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Chapter 4

DEPOSITORY

INSTITUTIONS:

ACTIVITIES AND

CHARACTERISTICS



Asset/Liability Problem

Depository institutions are the financial intermediaries,which are allowed/licensed by the central banks toaccept deposit for doing lending business

Spread Income or Margin Income on borrowing andlending is the primary income.

Liability management is the main concern and theinstitutions face following types of risks

Credit Risk

Regulatory Risk

Interest Rate Risk



Equity Securities and Retained Earnings

Deposits based sources of funds

1. Demand Deposits2. Time Deposits

Non-deposit Borrowing

1. Discount Window of Central Bank

2. Inter bank loan Market (Repos)

3. Issuance of Debt Securities

Major Sources of Bank Funds



Liquidity Concerns

Ways to obtain funds to accommodatewithdrawals and loan demand:

Attract additional deposits

Use currently-owned securities as collateral for loansfrom other institutions

Raise short-term / long term funds in themoney/capital markets

Sell currently-owned securities

Borrow from central bank by discounting eligiblesecurities 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. Corporate finance,

2. institutional banking

3. Commercial real estate finance,

4. Leasing,

5. Factoring

6. Capital market financing

7. 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 orguarantees extended



Some Bank Regulations

o Interest Rates on Deposit Accounts

o Geographical Restrictions on Branch Banking

o Permissible Activities for Commercial Bankso Capital Requirements for Commercial Banks

o Loan concentration and single loan limit

o Board structure and Accounts



Types Geographical Restrictions

in BD

Urban vs. rural branches

Branch on same area

International branch operation



Capital Requirements

Basle Accord on Bank Regulation andSupervisory Practices

± Capital adequacy standards (10per cent of riskassts must be held as total capital)

± Risk-based capital guidelines wherecommercial loans and guarantees are

considered as 100% risky assets, Real estate50%. Semi government loan 20% and govtloan 0% risky.



Non Bank Financial Institution

Principal assets

± Mortgages

± Lease (financing) hold assets

± Government securities

± Stocks

Principal sources of fundsInstitutional 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 includeSmall consumer loans

Residential mortgages

Securities

Principal source of funds

± Member deposits in the form of capital

depository institution

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