Deposit Management Practices Of Bank

Deposit Mangement:

Deposit management consists of acquisitions of stable and low cost deposit for the banking business. Banks are not only dealers in money but also manufacturers of credit money. It is in the sense of manufacturing that the concept of credit creation is used. Similarly deposit creation is an important function of commercial banks. Without deposit they cannot lend at all. When the banks receive cash from customers, deposit are created . These deposits may be current, saving or fixed. Depositors choose the types on the basis of their needs and requirements like; safety, convenience or earning. People deposit their income in commercial banks because bank vault are safer that home coffers. The bank attracts deposits from the people either by means of offering interests or facilities. Business people want seek for facilities rather than interest. Non business people generally select deposits having interests. The type and characteristics of deposits are constantly changing as banks are offering new product to attract new consumers. unlike the past, people are nowadays more aware and have confidence on banks on such the banking habit growing gradually. Deposit management involves the collection of adequate bank deposits required for the efficient and effective operation of banking business. Deposit management doesn’t merely concern with the high volume but also with low cost as well and its stability so as to produce competitive loans product.

TYPES OF DEPOSITS
General practice in the banking business shows that there are several deposit products in the market. These deposits can vary from one bank to other. Principally these can be categorized as; • CURRENT DEPOSIT:- It can be also known as Demand Deposit. These deposits are generally maintained by the traders and businessman who have to make a number of payments frequently and regularly. These deposits are withdrawal by the depositors at any time by means of check. Usually no interest is paid on them hence called non-interest bearing. Depositors may have to pay certain charges to the bank for the service rendered. Any amount of money may be deposited in this account.

• SAVING DEPOSIT :- These Deposit stand midway between Current and Fixed deposits. Banks may impose certain restrictions on the depositors regarding the number of withdrawals and the amount to be deposited in a given period. Cheque facility is provided to the depositors. Rate of interest paid on these deposits is low as compared to that of fixed deposits. Saving account are offered by commercial banks and financial institutions. Obtaining funds in saving account may not be as profitable as demand deposit account because these deposits are generally paid interest. A bank may insist on receiving prior notice of a planned withdrawal from saving deposit. But this practice has been disappearing gradually due to the cut throat competition. However these deposits are less volatile and less concentrated in nature and are considered as the best type of deposits. • FIXED DEPOSIT :- A fixed deposit is a deposit at banking institution that cannot be withdrawn for a certain term or period time. When the term is over it can be withdrawn or it can be held for another term. In this type of deposit, a customer is required to keep fixed amount of money with the bank for a specific purpose and period of time. Depositor is not allowed to withdrawal the amount before the maturity period. In case if depositor has to withdraw the amount the agreement will be void and no/or less interest is paid. • CALL DEPOSIT :- Call deposit also known as hybrid deposit is a combination of current and fixed deposit invented for meeting customers financial needs in a flexible manner. Increasing competition has facilitated to introduce this deposit product. This deposit mainly serves the need of appropriate asset liability management of the banks and financial institutions. Generally the practice of inter-bank borrowing and lending activities conducted through this product. • MARGIN DEPOSIT :- This account is for holding margin money of the customers as deposit (non-interest bearing) to avail various facilities from the bank . Customers are not allowed to withdraw any amount from such accounts till the expiry of the availed facilities. Margins are required for Guarantee, remittance and some other facilities. In this deposit, customers give the assurance of there deposit. Bank provides required facilities for their client. The main purpose of bank is profit maximization. So, Banks try to convince the client by providing better facilities as well as assurance.

Objective Of Deposit:
The main objective of a deposit is to save money in a safe account. Savers normally use deposit accounts for the long range, although banks offer deposit products for terms as short as one week for a certain threshold of funds (normally at least $100,000). Depending on the saver's own appetite for risk, deposit accounts may be just a part of the portfolio, the bulk of the total savings plan or even the only investment made. The Federal Deposit Insurance Corporation (FDIC) reminds us that no depositor has ever lost even a penny of FDIC-insured accounts, an important consideration for conservative investors who want a safe place to put money, while earning modest interest rates
Individual bank deposits provide the least expensive cost of new money for the bank to loan out.
The large amounts of people and deposits help the banks make lots of profit since the banks charge at prime rate (set indirectly by the country's bank) and the banks pay a low nominal interest on the deposits.
Money is needed to add new infrastructure (road, bridges, sewers, factories, etc) and capital equipment (machinery, assembly robots, etc) in order to grow the economy.
The banks are reluctant to borrow from other banks or other sources (such as rich persons) since the interest rate charges is much higher than the banks would pay individual deposits.
Importance of Deposit:

Since the amounts of deposits are very high in some countries, such as Japan and China, this new capital (or money) has fueled growth over the past few years.
As a consequence, economists always consider bank deposits as part of the overall money supply for the economy. Deposit:
Deposits are a crucial part of any investment and savings plan. Although during a recession deposit accounts may pay considerably less interest due to low rates, bank deposits provide savers with a measure of safety that cannot be found elsewhere. Actively managing your deposit accounts will ensure that you know how these savings instruments work, a first step toward reaching your financial goals.
Banks are crucial to a country’s economy; they serve as the center point of the exchange of money throughout the economy. They gather savings from small and large depositors, make loans, run the payments system, and coordinate financial transactions. In developing countries, they usually are the heart of the financial market and in industrial countries with complex financial markets they still have a role as primary providers of financial services.

Problem:
It is a common problem, ensuring your deposit account interest rate is keeping pace with the market. As individual clients, most of us will research the options, select an account and then trust the banks to continue to keep their end of the bargain or at least to tell their clients when they have changed their interest offering. But all too often, this is not the case. Banks regularly operate a business model based on the fact that their headline interest rates are temporarily and will be cut, as accounts are closed or downgraded. Keeping track of this ever changing environment is virtually impossible for all but the most diligent private clients, but on the other hand, optimizing returns on cash deposits within trusts and companies is one of the main responsibilities of a fiduciary company, so it is reassuring to know trust companies have recognized this problem and developed solutions accordingly.
Solution:
Bank operates a cash management policy based on a pooled funds concept, which enables it to negotiate higher returns based on larger deposits from banks, whilst for reporting purposes, client funds are kept segregated. This approach ensures enhanced returns, clear identification of balances, regular monitoring of interest rates and a much improved risk diversification for clients.
Historically, trustees and company directors have sought to find the most attractive deposit returns in the market, moving client accounts between banks, when interest rates become uncompetitive. Changes in the account opening rules imposed upon banks to prevent money laundering and promote greater clarity in the operation of accounts mean that simply swapping banks to chase the best interest rate is no longer practical from a time and cost perspective. Equally, the recent banking crisis has highlighted the importance of deposit security: placing deposits with one bank alone is unlikely to represent a good risk diversification strategy.
The Bank therefore aggregates available cash deposits into a pool and the funds are then allocated amongst a number of pre-approved panel banks. The objective is to access higher yields by dealing in larger volumes, whilst at the same time allowing for greater risk diversification between banks used.

Liquidity:

Active management of the deposit pools ensures there is always sufficient liquidity to meet clients' requirements. Funds are invested in cash only products with enhanced returns and strong liquidity, often developed by the approved panel banks to specifically meet cash management objectives. In normal market conditions, this will provide the accessibility of a call account with the better returns of a deposit account. The pool does not hold any gilts or treasuries and therefore its overall risk profile is below that of a money market fund. For clients with specific cash management requirements, individual bespoke pools can be created.

Diversification of credit risk:

Each pool will have target aggregate risk rating of A+ amongst the institutions used. Panel banks must have strong individual ratings of A- or more as rated by standard and Poor's, with no bank allowed to hold more than 50% of the pool. Institutions with A- rating are permitted to hold up to 5% of the pool value, subject to the overall pool meeting its composite A+ rating target. Bank is responsible for determining the risk and investment profile of the pool and the on-going monitoring and supervision of the performance of the funds invested.
All banks on the panel are reviewed at least quarterly. Banks that do not meet risk and return guidelines are removed from the panel and replaced with other qualifying banks.

Segregation:

Client assets continue to be completely segregated and identifiable. A full audit trail for all cash movements in client accounts is in place, with real time reporting available on individual client funds held with any panel bank.

Interest:

An overall interest rate is achieved by blending the yields achieved across the banks used. A tiring matrix is then applied to ensure that clients with larger balances in the pool receive a larger proportion of the return than clients with lower balances.
At any point, Clients can elect to be excluded from the pool and request individual cash management services, should this be a more appropriate solution to their portfolio requirements.
Conclusion:

In the bank deposit management is very important and complex task. The knowledge that their savings are protected gives small depositors confidence in the banking system as a whole. Therefore, the amount that can be insured needs a cap and conditions should be set out that will in effect limit coverage for large depositors. The system should state whether the cap will apply to each and every deposit at a failed bank, to the sum of all of a depositor’s separate accounts at a failed bank, or to the sum of all accounts owned by an individual depositor at all banks that fail during a given period. The system also needs to determine whether it will protect deposits in foreign currencies. The size of the cap will influence the extent of demands placed on the system. A small cap will protect most individuals, but not corporations with access to information on a bank’s condition.