Question

26. Write out the formula explaining the factors that affect bank cash flows and define cach factor.

Answer 1

Factors that affect bank cash flows are:

1. Overhead expenses and indirect costs- The loan recovery cost, customer acquisition cost, customer retention cost, interest rate fluctuation risk and the cost incurred for the same,etc these costs are overhead costs for the bank and if these increases than the money bank is earning from its customer then the cash flow will get affected and might get restricted as well.
2. Decrease in interest rates for deposits and saving accounts - When the products which bank are offering decreases in value its worth gets depleted and so customer might not want to give the money to the bank which will lead to lowering of cash outflows.
3. No confidence in the market- if the bank has poor rating and does not hold credibility in the market then the customers would show no turn up towards the bank which may lead to driving the bank out of the market.
4. The economy- If the economy is in recession and the people in general have low spending ability then the bank's cash flow is bound to get slowed down.
5. Expansion- if the bank decides to expand and increase its market area to capture the same there would be tremendous amount of cash outflow which will affect the cash flows.
6. Competition- to beat the competition sometimes bank plays dirty games which sometime leads to going overboard and benefiting the customer but at the end leads to loss of the bank.In such instances there is a cash outflow.

There are other small factors as well which might affect the cash flow of the bank.The above mentioned ones are the major factors.