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  • FEBRUARY 23, 2010

Making sense of a bank's balance sheet - II

In the previous article of this series, we discussed the 'Capital and Liabilities' portion of a financial firm's balance sheet. In this article, we will discuss the other part of the balance sheet - Assets.

Just to brush up the readers, a balance sheet of a manufacturing firm is divided into two parts - 'Sources of funds' and 'Application of funds'. For a bank these are termed as 'Capital and liabilities' and 'Assets' respectively.

Assets

While the 'Capital and Liabilities' is the portion from where the bank sources the money to lend as loans, the 'Asset's portion indicates where all and how the bank has utilised the money. Apart from advances, a bank needs to put aside a portion of its assets in various forms. These can be in the form of investments, deposits with the RBI, cash balances, amongst others. It must be noted that a bank needs to follow regulations made by India's central bank, the Reserve Bank of India (RBI). We shall discuss these later on in this article.

Cash and bank balances with the RBI
As the name suggest, this head includes the cash in hand and in ATMs that a bank maintains as well as the amount of money deposited with the RBI. A bank will need to reserve a certain amount to satisfy withdrawal demands. The proportion of deposits that a bank needs to keep with the RBI is determined by the prevailing 'cash reserve ratio' (CRR). As such, CRR is essentially the percentage of cash reserves to total deposits. The rate of the same is determined by the RBI in its monetary policies.

Balances with Banks and Money at Call and Short notice
This head again has two parts - balance with other banks (which can be in the form of current account or other deposit accounts) and money at call and short notice. Banks do show these types of balances with institutions that are in and outside India separately.

These funds are those which banks provide (or take) to (or from) other financial institutions at inter-bank rates. These types of loans are very short in nature, usually lasting no longer than a week. More often than not, these funds are used for helping banks meet reserve requirements.

Investments
This head is again divided into two parts - investments in and outside India. Investments in government securities (G-Secs) take the cake in this head. A bank is required to invest in G-Secs. The amount that needs to be invested is the dependent on the prevailing statutory liquidity ratio (SLR).

As mentioned in one of our earlier articles, a bank's revenues are basically derived from the interest it earns from the loans it gives out as well as from the fixed income investments it makes. If credit demand is lower, the bank increases the quantum of investments in G-Sec.

The other investment would be somewhat common between all firms. They could include investment in joint ventures, subsidiaries, bonds and debentures, units, certificate of deposits, amongst others.

Advances
Advance in the simplest term can be defined as loans given to a bank's customers, which could be retail or corporate clients. The growth in advance, coupled with the prevailing interest rates is what drives the banks interest income.

Advances are broadly of three types - Bills purchased & discounted, cash credits, overdrafts & loans repayable on demand and term loans. Term loans, followed by cash credits, overdraft and loans repayable on demand tend to have a larger share in this head.

Further, banks are also required to show how these assets have been covered. They can be either covered by tangible assets or bank/government guarantees. Banks also give unsecured loans to their customers. However, these types of loans would constitute a much less portion (as compared to the secured loans) of the advance pie.

Banks are also required to broadly show where they have made their advances. While more details can be sought from various reports, including annual reports, under the advance schedule, they are required to show what portion is advanced in and outside India. Further bifurcation is made as to how much has been advanced to the priority sector, public sector, other banks, etc.

Fixed assets and other assets
Fixed assets for a bank would mainly include premises, land, assets on lease and furniture & fixtures. The 'other assets' portion includes various items such as the interest accrued, advance tax paid, stationary and stamps, non banking assets acquired in satisfaction of claims, security deposits for commercial and residential property, deferred tax assets, amongst others.

It must be noted that banks are also required to disclose their contingent liabilities, which as the name suggests, are possible future liabilities that will only become certain on the occurrence of some future event. More often than not, liability on account of outstanding forward exchange and derivative contracts form the majority portion of this.

In the next article of this series, we shall continue our discussion on the financial statements of banks.

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