Popularity/ Advantages of Savings Accounts

Savings bank accounts are very popular among the general public because of the following advantages:

(a) A savings account can be opened with as little as Rs. 500 only. It helps the people of small means to save for their future.

(b) The balance lying in the savings bank earns some interest. The customer is benefited as his money grows with the bank.

(c) The money lying with the bank is quite safe. There is no fear of theft.

(d) The money can be withdrawn conveniently from the savings account.

(e) The customer gets the cheque book facility if his account is duly introduced by another account-holder and he keeps a minimum balance of $. 1000. It is quite easy to make payment to third parties by issuing cheques.

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Meaning of Unit banking

The banking system in different countries varies substantially from one another. Broadly speaking, however, there are two important types of banking systems, viz., unit banking and branch banking.

‘Unit banking’ means a system of banking under which banking services are provided by a single banking organization. Such a bank has a single office or place of work. It has its own governing body or board of directors. 

‘Unit banking’ functions independently and is not controlled by any other individual, firm or body corporate. It also does not control any other bank. Such banks can become member of the clearing house and also of the Banker’s Association. Unit banking system originated and grew in the U.S.A. Different unit banks in the U.S.A. are linked with each other and with other financial centers in the country through “correspondent banks.”

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Sources of a bank’s Income

A bank is a business organization engaged in the business of borrowing and lending money. A bank can earn income only if it borrows at a lower rate and lends at a higher rate. The difference between the two rates will represent the costs incurred by the bank and the profit. Bank also provides a number of services to its customers for which it charges commission. This is also an important source of income.

The followings are the various sources of a bank’s profit:

1. Interest on Loans: The main function of a commercial bank is to borrow money for the purpose of lending at a higher rate of interest. Bank grants various types of loans to the industrialists and traders. The yields from loans constitute the major portion of the income of a bank. The banks grant loans generally for short periods. But now the banks also advance call loans which can be called at a very short notice. Such loans are granted to share brokers and other banks. These assets are highly liquid because they can be called at any time. Moreover, they are source of income to the bank.

2. Interest on Investments: Banks also invest an important portion of their resources in government and other first class industrial securities. The interest and dividend received from time to time on these investments is a source of income for the banks. Bank also earns some income when the market prices of these securities rise.

3. Discounts: Commercial banks invest a part of their funds in bills of exchange by discounting them. Banks discount both foreign and inland bills of exchange, or in other words, they purchase the bills at discount and receive the full amount at the date of maturity. For instance, if a bill of Rs. 1000 is discounted for Rs. 975, the bank earns a discount of Rs. 25 because bank pays Rs. 975 today, but will get Rs. 1000 on the due date. Discount, as a matter of fact, is the interest on the amount paid for the remaining period of the bill. The rate of discount on bills of exchange is slightly lower than the interest rate charged on loans and advances because bills are considered to be highly liquid assets.

4. Commission, Brokerage, etc.: Banks perform numerous services to their customers and charge commission, etc., for such services. Banks collect cheques, rents, dividends, accept bills of exchange, issue drafts and letters of credit and collect pensions and salaries on behalf of their customers. They pay insurance premiums, rents, taxes etc., on behalf of their customers. For all these services banks charge their commission. They also earn locker rents for providing safety vaults to their customers. Recently the banks have also started underwriting the shares and debentures issued by the joint stock companies for which they receive underwriting commission.

Commercial banks also deal in foreign exchange. They sell demand drafts, issue letters of credit and help remittance of funds in foreign countries. They also act as brokers in foreign exchange. Banks earn income out of these operations. Read More

Management of Financial Institution Math Question Solve, June-2014

6. (A)   Given the following information for bank XYZ Ltd.

Particulars	(In million) Tk.
Interest income Interest Expense Total Assets Securities gain (loss) Earning Assets Total liabilities Taxes Number of common shares Non-interest income Non-interest expanse Provision for loan loss	2250 1452 18918 25 15145 18528 20 145000 600 820 455

You are required to calculate: ROE, ROA, NIM, EPS, Net Non-interest Margin and Net Operating Margin

SOLUITION:

Income & Expenditure	Tk. in Million	Tk. in Million
Income: Interest Income Securities gain (loss) Non-interest income Expenses: Interest expenses Tax Non-interest expense Profit before tax (2875-2292) (-) Provision for loan loss Net profit	2250 25 600	2875 2292
	1452 20 820
		583 455
		128

We know,

                   Total Equity   = Total Assets – Total Liabilities

                                      = 18918 – 18528

                                      = 390

Calculation of Return on Equity (ROE)

We know,

                   Return on Equity (ROE)   = Net Income/Total Equity [Net Income=Net Profit]

                                                          = 128/390

                                                          = .32821

Calculation of Return on Assets (ROA)

We know,

                   Return on Assets (ROA)  = Net Income/Total Assets

                                                          = 128/18918

                                                          = 0.00677

Calculation of Net Interest Margin (NIM)

We know,

Net Interest Margin (NIM)    = (Interest Income-Interest Expenses)/Total Assets of Earning Assets

                                      = (2250-1452)/18918                                      [Considers Total Assets]

                                      = 798/18918 

                                      = 0.04218

Or,

Net Interest Margin (NIM)    = (Interest Income-Interest Expenses)/Total Assets of Earning Assets

                                      = (2250-1452)/15145                                       [Considers Earning Assets]

                                      = 798/15145 

                                      = 0.0529

Calculation of Earnings per Share (EPS)

We know,

Earnings per Share (EPS)          = Net Profit/Number of Shares

                                      = 128000000/145000                    [As 1 million = 1000000]

                                      = 882.75862

Calculation of Net Non-interest Margin

We know,

Net Non-interest Margin  = Non-interest income–Non-interest expenses–Provision for loan loss/Total Assets or Earning Assets

                             = (600-820-455)/18918                                    [Considers Total Assets]

                             = - 675/18918

                             = - 0.035680

Or,

Net Non-interest Margin  = Non-interest income–Non-interest expenses–Provision for loan loss/Total Assets or Earning Assets

                             = (600-820-455)/14145                                    [Considers Earning Assets]

                             = - 675/15145

                             = - 0.04457

Calculation of Net Operating Margin

We know,

Net Operating Margin      = (Total Operating Revenues-Total Operating Expenses)/ Total Assets of Earning Assets

                                   

Here,

Total Operating Revenues    = Interest Income + Non-interest Income

                                      = 2250+600

                                      = 2850

Total Operating Expenses    = Interest Expense + Non-interest Expense

                                      = 1452+820

                                      = 2272

So,

Net Operating Margin      = (Total Operating Revenues-Total Operating Expenses)/ Total Assets of Earning Assets

                             = (2850-2272)/18918                                                [Considers Total Assets]

                             = 578/18918

                             = 0.03055

Or,    

Net Operating Margin      = (Total Operating Revenues-Total Operating Expenses)/ Total Assets of Earning Assets

                             = (2850-2272)/15145                                                [Considers Earning Assets]                                = 578/15145

                             = 0.03816

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