SOURCES AND USES OF BANK FUNDS

Banks are highly leveraged financial institutions; means it depends highly on the borrowed funds. There are some other sources also. For discussion, we can separate the sources of bank funds in two major categories:

1.       Deposit Sources of Funds: This source includes the fund arising from various deposit accounts like current, savings, SND, term & time deposits etc. and borrowing from Central Bank, other commercial banks and NBFIs, Eurodollar borrowings etc.

2.       Non-Deposit Sources of Funds: This source includes the fund owned by the bank itself, namely share capital, reserve fund, other reserves, retained earnings etc.

Other Sources: There are some miscellaneous sources of bank fund like as sale proceeds of any asset, return of invested fund on maturity, loan recovery etc.

Banks are nothing but a financial intermediary, which stands between the surplus economic unit (saver) and deficit economic unit (borrower). The fund arising from various sources must be deployed to the various investment opportunities to earn the expected margin. The followings are the major sources for using bank fund:

1.       Withdrawal and repayments: A considerable part of deposits is subject to withdrawn by the depositors in anytime. Banks generally keep some of the deposits in cash and cash equivalent assets to meet daily withdrawal needs. Moreover, funds are also used for repayment of Bank’s borrowing from various sources. These withdrawal also include the interest payment on deposits and borrowings.

2.       Increase in Loans and Advances and other investments: Banks use the major portion of its funds in various investment opportunities like Loans and Advances from various sources, investment in government bonds and projects, investment in capital market etc. From these investments, banks earn a spread over the cost and fulfill shareholder’s expectations.     

Banks are to use its fund for some other heads like operating expenses, corporate social responsibilities, taxes, fixed asset financing etc.     

Regulations imposed on Banks: There are some regulatory controls over banks in collecting deposits and its uses. Most important regulations are as follows:

Regulations on Deposit Collection:    

·         Caps on interest rate on deposit: For avoiding unhealthy competition among market players, BB often set on a cap over interest rate on deposits such as 12.50% prevailing now. Banks can set it more conservatively.

·         Reserve Requirements:

Ø  The Statutory Liquidity Ratio (SLR) for the scheduled banks, except banks operating under the Islamic Shariah and the specialized banks is 19% of their demand and time liabilities, excluding interbank items since December 15, 2010.

Ø  The SLR for the Islamic banks is 11.5% the specialized banks except BASIC bank are exempted from maintaining SLR.

Ø  The Cash Reserve Requirement (CRR) for the scheduled banks with the Bangladesh Bank is 6% of their total demand and time liabilities. It may be noted that banks are required to maintain CRR daily at the rate of 6% on average on bi-weekly basis provided that the CRR would not be less than 5.5% in any day with effect from December 15, 2010.

·         Bank Rate: The bank rate is determined as 5%.

·         Repo & Reverse Repo Rate: Repo rate is 7.25 % and Reverse Repo rate is determined as 5.25%.

Regulations on Lending & Investments:   

·         Minimum capital requirement: Minimum capital requirement for a bank is BDT 400.00 crore or 10% of total risk weighted assets whichever is higher.   

·         Interest caps on lending of various identified sectors:

Ø  The maximum cap of 7% interest rate on export credit has been fixed since January 10, 2004.

Ø  The maximum rate of interest on agriculture and term loans to industrial sector is 13%.

Ø  The maximum rate of interest on import financing of rice, wheat, edible oil (crude and refined), pulse, gram, onions, dates and sugar (refined & raw sugar/raw cane sugar) is in force at 12%.

Ø  Banks are allowed to differentiate interest rate up to a maximum of 3% considering comparative risk elements involved among borrowers in same lending category.

·         Single Borrower Exposure: As a prudential measure intended for ensuring improved risk management through restriction on credit concentration, Bangladesh Bank has from time to time advised the scheduled banks in Bangladesh to fix limits on their large credit exposures and their exposures to single and group borrowers as follows:

Ø  The total outstanding financing facilities by a bank to any single person or enterprise or organization of a group shall not at any point of time exceed 35% of the bank's total capital subject to the condition that the maximum outstanding against fund based financing facilities (funded facilities) do not exceed 15% of the total capital. In this case total capital shall mean the capital held by banks as per sectioin-13 of the Bank Company Act, 1991.

Ø  Non-funded credit facilities, e.g. letter of credit, guarantee etc. be provided to a single large borrower. But under no circumstances, the total amount of the funded and non-funded credit facilities shall exceed 35% of a bank's total capital.

Ø  In case of export sector single borrower exposure limit shall remain unchanged at 50% of the bank's total capital. But funded facilities in case of export credit shall also not exceed 15% of the total capital.

·         Prudential guidelines for consumer financing:

Ø  Regulation 23: "The maximum per party limit in respect of housing finance by the banks will be Tk. 10 (ten) million. The housing finance facility shall be provided at a maximum debt equity ratio of 80:20."

Ø  Regulation 25: "Banks are free to extend mortgage loans for housing, for a period not exceeding 25 (twenty five) year. Banks should be attentive to adequate asset liability matching".

Ø  In case of all kinds of consumer financing including car loan, the 50: 50 debt equity ratio shall be maintained.

·         Prohibition of bank loan for purchasing land: To stop funding by banks to the non-productive sectors like land purchase, it has now been decided by the Central Bank that banks shall not provide any loan/credit facility for purchasing land by BRPD Circular No. 16 dated April 27 2010.