. Acknowledgement
I am using this opportunity to express my gratitude to everyone who supported me
Throughout the course of this economics project. I am thankful for their aspiring guidance,
invaluably constructive criticism and friendly advice during the project work. I am sincerely
grateful to them for sharing their truthful and illuminating views on a number of issues related
to the project.
I express my warm thanks to Mr. Vishwas Gupta for giving me this project. And all the people
who provided me with the facilities being required and conductive conditions for my
economics project.
Thank you,