DEPOSITORY

INSTITUTIONS:
ACTIVITIES AND
CHARACTERISTICS

04/04/15

Asset/Liability Problem
Depository institutions are the financial
intermediaries, which are allowed/licensed
by the central banks to accept deposit for
doing lending business
Spread Income or Margin Income on
borrowing and lending is the primary
income.
Liability management is the main concern
and the institutions face following types of
risks
Credit Risk
Regulatory Risk
Interest Rate Risk

Major Sources of Bank

Funds

Equity Securities and Retained

Earnings
Deposits based sources of funds
1. Demand Deposits
2. Time Deposits

Non-deposit Borrowing
1. Discount Window of Central Bank
2. Inter bank loan Market (Repos)
3. Issuance of Debt Securities

Liquidity Concerns
Ways to obtain funds to accommodate
withdrawals and loan demand:
Attract additional deposits
Use currently-owned securities as collateral
for loans from other institutions
Raise short-term / long term funds in the
money/capital markets
Sell currently-owned securities
Borrow from central bank by discounting
eligible securities under possession

Types of Depository
Institutions
Commercial Banks

are financial intermediaries which collects

all types of deposit and offers short term and self liquidating loans to
its clients.

NBFIs

are such financial intermediaries which are allowed to

collected limited forms of term deposit s and use the funds in term loan
and lease.

Savings Banks

are mostly mutually owned (or cooperative

banks) organizations whose main source of funds come from the

members savings and are used for mortgage lending.

Credit Unions

are cooperative societies that generate compulsory

savings from members and lend the same to members on rotation.

Bank Services
Consumer Banking
1. Installment loans for consumer
durables,
2. Residential mortgage loans,
3. credit card loans,
4. Brokerage services,
5. Other Loans like student loans,
healthcare, etc.
6. Remittances

Other Bank Services

1.
2.
3.
4.
5.
6.
7.

Corporate finance,
institutional banking
Commercial real estate finance,
Leasing,
Factoring
Capital market financing
Foreign exchange market products and
services
8. Guarantees
9. Advisory services

Bank Income
Spread between interest income
and cost of funds
Bid-Ask spread on financial assets
Capital gains on securities and
gains on foreign currency
transactions
Commissions on services rendered
or guarantees extended

Some Bank Regulations

o Interest Rates on Deposit Accounts
o Geographical Restrictions on Branch
Banking
o Permissible Activities for Commercial
Banks
o Capital Requirements for Commercial
Banks
o Loan concentration and single loan
limit
o

Types Geographical
Restrictions in BD
Urban vs. rural branches
Branch on same area
International branch operation

Capital Requirements
Basle Accord on Bank Regulation
and Supervisory Practices
Capital adequacy standards (10per
cent of risk assts must be held as
total capital)
Risk-based capital guidelines where
commercial loans and guarantees are
considered as 100% risky assets,
Real estate 50%. Semi government
loan 20% and govt loan 0% risky.

Non Bank Financial

Institution
Principal assets

Mortgages
Lease (financing) hold assets
Government securities
Stocks

Principal sources of funds

Institutional borrowing
Time deposits
Bonds
Asset backed securities
Regulation Non Bank financial Inst Act 1993

US Experience on The S&L

Crisis

Borrowing short and lending long

Interest rate ceilings on deposits
Volatile interest rates
Fraudulent management activities
High-risk strategies
Investment in Junk Bonds

Savings Banks (Cooperative

Credit Unions in BD)
Mutually member owned or
general stockholder owned
Principal assets
Mostly Residential mortgages and
Consumer durable loans

Principal source of funds

Savings Deposits by the members

Credit Unions
Owned by similar nature of
owners /members
Principal assets include
Small consumer loans
Residential mortgages
Securities

Principal source of funds

Member deposits in the form of
capital