Sources of fund

in commercial
banks

1
 Chapter Contents

1. Role of funds in banking industry

2. Deposit accounts
3. Issuing securities
4. Borrow from interbank market
5. Borrow from Central bank

2
 Role of funds in banking industry

 Sources of fund in a bank include:

– Debt and Equity (like other types of non –
financial
firms)
– Debt:
 Iss
uin
g
de
bt
sec
3 uri
 Role of funds in banking industry
(cont.)

 Which sources of fund account for the

biggest proportion in a commercial bank’s
liabilities?
– Debt, especially deposits from customers
 Which source of fund is most important
for bank’s business?
– Debt, especially deposits from customers
– Why? Because banks cannot make loans
without debt, especially without deposits
4
 Debt to Total Liabilities of ACB, Sacombank
(STB) and Eximbank (EIB) in 2008
Billion
VND

Debt to
Total Total Common
Banks Total
Liabilities Shares
Liabilities
Debt

ACB 105.306 97.539 6.355 92.62%

STB 68.556 60.681 5.115 88.51%

EXIM 48.247 35.403 4.300 73.37%

5
 Debt to Total Liabilities of ACB, Sacombank
(STB) and Eximbank (EIB)in 2009
Billion
VND
Debt to
Total Total Common
Banks Total
Liabilities Shares
Liabilities
Debt
157.77
ACB 167.881 4 7.814 93.97%

STB 98.473 88.184 8.078 89.55%

EXIM 65.448 52.095 8.800 79.59%

6
 Debt to Total Liabilities of ACB, Sacombank
(STB) and Eximbank (EIB) in 2010
Billion
VND

Debt to
Total Total Common
Banks Total
Liabilities Shares
Liabilities
Debt
ACB 205.102 193.726 9.376 94.45%

STB 141.798 128.165 10.851 90.38%

EXIM 131.110 117.600 10.560 89.69%

7
 Debt to Total liabilities of banks 2006 - 2018

Role of funds in banking industry

100,00%

(cont.)
90,00%

80,00%

ACB STB

70,00%

EIB

60,00%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2017 2018

Sources: Financial reports of ACB, STB and EIB

8
 Deposit accounts

 Banks provides many types of deposit accounts to

satisfy customers’ demands
– Current account
– Time deposit
– Other types of deposit product
– ….

9
 Current account

 Also known as checking account

 Current accounts allow deposits and withdrawals.
 Current accounts are very liquid and can be 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 withdrawals and
10 unlimited deposits
 Who can use current account?

 All types of customer who wish to use

banks’ payment services
– Individuals
– Institutions
– Corporations

11
 Characteristics of Current account
 Are highly liquid
 Allows unlimited deposits and withdrawals
 Mainly used for banks’ payment services
– Bank cards
– Fund transfer
– Pay bills,…
 May be charged a monthly small fee
for maintaining the account
 Provides very low interest rate
12
(sometimes banks do not pay interest)
 Why do banks pay low interest
rate for current accounts?

 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

13
 Interest calculating for current account

 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 the
14 end of 25th every month before paying interest on 26th
 Interest calculating for current account

Interest amount =  Bi
Ni r
Where:
i1
• Bi: the account balance at the end of day i
• Ni: the number of days Bi is held
• r: interest rate per day
Interest rate per annum
15 Interest rate per day =
 Current account example

Day Account balance (USD)

26/03/2020 25.000

29/03/2020 39.000

05/04/2020 30.000

19/04/2020 37.000

25/04/2020 33.000
16
 Suppose:

 The interest rate is 1%/annum

 Days in year: 365 days
 Bank calculates interest on 25th every month
 Question:
– What is the interest amount on current
account the
bank client receive for April 2020?

17
 Suggested solution
Day Account balance Days balance Di x Ni
(Di) is held (Ni)
26/03/2020 25.000 3 75.000

29/03/2020 39.000 7 273.000

05/04/2020 30.000 14 420.000

19/04/2020 37.000 6 222.000

25/04/2020 33.000 1 33.000

1.023.000

Interest paid $28,027

for March
18 2020
 Example 1

Day Transaction Amount (USD)

26/04/2020 Starting balance 75.800

28/04/2020 Cash withdraw 9.000
07/05/2020 Receive monthly salary 14.600

12/05/2020 Money transfer 17.000

22/05/2020 Deposit 2.700
29/05/2020 Cash withdraw 5.000
19
 Suppose:

 The interest rate is 0,75%/annum

 Days in year: 365 days
 Bank calculates interest on 25th every month
 Question:
– What is the interest amount on current
account the
bank client receive for May 2020?

20
 Days
Amount Account
Day Transaction balance is DxN
(USD) Balance
held

21
 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.

22
 Who can use 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)

23
 Characteristics of Time Deposit

 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)
24
 Characteristics of Time Deposit (cont.)

 Customers cannot use bank’s payment services

 Fund only can be withdrawn at bank’s branches
– Must present the Time Deposit Certificate
– Must use valid Citizen Card or ID or passport,
– Must use the same signature as registered
with the
Bank.
 Automatically renew the deposit plus interest for the
same period
– With prevailing interest rate at the time of renewal.
25 – And without instruction
 Characteristics of Time Deposit (cont.)

 May be a monthly small fee

charged
maintaining the accountfor
 Provides very low interest rate
(sometimes, banks do not pay interest)

26
 Why do banks pay high interest
rate for Time Deposit accounts?

- Bank use funds in Time Deposit account to

make term loans
- Term loans are more than other
profitable money instruments
-  Banks can earn higher profit

27
 Interest calculating

Interest amount = B x N x r

Where:
• Bi: the balance of time deposit account

• Ni: the number of days has balance

(Interest period)
• r: interest rate per day
28
 Interest payment of Time Deposit

 Interest payment shall be made:

– At maturity
– Monthly
– At the beginning when customers open time deposit
account

29
 Example 2

 On May 2019, Mary opened a nine-month term

deposit account at STB bank. Information related to
Mary's transaction are as follow:
– Principal: 12.500 USD
– 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?
30 – What is the total amount Mary is paid at maturity date?
 Example 2

31
 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 thetotal amount John receives at
maturity date?
32
 Example 3

33
 End of Part 1

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