Banks earn profit mainly by borrowing (by way of deposits) from public at lower rates of interest and lending at higher rate of interest for economic activities. The difference is called spread. spread of bank less administrative expenses is the profit. Hence higher the spread higher is the profit.
The distribution of total deposits under various types of deposit products is called Deposit Mix.For example-The arrangement of (CA, SA, SND/ STD, DPS, FDR, FCD) MSA, MSN, MSS, MMPDS, MTDR, AWCA, MFCD, MCWD and other deposit products. 15% Cost Free deposit of total deposit denotes ideal deposit mix.
Deposit Mix useful for Bank Profitability
There are basically three types of deposits-
1. Current Deposits (No Profit/ Interest)
2. Savings Deposits (Marginal Interest/ Profit Rate- Mostly 4%)
3. Term Deposits (Slightly higher Interest/ Profit Rate- say 7% p.a -8% p.a).
Now let us define deposit mix. Deposit mix refers to the combination of various types of deposits (as above) and their share in total deposits. Current and Savings deposits are no cost and low cost funds. Hence, banks prefer to increase their share in total deposits.
We find banners in banks saying it is CASA week meaning that banks during that period try to canvass more of Current Accounts( CA) and Savings Accounts (SA).
Thus deposit mix play a very important role in deciding the profitability of Banks.