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Sources of fund in Chapter Contents

commercial banks
1. Role of funds in banking industry
2. Deposit accounts
3. Issuing securities
4. Borrow from interbank market
5. Borrow from Central bank

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Role of funds in banking industry

Role of funds in banking industry (cont.)

 Sources of fund in a bank include:  Which sources of fund account for the biggest
– Debt and Equity (like other types of non – financial proportion in a commercial bank’s liabilities?
firms) – Debt, especially deposits from customers
– Debt:  Which source of fund is most important for
 Issuing debt securities
bank’s business?
 Borrow from interbank market
 Borrow from Central bank – Debt, especially deposits from customers
– Equity: – Why? Because banks cannot make loans without
 Common shares debt, especially without deposits
 Preferred shares
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Debt to Total Liabilities of ACB, Sacombank Debt to Total Liabilities of ACB, Sacombank
(STB) and Eximbank (EIB) in 2008 (STB) and Eximbank (EIB)in 2009
Billion VND Billion VND

Debt to Debt to
Total Total Common Total Total Common
Banks Total Banks Total
Liabilities Debt Shares Liabilities Debt Shares
Liabilities Liabilities
157.77
ACB 105.306 97.539 6.355 92.62% ACB 167.881 7.814 93.97%
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STB 68.556 60.681 5.115 88.51% STB 98.473 88.184 8.078 89.55%

EXIM 48.247 35.403 4.300 73.37% EXIM 65.448 52.095 8.800 79.59%
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Debt to Total liabilities of banks 2006 - 2018

100,00%
Debt to Total Liabilities of ACB, Sacombank Role of funds in banking industry
(STB) and Eximbank (EIB) in 2010
(cont.)
Billion VND 90,00%

Debt to
Total Total Common 80,00%
Banks Total
Liabilities Debt Shares
Liabilities ACB STB

70,00%
ACB 205.102 193.726 9.376 94.45%
EIB

STB 141.798 128.165 10.851 90.38% 60,00%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

EXIM 131.110 117.600 10.560 89.69% Sources: Financial reports of ACB, STB and EIB
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Deposit accounts Current account

 Banks provides many types of deposit accounts  Also known as checking account
to satisfy customers’ demands  Current accounts allow deposits and
– Current account withdrawals.
– Time deposit  Current accounts are very liquid and can be
– Other types of deposit product accessed using checks, automated teller
– …. machines (ATM), bank cards, and electronic
debits
 A current account differs from other bank
accounts in that it often allows for numerous
9 10 withdrawals and unlimited deposits

Who can use current account? Characteristics of Current account

 All types of customer who wish to use banks’  Are highly liquid
payment services  Allows unlimited deposits and withdrawals
– Individuals  Mainly used for banks’ payment services
– Institutions – Bank cards
– Corporations – Fund transfer
– Pay bills,…
 May be charged a monthly small fee for
maintaining the account
 Provides very low interest rate (sometimes
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banks do not pay interest)

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Why do banks pay low interest

rate for current accounts? Interest calculating for current account

 Because clients can withdraw money at anytime
 Bank can not plan to use the fund on
current account  bank can not earn profit  pay
low interest
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 General rules for calculating interest:
– Use simple interest on a daily basis
– Depend on the balance at the end of the day
– Depend on the number of day the account
balance is held (days has balance)
– Pay interest for current account on a specific
day, usually on 26th every month
 It means that the bank has to calculate interest by
14 the end of 25th every month before paying interest
on 26th

Interest calculating for current account Current account example

n Day Account balance (USD)

Interest amount =  Bi N i r
i1 26/03/2020 25.000

Where: 29/03/2020 39.000

• Bi: the account balance at the end of day i
05/04/2020 30.000
• Ni: the number of days Bi is held
• r: interest rate per day 19/04/2020 37.000
Interest rate per annum 25/04/2020 33.000
Interest rate per day =
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Suggested solution
Day Account balance Days balance Di x Ni
Suppose: (Di) is held (Ni)
26/03/2020 25.000 3 75.000

 The interest rate is 1%/annum 29/03/2020 39.000 7 273.000

 Days in year: 365 days 05/04/2020 30.000 14 420.000
 Bank calculates interest on 25th every month
19/04/2020 37.000 6 222.000
 Question:
– What is the interest amount on current account the 25/04/2020 33.000 1 33.000
bank client receive for April 2020? 1.023.000

Interest paid $28,027

for March
17 18 2020

Example 1 Suppose:

Day Transaction Amount (USD)  The interest rate is 0,75%/annum

26/04/2020 Starting balance 75.800  Days in year: 365 days
28/04/2020 Cash withdraw 9.000
 Bank calculates interest on 25th every month
 Question:
07/05/2020 Receive monthly salary 14.600
– What is the interest amount on current account the
bank client receive for May 2020?
12/05/2020 Money transfer 17.000
22/05/2020 Deposit 2.700
29/05/2020 Cash withdraw 5.000
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Days
Amount Account
Day Transaction balance is DxN
(USD) Balance
held
Time deposit

 A time deposit is an interest-bearing

bank deposit account that has a specified
maturity, such as a Certificate of Deposit (CD)
 Bank customers must hold funds in time
deposits account for the fixed term to receive
the interest rate paid.

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Who can use Time Deposit? Characteristics of Time Deposit

 Customers who have a good plan to invest fund
and wish to earn high interest rate
 Can Individual and Corporate customers use
Time Deposit?
– Individuals: Definitely
– Corporations: Yes but usually under a specific
contract (term deposit contract)
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 Are not liquid
– Funds must be held until maturity
– Funds can not be withdraw before maturity unless a
penalty is paid
– What is the penalty?
 Banks may impose a fee for withdrawal
 Banks allow customers to withdraw but pay no interest
 Banks allow customers to withdraw but pay low interest rate
for the period that fund is held in Time Deposit account
 High return (compare to current account)
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Characteristics of Time Deposit (cont.) Characteristics of Time Deposit (cont.)

 Customers cannot use bank’s payment services

 Fund only can be withdrawn at bank’s branches  May be charged a monthly small fee for
– Must present the Time Deposit Certificate maintaining the account
– Must use valid Citizen Card or ID or passport,  Provides very low interest rate (sometimes,
– Must use the same signature as registered with the banks do not pay interest)
Bank.
 Automatically renew the deposit plus interest for
the same period
– With prevailing interest rate at the time of renewal.
25 – And without instruction 26

Why do banks pay high interest

rate for Time Deposit accounts? Interest calculating

- Bank use funds in Time Deposit account to

make term loans Interest amount = B x N x r
- Term loans are more profitable than other
money instruments Where:
-  Banks can earn higher profit • Bi: the balance of time deposit account
• Ni: the number of days has balance (Interest
period)
• r: interest rate per day
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Interest payment of Time Deposit Example 2

 Interest payment shall be made:  On May 2019, Mary opened a nine-month term
– At maturity deposit account at STB bank. Information related
– Monthly to Mary's transaction are as follow:
– At the beginning when customers open time deposit – Principal: 12.500 USD
account – Interest rate: 4,3% per annum, being paid at maturity
– A year has 365 days
 Question:
– What is the interest amount Mary receive at maturity
date?
29 30 – What is the total amount Mary is paid at maturity date?

Example 2 Example 3

 John decided to save his money in a time deposit

account deposit account as follow:
– Principal: 230.000.000 VND
– Tenor: 4 months
– Date of opening: 12th April 2019
– Interest rate: 8,3% per annum, being paid at maturity
 Question:
– What is the total amount John receives at maturity
date?
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Example 3 End of Part 1

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