Depository Institutions

What is depository institutions?

As the name implies, it refers to financial institution that accepts deposits from surplus units. It issues checking or current account, savings, and time deposit and help depositors with money market placement.

Depository institutions, which are usually just called banks, are categorized as such because their primary source of funding is the deposits of savers. Banks are further subcategorized depending on the markets they serve, their primary sources of funding, type of ownership, how they are regulated, and the geographic extent of their market.

Functions of Depository Institutions

They accept your money and typically pay interest over time, though some accounts will provide other services to attract depositors in lieu of interest payments.

While holding your money, they lend it out to other people or organizations in the form of mortgages or other loans and generate more interest than they pay you.

When you want your money back, they have to give it back. Fortunately, they usually have enough deposits that they can give you back what you want.

Plus, safeguards are now in place to protect against another Great Depression in the future (at least one that occurs because banks lend out more money than they keep on hand paying back to their lenders).

Depository Institutions includes: Commercial BanksA. Ordinary Commercial BanksB. Expanded Commercial or Universal

Banks Thrift BanksA. Savings and Mortgage BanksB. Private Development BanksC. Savings and loan associationsD. Microfinance Thrift BanksE. Credit Unions Rural Banks

Commercial BanksCommercial banks are easily the largest type of

depository institution. They’re for-profit corporations that are usually owned by private investors. They often offer a wide range of services to consumers and corporations around the world.

The primary business of commercial banks is to serve businesses, although with banking deregulation they have entered into the consumer business as well. Commercial banks provide the widest variety of banking services. In addition to savings accounts, checking services, consumer loans, commercial and industrial (C&I) loans, and credit cards, commercial banks may also offer trust services, trade financing, investment banking and management for corporations, governments and their agencies, and treasury services.

Ordinary commercial banks perform the more simple functions of accepting deposits and granting loans. Expanded commercial banks or universal banks( also called unibanks) perform investment services. They are “expanded” because they function as an investment house and investing in stocks and bonds of non-allied businesses.Universal and commercial banks represent the largest single group, resource-wise, of financial institutions in the country.

Thrift BanksThe thrift banking system is composed of savings and mortgage banks, private development banks, stock savings and loan associations, and micro-finance thrift banks. They banks that serve a local community. They take the deposits of local residents and lend the money back in the form of consumer loans, mortgages, and small business loans. Savings institutions include savings and loan institutions, savings banks, and credit unions.

Savings and mortgage banks are banks specializing in granting mortgage loans other than the basic function of accepting deposits.

Private development banks cater to the needs of agriculture and industry providing them with reasonable rate loans for medium- and long-term purposes.

Savings and loan associations(SLAs, S&Ls) accumulate savings of their depositors/ stockholders and use these accumulated savings, together with their capital, for the loans that they grant and for investments in government and private securities. These associations provide personal finance and long-term financing for home building and improvement.

Microfinance thrift banks are small thrift banks that cater to small, micro, and cottage industries, hence, the term “micro”. They grant small loans to small businesses, like sari-sari stores, small bakeries, cottage industries, among others. They help uplift the standard of living in most rural areas.

Credit unions are cooperatives organized by people from the same organization(whether formally or informally organized) like farmers, fishermen, teachers, sailors, employees of one company, among others. It grant loans to these people who become members of the credit union and get deposits from them.

Rural Banks and Cooperative Banks

Rural banks and cooperative banks are the more popular type of bank in the rural communities. Their role is to promote and expand the rural economy in an orderly and effective manner by providing the people in the rural communities with basic financial services. Rural and cooperative banks help farmers through the stages of production from buying seedlings to marketing of their produce. Rural banks and cooperative banks are differentiated from each other by ownership. While rural banks are privately owned and managed, cooperative banks are organized/owned by cooperatives or federation of cooperatives.