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Money and credit - Ivanov V.M.

24.3. Deposits and deposits attraction operations

A deposit is money (in cash or non-cash, in national or foreign currency) transferred to the bank by its owner or a third party on behalf of and at the expense of the owner for storage on certain conditions. Operations associated with raising funds in deposits are called deposit. Therefore, in the practice of commercial banks, customer deposits are deposits and are the main source of banking resources.

In principle, a deposit can be any account opened for a client in a commercial bank in which his money is stored, including active-passive accounts if they have a credit balance.

There are various signs of classification of deposits. It must be borne in mind that the boundaries between individual types of deposits are blurred, hybrid ones appear that combine the properties of various types of deposits. The reason for this process is increased competition between commercial banks themselves, as well as between commercial banks and non-banking institutions for raising funds from legal entities and individuals.

Depending on the depositor, deposits are usually divided into deposits of individuals and legal entities. The composition of legal entities is heterogeneous, therefore they can be classified depending on the type of society, form of ownership, nature of investments, and other characteristics. Deposits in banks can be placed by the government and local authorities, enterprises and organizations of all sectors of the national economy, credit and financial institutions, and citizens.

Depending on the term and procedure for withdrawal, deposits are divided into demand deposits and term deposits.

From the point of view of purpose, deposits can be divided into three groups: demand deposits, term deposits and savings.

Demand deposits are intended for current settlements; placed in commercial banks on current or contract accounts and may at any time be partially or fully replenished or in demand. In the case of placing funds in the current account, the client can withdraw an amount not exceeding its actual balance. On the contrary, both a credit and a debit balance are possible on a contract account, that is, the account holder can not only withdraw his deposit, but also get a bank loan for a certain time.

Demand deposits are withdrawn both through cash and through various forms of cashless payments.

With the regular use of funds held in current and some other bank accounts, most customers still have certain unused cash balances. The formation of balances on customer accounts is associated with the settlement of funds on passive and active-passive accounts in a commercial bank for a period of time that cannot be established at the time of receipt of funds to the account. In their composition, they are heterogeneous and include funds: on settlement, current and budget accounts of legal entities and individuals; on special accounts for the storage of funds and funds different in their intended economic purpose; in the calculations; on correspondent accounts for settlements with other banks; on some other bank accounts. The Bank, servicing customers, uses credit balances on their accounts by conducting active and other operations in order to make a profit.

Demand deposits are unstable, which limits the possibility and scope of their use by commercial banks. Therefore, current account holders are paid a low deposit interest or not paid at all. However, it should be borne in mind that the owner of such an account must pay for the services of a commercial bank for its maintenance, and for interest accounts the commission is withheld from deposit interest. Some commercial banks, instead of covering operating costs for maintaining interest-free current accounts, require owners to maintain a predetermined cash balance on them. If the owner violates this condition, that is, if the previously agreed balance of funds is reduced, he will pay all the bank’s operating expenses for maintaining the current account. This encourages account holders to be more attentive to issues related to maintaining current accounts.

In the absence of a charge on demand deposits and increased competition in the deposit services market, commercial banks try to attract customers and stimulate the growth of demand deposits by providing additional services that greatly facilitate the account holder to make regular payments and improve the quality of service.

Fixed-term deposits are funds deposited with a bank for a strictly specified period. They, in comparison with demand deposits, which are mainly short-term in nature, are made for longer periods.

It is unprofitable for a depositor who has a significant sum of money on demand deposits and who foresees significant expenses for any purpose to keep the said funds in a current account for a relatively small percentage or even without paying one. It is more profitable for him to put available funds on a fixed deposit. Then, when the time comes, he can withdraw money from the term deposit and carry out the intended expenses, while receiving additional profit. For time deposits, a sudden change in size, as well as the establishment of their value in round amounts, is characteristic. Consequently, the meaning of long-term investment of funds consists in the receipt by the depositor of higher interest than on demand deposits.

The Bank is also interested in attracting fixed-term deposits, as they are stable and allow it to hold funds for a long time and accordingly increase operating income from interest.

Term deposits can be of two types: actual term deposits and deposits with prior notification of withdrawal. Time deposits themselves are returned to the owner in a predetermined period. If the amount originally invested as a fixed-term deposit is not withdrawn by the owner in a timely manner, then in the future he can dispose of it in the same way as a demand deposit.

For withdrawal of deposits with prior notice, a notification must be received from the depositor in the commercial bank. The deadline for submitting a notice on withdrawal of a deposit is agreed in advance between a commercial bank and a depositor. The notification of the withdrawal of funds allows commercial banks to refinance their active operations at the expense of other sources and thus reduce the amount of operating expenses.

The fact that the owner of a term deposit can dispose of it only after the expiration of a predetermined period, in some cases does not exclude the possibility of early receipt of his money from a commercial bank. In case of early withdrawal by the depositor of funds, the size of the interest paid on the fixed-term deposit is significantly reduced.

One of the forms of term deposits is a certificate of deposit - a written certificate of the bank on depositing funds, which gives the right to the depositor to receive at the end of the set term of the deposit and interest on it. Certificates of deposit are issued by banks at a percentage specified in the contract for a specified period or on demand, registered and bearer. Registered certificates are not subject to circulation, and their sale (alienation) to other persons is invalid.

In a number of countries certificates of deposit are issued, which can be sold by depositors to a bank or transferred by one person to another using an endorsement (endorsement). Such certificates of deposit, as a rule, are issued in high denomination, circulate on the secondary securities market, which makes it possible for their owners to return funds before the end of the specified deposit period.

If the holder of the urgent certificate of deposit requires the return of the deposited funds earlier than the deadline set in it, then he shall be paid a reduced percentage, the level of which is determined on a contractual basis when making a deposit.

Savings deposits are intended for the accumulation or investment of monetary savings. They are characterized by slow, smooth growth and the fact that money is usually used only after a long period of time. It should be borne in mind that savings deposits do not include funds deposited in accounts intended for payments or invested for a predetermined period. A feature of savings deposits is that their owners are issued a personal certificate of the presence of a deposit in the form of a savings book, which indicates the identity of the owner and the rules for using the account, and also reflects all operations on the account. A savings book is issued only when a certain amount of money has been deposited into an account with a commercial bank, that is, it cannot be obtained on a credit basis.

A variety of savings deposits are accounts with a statement of the state of the savings deposit, which are generally similar to the accounts used to keep the savings book. In this case, instead of savings books, statements about the state of the savings account are used, which are periodically transmitted to the depositor at the agreed time and order (for example, by mail).

Withdrawal of funds from the savings account is possible only after the notification by the owner of the deposit. The notification period can be determined by law or set individually between the commercial bank and the account holder. This indicates that savings deposits assume the presence of stable cash balances in the accounts that are used in active banking operations. Moreover, in a number of countries it is legally established that monetary savings, for their greater safety, should be invested in relatively reliable assets, for example, government securities or mortgages on land plots.

Despite the need for prior notification of the withdrawal of funds from savings deposits, commercial banks issue them to depositors upon request. In this case, a commercial bank charges a depositor a fee to cover its operating expenses, usually by deducting them from the deposit interest.

Increasing competition in the deposit operations market, the use of electronic computers and other factors contributed to the emergence of new types of deposits that combine the individual properties of demand deposits, term deposits and savings. This is evidenced by the experience of both countries with developed market economies and Ukraine. Commercial banks are increasingly paying interest on demand deposits, using “hybrid” accounts, the funds of which are used both for financial investments and for current settlements. Term deposits in terms of their liquidity are close to savings, since the size of the losses of depositors in case of early withdrawal of funds is practically insignificant. The liquidity of savings deposits is increased due to non-cash payments made by them, the use of ATMs that allow you to withdraw funds from deposits at any time of the day, as well as the use of credit cards.

Deposits are an important source of resources for commercial banks. However, they, as a source of the formation of bank capital of a single commercial bank, have some drawbacks. Firstly, operations to raise funds for deposits are associated with significant marketing efforts, cash and material costs of a commercial bank. This does not allow a commercial bank, if necessary, to quickly receive funds for conducting active operations, making unexpected payments. Secondly, commercial banks are required to keep part of the attracted deposits and deposits with the National Bank of Ukraine. Thirdly, the mobilization of funds in deposits and deposits in most cases depends on the depositor, and not on a commercial bank, which is often difficult, or even impossible, to obtain additional funds through deposits. Finally, the total amount of temporarily free cash in an individual region is objectively limited.

To promptly raise the necessary additional funds, commercial banks use the opportunities of the interbank resource market, in which there is a sale of funds mobilized by other credit institutions.

Interbank credit occupies a special place in the structure of resources of commercial banks. This is a source that is operative in the way of obtaining funds, which is mainly in short-term in nature. An interbank loan is provided within the framework of correspondent relations, but at the same time it is expensive in relation to other sources of banking resources. Commercial banks can acquire additional resources from other commercial banks or from the National Bank of Ukraine. The possibility of selling money from one commercial bank to another is due to the presence of excess resources at the first in certain periods of time, which reflects the amount of resources mobilized by the bank minus the liquidity reserve and investing in loans and other income-generating operations to the bank. Moreover, the liquidity reserve of a commercial bank depends on the reserve requirements established by the National Bank of Ukraine and the level of liquidity reserve determined individually by the commercial bank. The reasons for the sale of banking resources by one commercial bank to another are different: the lack of proper demand and favorable allocation of resources among its customers, the need to establish closer relations between banks, etc. At first, commercial banks resorted to buying resources from other commercial banks solely to bring them in line with instructions of the National Bank of Ukraine of the level of their required reserves, solvency and liquidity indicators, as well as having encountered certain difficulties. Subsequently, this operation was linked to the need to increase the volume of its resources in order to obtain income from their profitable investment.

Specific to a commercial bank are loans received from the National Bank of Ukraine. Their source may be mainly emissions. The possibilities for commercial banks to use loans of the National Bank of Ukraine are determined by the main directions of a unified state monetary policy. After all, loans from the National Bank of Ukraine are a means of issue and one of the instruments for regulating the money supply in circulation. In order to reduce the money supply, the National Bank implements a policy of credit restriction, including by reducing loans provided to commercial banks and increasing interest rates on these loans. And vice versa, if the growth of the money supply is expected, the National Bank of Ukraine carries out credit expansion, including by expanding the loans provided to commercial banks and lowering the level of interest rates on them.

The provision of loans by the National Bank of Ukraine in some cases is associated with refinancing, that is, commercial banks initially provide loans to their customers from their own resources, and subsequently the National Bank reimburses (refinances) their commercial bank. Commercial banks can resort to obtaining loans at the National Bank in order to maintain the economic standards established by it, to make it necessary to pay their obligations urgently, and in some cases to increase the resources for granting loans and other active operations that bring profit to the commercial bank. The National Bank of Ukraine is the lender of last resort to commercial banks.