Sources and Uses of Funds of Bank Bank Balance Sheets Sources and Uses of Funds of Bank Samir K Mahajan

Financial Statement of an Enterprise Balance Sheet Profit and Loss Account

Assets= Liabilities + Capital + (Revenues – Expenses) Balance Sheet contd. LIABILITIES Liabilities are the obligations payable by the enterprise in future in the form of money or goods or services. Liabilities are proprietors’ and creditors’ claims against the assets of the business. ASSETS Assets are what firm owns. Assets/properties are the valuable thing/ economic resources owned the firm/enterprise. Assets are measured in money terms) In accounting sense, Assets= Liabilities + Capital + (Revenues – Expenses)

Balance Sheet

Bank Liabilities /Sources of Bank Funds Liabilities of a bank can be classified as type of debt and equity components. Equity component/ Net worth comprises of the following: Capital/Share Capital authorised issued subscribed paid up-capital Reserves & Surplus Statutory reserves Capital Reserves Share Premium Revenue &other reserves Debt component comprises of the following: Deposits Borrowings Interest accrued on borrowings and deposits Other liabilities and provisions Others

Capital /share capital Liabilities contd Capital /share capital The company has to show the authorised, subscribed and paid up-capital under capital head. Authorised capital/registered capital is the total of the share capital which a limited company is allowed (authorised) to issue. Capital Requirement (long run) = Rs. 1,000,00 Authorized Capital = Rs. 1,000,00 Issued capital is the total of the share capital issued (allocated) to shareholders. This may be less or equal to the authorised capital. Current Requirement = Rs. 50,000 Issued Capital = Rs. 50,000 (5000 share @Rs.10 per share) Subscribed capital is the portion of the issued capital, which has been subscribed by all the investors including the public. This may be less than or more than the issued capital. Subscribed capital= Rs. 40,000 (4000 shares @ Rs. 10 per share)

Capital /share capital : An Illustration Liabilities contd. Capital /share capital : An Illustration Called up capital is the total amount of subscribed capital for which the shareholders are required to pay. This may be less than the subscribed capital as the company may ask shareholders to pay by instalments. If 4,000 shares of Rs. 10 each have been subscribed by the public, and of which Rs. 5 per share has been called up. Called up capital= Rs. 20,000 Paid up capital is the amount of share capital paid by the shareholders. This may be less than the called up capital as payments may be in instalments ("calls-in-arrears"). Some of the shareholders might have defaulted in paying the called up money. If some of the shareholders have defaulted in paying the called up money, say: Paid Up capital  = Rs. 10000 (2000 share @ Rs 5 per share).

Bank Liabilities contd. Reserve and surpluses Typically the banks have to hold Statutory reserves, Capital Reserves, Share Premium Revenue and other reserves under this head. Under statutory reserves, any banking company has to create a reserve fund out of the profit each year disclosed in the profit and loss account. Such transfers to the reserve funds will be before any dividend is declared, the amount being equivalent to not less than 20 percent of the profit. Capital reserve: Capital reserve arises as a result of capital gains (capital profit) and not revenue profits. It is created out of profit earned from some specific capital transactions say profit from sale of investment or fixed assets, premium on issue of share and debentures. Capital reserve are not distributed as dividends.

Balance in profit and loss account Bank Liabilities contd. Reserve and surpluses Share premium will include any premium on the issue of share capital by the bank Revenue Reserve are the reserves created out of revenue profit (e.g. retained earnings, and profit and loss account under liabilities side etc). It is created to meeting unforeseen contingencies or some specific purposes such as fluctuations on investments. This can be distributed as dividend and also as bonus shares. Balance in profit and loss account

Borrowing is shown under two categories: Bank Liabilities contd. Deposits Deposits includes demand deposits, saving deposits, term deposits (such as: fixed deposits, recurring deposits, reinvestment deposits, cash certificates, certificates of deposits), NRI deposits. Borrowings Borrowing is shown under two categories: Borrowings in India such( as: refinance from RBI, NABARD, SIDBI etc, borrowing from other banks or financial institutions, call/notice money market) Borrowing outside of India Interest accrued on borrowings and deposits Inter-office adjustment i.e. net credit balance (claims of other banks over the bank is more than claim of later over former) Other liabilities and provisions such as bills payable arising out of fee-based services such as: demand drafts, banker’s cheque, travellers’ cheque etc. Others such as: unclaimed dividends, provision/funds for specific purposes, unexpired discount.

Bank Assets /uses of funds The funds mobilised from various sectors of the economy are deployed into productive sectors of the economy. The credit thus deployed forms the assets on the bank’s balance sheet. Assets of a bank includes the following : Cash Holdings Investment Loans and advances Fixed assets Other assets

Cash holding by bank would comprise of Bank Assets contd. Cash Holding Cash holding by bank would comprise of cash in the bank’s vault including foreign currencies and cash balance with overseas branches of the bank balances/deposits (cash reverses requirement)with RBI, balances with other banks held for clearing house requirement and other uses money at call and short notice Investment government securities approved securities shares, debentures and bonds, subsidiaries and joint ventures other investments

Interest accrued on investment and advances but not collected Bank Assets contd. Loans and advances Loans and advances includes bills purchased and discounted, cash credits, overdrafts and loans repayable on demand, term loans. Fixed assets Fixed assets includes premises including land, furniture and fixtures, assets on lease etc. These are of small size. Interest accrued on investment and advances but not collected Other assets includes advance expenses Inter-office adjustment i.e. net debit balance advance tax paid/tax deducted at sources stationaries and stamps non-banking assets (such as immovable property or tangible assets ) acquired in satisfaction of claims

Contingent liabilities Liabilities occur out of past events. But contingent liabilities are possible obligation which may arise depending on some future happenings. Contingent liabilities are off balance sheet items. Say Bank guarantee, letter of credit,

Income statement of Indian banks/ Profit & Loss Account Income statement has two aspect such as: Revenue Expenses .

Profit & Loss Account contd. Income/Revenue of the bank comprises of the following: Interest income earned which includes interest/discount on advances/ bills Income from investment which includes dividends and interest income earned from bank’s investment portfolio. Interest on balances with RBI , other inter-bank funds , call loans Other non-interest income Commission, exchange and brokerage  Profit and loss on sale of investment Profit/loss on revaluation of investment Profit/loss on sale of buildings and other assets Profit earned through foreign exchange dealings Dividend earned from subsidiaries, joint ventures Miscellaneous income

Expenses of bank comprises of the followings: Income statement contd. Expenses of bank comprises of the followings: Interest expended Interest on deposits Interest on RBI/interbank borrowings, refinance from other banks Other interests such as interest on borrowings/refinance from financial institutions   Operating expense Payment to and provisions for employees Rents, taxes and lighting Printing and stationeries Advertisement and publicity Depreciation on bank’s property Directors’ fees, allowances and expenses Auditor’s fees and expenses Legal charges Postage, telephone Repairs and maintenance Insurance, Taxes Diminution in the value of investments Other expenses which includes provisions and contingencies for loans losses/bad loans  

Net Income= Total income (Revenue) –Total Expenses – Taxes Income statement Net Income= Total income (Revenue) –Total Expenses – Taxes   Total income (Revenue) includes total interest + non-interest income + profit/loss on sale of investment Total expenses include interest expenses, operating expenses and provisions .