Sources of Banks Fund

CH INSTITUTE OF MANAGEMENT & COMMUNICATION

Submitted To-Prof. Aniruddha Durafe

Submitted By-Rajkamal ParohaVijaypal Singh

Presentation Topic: Sources of Bank FundPresentation Topic: Sources of Bank Fund

Introduction TO BANK

• A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses

SOURCES OF BANKS FUND

• A bank is a business firm. Its main aim is to earn profit. In order to achieve this objective it provides services to the customers.

• It offers a variety of interest bearing obligations to the public. These obligations are the sources of funds for the bank and are shown on the liability side of the balance sheet of a bank.

SOURCES OF BANKS FUND

The main sources which supply funds to a bank are as follows:

Bank’s Own Funds.Borrowed Funds

BANK’S OWN FUNDS

• Bank’s own funds are mainly of three types;

Paid up capital.Reserve fund.Portion of undistributed profit.

BORROWED FUNDS

The borrowed capital is a major and an important source of fund for any banking business. It mainly comes from deposits which are accepted on varying terms in different accounts.

Accepting DepositsBank’s borrowing is mostly in the form of deposits.

Bank collects three kinds of deposits from its customers.

Current or demand deposits.Saving deposits.Fixed or time deposits.

BORROWED FUNDS

Borrowing from central bank

The commercial banks in times of emergency borrow loans from the central bank of the country.

The central bank extends help as and when financial help is required by the commercial banks

BORROWED FUNDS

Other Sources

Bank also raise funds by-Issuing bonds.DebenturesCash certificates.

Though it is not common but is a dependable source of borrowing.

Factors determine the cost of sourcing of bank funds

Cost of funds

Cost of funds are the expenses incurred on obtaining funds from various sources in the form of share capital, reserves, deposits, and borrowings

Thus, it generally refers to interest expenses .

Lower the cost of funds, higher the profitability


Cost of Interest Rate Risk

The risk of loss due to a change in interest rates. Interest rate risk is important to transactions like interest rate swaps.

In such a transaction, the party receiving the floating rate will receive a smaller amount should the floating rate decrease. Interest rate risk is also important to bonds; if interest rates rise, the prices of bonds fall.


Spread

Spread is defined as the difference between the interest received (interest income ) and the interest paid (interest expense ) in funding.

Higher spread indicates more efficient financial intermediation and higher net income so if the interest income is more then cost of capital will low and banks always sources fund for gain certain profit.

Thus, higher spread leads to higher profitability and decrease the cost of funding.


Nature of Deposits

Deposits trade with the banks are of various types like time deposits, demand deposits, short – term deposits, etc.

larger demand deposits /short – term deposits also influenced the cost of funding


Yield on funds

The funds raised by the bank through various sources are deployed in various assets.

These assets yield income in the form of interest.

So, higher the interest, greater the profitability and if yield of fund is good then cost of fund will low.

Sources of Banks fund where Cost is minimum

• The primary source of funding of banks accepting deposits by the public’s is the best source of funding and it also have very low cost in comparison to all other sources so:-

Current Deposit

Saving Deposits Recurring Deposits

Some reasons

Expenses incurred on obtaining funds from accepting a deposits, generally low. Lower the cost of funds, higher the profitability.

The funds raised by the bank through deposits are deployed in various assets. These assets yield income in the form of interest. So, higher the interest, greater the profitability and then cost of fund will low.

Reasons continued

Deposits trade with the banks are of various types like time deposits, demand deposits, short – term deposits, etc. larger demand deposits /short – term deposits also influenced the cost of funding. Means as per the types of deposit cost may be differ.

Bank allows very low rate of interest on deposits and charged high rate of interest on lending so spread is also higher. Higher spread indicates more efficient financial intermediation and higher net income so if the interest income is more than cost of capital will low and banks always sources fund for gaining certain profit. It results in decreasing the cost of funding

Reasons continued

Interest rate risk is important at the time of sourcing of bank funding. The risk of loss due to a change in interest rates.

Interest rate risk is important to transactions like interest rate swaps. In such a transaction, the party receiving the floating rate will receive a smaller amount should the floating rate decrease.

So risk involvement cost is also a major concern of thinking for banks at the time of funding.

conclusion

• If we analyze others sources of funding then they are more risk full and risk involvement cost is also high and bank have to pay high rate of interest for funding.

• So as per our analysis the primary source of funding accepting public deposits is the good source of banks funding and it also involved very less operating and risk involvement cost.

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Sources of Banks Fund