Risk-weighted Assets

Risk-weighted assets are used to determine the minimum amount of capital that must be held by banks
and other institutions to reduce the risk of insolvency. All the risk components are considered together to
“correct” the nominal value of financial assets. In this way, a proper measure of the extent to which the
underlying risk is increasing or decreasing the accounting value of financial assets is generated. This
assessment attributes a high weight-coefficient to high-risk financial assets, and a low-weight coefficient
to low-risk ones. For example, let’s consider two financial assets with the same nominal value:

- A corporate bond with a medium/long-term duration of a company presenting negative losses during
the last three years, and a BBB rating;

- A sovereign bond with a short-term duration of a country presenting a low systemic risk, and a AAA
rating.

Hence, the first financial asset will produce higher RWA compared to the second one.

Statutory Liquidity Ratio

The Statutory Liquidity Ratio (SLR) refers to the proportion of deposits the commercial bank is required to
maintain with them in the form of liquid assets in addition to the cash reserve ratio. The statutory
liquidity ratio is determined by the central bank as the percentage of total demand and time liabilities.

The statutory liquidity ratio is determined and maintained by the central bank to control the bank credit,
ensure the solvency of commercial banks and compel banks to invest in the government securities.By
changing the SLR, the flow of bank credit in the economy can be increased or decreased. Such as, when
the central bank decides to curb the bank credit so as to control the inflation will raise the SLR. On the
contrary, when the economy faces recession, and the central bank decides to increase the bank credit
will cut down the SLR.

Creation of credit
Creation of credit is one of the most important function of a commercial banks. Banks take deposits from
the customers and provides loans from their deposits after keeping necessary reserves like cash reserves
etc. Actually the banking system creates credit rather than a bank individually.

For example, Mr A puts deposit worth Tk. 1000 in X bank. For simplicity assume that there us reserve
requirememt of 10%. X bank can lend Tk 900. Suppose Mr B gets this loan and deposits in his bank
account with Bank Y. Now if forms part of deposits of Y who can lend Tk 810 from the deposit. This chain
continues till the time money remains in banking system. This process is called credit creation where
deposit of Tk 1000 has created credit more than that. The process stops at the point where money is
moved out of banking system.
Functions of Banks

The functions of a bank are also known as banking functions. They are the main functions of a bank.

These functions of banks are explained below.

1. Accepting Deposits

The bank collects deposits from the public. These deposits can be of different types, such as :-

 Saving Deposits
 Fixed Deposits
 Current Deposits
 Recurring Deposits

a. Saving Deposits

This type of deposits encourages saving habit among the public. The rate of interest is low. At present it
is about 4% p.a. Withdrawals of deposits are allowed subject to certain restrictions. This account is
suitable to salary and wage earners. This account can be opened in single name or in joint names.

b. Fixed Deposits

Lump sum amount is deposited at one time for a specific period. Higher rate of interest is paid, which
varies with the period of deposit. Withdrawals are not allowed before the expiry of the period. Those who
have surplus funds go for fixed deposit.

c. Current Deposits

This type of account is operated by businessmen. Withdrawals are freely allowed. No interest is paid. In
fact, there are service charges. The account holders can get the benefit of overdraft facility.

d. Recurring Deposits

This type of account is operated by salaried persons and petty traders. A certain sum of money is
periodically deposited into the bank. Withdrawals are permitted only after the expiry of certain period. A
higher rate of interest is paid.

2. Granting of Loans and Advances

The bank advances loans to the business community and other members of the public. The rate charged
is higher than what it pays on deposits. The difference in the interest rates (lending rate and the deposit
rate) is its profit.

The types of bank loans and advances are :-

 Overdraft
 Cash Credits
 Loans
 Discounting of Bill of Exchange
a. Overdraft

This type of advances are given to current account holders. No separate account is maintained. All entries
are made in the current account. A certain amount is sanctioned as overdraft which can be withdrawn
within a certain period of time say three months or so. Interest is charged on actual amount withdrawn.
An overdraft facility is granted against a collateral security. It is sanctioned to businessman and firms.

b. Cash Credits

The client is allowed cash credit upto a specific limit fixed in advance. It can be given to current account
holders as well as to others who do not have an account with bank. Separate cash credit account is
maintained. Interest is charged on the amount withdrawn in excess of limit. The cash credit is given
against the security of tangible assets and / or guarantees. The advance is given for a longer period and
a larger amount of loan is sanctioned than that of overdraft.

c. Loans

It is normally for short term say a period of one year or medium term say a period of five years. Now-a-
days, banks do lend money for long term. Repayment of money can be in the form of installments spread
over a period of time or in a lumpsum amount. Interest is charged on the actual amount sanctioned,
whether withdrawn or not. The rate of interest may be slightly lower than what is charged on overdrafts
and cash credits. Loans are normally secured against tangible assets of the company.

d. Discounting of Bill of Exchange

The bank can advance money by discounting or by purchasing bills of exchange both domestic and
foreign bills. The bank pays the bill amount to the drawer or the beneficiary of the bill by deducting usual
discount charges. On maturity, the bill is presented to the drawee or acceptor of the bill and the amount
is collected.

3. Agency Functions

The bank acts as an agent of its customers. The bank performs a number of agency functions which
includes :-

 Transfer of Funds
 Collection of Cheques
 Periodic Payments
 Portfolio Management
 Periodic Collections
 Other Agency Functions

a. Transfer of Funds

The bank transfer funds from one branch to another or from one place to another.

b. Collection of Cheques

The bank collects the money of the cheques through clearing section of its customers. The bank also
collects money of the bills of exchange.
c. Periodic Payments

On standing instructions of the client, the bank makes periodic payments in respect of electricity bills,
rent, etc.

d. Portfolio Management

The banks also undertakes to purchase and sell the shares and debentures on behalf of the clients and
accordingly debits or credits the account. This facility is called portfolio management.

e. Periodic Collections

The bank collects salary, pension, dividend and such other periodic collections on behalf of the client.

f. Other Agency Functions

They act as trustees, executors, advisers and administrators on behalf of its clients. They act as
representatives of clients to deal with other banks and institutions.

4. General Utility Functions

The bank also performs general utility functions, such as :-

 Issue of Drafts, Letter of Credits, etc.

 Locker Facility
 Underwriting of Shares
 Dealing in Foreign Exchange
 Project Reports
 Social Welfare Programs
 Other Utility Functions

a. Issue of Drafts and Letter of Credits

Banks issue drafts for transferring money from one place to another. It also issues letter of credit,
especially in case of, import trade. It also issues travellers' cheques.

b. Locker Facility

The bank provides a locker facility for the safe custody of valuable documents, gold ornaments and other
valuables.

c. Underwriting of Shares

The bank underwrites shares and debentures through its merchant banking division.

d. Dealing in Foreign Exchange

The commercial banks are allowed by RBI to deal in foreign exchange.

e. Project Reports

The bank may also undertake to prepare project reports on behalf of its clients.
f. Social Welfare Program

It undertakes social welfare programs, such as adult literacy programs, public welfare campaigns, etc.

g. Other Utility Functions

It acts as a referee to financial standing of customers. It collects creditworthiness information about

clients of its customers. It provides market information to its customers, etc. It provides travellers'
cheque facility.

Types of Bank

Some of the most common banks are listed below, but the dividing lines are not always clean cut. Some
banks work in multiple areas (for example, a bank might offer personal accounts, business accounts, and
even help large enterprises raise money in the financial markets).

Retail banks are probably the banks we are most familiar with: our checking and savings accounts are
held at a retail bank, which focuses on consumers (or the general public) as customers. These banks
gives us credit cards, offer loans, and they’re the ones with numerous branch locations in populated
areas.

Commercial banks focus on business customers. Businesses need checking and savings accounts just
like individuals do. But they also need more complex services, and the dollar amounts (or the number of
transactions) can be much larger. They might need to accept payments from customers, rely heavily on
lines of credit to manage cash flow, and they might use letters of credit to do business overseas.

Investment banks help businesses work in financial markets. If a business wants to go public or sell
debt to investors, they’ll often use an investment bank.

Central banks manage the monetary system for a government. For example, the Federal Reserve Bank
is the US central bank responsible for managing economic activity and supervising banks.

Credit unions are similar to banks, but they are not-for-profit organizations owned by their customers
(most banks are owned by investors). Credit unions offer products and services more or less identical to
most retail and commercial banks. The main difference is that credit union members share some
characteristic in common (where they live, their occupation, or organizations they belong to, for
example).

Online banks operate entirely online – there are no physical branch locations available to visit with a
teller or personal banker. Many brick-and-mortar banks also offer online services, such as the ability to
view accounts and pay bills online, but internet-only banks are different: they often offer competitive
rates on savings accounts and they’re especially likely to offer free checking.

Mutual banks are similar to credit unions because they are owned by members (or customers) instead
of outside investors.
Savings and loans are less prevalent than they used to be, but they are still important. This type of
bank was important in making home ownership mainstream, using deposits from customers to fund
home loans. The name savings and loan refers to the core activity they perform: take savings from one
customer and make loans to another.