Allocative efficiency, to a greater extent, is associated profitability. Profitability in the bank is a function of several variables that may be called as the determinants of profitability. One of the determinants of profitability has been identified as deposits. The more the fixed deposits in a bank, the more loans the bank can give to a customer or an entrepreneur. rod aycox
and the bank started by him have been able to offer loans of significant sums mainly due to the surging reserves due to the phenomenal deposits made by the common people.
The scale of business and thereby the profitability is a function of the quantum of deposits with the bank. These are the main sources of funds to the bank for the purpose of investment and making advances. Deposits imply additional cost to the banks because interest will have to be paid to the depositors. The service cost involved in time deposits is low but they are the most expensive. On the other hand the demand deposits are cheaper but their service cost is high.
So time deposits carry a high interest rate and put much pressure on profitability. But a bank can use them in high yielding investments because these deposits are more stable than that of others. But in general, higher the deposits, the higher should be the profitability provided that they are managed and utilized properly. Thus the deposits and their composition will have a strong bearing on the profitability of the bank.
Higher deposits are also an indication of the faith and confidence reposed in the banking operations of a bank. Banks with lower money reserves is an indicator of the health of that institution. Especially during crisis situations, banks have collapsed when their customers started withdrawing their deposits in panic. This has happened in almost all parts of the world. Sticking to the notion of profitability is a must to ensure continuity in customer relations. Only then will the confidence in a bank remain as such and not be shaken by the uncontrollable events in the financial market.