Write a note on the assets and liabilities of a commercial bank
Assets And Liabilities of a Commercial Bank.
Introduction :
A commercial bank deals in the business of banking i.e. accepting money from the public for the purpose of lending with a view to make profits.
Thus, they play a pivotal role as a financial intermediary in an economy.
Around banking system is, therefore, extremely essential for the development of a nation.
As in case of any other business, the soundness of the banking business can be analysed through the bank’s profit and loss account and its balance sheet.
Meaning :
The balance sheet of a commercial bank is a statement of its assets and liabilities at a particular time.
The assets of the bank include all the amounts owed by others to the bank
They represent the application of funds to generate income for the bank.
The liabilities of the bank include all the amounts due to depositors and share holders.
The liabilities represent the sources of funds through which bank raises funds for its business.
Explanation :
ASSETS OF A COMMERCIAL BANK :
The funds raised by the bank are applied to various terms that form the assets of the bank.
These assets are represented in order of their liquidity.
They can be categorized as follows :
CASH BALANCES :
Every bank holds cash balances to meet its customers’ requests for withdrawal
These balances are held with the bank itself, with other banks and with the RBI
A certain proportion of cash balances is also held with the Central Bank.
In India, it is obligatory for banks to keep a certain proportion of its total deposits with the RBI
Though cash balances do not earn direct revenue to the bank, they are of utmost importance to maintain sound liquidity position.
MONEY AT CALL AND SHORT NOTICE :
These are short term loans ( between 1 day to 15 days ) made in the money market.
The loans are repayable at the insistence of either the borrower’s demand or the lender’s demand.
These assets are highly liquid as they can be quickly converted into cash at call (i.e. on demand ) or at a short notice.
These loans are generally given to the bill market
To the stock market between banks
To individuals having high financial status.
These loans may be given against collateral security.
DISCOUNTING / PURCHASING OF BILLS OF EXCHANGE
Banks provide credit to businessmen against discounting of bills.
The bill finance is repayable either demand or after a period not exceeding 90 days, whichever is EARLIER.
Thus, they can be converted into cash in less than 3 months.
These discounted bills can be further rediscounted by the bank with other financial institutions.
Banks may also purchase these bills and obtain the funds on due date.
INVESTMENTS :
The investments made by a bank form the major part of its assets.
The investments of a commercial bank can be categorized as :
a) Investment in SLR securities.
b) Investment in non- SLR securities.
a) SLR securities :
At present , as per the RBI norms, commercial banks are statutorily required to invest 25% of their demand and time liabilities in the Government and Approved Securities.
Government Securities
Securities issued by central and state government agencies.
Securities issued by PSUs of the Central and the state governments.
Approved securities :
Securities issued by Quasi- Government agencies.
Such securities are issued on a case to case basis
b) Non – SLR securities :
After the liberalization of investment norms for banks (1985), commercial banks have become active players in the financial market.
Hence banks invest in non- SLR securities like :
Commercial papers } of PSUs and private sectors,
Mutual funds}
Shares & stocks.}
Bonds & debentures}
The limit on investment in capital market has gradually shown an upward trend.
LOANS AND ADVANCES :
This is the most important item in the bank’s asset column.
These include the following:
Cash credit :
Borrower withdraws funds on collateral security
Credit limit is sanctioned by the bank .
Interest is charged on the amount outstanding.
Overdraft :
It is a short term advance
It is allowed on current accounts.
Interest is charged.
Demand loans :
They are short – term loans.
They are to be repaid on demand made by the creditor.
Term loans :
These loans are generally given for a period exceeding one year.
Loans are given against the security of tangible assets.
They have a specific schedule of repayment.
OTHER ASSETS : These include :
Fixed assets.
Bank premises
Items in transit
furnitures and fixtures
though they do not earn direct revenue for the bank, they are vital for its day-to-day functioning.
LIABILITIES OF A COMMERCIAL BANKS :
The funds raised by the banker for carrying out its business are derived from various sources .
These founds comprise the liabilities of the bank
They can be categorized as follows :
1) PAID-UP CAPITAL :
The bank raise their share capital for commencing their banking business as well as for expansion and nodernisation.
this is actvally the contribution of funds by the share holders.
Hence it is listed in the ‘ liabilities’ column of the balance sheet.
RESERVES AND SURPLUS :
This amount represents the sum of undistributed profit accumulated by the bank over a period of years.
According to the Banking Regulation Act 1949, a commercial bank needs to provide for at least 20% of its profit every year to reserves.
Reserves are maintained to meet contingencies
Since the reserves actually belong to the shareholders, they are the liabilities of the bank.
DEPOSITS :
Banks accept various forms of deposits from the people.
These deposits are the major source of funds for the bank
The main types of deposits are :
Current deposits} (refer to notes on Banking function for detailed explanation )
Savings deposits }
Fixed deposits }
Recurring deposits }
BORROWINGS :
Commercial banks resort to borrowings from other financial institutions including the RBI an other commercial bank
They may be in the form of direct borrowing or re financing
It also comprises of overseas borrowings of Indian banks and borrowings of foreign branches.
They are generally utilized to meet working capital needs (medium & long term )
OTHER LIABILITIES :
These liabilities are incurred by the bank in course of banking operations.
They include drafts
Pay slips
Traveller’s cheques
Bankers cheques etc.
Other liabilities include : interest accrued but not due provision for tax, etc.
CONCLUSION
Thus, assets and liabilities of a commercial bank reflect the performance and soundness of a commercial bank.
ILLUSTRATION :
BALANCE SHEET OF A COMMERCIAL BANK AS ON …
LIABILITIES
ASSETS
Paid-up capital
Cash balances.
Reserves and surplus
2.Money at call/short notice.
Deposits
3.Discounting /purchasing of B/E
Borrowings
4.Investments
Other liabilities
5.loans and advances
6.other assets.
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