Chapter 1 - Flow of Funds in a Bank

Question 1 - What are the broad functions of a Commercial Bank?

Answer 1 – Functions of a commercial bank

I. A bank whose function is to collect deposits and lend money

II. A Bank which deals in Interbank market (borrow and lend to other banks)

a. Bid Rate – A bank borrows money

b. Ask Rate – A Bank lends money at its quoted Ask Rate at its quoted Bid Rate

c. Ask Rate > Bid Rate (For a Bank)

III. Reserve Maintenance – In some countries, banks are required to maintain a fixed % of their deposits in account with Central Bank (RBI, India). This is called reserve requirement.

a. CRR –

i. % of total deposits a bank has to keep with RBI in cash or near cash assets

ii. It is maintained with RBI

iii. It is maintained in cash

iv. It is 5% to 6%

v. Tool to generate money - Its purpose is absorb excess cash / liquidity from the market and vice versa

b. SLR –

i. % of total deposits a bank has to keep with itself in approved securities

ii. It is maintained with bank

iii. It is maintained in securities approved by RBI

iv. It is 25% of total deposits

v. Secures public deposits - Its purpose is to protect portion of depositors money deposited in the bank in case the bank fails (insurance)