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Deposits
Deposit Schemes And
Rules Of Issuance of COIs
Presented By
 Amir Rafique

 Syed Adil Hussain

 M. Attique

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Deposits
Significance Of Deposits For Banks

Banks are financial institutions which are

primarily involved in functions of lending,
investing money, making payments on behalf
of customers for their purchases of goods and
services and assisting customers in investing
and raising funds. To provide these services
banks need low cost funds in shape of
deposits.

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Deposit Significance –contd-
 The main difference between a bank
and a non banking financial institution
is that Banks are the only financial
institutions which accept deposits and
then lend them out keeping a spread of
interest rates, whereas other financial
institutions may only accept deposits
e.g saving centres or may only lend
funds e.g. leasing companies.
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Deposits Significance –contd-
 As deposits are essential for operations
of a commercial bank and they cannot
function without them therefore
 For these reasons; deposits for
commercial banks are regarded as
LIFE BLOOD.
 Banks are thus always finding ways of
attracting fresh deposits at low cost.

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 How Deposit Scheme Are
Developed
Following Are Important Points While
Developing A Deposit Scheme

 Significance of Fresh Deposits

 Cost of Funds To Bank
 Administrative & Other Fixed Cost
 Other Deposit Schemes Available Elsewhere
 Utilization Opportunities
 Bank’s Deposit Mixture

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Cost of Funds Mechanism
 Determination of cost of funds is essential to
ensure profitability and benefit of any
transaction.
 Deposits (both local currency and foreign
currency) from individuals, corporations,
organizations generate liquidity resource for
the bank. These comprise either cost bearing
or cost free deposits. Cost bearing deposits
are those on which the bank has to pay profit
at specified rates whereas, cost free deposits
do not have any cost attached.

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Cost Of Funds Mechanism
–contd-
Cost Bearing Deposits Cost Free Deposits

 Saving Accounts  Current Accounts

 Term Deposit  Margins on LC/LG
Accounts  Demand Drafts, Pay
 Any Other Cost Orders, Sundry
Bearing Deposit Deposits, Traveler
Scheme of Bank Cheques

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 Cost Of Funds Mechanism-contd-
A Hypothetical Example
Yield/Return of Rs.100 Deposit

Particulars Amount (Rs) Avg Rate Earnings(Rs)

Cash Resv 5 0% Nil
SLR 15 6% 0.9
Cash Balance 2.5 0% Nil
Branches
Advances 65 6% 3.9
Balance MM 12.5 3% 0.38
Operation
Total 100 5.18 9
Cost Of Funds Mechanism
–contd-
What is Cost of Funds?

 Cost of funds is the cost incurred by

bank for maintaining its deposits. It is
essential to ascertain cost of
deposits/funds to profitably evaluate
any proposal for financing/investment
or launching a new deposit scheme.

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Cost Of Funds Mechanism
–contd-
Constituents of Cost of Deposit/Funds

 Direct Cost : Profit Paid On Deposits

 Indirect Cost : Administrative/Operating
Expenses Borne By
Branches/Bank

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Cost Of Funds Mechanism
–contd-
Cost of Deposits/Funds Calculation factors

 Period For Which Cost Is Calculated

 Profit Paid/Accrued On Relevant Deposit
 Average Amount of Relevant Deposit
 Amount Of Administrative/Operating
Expenses
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Cost Of Funds Mechanism
–contd-
 Actual Calculations

 Cost of Deposits
Profit Paid/Accrued x 365 x 100
Average Deposit # of Days
 Cost of Funds
Profit Paid/Accrued+Admin/Oprt Cost x 365 x 100
Average Deposit Held During Period # of Days

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Cost Of Funds Mechanism
–contd-

Average Deposit = Daily Product of Deposit

# of Days Given Period

Cost of Deposit can be worked out for each and

every type of deposit, whereas cost of funds
has to be calculated for the aggregate
amount of all deposits, as the
Administration/Operating cost cannot be
segregated for each category of deposit.
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Example of Calculation of Cost
of Deposits
 PLS SB Deposit Daily Product For One Year = 36,500,000
 Profit Paid And Accrued For Same One Year = 10,000

 Cost of PLS SB Deposit (For a Year) =

10,000 x 365 x 100 = 10%
36,500,000/365 365

 Cost of PLS SB Deposit (For a month of 30 days) =

10,000/12 x 365 x100 = 10.14%
3,000,000/30 30

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Example of Calculation of Cost
of Funds
 All Kinds of Deposit Daily Product For One Year = 54,750,000
 Profit Paid And Accrued For Same One Year = 10,000
 Admin/Operating Cost For Same One Year = 20,000

 Cost of Funds (For a Year) =

10,000+20,000 x 365 x 100 = 20%
54,750,000/365 365

 Cost of Funds (For a month of 30 days) =

(10,000+20,00)/12 x 365 x100 = 20.28%
4,500,000/30 30

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Example of Calculation of
Admin & Operating Cost %
 Total Deposits Product (For A Year) = 36,500,000
 Total Admin/Operating Expense (For A Year) = 5,000

 Fixed Cost As % Of Deposits =

5,000 x 365 x 100 = 5 %
36,500,000/365 365

 Total Cost to Bank = Cost of Deposit + Fixed Cost

10% + 5% = 15 %

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Example of Calculation of
Earning As % of Deposits
 Total Deposits Product (For A Year) = 36,500,000
 Total Earnings Of A Bank (For A Year) = 25,000

 Yield On Deposits =
25,000 x 365 x 100 = 25 %
36,500,000/365 365

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Example of Calculation of
Spread Of A Bank
 Spread =

%Yield on Deposit–(%Cost of Deposits + %Admin/Operating Cost)

Spread As in Given Example =25%-(10% + 5%)=10%

Note that as interest rates on deposits increase the

bank’s earning spread decreases and vice versa.

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Cost of Deposit and Spread
There are two major factors. First, the bank
must offer a high enough interest rate to
attract and retain deposits. If deposit rates
are too high they squeeze the spread
between the average return on assets and
the average cost of liabilities. Second, to
meet competition, banks not only have to
lower rates charged on loans, but also have
to increase rates on deposits. Undoubtedly
market forces ultimately determine deposit
rates.

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Deposits Scheme Attracting
Fresh Deposits
PLS- Monthly Income Scheme
Salient Features
 Profit will be paid on monthly basis at a rate

which will yield Rs.1,000 for each investment

of Rs.100,000 and equivalent. (Rates and Return are Subject to Rules)

 This scheme is meant for individuals only, no

public/private institution can invest in it.

 Tenor of Scheme is 10 years.

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Deposits Scheme Attracting
Fresh Deposits -contd-
Other Important Rules Governing Monthly Income Scheme
 Investment can be made in cash or cheque subject to
realization.
 MIS holder would be eligible for sharing Profit/Loss with the
bank at the rate determined by the bank in its sole discretion
and bank’s decision in this behalf will be final and binding on
depositors.
 MIS is issued for minimum Rs.10,000 and multiples thereof.
 On expiry of deposit period, if not opted for automatic renewal,
the deposit will cease to be eligible for profit and loss at the MIS
rate.
 Bank shall be within its rights to invest deposited funds at its
sole discretion.

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Deposits Scheme Attracting Fresh
Deposits Rules-contd-
 In case of premature encashment, profit will be paid at PLS-SB
Rate existing at the time of encashment for the whole period of
retention. Excess profit paid will be deducted from principal.
 Profits on MIS shall be determined by Bank at end of half year
along with a provisional rate at which profit will be paid for next
6 months.
 The depositor shall be liable to reimburse the Bank with the
amount of claim, if any, in respect of losses incurred on basis of
half yearly closing.
 Any Change in Address of depositor would be immediately
communicated to the bank. The post office or other agents of
delivery shall be considered to be agents of depositor and no
responsibility can be accepted by Bank for delay, non delivery.
 Holders of MIS Receipt must keep receipts under lock and key.
Any losses must be intimated immediately to issuing branch.

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Deposits Scheme Attracting Fresh
Deposits Rules-contd-
 Bank reserves the right to add or alter any of the rules
governing PLS-MIS scheme and such alteration or addition of
rules shall immediately thereafter be deemed to be binding on
customers.
 MIS holders will be eligible for participation of profit and loss on
the condition that the deposit will not be withdrawn earlier than
2 years. In the event any depositor wishes to withdraw the
money earlier than 2 years, he/she will forfeit his/her right to
share profit and be absolved of his/her obligations to share loss
on this deposit for the period deposit remained with bank.
 Facility of loan will be available on MIS certificates for 75%
value of Principal and 2% mark up above profit rate.
 Deposits remaining unclaimed for 10 years after maturity will be
transferred to SBP as per their policy.
 MIS scheme is available subject to acceptance of above rules.

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Summary
 Significance of Deposits for commercial
banks
 Issues in Developing of a new deposit
scheme
 Cost of funds/deposits calculation
mechanism
 A new PLS-MIS scheme

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