Deposit Mobilisation in Banks Essay

Excerpt:

Deposit mobilisation is one of the crucial functions of a conventional financial institutions or banks to satisfy one of the requirements of a “banking business”, i.e.sourcing of funds or borrowing money from customers.Continuous and adequate deposit mobilisation would ensure the bank shall be able to sustain its business of lending and investing, thus incurring profit for future growth. Nevertheless, different types of deposits have different and distinct characteristics andfeatures which in consequence impose different risks and costs to the banks. Therefore, in many cases, deposit mobilisation strategy relies heavily to the banks’ asset and liability management policy.In a relationship between bank and depositors, the rights and duties for both parties vary according to the nature of deposit mobilisation. The ability of the bank to fulfil their duties is an important measure of the bank’s acceptance by the public, or by far as a comparison yardstick with other banks.

Introduction

Banks mobilise deposits as their primary source of funds. Having optimal deposits level, banks shall be able to lend the funds to generate interest onlending. In addition to lending, the deposits fund can be placed in certain investments avenues which suits the banks’ or the deposits’ objectives. Deposit mobilisation is a continuous function for a bank to ensure the sumtotal of deposits at any time adequate to maintain the current level of lending and investments especially to compensate the withdrawals madeb y depositors. Usually, the deposits level is kept slightly or certain percentages above the lending and investments level to ensure the bank has adequate cash reserves to meet expected withdrawals and also recurring withdrawals. The cash reserves are called Liquidity Reserves. Deposits bring costs to the banks, either on the maintenance of the deposits and its transactions or on the interest payout onto the deposits upon deposit maturity.

How a Bank Mobilises Deposits

Bank receives deposits from individuals, organisations and businesses,initially by opening an account with the bank itself. Based on the types of deposits, minimum initial deposits are set together with the rules and regulations governing the accounts. Subsequent deposits can be made into the accounts, except for time deposits where the amount is fixed until deposit maturity. Depositors maintain deposits with specific banks due to many factors, but in particular trust and confidence with the banks are the major factors.Once these are established, the banks continuously attract depositors and deposits by providing convenience banking, quality services, excellent brand association and higher interest payout. However, there are instances where depositors put their money into the banks mainly for security purposes, i.e. the banks to protect their money from loss and theft and also warrant the deposits from investment loss. Assuch in Malaysia the government provides guarantee upon deposits placed with commercial banks.

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Banks are competing against each other to attract deposits and new depositors. Normally interest payout rates, locations and services are the main attractions to the mass market. However, some banks are going intothe niche markets and thus providing specific attractions to the targeted market segment. One example is the pensioners group, where specific products are developed with special features which suit their lifestyles. Sometimes banks do promotions with door-gifts, lucky draw, establish savings clubs, “staff get customers” programme and else to ensure thedepositors’ base and deposits keep growing and to instil loyalty to thed epositors.Some deposits products have also grown from a single purpose deposits to combined purpose products to meet higher expectations from customers. For example, attachment of insurance scheme, combination with debitcard, etc.c.

The importance of deposits

Deposits are the primary source of funds for a bank, which facilitates the uses of funds (loans and investments). The higher the deposits amount, the bigger the lending and investments portfolio can be maintained by the banks to sustain its expansion and future growth.The banks must have adequate deposits to meet the lending volume required by the public and at the same time maintain extra cash for withdrawals by depositors. The cash reserve is a component of liquidity reserves which measure the ability of the bank to meet its expected withdrawals and recurring withdrawals. The withdrawals made from the reserves are oddly-offset against new deposits which the banks should continuously mobilise. The inability to get sufficient deposits could result in negative fund situation.The level of deposits growth also indicates the bank’s performance in relation to customers’ satisfaction on interest payout and services rendered.

Deposits as key liquidity indicator

Deposits are made mainly in cash, the most liquid asset for banks. Once withdrawal requests are made by depositors, banks must immediately provide cash for that particular purpose. As compared to other liquiditycomponents such as short term investments which take time to beconverted into cash, it is rather wise for a bank to simply get moredeposits beyond the withdrawal amount.

However, the percentage of the cash reserves must be kept at optimum level. Idle cash does not create profit, but in fact, brings additional costs interms of storage and insurance. Therefore, by maintaining cash reserves at an optimal level enables bank to generate maximum profits from lending and investment activities.The costs for cash reserves are mainly on the storage and insurance. The storage of cash reserves involves the requirement for adequate vaultrooms, cash in-transit security and cash handling at branches. The insurance costs are to cover the amount of cash available anytime at branches or in-transit from loss, fire and theft. It generally covers the maximum cash amount allowed at branches or in-transit