Sources of Bank

Funds
 Factors Impacting sourcing of Funds by a
Bank
• Regulatory restriction if any
• Quantum of funds – requirement vis-à-vis availability
• Cost of funds for the Bank
• Pre-emption rules applicability
• Tenor of the funds vis-à-vis tenor required by the bank
• Purpose for which funds are required
• Maintenance of ratios – CRR, SLR, ALM, Treasury Management,
Liquidity ratios under Basel
• Alternate availability of resources
• Seasonality requirements
• Limit fixed by the counter-party for providing funds to the Bank
Summary of Sources
Type Savings Deposit Account
Tenor On demand

ROI 2.5% - 4% - deregulated

Source Public

Transferability Not transferable

Remarks CRR / SLR applicable

Summary of Sources
Type Current Deposit Account
Tenor On demand

ROI Nil- regulated

Source Public

Transferability Not transferable

Remarks CRR / SLR applicable

Summary of Sources
Type Term Deposit Account (FDR,Recurring)
Tenor 7 days – 10 years

ROI 3% - 5.50% - deregulated

Source Public

Transferability Not transferable

Remarks CRR / SLR applicable

Summary of Sources
Type Certificate of Deposit
Tenor Minimum 7 days, Maximum 1 year

ROI Higher than term deposit rate, market-driven, de-regulated

Source Individuals, Corporations, Companies, Trust, Funds, Associations etc.

Transferability By endorsement and delivery

CRR / SLR applicable on issue price, issued only in Demat form, no

Remarks
buy-back and loans against CDs
Summary of Sources
Type Refinance

Tenor Co-terminus with the loan refinanced

Different for different schemes, Usually 1% -2% less than charged to

ROI
borrower

Source RBI, SIDBI, EXIM Bank, NABARD

Transferability Not transferable

Remarks Provided for lending to agriculture, exports and SME sectors

Summary of Sources
Type Borrowing from RBI

Tenor Medium-term period

ROI Bank rate which is higher than repo rate borrowings

Source RBI

Transferability Not transferable

Remarks Provided only to banks

Summary of Sources
Type Repo Borrowing

Tenor Very short period, up to one week

ROI Lower than bank rate as prescribed by RBI from time to time

Source RBI

Transferability Not transferable

Remarks Borrowing permitted only against approved government securities

Summary of Sources
Type Inter-bank Call Money Borrowing

Tenor Overnight or few days

ROI Deregulated and market driven by supply and demand

Source Various banks who operate in call money market

Transferability Not transferable

Remarks Inter-bank exposure ceilings are fixed

Summary of Sources
Type Euro Dollar Borrowings

Tenor 1 year – 3 years

Market driven and per rates in International market depending on

ROI
rating of borrowing Bank

Source Foreign Investors

Transferability Not transferable

Amount is raised in foreign currency and bank bears the exchange

Remarks
rate risk
Summary of Sources
Type Tier-I & Tier-II bonds

Tenor 10 years – 15 years

ROI 4.50% - 6.00% depending upon market conditions

Source Long-term Investors (like Insurance Companies and Pension Funds)

Transferability Transferable by endorsement and delivery

Raised by banks for CRAR and Basel requirements, banks have to

Remarks
discount the amount for CRAR purpose
Summary of Sources
Type Preference shares

Tenor Unlimited tenor

ROI Market driven

Source Long-term Investors

Transferability Transferable by endorsement and delivery

Remarks Not very popular in Indian market

Summary of Sources
Type Equity shares

Tenor Unlimited tenor

Cost varies depending on investor demands and expectations and

ROI
companies’ future growth prospects

Source Public, FII, GOI, DFI

Transferability Transferable by endorsement and delivery

Not repayable till company goes into liquidation, issued through

Remarks
IPOs, QIPs, FPOs or Rights issue
 Bank sources of Funds
Long-term sources
Deposit accounts Borrowed Funds of funds

Transaction Deposits Funds purchased or Bonds issued

borrowed from RBI by banks

Savings Deposits Repurchase

agreements Bank Capital

Time Deposits Euro-Dollar

Borrowings
Money Market
Deposit accounts
Deposit accounts
• The demand deposit account, or cheque account, is offered to
customers who desire to write cheques against their account
• From the bank’s perspective, demand deposit accounts are classified
as transaction accounts that provide a source of funds that can be
used until withdrawn by customers
• Another type of Transaction account is SB and Current with Interest
above certain level. It provides cheque services as well as interest. It
requires large minimum balance
• Electronic Transactions: Customers now use electronic banking to pay
utility bills, check account balances, add deposits, Credit card
payments, funds transfer, cash withdrawals (ATM). Debit cards allow
customers to make purchases and their accounts are debited by the
amount
Borrowed Funds
• The RBI funds market allows to accommodate the short-term liquidity
needs of other financial institutions
• RBI funds purchased represent a liability to the borrowing bank and
an asset to the lending bank that sells them
• Loans are made from one day to seven days
• The interest rate charged in the RBI funds market is called the RBI
repo funds rate which changes according to demand and supply of
funds
• If many banks have excess funds and few banks are short of funds, the
RBI funds rate would be low
• RBI funds rate is generally related to T-Bill rate
Repurchase Agreements
• represents the sale of securities by one party to another with an
agreement to repurchase the securities at a specified date and price
RBI funds purchased represent a liability to the borrowing bank and
an asset to the lending bank that sells them
• The government securities involved in the repo transaction serve as
collateral for the corporation providing funds to the bank
• Repurchase agreements transactions occur through a
telecommunications network connecting large banks, other
corporations, government securities dealers, and RBI funds brokers
• The yield on repurchase agreements is slightly less than the RBI funds
rate at any given point in time, since the funds loaned out are backed
by collateral and are therefore less risky
 Bank Capital
• It generally represents funds obtained through the issuance of stock
or through retaining earnings The government securities involved in
the repo transaction serve as collateral for the corporation providing
funds to the bank
• Primary capital results from issuing common or preferred stock or
retaining earnings, while secondary capital results from issuing
subordinated notes and debentures
• A bank’s capital provides a cushion to absorb losses, therefore, a bank
must maintain a specific minimum capital required by law
• When banks issue new stock, they dilute the ownership of the bank,
since the proportion of the bank owned by existing shareholders
decreases
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