So, in the previous class we discussed about
the basic functions of the Commercial Bank
and what are the services the commercial bank
give or provide.
Here what we have seen that the commercial
banks are so special and they provide different
kind of services which are technology based.
Mostly the importance was given to the online
banking and the credit card operations and
all this things.
So, today we can discuss or we will discuss
certain issues related to the financial statements
of the commercial bank and further we will
see at how the performance of the commercial
banks are measured.
If you see in general accounting term whenever
you talk about the financial statements there
are three types of financial statements always
we come across.
The financial statements are mostly the balance
sheet, then we have the second statement is
basically your profit loss account or the
income statement and another is basically
the cash flow.
But, from the banking prospective the cash
flow has some different meanings.
So, mostly the performance is always consider,
always observed, always analyzed from the
two financial statements that is the balance
sheet and the income statement.
If you know that what do you mean by the exact
balance sheet is, how the balance it can be
defined?
The balance sheet is basically what?
It provides the organizations financial condition
at a single point of time.
So, they if you see that any company’s balance
sheet including the bank’s balance sheet
it is always prepared on a particular date,
usually the last day of quarter or the year.
So, you might have seen that whenever we are
talking about a balance sheet we are talking
about like as on 31 March 2018.
That means, as on 31 first March 2018 what
is the financial condition or financial position
of that particular company including the bank,
that is basically reflected through the balance
sheet.
Whether it is a bank or any other company
that has no difference and only we have to
see that the condition of that particular
organization, particularly the financial condition
of that organization is observed through the
different parameters, there are different
items and that is basically shows; that basically
shows that the financial position of that
company on that particular date.
But whenever we talk about the income statement,
the income statement basically shows the all
major revenues and expenditure, net profit
loss dividends if at all the company paid
and it also the measures the banks financial
performance over a period.
It does not show the performance at a particular
point of time or at a particular date, but
it shows the performance over a period of
time, mostly the period of time is either
quarterly or the period of time can be yearly.
So, the income statement is a flow concept
or over the period of time what is the condition
of financial condition of the organization
that is reflected through the income statement.
And whenever you talk about the balance sheet,
the balance sheet shows the financial position
of the company or a position of the bank at
a particular date or a particular point of
time; here the point of time is we are talking
about a particular date.
So, that is the basic differences between
these two types of financial statements.
Although the cash flow has a different meaning
for the banks, but if you talk about the cash
flows, the cash flow is basically is always
from the three activities; 1 is your financing
activities.
Whenever, we measure the cash flow it is basically
measured through the cash flow can be prepared
from the financing activities of the company,
2nd one is your investment activities how
that money is utilized, investment cash flow
and 3rd one is basically your operating cash
flow.
So, these are the different activities which
always we try to observe whenever we are defining
the cash flow statement of a particular company.
But form a banking prospective we always measure
the performance in terms of the balance sheet
items and the items which are reflected in
the income statements.
So, this is the basically what the financial
statement of the banks are.
And here if you see how the balance sheet
first of all we can discuss about the balance
sheet.
So, whenever we talk about the balance sheet;
the balance sheet of a particular bank is
defined, is divided all those items is basically
in two side; one is your liabilities and another
side is assets.
There are certain assets and liabilities which
are always considered in terms of the balance
sheet of a particular organization including
the bank.
So, when we are talking about the liabilities
and the assets what are those different, let
us was discussed about the liabilities then
we can come to the assets.
Then what are those liabilities?
The liabilities is with first liability is
always for any kind of organization is the
share capital.
Share capital means you are we are referring
to the equity capital.
Why equity capital is a liability?
The equity capital is a liability because
the money which is invested by the different
equity holders within that an organization
the they are the owner of the company and
the company of the bank has to pay the dividend
and also the particular amount of the profit
which is arised from that particular investment
that is basically should be shared among the
individual shareholders or the other type
of shareholders, who are participating in
that particular of operations.
That is why equity capital is considered as
a liability for the organization.
Then we have the reserves and surplus; reserves
and surplus: why we say that reserves and
surplus basically is a liability?
Because, reserves and surplus does not provide
any kind of return which is always there within
the organization for some kind of contingency
reasons.
So, that is why this is also considered as
a liability for the bank.
Then we have the another liabilities the deposits.
So, the deposits are basically the major component
one the most components in terms of the liabilities
whenever we are discussing about the banks.
And the deposits for the people or the household
sector or the business sector who makes the
deposits; deposits are the assets for them
for deposits of the liability for the banks.
Why the deposit is a liability?
Because the bank has to pay the interest against
the deposits; so, any type of deposit what
we are making, all though this is the major
instrument or major resources for the bank
for the operation, but still it is considered
as a liability for the banks because we pay
the interest against this deposits.
So, the interest basically, interest payments
are made against the deposit or the bank has
to pay the interest rate against the deposit,
that is why deposit is considered as a liability
for the banks.
As usual you have the borrowings, any type
of long term and short term borrowings whatever
the bank take either the borrowings can come
from RBI or the borrowings can come from other
type of; other type of banks which are existing
in the financial system.
So, any type of borrowings what the banks
take against that borrowings they have to
make the interest, they have to pay the interest
against that.
So, there is the fixed obligations they have
because they have to pay the interest and
as well as in the end they have to pay also
the principal amount.
So, because of that the borrowings are basically
considered as one of the major liabilities
for the banks and as well as the other organization.
Then there some other liabilities, short term
and long term liabilities then the provision
over the bank keep against any kind of loss;
the provisions against any kind of loss depending
upon the credit risk.
Whenever the bank provides the loans there
is some kind of risk involved in that, there
are different type of risk involved in that
and the major risk what the bank can face
that is basically the credit risk.
So, to overcome that kind of risk what are
the banks do?
The banks basically keep certain kind of provisions,
loan loss provisions what they keep and the
loan loss provisions are basically also considered
as the liability because it does not provide
any kind of return over the period of time.
So, this is also another type of liability
always we observe or always you see.
So, these are the major liability components
of the commercial banks.
So, here what we have seen that mostly the
major type of liability what the commercial
bank has that is basically your deposit.
So, we have to understand more about the deposits
what are the different type of deposits and
how the, what are the factors which basically
determine the deposit base of the commercial
banks?
If you see this one then whenever you talk
about the bank deposits because it is the
one of the maximum component of the total
liabilities comes from the deposit base.
So, there are two types of deposits broadly;
one is demand deposits another one is the
term deposits or the time deposits.
So, whenever talk about the demand deposits;
the demand deposits again has been divided
into two parts, other two types of demand
deposits; one is current deposit second one
is the savings deposit.
That means, you might have already the idea
that the people either have a current account
in the bank or they can have a savings account
in the bank.
So, whenever you talk about the current deposits
or current account these are also the chequable
accounts, the cheque can be issued against
the current account, but there are no restrictions
on amount or the number of withdrawals from
these accounts and it does not carry any kind
of interest.
So, if you are going to open the current account
in the bank then that account we will not
face any kind of interest.
So, will not be paid and interest against
the current accounts, but there are no restrictions
for withdrawal of the money in terms of amount
and as well as the number of times.
So, n number of times, any number of times
you can withdraw the money and also if it
is required you can also withdraw any amount
of the money whenever you need.
So, that is basically a part of the current
deposits and against that the banks basically
open the current account.
Then we have this savings deposits; the savings
deposits is cheque can be withdrawn; cheque
can be drawn against that deposits and that
carry generally the interest already 3.5 percent
to 4 percent interest it carries and as well
as also there are certain restrictions in
terms of the amount of money withdrawn and
as well as the number of times the money can
be withdrawn in a particular period of time.
So, that is basically you called the saving
deposits or the savings account what is the
customer can open with the commercial bank.
Then we have the call deposits their accepted
from the fellow bankers and are repayable
on demand this deposits also carry the interest
the call deposits are not available the regular
retail customers.
They are basically available for the other
banks which can have the account with that
particular bank and they can also repayable
on a whenever they need on or whenever they
demand that amount and this deposits also
carry certain amount of interest rate.
So, these are the part of the demand deposits
whatever we have, then we have the term deposits
on we are more popular popularly it is known
as the fixed deposit or we are more accounted
with the term fixed deposits.
So, there are different type of maturity period
the term deposits of the fixed deposits can
be made for 2 months, it can be made for 6
months it can be made for 2 years 3 years
or one year like that.
So, depending upon the term to maturity the
rate of interest varies.
So, the longer the term to maturity the rate
of interest also will be more against that,
but it has a certain limit after that the
interest rate does not vary.
So, these are the part of the term deposits
or the fixed deposits and these are the two
ways the deposits are basically defined in
terms of the commercial banks.
So, then we will see that what are those factors
which basically affecting the composition
of the bank deposits particularly in India
and as well as the other countries.
If one first and foremost factories and national
income, if national income will increase then
there is a possibility that the deposit base
of the bank will increase.
Because the level of income within the household
and as well as the other kind of customers
who are available in the particular market
at that particular point of time that may
increase.
Expansion of banking facilities in the new
areas and new classes of the people because,
you see if there are more number of banks
and there is expansion of the banks and that
creates the avenue for the people to make
their savings or to create their savings account.
There is a possibility that your deposit base
may increase, increase in banking habit because
every day we all the transactions we are trying
to make through online and all kind of digital
payments are in demand for digital payments
are increasing.
So, that also make the people increasing their
banking habit.
So, the banking habit is more or people are
more interested to do the transactions through
the banks because of kind of authentic record
and as well as it has also has an free kind
of spending or the transactions, then also
that increase that also will increase the
demand for the bank deposits in the system.
And increase in the relative rates of return
on the deposits, then you see that whenever
the deposit rate is higher than the other
type of investments or other type of instrument,
financial instrument which are available in
the financial system then also people demand
for the bank deposits may increase.
Increase in deficit financing this is another
reason through which also we are always we
need more deposits should be there in the
bank to cover off that financing whatever
we have.
And increase in bank credit; if you see that
increase in bank credit is another reason
that whenever you talk about the bank credit,
the bank credit basically what?
The loans.
If the loans will increase then it will increase
the money supply already we have explain that,
a money supply will increase then the investment
will increase, when investment will increase
then output will increase, the if the output
will increase, then the profit of the producer
may increase.
And if the profit will increase automatically
that money will again come to the bank as
a deposit.
So, that is also another channel through which
the deposit base can be increased.
So, there is a relationship between the bank
credit or the bank loan against deposit base
and inflows of deposit from NRIs.
Already you know that NRIs is also one of
the major sources of the money supply in the
financial system, if the inflows are more
from the NRIs then also the Non Resident Indians
then the deposit of the commercial banks also,
the total deposit base of the commercial banks
also increase.
Then the growth substitutes, the other kind
of alternatives which are available in this
market and as well as other type of investment
alternatives which are available in the market
that also decides that how much bank deposits
we should we should have.
If there are more alternatives are available
and that are lucrative industry, people may
be interested to invest their money in terms
of those investments or those kind of assets.
So, then automatically they deposit base will
go down.
But if the alternative assets availability
is relatively less, then what will happen?
The demand for bank deposits also may increase
because people will consider that this is
the safest invest what they can make and the
amount of return what they get out of this
although this is very minimal or it is very
less, but still it gives kind of safe return
and also increases the saving habits of the
people.
So, that is why growth of substitutes is very
important factor whenever you talk about the
composition of the bank deposits or demand
and supply of the bank deposits in the particular
system.
So, these are the different factors which
affect the composition of the bank deposits
for the commercial bank.
Then there are some, we are talking about
there are other.
So, these are the items which are basically
the assets.
So, these are the items these are basically
the assets with the commercial bank; these
are the different assets.
So, these assets are basically what?
These are cash in hand, balances with the
central bank, balances with other banks money
at call and short notice, balances with the
banks which are outside in India, investment
in government and other approved securities,
bank credit, fixed assets and the other assets.
So, whenever you talk about this we are basically
what we are talking about there are different
type of assets because just now we have talking
about the liabilities and assets and out of
them the major liability of the commercial
bank in the deposits.
So, there are different type of assets whatever
cash the banks have to fulfill their liquidity
requirements that is also asset for them.
Whatever balance they will keep with the RBI
they get interest against that, because of
that that is also one of the assets.
Balances with other banks they get the interest
out of this because of that this is considered
as an asset, money at call and short notice
whatever liquid instruments whatever they
have they considered as an asset.
Balances with the banks if they have any anything
outside India there are fixed assets like
land buildings machinery all this things whatever
they have their considered the fixed assets.
But the major assets of the commercial banking
system is investment in government and other
approved securities and the bank credit.
So, these are the basically major assets one
is your investments and another one is the
bank credit because the loan is one of the
major components of the assets and investment
is another component of the assets.
So, these are the two things what basically
we will discuss more, that what kind of policies
the bank adopt whenever they discuss about
investments or the deal with the investments
and the bank credit.
If you see that whenever you to talk about
the investments the investments can be three
type what the banks do; one is your government
of India securities, government securities
which are SLR investments or SLR securities.
So, minimum amount of investment that is a
certain percentage of the total deposit has
to be invested in that kind of securities
and other thing is other approved securities.
Other approved securities been there are some
certificate of deposit or commercial papers
whatever they have, they can be also part
of the SLR investments, they can invest in
those kind of securities is a relatively very
liquid and softer.
And another is non approved securities, they
can invest in any kind of this risky bonds
either it is a corporate bond or any other
bond.
So, those kind of bonds are basically called
a non SLR securities, they cannot be considered
as a part of statutory liquidity ratio requirements,
but they are considered as the investments
and also they can also invest in the equity
market or the stock market.
So, these are basically the in non approved
securities which are basically non SLR securities,
but bank always invest in that because return
from those kind of assets are relatively higher
and they can maximize the return out of this.
And whenever we are about talking about loans
and advances there are different kind of loans
the commercial bank give, one is your overdrafts
or cash credits.
They can go for discounting or purchasing
the commercial bills and demand and term loans.
So, if you see this demand and term loans
these are the two most important type of loan,
what always we deal with.
The whenever we talk about the loan the loan
can be anything already we know that the loan
can be industrial loan; Why we talk is demand
and term loan?
Because the demand loans are relatively short
term in nature and term loans are relatively
long term in nature.
So, industrial loan, you have a housing loan,
you have the personal loan, you have also
the loans related to like other objective
like education loan so like that.
For different purposes the loans can be given
and some of the loans are very short term
in nature that is why they called the demand
loans.
And there are some loans which are very long
term for example, the housing loan that can
go up to lets 20 years, industrial loan also
can be given after 15-20 years.
So, like that you have the vehicle loan also.
So, different kind of loans are available
and depending upon the term to maturity of
that particular loan we define them whether
they are the demand loans or that term loans.
And that is the major sources of revenue what
the commercial banks can generate and they
major source of the profit or income what
the commercial bank can generate.
So, these are this these are the major loans
and advances what the commercial banks always
use, but whenever you talk what the loans
and advances what the commercial bank give
there is certain policy they adopt, then how
basically they provide this loans and what
kind of theoretical basis against that.
If you see there are different approaches
for the bank lending because this lending
activities based on the different approaches;
the one approach call the liquidation approach
another approach is called the going concern
approach.
What do you mean by the liquidation approach
and going concern approach?
The liquidation approach is basically what?
Whenever the bank provides the loan they basically
look the value of the assets of the borrower
as a security for the loan; that means, whenever
we take the loan they see that whenever we
are taking the loan they take certain kind
of mortgage or collateral against that particular
loan.
So, if there is a default then the bank and
liquidity of the assets and can recover money.
So, this particular approach is defined as
the liquidation approach.
So, it implies a short term rather than long
term view of the borrower’s prospects and
usually involves taking charge of these assets.
So, any point of time if you are asset value
is not compatible with the loan what you are
taking then maybe loan may not be granted
for that.
So, that approach is called the liquidation
approach, but whenever we go for the going
concern approach, in the going concern approach
the bank basically sees the borrower’s ability
to repay the loan out of the future cash flows
rather than this ability to offer some tangible
assets as security for the loan.
They see that whether they in the future how
much revenue or how much cash flow this particular
customer can generate.
So, whether is it possible to recover that
loan in terms of the cash flow what that particular
customer is able to generate in the future.
So, in that particular context we see what
is the prospect of the outflow or the future
cash flow of that particular customer.
So, here the banks basically analyze your
ability to pay banks does not analyze whatever
assets you have and this whether the assets
value is compatible with your loan amount
what you are demanding.
So, this is what the going concern approach,
for your information the India follows the
liquidation approach mostly and US and other
countries follows the going concern approach.
Some people argue that liquidation approach
is a backward looking approach and going concern
approach is basically forward looking approach
for the commercial banks.
So, these are the different approaches for
the bank lending and either of these approaches
can be followed by the commercial bank.
Then whenever they provide the loan they basically
take certain kind of margin in the liquidation
approach.
So, whenever the loan made by the bank; the
loan made by the bank against any kind of
security is always less than the value of
that security so this difference is called
the margin.
Just now we said whenever in the liquidation
approach whenever you provide the loan always
we consider certain assets as the security
or as the collateral.
So, whenever we give the collateral the collaterals
value and your loan value there is a difference
and always the value of the collateral should
be more than the loan value.
So, that amount is called the margin.
So, the margin basically differs from security
to security and the major principles which
determine its it or marketability, there accertainability
of the value, stability of the value and transferability
of the title of that particular security.
For example, if you see if you are using gold
as instrument than 10 percent is the margin,
if you are using gold ornaments then it is
20 to 30 percent of the margin.
If you are using government and other securities
then it is 10 percent, if you are using your
equity ordinary shares it is 40 to 50 percent,
if you are using preference share is 25 percent,
if it is debenture it is 15 to 20 percent.
Life insurance policies 90 percent of the
surrender value, commodities 25 to 50 percent
and any kind of immovable property that is
50 percent, land and all this things if you
are using that mortgage.
Than the value of the total land always should
be 50 percent always we considered the 50
percent of total that will be sanctioned amount
for your loan.
So, these are the margins which has been used
and why this kind of margin concept is used
because to avoid any kind of loss valuation
of that particular asset.
So, if there is a possibility that valuation
of that particular asset may go down.
So, depending upon that from the beginning
bank take the precautionary approach to keep
that particular margin by that any point of
time if loss any if you are the defaulter
and the particular asset can be sold in the
market then that should not affect the total
amount recovered from that particular loan.
So, this is what basically the margin and
further will be discussing about the performance
of the commercial bank and how it is measured.
Please go through this particular references
for this particular session.
Thank you.
