Question

Over the last five years, Bank of Bharat has seen the number of its retail customer accounts drop by over 40 percent. Over the same period, the share price of Bank of Bharat has increased by more than 80 percent. This amazed a few investors, who believe that a bank's share price should drop if its number of customers drops. Which of the following, if true over the last five years, best accounts for the observed movement in the price of Bank of Bharat's equity shares?

• A. Two years ago Securities and Exchange Board started an investigation on the bank for accounting irregularities, but last year the company was cleared of all charges.
• B. The bank recently implemented a highly publicized program for free home loans.
• C. The bank has been switching its customer base from retail customers to commercial customers, which now accounts for over 75 percent of the bank's revenues.
• D. There have been many new banks, which have entered retail banking business over the last five years.
• E. The bank is known to be the best paymaster in the industry.

Hint:

When faced with a paradox question (e.g., "X went down, but Y went up"), look for an answer that introduces a new piece of information showing that X and Y are not as directly related as assumed, or that a third, more powerful factor is driving the outcome.

Answer 1

The Correct Option is C

Step 1: Identify the paradox that needs to be resolved.
The paradox is that two seemingly contradictory things happened at the same time: the number of retail customers (a supposed indicator of health) decreased significantly, while the bank's value (share price) increased dramatically. A good explanation must resolve this contradiction by showing how these two events can logically coexist.
Step 2: Analyze each option to see if it resolves the paradox.
(A) Being cleared of charges would give the stock a boost, but this is a single event from "last year" and is unlikely to account for a sustained 80% increase over five years. It doesn't explain the drop in retail customers. (B) A free home loan program would aim to increase retail customers, which contradicts the facts given in the premise. This deepens the paradox rather than solving it.
(C) This option resolves the paradox perfectly. It explains that the drop in retail customers was a deliberate strategic shift, not a sign of failure. It also explains the rise in share price by stating that the new focus—commercial customers—is far more profitable, generating over 75% of revenues. The bank became more valuable by focusing on fewer, but higher-value, customers.
(D) Increased competition explains why retail accounts might drop, but it provides no reason why the bank's share price would rise. In fact, losing customers to competition should logically lead to a lower share price. This only explains one half of the paradox
(E) Being a good paymaster relates to expenses, not revenues. High salary costs could potentially reduce profits and negatively impact the share price. This is irrelevant to resolving the paradox.
Step 3: Determine the best explanation.
Option (C) is the only one that logically connects and explains both parts of the paradox: the decline in one metric (retail accounts) and the rise in another (share price) by introducing a third, overriding factor (a strategic shift to more profitable commercial clients).
Therefore: The bank switching its customer base to more profitable commercial clients best accounts for the observed movements. \[ \boxed{\text{(C)}} \]