Five smart things to know about fee and fund-based products

— A bank or NBFC offers two types of products: fee-based and fund-based. The proportion between the two impacts the amount of capital needed and income earned.

— Loans are fund-based products. To make a loan, a bank or NBFC has to borrow money and ensure that the cost of borrowing is less than the cost of lending.

— When it sells a mutual fund or insurance product, it earns a fee or commission for doing so. These are third-party products, which do not require the bank to fund them.

— Fund-based products are also subject to capital adequacy norms and tighter regulation for non-performing loans.

— The profit margins in fee-based products may be lower, but since they do not require high capital investment, they are profitable. Existing infrastructure is usually extended to offer them.