# Service Costing for Financial Institutions
## Background
Banks, NBFCs and similar financial institutions provide finance to individuals and businesses in various loan products. Costing is needed to know the cost of processing each loan so the institution can fix interest spreads and processing fees rationally.
## Typical Loan Products Offered
| Loan Type | Borrower / Purpose |
|---|---|
| Home Loan | Purchase / construction of house |
| Educational Loan | Higher studies (often with collateral or co-signer) |
| Car Loan | Vehicle purchase |
| Personal Loan | General unsecured loan |
## Cost Classification
### 1. Costs of the Respective Department
- Each loan product is usually handled by a dedicated department/team (Home Loan Dept, Personal Loan Dept etc.).
- All costs incurred by that department (salary of staff, departmental expenses) are directly charged to that department.
### 2. Common Overheads of All Departments
- IT systems shared by all departments
- HR, finance, legal, top management salary
- Branch infrastructure
Recovery basis: apportioned on a rational basis such as:
- Number of loan applications processed by each department, or
- Loan amount disbursed by each department.
## Cost Per Loan / Per Rupee Lent
```
Cost per loan in Dept X
= (Direct cost of Dept X + Apportioned common OH)
─────────────────────────────────────────
Number of loans processed by Dept X
```
## Why This Matters
Knowing the cost per loan helps the institution:
- Fix processing fees that recover the cost
- Decide whether a product line is profitable
- Allocate resources between products