Uses of Bank Funds

Bank funds can be used in two ways:



1. Non profitable use

2. Profitable use



Non profitable uses



Banks muse use some of its money without any profit. Such a use is compulsory by law and nature of the business. There are:



1. Purchases of fixed assets.

2. Maintaining cash reserve/till cash

3. Bank reserve at the central bank



1. Purchases of Fixed Assets:



To carry out its business the bank must invest in (i.e. buy) fixed assets which include building, land, furniture. fixture, equipment. as typewriters, cars, vans, computers.etc. These assets do not yield a direct profit or income but are necessary to carry out the bussiness.



2. Cash reserve/Till cash:



The bank must keep a sufficient amount of cash in the reserve to meet checking obligations.

This cash remains in the vaults of the bank and does bring no profits. but it is essential to keep it up to make payments against the cheques presented at the bank for cash.



3. Bank reserve:



All schedule commercial banks are bound to keep a certain part of their deposits at the central bank as mandatory bank reserve. this reserve at the central ank yields no profit to the bank. In the USA commercial banks can put their mandatory reserve in other commercial banks also, with no profit as usual.



Profitable Uses



Profitable use of funds refers to investment that yields profit to the bank. Banks must invest profitably to meet expenses, distribute dividends, and pay interst.



Profitable use may be classified as follows:



1. Lending

2. Investment



1. Lending:


Banks employ their funds inadvancing money and in return get interet income. The loans are provided to the following businesses.

1. Commercial and industrial concerns.
2. Agriculturists
3. House building companies
4. Individuals
5. Brokers

Banks lend their funds in the following ways

1. Call loans
2. Overdrafts
3. Cash credit
4. Loans
5. Discounting bills of exchange

Investments:

Investments refers to buying shares, bonds, debentures, treasury bills in the open market. Banks earn money in the formof dividens, interests and capital gains. Shares and bonds can be bought and sold at the stock exchange. The bank employs its fund in t he following types of investment.

1. Government Securities

They are referred to gold edged securities because they are the safest investments. They are of the following kinds.

a. Treasury bills
b. Treasury notes/coupons
c. Treasury bonds

2. Provincial and Local Gorvernment Bonds

Provincial and local governments need fund to carry out their day-to-day functions. Some of these requirements are financed by the grant-in-aid of the federal government and the provincial an local taxes. Since it takes time to collect taxes and government cannot stop their function their function they issue bonds to raise needed funds.

3. Foreign Governments' Bonds

Foreign governmetns raise funds by issueing bonds on the international markets. The commercial bankers prefer the because they are extremely secured, carry good rate of interest, and yield foriegn exchage.

4. Others Securities

Other securities include bonds or debenture government institutions.

5. Corporate Securities

Public limited companies float their shares and bonds through stock exchanges. Commercial banks purchase them provided the company is financially sound and its business is progressive. Although they are long-term investment but can be sold any time on the stock exchange