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EXECUTIVE SUMMARY Funds which means a stock of money and monetary resources is always subject to change in its magnitude and composition. A continuous change in the magnitude as well as composition of funds is deemed as a flow of funds. Therefore, flow of funds can be observed in the Financial Statements. Financial Statements of any type of company consist of the Balance Sheet and the Profit & Loss Account. Balance Sheet consists of Liabilities and Assets which is also called as Sources and Uses. Balance Sheet has to be prepared according to the Schedules. There are different schedules for different companies. For example Fixed Asset schedule is 10 in Banking Company whereas it is 5 in Corporate. In other words, what is the Cost of Funds and after deploying it what are they earning from it. Are the Cost of Funds and Revenues matching or not. It is also very important to see how the banks manage liquidity. Are the banks able to satisfy the needs of the customers or not & what are the 1

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Page 1: Executive Summary o3

EXECUTIVE SUMMARY

Funds which means a stock of money and monetary

resources is always subject to change in its magnitude and

composition. A continuous change in the magnitude as well as

composition of funds is deemed as a flow of funds. Therefore,

flow of funds can be observed in the Financial Statements.

Financial Statements of any type of company

consist of the Balance Sheet and the Profit & Loss Account.

Balance Sheet consists of Liabilities and Assets which is also

called as Sources and Uses.

Balance Sheet has to be prepared according to the

Schedules. There are different schedules for different

companies. For example Fixed Asset schedule is 10 in Banking

Company whereas it is 5 in Corporate.

In other words, what is the Cost of Funds and after

deploying it what are they earning from it. Are the Cost of

Funds and Revenues matching or not.

It is also very important to see how the banks

manage liquidity. Are the banks able to satisfy the needs of the

customers or not & what are the different types of risk which is

associated with the funds of the banks & how much profitability

they are earning from these funds.

All the above concepts can be found from the

Balance Sheet and Profit & Loss Account itself. Balance Sheet is

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very much useful for the investors, and even for the

government.

INTRODUCTION

Banks acts as vital links between the policies of the

government and the various economic factors. Banks have

become the most important financial intermediaries in the era

of market-oriented economies by reflecting the performance of

the economy as a whole.

To analyze the performance of the banks, it is

instructive to take a brief overview of the principal assets and

liabilities as presented in the bank’s balance sheet and also its

revenues and expenses from the income statement. The main

objective in this project is to examine the balance sheet and

income statement of the bank in a manner to familiarize with

the sources and uses of the funds and the revenues and the

expenses of the banks.

A bank is a government-regulated, profit-making

business that operates in competition with other banks and

financial institution to serve the savings and credit needs of its

customers. The primary business of banks is accepting deposits

and lending money. Banks accept deposits from customers who

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want the safety and convenience of deposit services and the

opportunity to earn interest on their excess funds. Banks put

their depositors’ funds to profitable use by lending those funds

to others- to individuals for satisfying their personal needs, to

businesses for satisfying their working capital needs, to state

and local government units for public projects.

Banks safety and profitability depend on effective

management of a bank’s assets and liabilities. A bank’s total

pool of funds shifts constantly as funds flow in and out of the

bank. Funds management is planning and coordinating a bank’s

sources and uses of funds over time to achieve maximum

profitability and yet maintain adequate safety and liquidity

consistent with banking regulations and community needs.

FUNDS AND FLOW OF FUNDS-MEANING

According to Bonneville and Dewey, ‘funds’

constitute the prime importance in starting and operating any

business enterprise. The most significant of all financial

activities is the raising and management of funds. In the

ordinary parlance, the term funds mean cash, or at least cash

equivalent. In corporate statements, however, the so-called

funds statement usually refers to net working capital.

The word funds have different connotations for

various individuals. For the layman, it usually refers to cash; for

accountants and analysts, it most frequently refers to working

capital---current assets less current liabilities; it may refer to all

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the resources or to purchasing power. For others, it may refer to

the net quick or current assets--- cash, temporary investments

and net receivables, less current liabilities; or to net owners’

equity.

The words funds are closely related to the normal

decision- making process of a business, to accounting

statements, the balance sheet and the income statement. It is

related to a time span.

Fund which means a stock of money and monetary

resources is always subject to change in its magnitude and

composition. A continuous change in the magnitude as well as

in the nature of composition of funds is deemed as a flow of

funds. Such a profile which highlights the inflows and outflows

of funds is useful for the owners and lenders in order to ensure

profitability and safety of their investment in the concern.

The concept of ‘Fund Flow’ arises from the changes

that take place in the proprietor’s fund and the borrowed funds

(liabilities) and the resources or assets held against them.

These changes are an outcome of the movement of funds,

which take place as a result of the operations of the business.

While a change in a particular item of liability or asset can be

ascertained from time to time, changes in all the items of

assets and liabilities can be figured out only from balance

sheets. The changes that take place in these items over a given

period are reflected in the next balance sheet and so on. Flow

of funds can be observed in the Financial Statement.

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PREPARATION OF FINANCIAL STATEMENT IN

BANKS

According to Section 29 of the Banking Regulation

Act, 1949 banks will have to prepare the Balance Sheet and

Profit & Loss Account in the format set out in the third schedule

of the Act. The items that appear in the bank’s balance sheet

and profit and loss account are shown under different

schedules.

Form ‘A’ is the form of the balance sheet of a bank

and has 12 schedules under which the various assets and

liabilities are classified.

Form ‘A’

FORM OF BALANCE SHEET

Balance Sheet of XYZ Bank Ltd. As on 31st March

Particulars Schedul

e No

As on

31.3…….

Current

Year

As on

31.3…….

Previous

Year

CAPITAL AND LIABLITIES

Capital

Reserves and Surplus

1

2

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Deposits

Borrowings

Others Liabilities and

Provisions

3

4

5

Total Rs

ASSETS

Cash and Balance with RBI

Balance with Banks and

Money at call

and Short Notice

Investments

Advances

Fixed Assets

Other Assets

6

7

8

9

10

11

Total Rs

Contingent Liabilities

Bills for Collection

12

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CAR (Capital Adequacy Ratio)

What is Capital Adequacy Ratio?

It is the measure of a bank’s financial strength

expressed by the ratio of its capital (net worth and

subordinated debt) to its risk-weighted credit exposure (loans).

It is also called CRAR-Capital to Risk-weighted Assets Ratio. The

Reserve Bank of India (RBI), currently prescribes a minimum

capital of 9% of risk-weighted assets, which is higher than the

internationally prescribed percentage of 8%. Most banks in

India have a capital adequacy is considered safer because if its

loans go bad, it can make up for its net worth.

Why do banks have to maintain CAR?

CAR is the ratio that measures a banks capacity to

meet time liabilities and risks like operational risks, credit risks

and other risks. Indians banks regulator, RBI, has prescribed a

minimum ratio to be maintained by the banking system. This is

done because the depositors are secured about their deposits

and banks have a cushion for their potential losses. In the face

of the financial crises seen in the last few years, maintenance of

CAR is mandated by the regulatory authorities to protect the

depositors.

What is risk weighting?

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Every financial asset carries a risk. The extent of risk,

however, varies. For instance, government bonds carry almost

no risk while loans to government-promoted companies carry

some risk. On the other hand, loans to a corporate carry 100%

risk weighted as the entire loan is exposed to risk. Degrees of

credit risk expressed as percentage weights have been

assigned by RBI to each such asset.

How are risk weight assigned?

Different types of assets have different profiles in risk

value. CAR primarily adjusts for assets that are less risky by

allowing banks to ‘discount’ lower-risk assets. The specifics of

CAR calculation vary from country to country. In the most basic

application, government debt is allowed a 0% ‘risk weighting’-

that is, they are subtracted from total assets for purposes of

calculating the CAR.

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Characteristics of Financial Statement in

Banks

A bank’s financial statement is quite different from those

of a Firm or in any other Industry. A Simplified form of a typical

Bank’s balance sheet would appear as follows:

Rs. in

Crores

Liability

Am

t Asset Amt

Deposit :   Cash 3

Short term 65

Loans & Advances

:  

Medium term 20 Short term 30

   

Medium/Long

term 25

       

Borrowings 5 Investment 40

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Capital &

surplus 10 Fixed asset 2

       

 

10

0   100

The Characteristics of the Above Financial Structure are

as follows:

The Sources of Funds are primarily in short term in Nature,

payable on demand or with short term maturities. Depositors

can renegotiate the term deposit rates as market Interest rates

change.

Financial leverage is very high, in other words, the equity base is

very low. This is risky and can lead to earnings volatility.

The proportion of fixed assets is very low.

A high proportion of banks funds are invested in loans and

advances or investments, all of which are subject to interest

rate volatility.

Besides, when deposit rate change, the consequent impact on

the cost of funds could create problems with the pricing of

portfolio of assets.

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Operating leverage is relatively low due to comparatively lower

fixed assets

SOURCES OF FUNDS-BANK’S LIABILITIES

Similar to the balance sheet of any other firm, the

banks’ balance sheet also has assets that represent

Application of Funds to generate revenue for the bank and

liabilities and net worth that form the Sources of the bank’s

funds.

However, within this framework, there are significant

differences in the basic composition of the assets and the

liabilities and how they contribute towards the revenues and

expenses of the bank.

The sources of the funds for the lending and

investments activities constitute the Liabilities of the bank’s

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balance sheet. The various sources through which the bank

raises funds for its business are broadly classified into the

following:

SOURCES OF FUNDS

13

CAPITA

RESERVES ANDSURPLUS

DEPOSI

BORROWINGS

OTHER LIABLITIES AND PROVISIONS

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Capital

The RBI has provided guidelines for the capital

requirement of the banks. The capital of the nationalized banks,

which is fully contributed by the government, will also include

the contributions made by the governments for participating in

the World Bank projects. For banks that are incorporated

outside India, and have branches in India, the capital will be the

amount they bring in by way of start-up capital as prescribed by

the RBI. Under this head amount of deposits kept with the RBI

under section 11(2) of the banking Regulation Act, 1949 is also

shown. According to this section, if the bank is not incorporated

in India, it will have to maintain a deposit with the RBI either in

cash or in the form of unencumbered approved securities or the

party in such securities. New banks will have to be incorporated

under the Indian Companies Act and have a minimum capital

requirement of Rs 100 crore. Banks will have to show in

their capital account the authorized, issued, subscribed and

called –up capital. The account will, however, be represented by

the paid-up capital which will be arrived at after deducting the

calls-in-arrears and adding up the paid-up value of forfeited

shares to the called-up capital.

The Purposes of Bank Capital

The most obvious purpose of bank capital (although

minor in comparison with other businesses) is that it provides

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funds for fixed-asset purchases-building, equipment, and other

physical assets-necessary to conduct the bank’s business. A

major difference between banks and other businesses is that

banks operate with a much lower level of capital than non-

financial businesses.

Capital is also the basis on which bank regulators set

limits on lending. These limits restrict the amount that can be

lent to any one borrower to a certain percentage of the bank’s

total capital. Such limitations force banks to diversify their

loans, thus protecting bank from concentrating funds in one or

two major loans that may lead to major losses. Finally capital is

the basis for market evaluations of bank performance.

Reserves and Surplus

The components under this item of the bank’s

liability will include statutory reserves, capital reserves, share

premium, revenue and other reserves and balance in profit and

loss account. These items are discussed below:

1. Statutory Reserves: Section 17 of the Banking Regulation

Act, 1949 which deals with the reserves fund account of the

bank provides that every banking company incorporated in

India shall create a reserve fund out of the balance of profit of

each year as disclosed in the profit and loss account. This

transfer of funds will be before any dividend is declared and the

amount will be equivalent to not less than 20 percent of the

profit.

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2. Capital Reserves: The surplus arising due to revaluation

will be considered as the capital reserve. It will not include any

amount that is regarded as free for distribution through the

profit and loss account. As stated earlier, if there is excess

depreciation on investments and the bank intends to reverse it,

then it shall be taken to capital reserve. Similarly, profit made

on sale of permanent investments shall also be taken to capital

reserves.

3. Revenue and Other Reserves: All other reserves other

than the capital; reserve will appear under this category of

reserve fund. Excess provision for depreciation in investments

will have to be appropriated to investment fluctuation reserve

account and be shown under this head. This amount will be

considered as Tier-2 capital and can be utilized for the

depreciation requirement on investment in securities, in the

future.

4. Share Premium: This item will show the premium on the

issue of share capital by the bank.

5. Balance in Profit and Loss Account: The profits

remaining after the appropriations are considered under this

heading.

Deposits

The equity capital and reserves of a bank form

relatively a small proportion of the total liabilities. Banks are

highly leveraged organizations, relying mainly on debt and the

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chief sources of funds are the deposits that are raised. These

deposits are grouped into various types depending on the

purpose and the maturity.

The deposits are broadly classified as deposits

payable on demand and deposits accepted for a term and

hence payable on a specified date. Deposits payable on

demand consist of current deposits and savings deposits.

However, the classification of these deposits for balance sheet

purpose will be as demand deposits, savings bank deposits and

term deposits.

Demand Deposits: these include balances in current account

and term deposits which have become due for payment but have

not been paid yet. These funds represent interest-free balances.

These accounts will be in the form of an operating account

primarily for a business concern.

1. Savings Deposits: these represent balances payable on

demand which is in the form of an operating account catering to

non-commercial purposes such as individuals, trusts, etc.

2. Term Deposits: Deposits that are repayable after a

specified term are included here. The minimum maturity period

for which term deposits can be accepted are 15 days to 10

years and in case of deposits of Rs.15 lakhs and above this

period can be relaxed in certain specific case.

These term deposits which can be raised from banks

and others will include fixed deposit, cumulative and recurring

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deposits, cash certificates, certificates of deposits, annuity of

deposits, deposits raised under various schemes, ordinary staff

deposits, FCNR deposits, etc. The deposits under special

schemes which are included here will be shown as demand

deposits when they mature for repayment.

All the deposits mentioned above will be classified as

Those from banks and

From others.

The deposits from banks will include deposits from

the banking system in India, co-operative banks, foreign banks

which may or may not have operations in India. The balance

sheet will also present the deposits segregating them into those

raised by branches in India and those raised by overseas

branches.

The Cost and pricing of Funding Instruments

A variety of factors influence the cost of deposits, the

single most important source of bank funds. Bank funding

sources have undergone profound changes in recent years, and

continued change and challenge are still on the horizon. The

deposit structures of most banks have been altered significantly

due to marked declines in traditional demand deposits and

rapid increases in the volume of time deposits. The sources of

most bank funds are now interest sensitive and increasingly

volatile. Competition for funds is intense, and effective

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management of a bank’s liabilities now requires a much more

aggressive approach to attracting and keeping funds.

Bank funds managers must determine the true costs

and appropriate prices of deposit accounts and must evaluate

the relative costs of various short-term sources of borrowed

funds.

Determining Deposit costs and prices

The changes in bank deposit structure coupled with

increased competition for funds, have forced many banks to look

more realistically at the true costs of obtaining funds and the

adequate pricing of bank products and services to offset the total

cost of funds. Recognizing the true cost of funding and recovering

those costs through accurate pricing are essential to bank

profitability and stability in the increasingly competitive and

complex financial services industry.

Borrowings

Borrowings of the bank will be shown as those made

within India and those made in the overseas markets. Borrowings

in India will consist of Borrowings/ refinance obtained from the

RBI, commercial banks (including co-operative banks) and other

institutions and agencies like IDBI, EXIM Bank of India, NABARD

etc. The borrowings made outside India will include the overseas

borrowings made by the Indian branches and the borrowings of

the foreign branches. The amount borrowed in the money market

will be shown under borrowings from other banks and other

institutions depending on the lender.

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These borrowings will not include interoffice

transactions. Further, the funds raised by the foreign branches

by way of Certificate of Deposits, notes, bonds, etc., should be

segregated into deposits, borrowings, etc., based on the

documentation.

The secured borrowings made in the above two

categories i.e. within and outside India will be shown separately

under this head.

Purchased and Borrowed Funds

Purchased or borrowed funds play a significant role in

bank funds management because they offer banks an

alternative means of liquidity apart from assets liquidation.

They also enable banks to compete for funds to expand their

earning assets rather than relying solely on funding from

deposits. All banks purchase or borrow funds from time to time

to met reserve deficiencies, but many banks with access to

national money markets also use purchased funds to enable

them to expand their assets significantly.

Comparing the Costs of Borrowed Funds

Comparing the costs of funds that banks borrow or

purchase is not as straightforward as cost comparisons on

various types of deposit instruments. Short-term borrowed

funds, or money market liabilities, are liabilities that a bank

incurs voluntarily to cover both expected and unexpected short-

term needs for funds. The costs of borrowing vary somewhat

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depending on the characteristics of the particular instrument

used, but the major determinants of cost with borrowed funds

are market supply and demand, as well as the efficiency of

funds managers in obtaining funds.

Other Liabilities and provisions

The other liabilities of the bank are grouped into the

following categories:

Bills Payable: This includes drafts, telegraphic transfers,

travelers’ cheques, mail transfers payable, bankers’ cheques

and other miscellaneous items.

Interoffice Adjustments: As mentioned earlier, while

discussing the assets side of the balance sheet, the credit

balance of the net interoffice adjustments will appear on the

liabilities side of the bank’s balance sheet.

Interest Accrued: The interest accrued but not due on

deposits and borrowings is entered under this heading. Interest

accrued and due is usually credited to the deposit account and

hence such amounts usually do not get reflected here.

Others: The other liability items include the net provision

for income tax after deducting the advance payment, tax

deducted at source, etc., and other taxes like interest tax. It

also includes the surplus in the aggregate in provisions for bad

debts account and for depreciation in securities. The

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contingency funds which are not disclosed as reserves but are

required to be included under this head are as follows:

the proposed dividend/transfer to government,

unexpired discount,

outstanding charges like rent, conveyance, etc.,

other liabilities that do not appear under any head such as

unclaimed dividend.

Provisions and funds kept for specific purposes and certain

types of deposits like staff security deposits, margin deposits,

etc., where the repayment is not free.

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APPLICATION OF FUNDS-BANK’s ASSETS

The funds mobilized by the bank, through various

sources will be deployed into various assets. The assets side of

a bank’s balance sheet consists of various items that fall into

the following broad categories:

APPLICATION OF FUNDS

23

Cash

and

Balanc

es

with

Reser

ve

Bank

Balanc

es with

Banks

and

Money

at Call

and

Short

Notice

Investme

Advances

Fixed

Other Assets

Page 24: Executive Summary o3

Within the broad classification given above, lies a variety of assets, a detailed description of which is given below:

Cash and Balances with Reserve Bank of India

All cash assets of the banks are listed under this

account and it forms the most liquid account held by any bank.

Cash is held by banks to cover deposit withdrawals, meet

emergency expenses and handle unexpected credit demands

from customers. The cash assets consist of the following:

1. Cash in Hand: This asset item includes cash in hand,

including foreign currency notes and cash balances in the

overseas branches of the bank. These are held on the bank’s

premises to meet customer requests for withdrawal and loan

demands at short notice.

2. Balances with the RBI: Cash account also includes the

balances held by each bank with the RBI in order to meet the

statutory Cash Reserve Requirements (CRR). Cash will also be

held by banks in current account with various offices of the RBI.

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Cash maintained by a bank in the current chest is also reflected

here as an integral part of the balances. A currency chest is an

office, which is treated as a representative office of the RBI, but

is actually maintained by a bank in terms of specific approval

given to the bank by the RBI. Hence, cash balances with

currency chest are treated as if the cash is deposited with the

RBI and hence is accounted for the purpose of CRR.

Balances with Banks and Money at Call and Short

Notice

Primarily, assets under this category will be shown

separately as those maintained in India and abroad. The bank

balances include the amount held by the bank in the current

accounts and term deposit accounts, i.e. the current account

and other term deposit accounts, both within and outside India

should be shown separately. The bank accounts within India will

include all balances with banks, including co-operative banks.

Likewise, the balances with banks outside India will include

balances held by the domestic/foreign branches of the bank

with other banks, which are located outside India. However, the

balances maintained by the branches in India with their foreign

branches will be considered as inter- branch balances and shall

not be classified here. The other sub – class of asset that

appears under this category is, ‘Money at call and Short Notice.’

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All loans made in the interbank call money market that are

repayable within 15 days notice are included here. All loans that

are made outside India and which are classified as money at

call and short notice in those markets will also be included.

These secondary reserves (CRR and SLR from the primary

reserves), which are in the form of call loans and loans payable

at short notice, serve as a first line of defense when the bank

needs funds to meet withdrawal requirements at short notice.

The funds deployed in call market are shown separately

depending on whether they are deployed in India or abroad.

Investments

A major asset item in the balance sheet of a bank is

investments in various kinds of securities. Bank’s investments

are classified into six different baskets depending upon the

nature of security. These include:

Government Securities

Approved Securities

Shares

Debentures and Bonds

Subsidiaries and Bonds

Other investments

While the above – mentioned categories refer to the

investments made in the domestic market, bank’s can also

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invest in the overseas markets. The overseas investments will

include foreign government securities, subsidiaries and/or Joint

Ventures and other investments.

Advances

The most important asset item on the bank’s balance

sheet is advances. Advances, which represent the credit,

extended by the bank to its customers, form a major part of the

assets for all the banks. The assets account will be presented in

the balance sheet of a bank in three different formats. In the first

format, categorization will be based on the type/nature of the

asset, in the second format, advances will be categorized into

secured and unsecured advances and the third will consist of a

categorization based on the sectorial credit disbursements. The

total advances of all the three formats will be equal since the

same advances are presented in different ways.

As in the case of investments, the balance under the

advances is reflected in the balance sheet after reducing the

provisions. It will be helpful to know the following to understand it

better.

1. Net Bank Credit: This represents the total credit outstanding

in the books of the bank.

2. Gross Bank credit: Net Bank Credit plus Bills Rediscounted by

the bank with IDBI/SIDBI.

The bank will have to make provisions depending on

the level of NPAs. The figures reflected in the balance sheet are

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net of the provisions. It means that the figures in the balance

sheet will be net bank credit less provisions. The provisions on

account of NPAs are usually less than NPAs since in most of the

cases the provisions are not made to the extent of 100 percent.

Type/Nature of Advance: Given below is the

Classification of advances based on the nature/type of the

credit extended.

- Bills purchased and discounted: The amount that is

shown against this item in the balance sheet will be discounted/

purchased by banks from the client irrespective of whether they

are clean/documentary or domestic/foreign.

- Cash credits, overdrafts and repayable on demand:

Items under this category represent advances which are

repayable on demand though they may have a specific due

date.

- Term Loans: All term loans extended by the bank

including their outstanding balances are shown here. These

advances also have a specific due date, but they will not

become payable on demand.

Secured/Unsecured Advances : Based on the underlying

Security, advances are classified into the following categories:

- Secured by Tangible Assets: All advances are part of

advances, within/outside India, which is secured by tangible

assets, will be considered as secured assets.

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- Covered by Bank/Government Guarantees: Advances in

India and Outside India to the extent they are covered by

guarantees of Indian and Foreign government/banks and DICGC

and ECGC will be included here.

- Unsecured Advances: All advances that do not have any

security and which do not appear in the above two categories

will come under this category.

Sectorial Advances: Sectorial segregation will be done

separately for advances within and outside India.

Advances in India will be classified into the

following:

- Priority sector represents advances made to sectors which

are classified as priority sectors by the RBI.

- Public sector advances are those advances that are made

to central and state government and other government

undertakings. Advances extended to public sectors which are

eligible to be classified as priority sector should be shown under

the category of priority sector and not as public sector

advances.

- All advances made to the banking sector including the co-

operative banks will come under the head of banks.

- All the residual advances will appear under the head of

“others”. This includes non-priority advances given to the

private, joint and co-operative sectors.

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Further, if the advances provided by the banks are on

a consortium basis, the amount to be considered will be net of

the share from other participating banks/institutions.

Advances that are made outside India will be

classified into those extended to banks and those extended to

others. Advances to others will be classified as bills purchased

and discounted syndicated loans and others.

Fixed Assets

Fixed assets of the bank are classified into premises

and other fixed assets which include furniture and fixtures.

Premises which are wholly or partly owned by the bank for

business/residential purpose will be shown after considering the

additions or deductions made during the year and writing off

the depreciation. Further, if there is any write-off on reduction

of capital and revaluation of assets, then the revised figures

must be shown in the subsequent balance sheets for a period of

five years.

All fixed assets other than premises will appear as

other assets. These include furniture, fixtures and motor

vehicles. Cost of the assets as given in the preceding year’s

balance sheet will be adjusted for any additions and deductions

made during the year and the write- offs due to depreciation.

Other Assets

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The remainder of the items on the assets side of the

bank’s balance sheet is categorized as other assets. The

miscellaneous assets that appear here are:

Interoffice Adjustments: This shows the net position of

the interoffice accounts, domestic as well as overseas. The

debit balance obtained after aggregating all the interoffice

accounts will appear in this account. This will generally include

items in transit and unadjusted items. If the net balance shows

a credit, it will be shown on the liability side. Since 1998-99,

banks are required to make 100% provision for the net debit

position in their inter-branch accounts arising out of the

unrecognized entries (both credit and debit) outstanding for

more than 3 years as on March 31, every year.

Interest Accrued: Interest that can be realized in the

ordinary course will be considered. Included in this will be the

interest accrued, but not due on investments and advances and

interest due, but not collected on investments. Interest on

advances which are in the form of loans, overdrafts and cash

credit is debited to the respective accounts and hence no such

amount usually gets classified here. However, interest accrued

on bills purchased/discounted gets classified here. Hence, the

major item under this category will be interest on investments.

Tax Paid in Advance/Tax Deducted at Source: The

amount of tax deducted at source on securities and the

advance tax paid to the extent that they are not set-off against

relative tax provisions will appear under this item.

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Stationery and Stamps: Bulk purchase of stationery

which will be written off over a period of time will be considered

under this head of account.

Non-banking Assets Acquired in Satisfaction of

Claims: Items under this account include immovable

properties/tangible assets which are acquired by the bank in

satisfaction of bank’s claims on others.

Others: Other items primarily include claims that are in the

form of clearing items, unadjusted debit balances representing

additions to assets and deductions to liabilities and advances

provided to the employees of the bank. Losses that are incurred

over and above the capital, reserves and surplus will also

appear under this item. In respect of public sector banks, losses

incurred can be set-off with capital without the prior approval of

the government. Hence, all the accumulated losses are

reflected under the item “Other Assets” irrespective of whether

losses are in excess of capital or not. In all such cases it will be

appropriate to reduce the accumulated losses shown on the

asset side from the total of the balance sheet to arrive at

working funds/earning assets/total assets. Working Funds,

Earning Assets and Total Assets represent the same item and

are used interchangeably.

The assets and liabilities noted above will generate

revenues and create expenses for the bank. Banks will thus have

to balance their revenues against their expenses in such a way

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that there is adequate net income for them to sustain profitability

in that business.

Contingent Liabilities

A Contingent liability is an off Balance sheet item. A

Liability arises out of a present obligation as a result of past

events. Further settlement of liability is expected to result in an

outflow of resource, by way of payments to Creditors.

A Contingent liability, on the other hand, is a possible

obligation, which could arise depending on whether some

uncertain future event occurs. It could also arise where there is

a present obligation, but payment is not probable or amount

cannot be measured reliably.

Contingent liabilities in the case of banks can

generate substantial income while the going is good. A major

contributor to contingent liabilities is the non- funded business

that banks take such as issue of Letters of Credit, Opening

Letters of Guarantee and derivatives dealing.

The major risk in contingent liabilities is the

counterparty default risk. In the event of counterparty failing to

honour his commitment, the liability will crystallize into a fund-

based liability of the bank. Relatively higher fees for these

Services offset the higher risk.

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MATCHING REVENUES AND COSTS OF

COMMERCIAL BANKS

A commercial bank deals in other people’s money. It

gathers funds on one hand, and, deploy them on other. The

problem is how to do this more effectively. For long the banks

followed the Traditional Approach called Asset management.

This meant putting funds, made available by the depositors to

the bank, to profitable use, or, deploying them in a balanced

mix of assets.

The traditional approach assumes multiple pools of

funds. Funds as they flow in to the bank are classified on the

basis of different time structures of different sources short,

medium or long; and, are assigned conceptually to different

pools, so as to permit matching of short sources with short uses

and long sources with long uses.

The traditional approach implicitly makes two further

assumptions:

Sources of funds are fixed and given and,

The liquidity is the overriding criterion for success.

But, the general analytical approach to determination

of the liquidity needs of a bank rests on the fundamental fact

that changes in needs - whether short-term or long-term – arise

from either changes in total deposits or in total customer loans

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Basic underlying relationship assumed between the

costs and revenues are as follows:

Costs Resources

Services Revenues

All activities need resources and have therefore

costs. But, all activities do not directly result in services. There

are thus direct and indirect costs for services. A service is

identified on the criterion that it satisfies the need of the

customer and for which he would be willing to pay a price or a

service charge, i.e. it can be a source of revenue. Services

rendered by a commercial bank can be classified into two

categories: funds-related and non-funds-related.

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Activities

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Return and Cost of Funds in Banks

Return on Application of Funds

Total deployment of funds by a commercial bank during a

period can be divided in to large number of components. For

e.g. Let us assume that deployment of funds by banks is

divided into three broad categories:

Deployment in statutory and non-statutory requirements of

cash and liquidity reserves and it includes investment in liquid

governmental bonds or securities.

Deployment in lending to nationally determined high-

priority borrowers at concessional rate of interest.

Deployment in normal or competitive lending to the rest of

the borrowers at concessional and non concessional rates.

Similarly, the interest earned on the total deployment

of funds by a commercial bank during a period can be divided in

to three broad categories:

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Total amount of interest earned from statutory and non-

statutory reserves of cash and liquidity reserves which includes

investment in liquid governmental bonds or securities.

Total amount of interest earned from lending to nationally

determined high-priority borrowers at concessional rate of

interest.

Total amount of interest earned from normal or competitive

lending to the rest of the borrowers at concessional and non

concessional rates.

The total amount of interest earned on a particular

component is divided with rate of interest earned from such

deployment of funds to get appropriate rate of earnings.

But, in order to arrive at an appropriate rate of

earnings on funds deployment by a bank, it is necessary to

deduct the allocated non-interest cost from out of interest

revenue and add the corresponding service charges or

commission recovered from the customers as non-interest

revenue.

Cost of Funds in Banks

Total sources of funds by a commercial bank during a period

can be divided in to large number of components. For e.g. Let

us assume that sources of funds by banks are divided into three

broad categories:

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Sources from demand deposit such as savings account

deposit, current account deposit.

Sources from time deposit such as FD’s, recurring account.

Sources from long term borrowings, loans and advances.

Similarly, the interest paid on the total sources of

funds by a commercial bank during a period can be divided in to

three broad categories:

Interest cost to demand deposit such as savings account

deposit, current account deposit.

Interest cost to time deposit such as FD’s, recurring

account.

Interest cost to long term borrowings, loans and advances.

The total amount of interest cost on a particular

component is divided with rate of interest cost from such

sources of funds to get rate of cost of sources of funds:

But, in order to arrive at an appropriate rate of cost

of sources funds by a bank, it is necessary to deduct the

allocated non-interest revenue and add the non-interest cost

such as manpower, administrative and other operating cost.

Cost of Loanable Funds in Banks

A part of deposits received by a bank from the public

has to be deployed as cash reserves and as investment in

highly liquid assets, i.e., in government and other eligible bonds

and securities. The Cash Reserve Ratio and Statutory Liquidity

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Ratio are laid down by the Reserve Bank of India. These assets

on average earn lower interest rates compared to what is on

average earned on loans and advances.

For working out cost of loanable funds, the loss

arising out of deployment under CRR and SLR obligations. The

loss is defined as the difference between the cost of funds, and

rate of earnings on obligatory deployment of funds.

Cost of Funds versus Cost of Loanable Funds

The definition of cost of funds is considered to be

most appropriate for all types of comparisons and decisions.

Reason is based on the following:

1. cost needs to be defined for the bank as a whole taking all

funds raised by the bank during the period such that total funds

raised from different sources equal total funds deployed in

cash, inventory and reserves, investments, loans and advances,

and other assets including fixed assets;

2. all funds are assumed to flow into a common pool, no

source of funds is related to any specific use or uses of fund;

3. cost of funds needs to be calculated totally, separately and

independently of the revenues arising from deployment of

funds; at no stage while measuring cost of funds they should

get mixed up with each other;

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4. interest cost needs to be calculated in terms of effective

rates by relating average outstanding to actual amount of

interest paid, and not in terms of nominal rates; and

5. cost needs to be reckoned as total cost by adding

manpower and all other operating costs to the interest cost to

arrive at the overall cost of funds to the bank; and, similarly,

related service charges recovered need to be deducted.

Working Out Cost of Funds for a Bank

For working out cost of funds and earnings from

funds needs a fund flow statement for a bank. This statement

can be worked out on the basis of the average balance sheet.

Then it can be modified and transformed into the funds flow

statement. Average deposits and average borrowings can

straightaway be taken as sources of funds. Similarly, average

cash, average balances with RBI and other banks, average

loans, advances and investments can be taken as uses or

deployment of funds. The difference between average capital

and reserves and average fixed assets, as also the difference

between average other liabilities and average other assets, can

be taken as either sources or uses of funds depending on

whether the difference is positive or negative. Due to averaging

effect, most of the time the two sides may not exactly equal.

The equality can be resorted after careful examination by

plugging the difference into the sources or uses side.

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The True cost of Funds for the Bank

Interest cost of raising funds and interest earned

from deployment of funds need to be adjusted for non-interest

cost, manpower and other operating cost. Similarly, other

income received as commission, brokerage and service charges

also needs to be adjusted. It was found difficult to estimate

allocation of non-interest income to different components of

sources and uses of funds. Major part of this income is earned

through funds related activities and only a minor part emanates

from ancillary services like safe-deposit lockers. A rough

estimate indicated that of the total non-interest income earned

by the bank is about 70% came from the borrowers, 20% from

current depositors, 5%from savings deposits and only 5% from

ancillary services not directly related to deposits or advances.

Need to Calculate True Cost of Funds in Banks

Using the true and correct cost of funds for banks it is

found that banks lose of funds deployed as cash inventory or in

compliance of CRR and SLR requirements. The fact is that net

earnings on these are lower than the cost of funds. If the loss

has to be avoided or some profit earned, earnings rates on

these items need to be raised.

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Therefore, the true rate of earnings from deployment

in cash is CRR and SLR and the true rate of earnings from

deployment in loans and advances.

Credit-Deposit Ratios of Banks

Large number of commercial banks in India today has

consistently low and declining credit-deposit ratios vis-à-vis the

rest of the banks. Improvement in credit-deposit ratio of a bank

may require efforts in two areas:

1. augmenting the loanable resources of the bank on one

hand, and

2. Making efforts to step up credit on the other hand.

One major reason for this is rise in the cash reserve

and statutory liquidity ratios over this period.

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Liquidity Management in Banks

Liquidity is the ease with which an individual,

business firm or a financial institution can obtain cash by selling

non-cash assets. Providing liquidity to the customers is one of

the intermediation functions of banks. A bank is liquid if it can

meet all the demands made for cash against it at precisely

those times when cash is demanded. Moreover whatever

sources of funds bank may choose to draw upon must be

available at a reasonable cost and time.

Bank must maintain adequate liquidity in order to

provide for declines in deposits and other liabilities, to satisfy

unforeseen increases in demand for loans, and to permit

increased investment in particularly desirable earning assets

when such opportunities arise.

Liquidity, defined in its broadest sense, is the ability

to obtain needed cash quickly and at a reasonable cost.

Because needs for funds may be unpredictable and

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uncontrollable, banks must maintain adequate liquidity to

ensure that cash, or access to it, can be obtained on short

notice and with little or no loss of capital. Liquidity is necessary

for banks to carry out daily business transactions, to cover

emergency needs for funds, to satisfy the bank customers’

demand for loans, and to provide flexibility in taking advantage

of especially favourable investment opportunities. Fund

managers must estimate and provide for liquidity needs as

efficiently and cost-effectively as possible.

Purposes of Liquidity

Liquidity enables a bank to answer a need for funds

when that need cannot be fully met by the steady growth of the

bank’s primary sources of funds.

A bank’s deposits do not grow steadily. Deposit levels

are influenced by national and local business conditions and

cannot be fully controlled or predicted with accuracy. The same

is true for loan demand. Uncertainty, therefore, is a

key characteristic of the banking business. As a result, banks

must build enough flexibility into their asset and liability

portfolios so that they can handle any unexpected needs for

funds.

Bankers seek the highest yields possible on their

investments and loans, but they must carefully consider how

much risk they are willing to take to achieve that objective.

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They must also ensure that the bank is compensated with

earnings proportionate to the risks assumed.

RISK ASSOCIATED WITH THE SOURCES AND

USES OF FUNDS IN BANKS

As it is truly said that, income or return is closely

related to risk. A bank may invest its entire fund in low-risk

Government securities from which it would earn a low income of

say 7%. Another bank may invest its entire fund in high risk

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corporate equities and real estate and earn income of say, 25%.

However, the former would have safety of funds with low risk in

its favour while the latter would have higher profitability along

with the risk of incurring heavy losses. Thus, there is a direct

correlation between risks and returns.

Low risk investments are also quite liquid. They are

marketable as there are many buyers for the same. On the

other hand, high-risk loans are less liquid and less marketable.

As such, there is a trade-off between profitability and liquidity.

Banks usually carry the following basic risks:

I. Liquidity risk: It is the risk of meeting the liquidity needs of a

bank as and when they arise. It is measured as the ratio

between the liquidity outflow (e.g. withdrawal of deposit,

repayment of bank’s borrowings etc.) to liquidity inflow (e.g.

maturing assets, fresh deposits etc). a rough approximation of

liquidity risk would be: (Short-term securities – Short term

borrowings)/Total Deposits.

If a bank holds more of liquid assets, it would minimize liquidity

risk but earn a low income.

II. Interest rate risk: It is the risk arising out of changes in

interest rates and their impact on the income of a bank and

values of its assets and liabilities. The assets and the liabilities,

which are sensitive to interest rate changes, are called interest

sensitive. Interest rate risk can be roughly measured as the

ratio of interest sensitive assets to interest sensitive liabilities.

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As ideal ratio is one that brings safety. If interest rate

fluctuates, the bank with an interest rate risk of one would have

equal to zero variation in interest income and interest cost and

the net impact on profit would be zero. If the ratio is above or

below one, the bank would have fluctuation in earnings,

depending on how fast the interest rate on advances increases

vis-à-vis the cost of deposits. A bank needs to take a view on

interest rate movement and shuffle the portfolio at short notice.

III. Credit risk: It is the risk arising out of default in the payment

of the interest and/ or principal of the loan amount. The ratio of

non-performing assets to total loan assets is a rough measure

of credit risk. Credit risk is higher if the bank has more of

low/medium rated loans, but the income from those loans is

also correspondingly more. If a bank decides to focus only on

quality loans the income from those loans is correspondingly

more. But if a bank decides to focus only on high quality loans,

its interest income will shrink because of less availability of

such assets and finer interest rate they attract.

IV. Capital Risk: It is the risk that arises from diminution of capital

due to losses. It measures how much the asset value may

decline before the position of depositors and creditors is

jeopardized. Capital adequacy is the bulwark against capital

risk. A bank with a capital-to-asset ratio of 10% will be in a

better position to absorb capital risk than the bank with the said

ratio of 5%. Capital risk is inversely related to Equity Multiplier

and to Return on Equity. Capital risk calls for higher capital

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while ROE and Equity Multiplier call for higher debt. Banking

operations also face other risks like pre-payment risk, operation

risk, reputation risk etc.

PROFITABILITY IN BANKS

Profitability is an essential objective of bank funds

management. Strong profits are necessary to pay dividends

stockholder and build stockholder equity, to offset loan losses,

to pay ongoing operating expenses, and to expand products

and services.

However, bank profitability entails more than striving

for immediate maximum returns; rather, it is the profitable

management of the bank’s assets and liabilities over both the

short and long term. To be profitable, a bank must show healthy

short-term earnings; but it must manage liquidity, risk, and

earnings through recurring business cycles for long term

survival.

In fact, a bank’s location and the type of financial

service needs of its market area greatly influence the level of

the bank’s profitability. For this reason, any analysis of bank

profitability must be comparative. A bank’s performance must

be viewed in relation to records of its own past performance

and to the performance of banks of similar asset size, location,

and type of customer service markets.

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Profit is mainly the difference between the income

earned and the expenditure incurred to earn the said income

during the period i.e.

Profit = Income – Expenditure

It can also be written as:

Profit = Revenue – Expenditure / Cost

The equation can be replaced as:

P = R – C

Where,

P = profit of a bank for a period

R = total revenue earned by the bank during a period

C = total cost paid by the bank during a period

The revenue and cost can be further bifurcated as:

R = R1 + R2 & C = C1 + C2

Where,

R1 = revenue earned by way of interest on loans, advances and

investments

R2 = non-interest revenue earned by way of service charges

and commission on guarantees or remittances or collections

from its customers

C1 = cost incurred by way of interest paid out of deposits and

borrowings

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C2 = non-interest cost paid as expenses on manpower and

establishment for rendering services to customers

Therefore,

P = (R1 + R2) – (C1 + C2)

Now let us see an example of how the bank’s

profitability gets affected because of NPAs:

Effects of NPAs on Profitability of Banks

As we know, banks incur costs to mobilize funds and

earn interest on the loans. The difference between the costs of

deposits and yield on advances is a measure of the bank’s

profits. Impairment of loans has an adverse impact on the

profits, as impaired loans cease to generate income. A small

degree of impairment may not affect the profit of the bank but

a substantial level of NPAs results in losses. To the extent that

they do not generate any income the NON – Performing Assets

are a drag on the net interest income of the bank. The

impairment of the asset further requires provisioning at various

rates in accordance with the guidelines of the RESERVE BANK

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OF INDIA depending on the stage of their non – performance.

These provisions are made out of the income generated by

other performing assets thereby creating further pressure on

the net interest income of the bank.

NPAs are a serious strain on the profitability of banks

as they cannot book income on such accounts and their funding

costs and provision requirements are a charge on their profits.

NPAs also carry 100% risk weightage and block capital for

maintaining Capital Adequacy Ratio. To that extent this is a

drain on the profitability of a bank.

AN ILLUSTRATION

An illustration of a simple balance sheet of a typical bank is given

below, which explains the effects of NPAs on bank profitability.

Balance Sheet

& Profit & loss Statement of XYZ Bank

(Rs. In crores)

Balance Sheet

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Sources(Liabilities) Uses(Assets)

Share

Capital

620 Cash 1,000

Reserves 1,240 Investments 7,150

Deposits 19,550 Loans & Advances 10,060

Inter Bank

Deposits

500 Bills 4,000

Borrowings 450 Fixed assets 150

22,360 22,360

Profit and Loss Account

Interest

Income

1,260 Interest

Expenses

1,560

Other Income 900 Other Expenses 350

2,160 1,910

Profit 250

Tax 70

Profit After

Tax

180

It may be observed that the Balance Sheet is healthy and the

bank has made healthy profits. Assuming that the loans and

advances are non – performing to the extent of 20% i.e. about Rs.

2,012 crores, the interest earnings will reduce to that extent (as

the interest income of Rs.1,260 crores will not be earned by the

bank). In addition, the cost of carrying the NPAs like the

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Provisions and other expenses will add to the expenses and thus

the level of profits would substantially reduce.

CASE STUDY

An Illustration

Here, the case of a hypothetical bank, called XYZ

Bank, is taken to show measures of risks and returns. The

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balance sheet of XYZ Bank is given below. Then shuffle the

portfolios, first towards low risk and then towards higher risks,

to observe their impact on returns/profits.

XYZ Bank

(Rs. in crores)

Balance Sheet as on 31st March, xxxx

Liabilities Assets

Capital 1,000 Cash Balances 6,900

Reserve &

Surplus

6,000 Balance with

banks, Money at

Call and Short

Notice

15,000

Current Account 30,000 Investments 15,000

Savings Deposits 30,000 Bills Purchased 20,000

Time Deposits 30,000 Cash Credit 20,000

Borrowings 3,000 Term Loans 20,000

Fixed Assets 3,100

Total 1,00,000 Total 1,00,00

0

Profit and Loss Statement for the year ended 31st

March, xxxx

Income Expenses

Interest Income 6,950 Interest Expenses 3,720

Other Income Other Expenses 2,000

6,950 5,720

Operating 1,230

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Income/profit

Tax 400

Net

Income/profit

830

XYZ Bank has total assets of Rs.1, 00,000 crores, out

of which earnings assets (i.e. excluding premises and cash

balances) are Rs.90, 000 crores. Among its assets, it is assumed

that only cash credit loans, bills purchased and investments are

affected by change in interest rate (term loans are at fixed rate

of interest). Hence, its rate sensitive assets are Rs. 55,000

crores. Similarly, among its liabilities, savings deposits, time

deposits and borrowings are affected by change in interest rate.

Thus, its rate sensitive liabilities are Rs.63, 000 crores.

Now, let us find out the various measures of returns

and risks of the XYZ Bank from the above data.

A. Measures of Returns :

1. Interest margin = (Interest Income – Interest Expenses)/

Earnings Assets

= (6,950-3,720)/90,000 = 3.59%

2. Net Profit margin = Net Income/Total Income

= 830/6,950 = 11.94%

3. Asset Utilization = Total Income/Total Assets

= 6,950/1, 00,000 = 6.95%

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4. Return on Assets = Net Income/Total Assets

= 830/1, 00,000 = 0.83%

5. Equity Multiplier = Total Assets/Equity

= 1, 00,000/7,000 = 14.29

6. Return on Equity = Net Income/Equity

= 830/7,000 = 11.85%

B. Measure of Risk

1. Liquidity Risk = Short-term securities/Deposits

= 15,000/90,000 = 16.67%

(Balance with banks, Money at Call and Short Notice)

2. Interest Rate Risk = Interest Sensitive Assets/Interest

Sensitive Liabilities

= 55,000/63,000 = 0.87

3. Credit Risk = Medium quality loans/Total Assets

= 20,000/1, 00,000 = 20%

4. Capital Risk = Capital/Risk assets

= 7,000/7, 5000 = 9.33%

It may be mentioned here that the above parameters

are only approximate measures of risk and returns adopted only

for the purpose of illustration.

After the measures of risks and returns of XYZ Bank are computed, it may be possible to compare the same with similar measures of peer group banks to ascertain its

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position in the industry and the scope for improvement on any of the said parameters. It is also possible to take into accounts the parameters prescribed by the regulatory/supervisory authorities and the parameters laid down by the bank’s Board of Directors/senior management, while adopting various management strategies to improve profitability.

FINDINGS OF THE STUDY

The study has given an insight into:

Components of various Sources and Uses of Funds of

banks’ Balance Sheet.

Components of Profit and Loss Account of a bank.

The impact of fluctuations of rates of interest on the

Source and Uses of Funds.

Importance of Revenues and Cost of funds in banks.

The need for maintaining liquidity in banks.

How the banks’ profitability gets affected.

LIMITATIONS OF THE STUDY

As the study of specific area is restricted, and time allotted

is very limited for making project. If time permits then

there would be a wide scope of study on specified topic.

Study/ Project on a specified topic have page constraint.

The information which is provided is not enough for in-

depth study of the topic.

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If there would be work experience then there will be

different view of the study.

Due to lack of practical knowledge there is limited view of

the project.

PRIMARY DATA

What are the sources of funds for your bank?

The sources of funds for our banks are demand deposits, term deposits, savings deposits account, current deposits account and fixed deposits.

Under guidelines of RBI how much capital is required to do the banking business?

Under guidelines of RBI capital required to do the banking business is rupees 100 crore.

What type of deposit does your bank accepts from the customer?

Bank accepts deposits from customer are fixed deposits, recurring deposits, current account deposits and savings account deposits.

What are the factors for the cost of deposit which is the single most important source of bank fund?

Single most important source of bank fund is interest.

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If your bank is in need of money than what are the sources of borrowings?

If bank is in need of money than the sources of borrowings are future public offer, right issue, bonds, call money and from RBI.

How does your bank mobilize the funds?

Bank mobilize the funds by way of opening new branch office, developing net banking, set up ATM’s and marketing the products.

Does there is any restriction from RBI for investment?

Yes there is restriction from RBI for investments.

In what type of securities does your bank invest the money more?

Our bank invests the money more in government securities, call money and treasury bills.

How does your bank calculate interest on loans and advances given to the customer?

Our bank calculates interest on loans and advances on the based on base rate or on monthly EMI’s.

What are the current CRR and SLR maintain by your bank?

The current CRR is 6% and SLR is 25% which is maintained by our banks.

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How does your bank manage liquidity for day to day expenses?

Our bank manages liquidity for day to day expenses by accepting deposits from customers.

Which are the risk associated with sources and application of funds?

There is no risk associated sources of funds but there is risk associated with application of funds are NPA’s and unsecured loans given to customer’s.

Does NPAs affect the profitability of your bank?

Yes NPA’s affects profitability of our bank.

How your bank does measures the risk on loans given to customer?

Bank measures the risk on loans on financial statements, profit margins, credibility of customer and repaying ability etc

CONCLUSIONBanking industry in a large part of the world-both

developed and developing has been witnessing major

environmental changes during the last few decades. The

changes have been witnessed in political, economic, policy and

regulatory areas and have dramatically altered bank business

strategies, organizational structures, and critical management

areas and have related processes. The volatility of environment

surrounding the banking organizations has made it clear to the

banks managements that strategies and systems that were

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adopted earlier could no more be relied upon to provide

solutions in the current environment.

The volatility of environment is relevant for the

banking system not only because its impacts a bank’s critical

functions of selling various products and services at competitive

prices or of raising resources. Importantly, the environment also

affects individuals, corporate and institutions to which the bank

sells various products and services. The environmental change

may operate either on the cost/income side. While a bank has

necessarily to respond to such changes, the severity of

competition requires banks to be proactive, anticipate such

changes and prepare themselves to face them.

It is in this context that the Sources and Uses of

funds of banks assume greater significance in order to maintain

sustainability of its operations.

BIBLOGRAPHY

TITLE AUTHOR PUBLICATION EDITION

FUNDAMENTALS OF INDIAN FINANCIAL

SYSTEM

VASANT DESAI HIMALAYA PUBLISHING

HOUSE

6TH

EDITION 2007

MANAGEMENT OF BANKING AND

JUSTIN PAUL AND

PERSON EDUCATION

1ST

EDITION

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FINANCIAL SERVICES

PADMALATHA SURESH

2007

BANKING LAW AND PRACTICE

P.N. VARSHNEY SULTAN CHAND AND SONS

21ST

EDITION 2005

ARTICLE

SOURCE TOPIC DATE

ECONOMIC TIMES CAPITAL ADEQUACY RATIO

(CAR)

27TH JULY 2010

PRIMARY DATA

NAME OF THE INSTITUTION

NAME OF THE PERSON

DATE OF INTERVIEW

HDFC BANK Mr. VIPUL SHAH 24TH September 27, 2010

COLLECTION OF ARTICLES ECONOMIC TIMES

MINT NEWS PAPER

62