Bank Deposits

• Deposits
– It is a major source of funds for banks
• Types of Deposits
– Demand Deposit
– Time Deposit
• Demand Deposits further sub-divided
– Current Deposit
– Saving Deposit
 Pricing of the deposits
• Banks need to monitor the cost of their
funding sources because of
– Change in cost of funding would require
changes in assets yield
– It can alter liability mix and liquidity
– It will affect competitiveness of the bank in
the market
 Factors to be considered while
deciding pricing of deposits
• Service cost and minimum balance
requirement
• Deposit volume
• Lending and investment avenues
• Relationship with customer
• In case of new product, promotional
pricing
• Product differentiation
 Factors affecting bank deposits
• Increase in national income
• Expansion of banking facility
• Increase of banking habit
• Increase in the relative rate of return on
deposit
• Increase in deficit financing
• Increase in bank credit
• Inflow of deposits from NRIs
 Measures to increase bank
deposits
• Offering properly graded interest rate on
term and saving deposit
• Raising deposit insurance cover
• Discontinuing TDS in respect of interest
income from deposits
• Improving internal efficiency and
reducing bad debts and frauds
• Improving customer service
 General guide lines for opening
deposit accounts
• “Know Your Customer” guidelines
issued by RBI to be followed
• The objective is prevent financial fraud,
identify money laundering and criminal
activities and monitoring large value
cash transactions
Salient features of KYC norms
• Proper introduction while opening account is
necessary
• Identity of the account holder is to be
established
• Photograph of the account holder
• Proof of address is necessary
• Specimen signature of the account holder is
to be obtained
• Monitoring and reporting suspicious
transaction
 Deposit Insurance
• In case of bank failure to protect the
saving of small depositors either fully or
in part
• Mostly Govt. established and managed
• May or may not be a part of Central Bk.
• DICGC in India (Up to Rs.100,000)
• Problem of moral hazard
 When insured bank fails
• Insuring agency may ask some healthy
bank to take over failed bank
• It can take charge and manage
operation of failed bank till suitable
buyer is found
• It can pay off the deposit up to the
maximum amount insured
 Non deposit source of funds
• Concept of “Funding Gap”
• It is the difference between current and
projected credit and deposit flows
• If projected credit > projected deposit
flow, bank need to raise additional funds
• If it is reversed, bank needs to find out
profitable investment avenues
 Various non deposit sources
• Borrowing from Central Bank
• Certificate of Deposits
• Foreign Funds
• Commercial Papers
• Other Money Market borrowings
 Selection of non deposit source

• Factors to be considered while selecting

non deposit source
– Cost
– Risk
– Period for which the funds required
– Prevailing regulations for each of these
sources