The Importance Of Cost Of Fund

The importance of embody of fund
The banks aw areness on the hail of deposits or cost of funds at all timesis basically to forever identify the cost of doing business. This is dueto the dynamic composition of deposits and its volatility, which effectivelychange the aggregate cost of deposits.In comparison to a normal company set-up where the capital is normallyfixed, the cost of capital or return on equity is exceedingly predictable anddividends is paid on yearly basis; the banks deposits get under ones skin differentchallenges to its management.In early days, banks offer only a few products and many an(prenominal) ope rated assingle-branch banks. Added by regulations on the deposit rate ceiling, thebanks management are quite straightforward. However, nowadays banksbecome major establishments with branches nationwide and overseasoffering a classification of products and services to their customers. And thebanks are aggressively competing to maintain existing depositors andattract newborn clients. Normally, banks resort to offering better services and amplyer(prenominal) interest rank which effectively increase the cost of deposits.On the other side, the banks shareholders demand higher profit and better dividend payout. The banks profit margin is projected and themanagement is minded(p) the tasks to achieve the goals.



Literally, to satisfy both the higher interest rate to depositors and higher dividend payout to shareholders, banks need to price the loan relativelyhigh and invest in high-return investment products. But, this cannot betrue considering that the banks also struggle to compete for loan customersespecially for high net worth corporate customers and high-returninvestment products are quite especial(a) in the market.In summary, the cost of deposits is the key factor that determines the loanpricing and targeted investment income, which wherefore provides thebanks profit. Without a prudent cost of deposits management, the bank could abide its competitiveness.

Liquidity reserves impact
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