CH INSTITUTE OF MANAGEMENT & COMMUNICATION

Submitted ToProf. Aniruddha Durafe

Submitted ByRajkamal Paroha Vijaypal Singh

 Presentation Topic: Sources of Bank Fund Presentation Topic: Sources of Bank Fund

Introduction TO BANK
A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses

SOURCES OF BANKS FUND

A bank is a business firm. Its main aim is to earn profit. In order to achieve this objective it provides services to the customers.
It offers a variety of interest bearing obligations to the public. These obligations are the sources of funds for the bank and are shown on the liability side of the balance sheet of a bank.

SOURCES OF BANKS FUND

The main sources which supply funds to a bank are as follows: Banks Own Funds. Borrowed Funds

BANKS OWN FUNDS

Banks own funds are mainly of three types;
Paid up capital. Reserve fund. Portion of undistributed profit.

BORROWED FUNDS
The borrowed capital is a major and an important source of fund for any banking business. It mainly comes from deposits which are accepted on varying terms in different accounts.

Accepting Deposits
Banks borrowing is mostly in the form of deposits. Bank collects three kinds of deposits from its customers. Current or demand deposits. Saving deposits. Fixed or time deposits.

BORROWED FUNDS
Borrowing from central bank
The commercial banks in times of emergency borrow loans from the central bank of the country. The central bank extends help as and when financial help is required by the commercial banks

BORROWED FUNDS
Other Sources
Bank also raise funds byIssuing bonds. Debentures Cash certificates. Though it is not common but is a dependable source of borrowing.

Factors determine the cost of sourcing of bank funds

Cost of funds
Cost of funds are the expenses incurred on obtaining funds from various sources in the form of share capital, reserves, deposits, and borrowings Thus, it generally refers to interest expenses . Lower the cost of funds, higher the profitability

Factors determine the cost of sourcing of bank funds

Cost of Interest Rate Risk
The risk of loss due to a change in interest rates. Interest rate risk is important to transactions like interest rate swaps. In such a transaction, the party receiving the floating rate will receive a smaller amount should the floating rate decrease. Interest rate risk is also important to bonds; if interest rates rise, the prices of bonds fall.

Factors determine the cost of sourcing of bank funds

Spread
Spread is defined as the difference between the interest received (interest income ) and the interest paid (interest expense ) in funding. Higher spread indicates more efficient financial intermediation and higher net income so if the interest income is more then cost of capital will low and banks always sources fund for gain certain profit. Thus, higher spread leads to higher profitability and decrease the cost of funding.

Factors determine the cost of sourcing of bank funds

Nature of Deposits
Deposits trade with the banks are of various types like time deposits, demand deposits, short term deposits, etc. larger demand deposits /short term deposits also influenced the cost of funding

Factors determine the cost of sourcing of bank funds

Yield on funds
The funds raised by the bank through various sources are deployed in various assets. These assets yield income in the form of interest. So, higher the interest, greater the profitability and if yield of fund is good then cost of fund will low.

Sources of Banks fund where Cost is minimum

The primary source of funding of banks accepting deposits by the publics is the best source of funding and it also have very low cost in comparison to all other sources so: Current Deposit Saving Deposits Recurring Deposits

Some reasons
Expenses incurred on obtaining funds from accepting a deposits, generally low. Lower the cost of funds, higher the profitability. The funds raised by the bank through deposits are deployed in various assets. These assets yield income in the form of interest. So, higher the interest, greater the profitability and then cost of fund will low.

Reasons continued
Deposits trade with the banks are of various types like time deposits, demand deposits, short term deposits, etc. larger demand deposits /short term deposits also influenced the cost of funding. Means as per the types of deposit cost may be differ. Bank allows very low rate of interest on deposits and charged high rate of interest on lending so spread is also higher. Higher spread indicates more efficient financial intermediation and higher net income so if the interest income is more than cost of capital will low and banks always sources fund for gaining certain profit. It results in decreasing the cost of funding

Reasons continued
Interest rate risk is important at the time of sourcing of bank funding. The risk of loss due to a change in interest rates. Interest rate risk is important to transactions like interest rate swaps. In such a transaction, the party receiving the floating rate will receive a smaller amount should the floating rate decrease.

So risk involvement cost is also a major concern of thinking for banks at the time of funding.

conclusion

If we analyze others sources of funding then they are more risk full and risk involvement cost is also high and bank have to pay high rate of interest for funding. So as per our analysis the primary source of funding accepting public deposits is the good source of banks funding and it also involved very less operating and risk involvement cost.

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