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Sem 5 Prep
← Money & BankingSources and uses of bank funds

Formulas for this chapter

CASA ratio

CASA ratio = (Current account deposits + Savings account deposits) / Total deposits

Any question on the cost or the stability of a bank's funding. Only current and savings go on top; fixed, recurring and term deposits are in the denominator only.

Current accounts
Demand deposits paying 0% interest
Savings accounts
Demand deposits paying usually 2% to 4%

Weighted average cost of deposits

Cost = (SUM of each bucket x its rate) / total deposits Saving from a mix shift = amount shifted x (old rate - new rate)

When a deposit mix and its rates are given. Divide by total deposits, not by the interest-bearing ones, or the zero-cost current accounts will vanish from the answer.

bucket
Current, savings or term deposits, each with its own rate

Net interest income from a balance sheet

Interest earned = advances x lending rate + SLR securities x their yield + 0 x CRR cash Interest paid = CASA x CASA rate + term deposits x term rate NII = interest earned - interest paid

When a question builds a bank from its deposit mix and reserve requirements. The CRR balance is non-earning, so it appears on the asset side with a yield of zero and still has to be funded.

advances
Deposits times (1 - CRR% - SLR%), when the bank lends to its limit
Step 1 of 26
The ideaTheory

A shop with two doors

Money comes in one door and goes out the other. A bank's whole business is the gap between what it pays at the first door and what it earns at the second.

Pay 4% for deposits, lend at 9%, and the 5-point gap covers salaries, bad loans and profit.

So there are only two questions in this chapter. Where does the money come from, and how cheap is it? Where does it go, and how much does it earn?

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