No matter how diverse the functions performed by commercial banks, all of them as a result are realized through operations. The latter are divided into intermediary, active and passive operations of commercial banks. Let us consider in more detail each of these groups.
Principles
The separation of operations is carried out depending on how they affect the resources of the bank, that is, on the funds that the institution can use for investment. Active operations lead to an increase in the money supply in accounts. This category includes loans, real estate investments, securities, etc. Passive operations of commercial banks increase the account balances on which profit, loans received, customer deposit balances, etc. are carried out. Bank operations carried out are also important for the public farms. With their help, financial institutions redirect released funds to promising sectors of the economy.
Types of assets
Assets are allocated based on the ratio of riskiness and profitability. The less liquid the investments, the more income they can bring. According to this criterion, they are divided into working and non-working. The first group includes investments in the Central Bank, loans and other operations that generate income. The second group includes balances on reserve accounts, cash on hand, real estate investments, etc.
For low liquid assets, the process of converting into cash is very slow. This category includes long-term debts, investments in difficult to sell real estate, long-term loans. Demand loans, bills are converted into money supply with a slight loss of value. Highly liquid assets, such as cash on hand, can immediately be used to satisfy loans and pay deposits.
Active operations are divided into credit and investment. Consider these categories in detail.
Credit operations
Transactions on providing funds to the borrower on a paid, repayable and urgent basis bring the most profit to the bank. Lending is direct and indirect. In the first case, the client himself applies to the bank for a loan. In the second case, credit relations arise first between entities, which then draw up a bill, factoring or leasing.
For the provision of a loan, the client pays a certain cost, which is fixed in the form of an interest rate. It includes the costs of providing the operation and the profit of the financial institution. The rate depends on:
- demand for loans;
- Central Bank refinancing level;
- loan term;
- type of loan;
- average rate in the interbank market;
- level of inflationary processes.
Loans are classified by:
- loan term;
- type of collateral;
- type of loan (commercial, public, private, banking);
- in areas of use (investment, for the formation of working capital, to eliminate temporary difficulties);
- size;
- method of provision (bill, seasonal, through a bank account).
Algorithm
The process of providing a loan consists of the following stages:
- Assessment of the economic situation in the industry, based on which a credit policy is developed.
- Obtaining documents from the borrower and concluding an agreement.
- Monitoring the financial condition of the borrower and the use of credit.
- Refund to the bank.
To issue loans open:
- A simple account for each individual contract.
- A special account from which funds are transferred to pay for payment documents or to the client’s current account.
- Contract account, which reflects all receipts and payments. In this case, the bank sets a limit and a maximum period for the presence of a debit balance. The loan amount depends on the quantity and quality of securities provided as collateral.
Investment operations
The Bank invests in the Central Bank on a long-term basis in order to make a profit. Transactions with the Central Bank are divided into the following types: transactions with promissory notes, repurchase transactions, investments in the Central Bank in order to obtain interest income, resale of shares.
Agency operations
The financial institution also makes profit from intermediary transactions. These include:
- Operations with cash settlement.
- Purchase and sale of securities at the request of the client.
- Factoring
- Leasing.
- Consulting
- Trust Operations.
- Depository services.
These are active and passive operations of a commercial bank, which are carried out simultaneously.
Passive operations
The role of passive operations in the activities of a commercial bank is to form its own and borrowed resources. These are operations to raise funds, namely: attracting loans, deposits from other banks, issuing their own securities. Funds raised from such transactions are the basis of the financial institution.
Types of passive operations of a commercial bank:
- The issue of the Central Bank of the Bank (contributions to capital).
- Deductions for the formation of funds.
- Getting loans from other banks.
- Deposit operations.
A detailed description of the passive operations of commercial banks will be presented below.
Resources
Passive operations of commercial banks are used to replenish the capital of a financial institution. Its size affects the liquidity, solvency and profitability of the institution. Bank resources - a combination of all the funds of the institution used to conduct operations. They are divided into equity (charter, additional capital) and borrowed (deposits).
The process of attracting free funds from organizations and the population is regulated by the internal deposit policy. It prescribes:
- Bank strategy to raise funds, goals and objectives aimed at its implementation;
- acceptable ratio of own and borrowed resources;
- structure of borrowed funds;
- preferred types of deposits;
- correlation between fixed-term and demand deposits;
- category of investors;
- ways to attract resources;
- the ratio between foreign currency and ruble deposits, etc.
Equity
Structure:
- Funds (authorized capital; depreciation, reserve, temporary funds that are formed as a result of inflation):
- OS revaluation
- share premium;
- revaluation of the money supply;
- reserves for possible losses from loans, depreciation of the Central Bank and other operations.
2. Retained earnings.
The procedure for calculating own funds is carried out in accordance with the regulation of the Central Bank of the same name No. 215-P and under the Basel agreement. The whole process comes down to dividing capital into levels.
The first:
- Share capital (paid ordinary and preferred shares).
- Published reserves: profit from the sale of securities, retained earnings, general reserves.
Second:
- Reflected in the accounting report but not published reserves.
- Revaluation of OS value.
- Reserves that may arise with long-term ownership of the Central Bank.
- Deductions for deferred losses.
- Hybrid financial instruments.
- Long-term subordinated liabilities.
Standards of sufficiency of funds:
- the ratio of tier 1 capital to assets should exceed 4%;
- the ratio of capital of the 1st and 2nd levels to assets should exceed 8%.
Depends on the size of the bank’s own resources:
- the volume in which active and passive operations of a commercial bank are carried out;
- safety of funds and stability of customer service;
- adequate indicators of the financial activities of the bank.
Borrowed capital
The classification of passive operations of a commercial bank according to this criterion is different in domestic and foreign literature. The fundamental difference is between funds that are already capital and resources that are at the stage of transformation. Given this difference, the structure of borrowed funds looks like this:
- Attracted from depositary operations funds.
- Borrowed funds obtained from such sources:
- interbank loans;
- debt securities (bills, bonds, certificates);
- REPO operations, etc.
Deposit operations
These are the main passive operations of a commercial bank. These include:
- Term deposits, that is, customer funds that are stored in accounts, but are intended for withdrawal through an ATM, credit cards, letters of credit. Banks can use these funds to satisfy their own needs or to reinvest.
- Fixed-term deposits are ordinary bank deposits.
- Savings accounts are funds of individuals that are attracted for a fixed term.
Funds that are in savings accounts are exposed to various external factors (political, economic and psychological). Their rapid outflow contributes to the loss of liquidity. Banks cannot renew these resources continuously.
Certificates of deposit
The Federal Law “On Banks and Banking Activities” provides that a credit institution has the right to issue shares, bonds and such specific securities as deposit certificates. In world practice, this tool is used to manage liabilities, as the bank raises funds at a higher interest rate.
A certificate of deposit is a bank certificate of a deposit confirming the beneficiary’s right to receive a deposit amount at the expiration of the term, taking into account the interest. The circulation process of these securities is regulated by the Regulation of the Central Bank No. 14-3-20 of the same name. All certificates are urgent securities with a circulation term of 3 years. At the end of this period, the bank is obliged to pay the client the amount at his first request. Certificates cannot be used as settlement or payment documents.
Classification:
- For depositors: deposit (for legal entities) and savings (for individuals).
- By the method of deposit: one-time and serial.
- By design: registered and bearer.
- According to the terms of payments: regular payment of interest or full repayment at the end of the document.
Bill of exchange
Passive operations of a commercial bank include operations to raise funds using bills of exchange. Such operations are regulated by:
- "Regulation on the bill" of 08/07/1937
- Federal Law No. 48 "On a bill of exchange and a promissory note."
- General rules of the Civil Code and acts regulating monetary relations, in particular the Federal Law “On Banks and Banking Activities”.
The bill of exchange certifies the obligation of the bank to pay a specified amount within the specified period. The release of these forms is not subject to registration. The holder can use this document for settlements or as collateral when obtaining a loan. The beneficiary receives a certain fee for the provision of his funds for another's use. For the attracted amounts, a financial institution forms reserves on the accounts of the Bank of Russia.
Benefits of Bills:
- the issuer independently determines the maturity of the document and makes its early redemption;
- it is possible to attract intermediaries for the distribution of certificates;
- in the secondary market, the beneficiary can sell (endorse) a bill without loss of profitability.
Interbank loan
Any bank periodically has an excess or lack of resources.This problem is easily solved by domestic bank loans, that is, by means that financial institutions place or attract from each other for a short-term period. As collateral for such transactions, shares, bills and debt instruments are used.
These passive operations of commercial banks in the domestic market allow:
- quickly replenish correspondent accounts for active operations;
- reduce reserves to maintain liquidity;
- increase the efficiency of the use of credit resources in general;
- since the requirements for creating reserves are not subject to interbank loans, all profits made can be directed to active operations.
Today, the Bank of Russia also participates in the domestic market, providing a loan secured by state securities or loans from first-class borrowers. In general, the market has become more segmented. Large banks and non-residents work mainly among themselves.
The whole mechanism is carried out through credit stores. First, the participant submits an application for a loan indicating the amount and term. Based on the given requirements, he receives market quotes and selects the best product. For each client, the lender calculates the transaction limit, which includes direct loans, bonds and guarantees. The regulator uses its own methodology for calculating the limit, based on the financial condition of the bank, its lack of obligations and the availability of collateral.
REPO
This financial transaction consists of two stages: the bank sells the securities to the client and at the same time takes the obligation to redeem them on the indicated date or at the request of the other party. Bank income is the difference between the purchase and sale price. Let us examine how such passive operations of commercial banks are carried out in practice.
Examples
The client wants to get a loan of 1 million rubles. The bank is ready to provide a loan for 1 year at 10%, but provided that the borrower's apartment is used as collateral. If a client pays a loan within a year, taking into account interest, the bank will remove the arrest from the property. If the debt is not repaid on time, the credit institution will sell the apartment and take back the remaining amount of debt, taking into account interest. This is how ordinary credit works.
In the case of repos, the transaction is executed differently. The bank today buys from the client an apartment for 1 million rubles. The contract of sale states the obligation of the bank after 1 year to sell the apartment back to the client for 1.1 million rubles. If the debt is not repaid on time, the borrower will lose his property.