Presentation on theme: "Sources and Uses of Funds of Bank"— Presentation transcript:
1 Sources and Uses of Funds of Bank Bank Balance SheetsSources and Uses of Funds of BankSamir K Mahajan
2 Financial Statement of an Enterprise Balance SheetProfit and Loss Account
3 Assets= Liabilities + Capital + (Revenues – Expenses) Balance Sheet contd.LIABILITIESLiabilities 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.ASSETSAssets 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)
5 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 Capitalauthorisedissuedsubscribedpaid up-capitalReserves & SurplusStatutory reservesCapital ReservesShare PremiumRevenue &other reservesDebt component comprises of the following:DepositsBorrowingsInterest accrued on borrowings and depositsOther liabilities and provisionsOthers
6 Capital /share capital Liabilities contdCapital /share capitalThe 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. 1,000,00Authorized Capital = Rs. 1,000,00Issued 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. 50,000Issued Capital = Rs. 50,000 (5000 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 Rs. 10 per share)
7 Capital /share capital : An Illustration Liabilities contd.Capital /share capital : An IllustrationCalled 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. 20,000Paid 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 (2000 Rs 5 per share).
8 Bank Liabilities contd. Reserve and surplusesTypically 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.
9 Balance in profit and loss account Bank Liabilities contd.Reserve and surplusesShare premium will include any premium on the issue of share capital by the bankRevenue 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
10 Borrowing is shown under two categories: Bank Liabilities contd.DepositsDeposits includes demand deposits, saving deposits, term deposits (such as: fixed deposits, recurring deposits, reinvestment deposits, cash certificates, certificates of deposits), NRI deposits.BorrowingsBorrowing 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 IndiaInterest accrued on borrowings and depositsInter-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.
11 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 HoldingsInvestmentLoans and advancesFixed assetsOther assets
12 Cash holding by bank would comprise of Bank Assets contd.Cash HoldingCash holding by bank would comprise ofcash in the bank’s vault including foreign currencies and cash balance with overseas branches of the bankbalances/deposits (cash reverses requirement)with RBI,balances with other banks held for clearing house requirement and other usesmoney at call and short noticeInvestmentgovernment securitiesapproved securitiesshares,debentures and bonds,subsidiaries and joint venturesother investments
13 Interest accrued on investment and advances but not collected Bank Assets contd.Loans and advancesLoans and advances includes bills purchased and discounted, cash credits, overdrafts and loans repayable on demand, term loans.Fixed assetsFixed 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 collectedOther assets includesadvance expensesInter-office adjustment i.e. net debit balanceadvance tax paid/tax deducted at sourcesstationaries and stampsnon-banking assets (such as immovable property or tangible assets ) acquired in satisfaction of claims
15 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,
16 Income statement of Indian banks/ Profit & Loss Account Income statement has two aspect such as:RevenueExpenses .
17 Profit & Loss Account contd. Income/Revenue of the bank comprises of the following:Interest income earned which includes interest/discount on advances/ billsIncome from investment which includes dividends and interest income earned from bank’s investment portfolio.Interest on balances with RBI , other inter-bank funds , call loansOther non-interest incomeCommission, exchange and brokerage Profit and loss on sale of investmentProfit/loss on revaluation of investmentProfit/loss on sale of buildings and other assetsProfit earned through foreign exchange dealingsDividend earned from subsidiaries, joint venturesMiscellaneous income
18 Expenses of bank comprises of the followings: Income statement contd.Expenses of bank comprises of the followings:Interest expendedInterest on depositsInterest on RBI/interbank borrowings, refinance from other banksOther interests such as interest on borrowings/refinance from financial institutionsOperating expensePayment to and provisions for employeesRents, taxes and lightingPrinting and stationeriesAdvertisement and publicityDepreciation on bank’s propertyDirectors’ fees, allowances and expensesAuditor’s fees and expensesLegal chargesPostage, telephoneRepairs and maintenanceInsurance,TaxesDiminution in the value of investmentsOther expenses which includes provisions and contingencies for loans losses/bad loans
19 Net Income= Total income (Revenue) –Total Expenses – Taxes Income statementNet Income= Total income (Revenue) –Total Expenses – TaxesTotal income (Revenue) includes total interest + non-interest income + profit/loss on sale of investmentTotal expenses include interest expenses, operating expenses and provisions .