Banks’ Assets and Liabilities

Banks’ Assets

Assets are items of value that banks hold or control to generate income. They reflect how banks utilize the funds they receive.

1. Loans and Advances

  • Definition: Money lent by banks to individuals, businesses, and governments. This is the primary source of income for banks.
  • Types:
    • Retail Loans: Personal loans, home loans, car loans, education loans, etc.
    • Corporate Loans: Credit for businesses, including working capital finance and term loans.
    • Priority Sector Lending: Mandatory lending to sectors like agriculture, MSMEs, and weaker sections as per RBI norms.
  • Risks:
    • Loans can turn into Non-Performing Assets (NPAs) if borrowers default.

2. Investments

  • Banks invest in financial instruments for safety and returns.
  • Types:
    • Government Securities (G-Secs): Bonds issued by the government, which are risk-free.
    • Corporate Bonds: Debt instruments issued by companies with higher risk but better returns.
    • Treasury Bills (T-Bills): Short-term government securities with maturities of up to one year.
    • Certificates of Deposit (CDs) and Commercial Papers (CPs).

3. Cash and Balances with Central Banks

  • Banks must maintain reserves with the central bank (e.g., RBI) as part of regulatory requirements.
  • Types:
    • Cash Reserve Ratio (CRR): A percentage of net demand and time liabilities (NDTL) that banks must keep with the RBI.
    • Statutory Liquidity Ratio (SLR): A portion of NDTL that banks must maintain in the form of liquid assets like G-Secs or cash.

4. Balances with Other Banks

  • Banks hold accounts and deposits with other banks for operational and liquidity purposes.
  • Examples include interbank deposits or money parked overnight in the call money market.

5. Fixed Assets

  • Includes physical infrastructure and equipment like:
    • Bank branches and offices.
    • ATMs, IT systems, and hardware.
  • These assets help in providing services but do not directly generate income.

6. Other Assets

  • Accrued income: Interest or dividends that are earned but not yet received.
  • Deferred expenses: Costs already incurred but applicable to future periods.
  • Miscellaneous items like goodwill or software licenses.

Banks’ Liabilities

Liabilities are obligations the bank owes to others. They represent the sources of funds for the bank.

1. Deposits

  • Definition: Money deposited by customers forms the largest part of a bank’s liabilities.
  • Types:
    • Demand Deposits:
    • Can be withdrawn by customers at any time.
    • Includes current and savings accounts.
    • Time Deposits:
    • Deposits with a fixed maturity period.
    • Examples: Fixed Deposits (FDs) and Recurring Deposits (RDs).
    • CASA (Current Account Savings Account) Deposits:
    • Low-cost deposits that form an important part of a bank’s liability profile.

2. Borrowings

  • Banks borrow from various sources to manage liquidity or fund their operations.
  • Types:
    • Borrowings from the central bank (e.g., Repo agreements).
    • Loans from other banks in the interbank market.
    • International borrowings via external commercial borrowings (ECBs).

3. Other Liabilities

  • Includes short-term liabilities, expenses payable, and reserves for contingencies.
  • Provisions: Funds set aside to cover potential NPAs or bad debts.

4. Capital and Reserves

  • Represents the bank’s net worth, contributed by shareholders or retained from profits.
  • Components:
    • Paid-up capital: Initial funds raised from shareholders.
    • Reserves and surplus: Retained earnings, revaluation reserves, etc.
  • Importance:
    • Acts as a buffer against losses.
    • Enhances the bank’s stability and creditworthiness.

Regulatory Framework

Banks must follow various regulations to ensure financial stability and risk management. Key guidelines include:

1. Basel Norms

  • Set of international standards on capital adequacy, risk management, and banking supervision.
  • Basel III Key Points:
    • Capital Adequacy Ratio (CAR): Minimum 10.5% of risk-weighted assets.
    • Tier 1 and Tier 2 Capital: Banks must maintain high-quality capital to absorb losses.
    • Liquidity Coverage Ratio (LCR): Banks must hold enough liquid assets to survive a 30-day stress scenario.

2. RBI Guidelines

  • Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements.
  • Priority sector lending mandates.
  • Loan classification: Performing vs. Non-Performing Assets (NPAs).

Key Ratios to Understand Assets and Liabilities

  • Credit-Deposit Ratio (CDR):
  • Indicates the proportion of deposits used for lending.
  • Formula: ( \text{Loans and Advances} / \text{Total Deposits} ).
  • Capital Adequacy Ratio (CAR):
  • Measures the bank’s capital against its risk-weighted assets.
  • Net Interest Margin (NIM):
  • Difference between the interest income earned and the interest paid.
  • Formula: ( (\text{Interest Earned} – \text{Interest Paid}) / \text{Average Assets} ).
  • NPA Ratio:
  • Indicates the quality of a bank’s loan portfolio.
  • Formula: ( \text{Gross NPAs} / \text{Gross Advances} ).

Conclusion

The management of assets and liabilities is crucial for the financial health of banks.

  • Efficient Asset Management: Ensures profitability and liquidity.
  • Controlled Liabilities: Provides stable and cost-effective funding.
  • Regulatory compliance and risk management frameworks are essential to safeguard the interests of depositors and the financial system.