MBFI

Sources of Funds

Liabilities Management

Liabilities of a Commercial Bank

• Capital & Reserves

• Subordinated Bonds

• Bonds Issued

• Deposits

• Borrowing from other Banks (Inter-Bank)

• Borrowing from RBI (Central Bank)

• Others (CBLO)

Checking Accounts• Since Checking Accounts are zero cost

funds, can we offer only these accounts?

• Our cost of funds would be near zero.

• Should we recover the cost of operations of checking accounts?

• How should we use these funds?

 lend short term?

Can we lend these long term?

Savings Bank Accounts• Is it a low-cost deposit?

• Why are there restrictions on number of withdrawals ?

• Can we is place a restriction that withdrawals cannot be more than 10% of the balance? Will it help?

• Should we discourage persons who keep low balances in their account?

• Do we expect large balances in Savings Bank Accounts?

Dilemma:

• Banks can encourage customers who have large balances to deposit them in Term-Deposits or invest in higher yielding schemes such as mutual funds etc of group companies. But, if this is done, the banks lose out on low cost deposits.

Marketing Savings Deposit

• Would a savings account which does not have checking facility but allows a restricted number of withdrawals be popular?

• What would make it popular?

• Will our bank benefit from such an offering at all as there will be migration from savings bank account to this savings account?

Term or Fixed Deposits

• Why do we offer this product even though these are high cost funds?

• How to decide how many maturity slabs a bank should offer?

• What rates to offer? What are the factors on which this depends?

• Is the rate higher for longer maturities?

• Why do banks allow “pre-mature withdrawal”? What are the problems?

Corporate Short Term Deposits and Certificates of Deposits

• When should banks target such deposits?

• Corporates generally negotiate for higher rates of interest? Is this ok?

• What are the drawbacks of ST Deposits?

• Do CD’s have these drawbacks?

• Logically, should the rates on CD’s be higher or lower than deposits of same maturity?

Augmented Deposit Products

• RD – Recurring Deposit

• Re-investment Deposits

• Flexi- Deposits

• Deposits with built-in Overdraft

• Sweep Deposits

• Internet, Mobile, App based, Video Chat

Deposit Insurance

• Rs 100,000 thousand per “person”

• DICGC (FDIC) – Deposit Insurance and Credit Guarantee Corporation

• Why are bank deposits insured?

• Should bank deposits be insured?

• Moral hazard ?

• Should deposit insurance be voluntary?

Liabilities Management Deposit Mix

Pricing matrix (fixed or floating)

Administration costs

Profitability

Lending rates (predominantly floating)

Bulk deposits

Corporate deposits

Customer relationship pricing

Core Deposits

CASA – low cost but ‘volatile’ If amount deposited on any day is equal to

or more than the amount withdrawn, the total CASA will not fall below a certain level

Large number of accounts Diversity in types of account holders Spatial spread or Core or non-fluctuating portion of the total

deposits

Pricing

Pricing strategy of competitors

Interest elasticity (or responsiveness) of consumer demand

Past deposit flows for various kinds of consumer accounts

Marketing Issues

• Product differentiation?

• Product Life of a banking product is very short – can be copied very easily

• Branding – bank or individual products?

• Advertising – Why? What message?

• Why has the customer come to your bank? Why will he continue?

• Salary Accounts

Regulations• No incentives, prizes, brokerage etc

• No interest on Current A/cs or deposits <7 d

• No interest ceiling

• Interest on daily balances on Savings Bank Accounts

• Premature repayment of Term Deposits to be made if customer demands !!

• CRR & SLR

Issues in India

• Pass Book

• Overdraft in Savings Bank Accounts

• Charges on NEFT, RTGS etc

• Low level of deposit insurance?

• Banks do not fail ?

Bulk,Corporate & Govt Deposits

Bulk Deposits – interest rates higher

Corporate Deposits

Deposits from Public Bodies

“Purchased Deposits” are acquired on a non personal basis from the financial market at competitive interest rates.

• Brokered deposits

Non Deposit Sources of Funds• Bonds

• Subordinated Debt

• Inter-Bank Borrowings

• Call Money – Overnight Deposit

• What factors decide the rate of interest on IB O/N Deposit?

• Is this a good source of funds?

• Why are regulators unhappy if this is the chief source of funds for a bank?

• What was S&L crisis in USA?

• In India this market is about Rs 15,000 to 20,000 crores (150-200 billion)

Repos and Reverse Repos

• Simultaneous sale of an asset (today)And an agreement (contract)To repurchase the same asset on a future date

at a price fixed today• Two legs

Sale Give the asset and receive rupees Title passes on ‘day one’

Re-purchase Give rupees and receive back the asset Title restored on the date of maturity

• Repo a form of borrowing ?

RBI and the Money Market

• RBI intervention and signaling in money market• RBI Reverse Repo-

Sells GOI bonds and buys back Implications

Borrows from the market Sucks up liquidity Influences interest rate s- “ floor”

• RBI Repo Buys GOI bonds and sells them back Implications

Lends to banks / PD’s Injects liquidity Influences interest rates – “ceiling”

RBI - LAF and OMO• LAF

Every working day Both REPO and Reverse Repo window Announced interest rates (7.25 & 6.25 %) Very effective fine tuning of money supply /

liquidity / interest rates

• Structural Liquidity Facility (SLF) Upto 2% of NDTL @ (3% above LAF) ie 10.25% Collateral – GOI bonds Collateral counted for SLR compliance

C B L O’s of CCIL:• Collateralized Borrowing and Lending

Obligation

• Mechanism to borrow and lend funds against securities

• The lender’s claim and the borrower’s liability are separated and traded separately

• Not only for banks but also for primary dealers, financial institutions, mutual funds, non-banking finance companies and corporates.