7.

2 Balance Sheet of a Commercial Bank

Commercial bank's balance sheet proves a picture of its functioning. It has two main sides i.e. the liabilities
(on the right side) and the assets (on the left side). It reflects bank credit extension on its asset side in loans
and investments, and on the liabilities side reflects the bank’s operations as an intermediary in time
deposits and its role as an element in the nation’s monetary system in demand deposits. The balance sheet
of a bank is a system which a bank has followed for raising funds and allocation of these funds in different
asset categories.

Form of Balance Sheet

Distribution of Asset - the assets of a bank are those items from which it receives income and profit.

Cash - consisting of coins and currency notes lying in reserve with it and in its branches. This is a certain
percentage of its total liabilities which it is required to keep by law. Cash reserves do not yield income to
the bank but are essential to satisfy the claims of its depositors.

Central bank and other banks - The commercial banks are required to keep a certain percentage of their
time and demand deposits with the central bank. They are the assets of the bank because it can withdraw
from them in cash in case of emergency or when the seasonal demand for cash is high.

Money at call and short notice - relates to very short-term loans advanced to bill brokers, discount houses
and acceptance houses. They are repayable on demand within fifteen days. The banks charge low rate of
interest on these loans. The fourth item of assets relates to bills discounted and purchased.

Bills and Securities discounted - The bank earns profit by discounting bills of exchange and treasury bills of
90 days duration. Some bills of exchange are accepted by a commercial bank on behalf of its customers
which i ultimately purchases. They are a liability but they are included under assets because the bank can
get them rediscounted from the central bank in case of need.

Investments by the bank - in government securities, state bonds and industrial shares, yields a fixed income
to the banks. The bank can sell its securities when there is need for more cash.
Loan advances and cash credits and overdrafts - the most profitable source of bank assets as the bank
changes interest at a rate higher than the bank rate.The bank makes advances on the basis of cash credits
and overdrafts and loans on the basis of recognised securities.

Liabilities of Customer for Acceptances. Endorsements and other Obligations - the bank has accepted and
endorsed on their behalf. They are the assets of the bank because the liabilities of customers remain in the
custody of the bank. The bank charges a nominal commission for all acceptances and endorsements which
is a source of income.

Property, Furniture, Fixtures less Depreciation - the value of permanent assets of the bank in the form of
property, furniture, fixtures, etc. They are shown in the balance sheet after allowing for depreciation every
year.

Profit and Loss - includes profits retained by the bank after paying corporation tax and profits to
shareholders.

Distribution of Liabilities - the liabilities of commercial banks are claims on it. These are the items which
form the sources of its funds.

Share capital - contributed by its shareholders and is a liability to them.

Reserve fund - consists of accumulated resources which are meant to meet contingencies such as losses in
any year. The bank is required to keep a certain percentage of its annual profits in the reserve fund. The
reserve fund is also a liability to the shareholders.

Deposits - are the debts of the bank to its customers. They are the main source from which the bank gets
funds for investment and are indirectly the source of its income. By keeping a certain percentage of its time
and demand deposits in cash the bank lends the remaining amount on interest.

Borrowings from other banks - the bank usually borrows secured and unsecured loans from the central
bank. Secured loans are on the basis of some recognised securities, and unsecured loans out of its reserve
funds lying with the central bank.

Bills payable - refer to the bills which the bank pays out of its resources.

Bills for collection - these are the bills of exchange which the bank collects on behalf of its customers and
credits the amount to their accounts. Hence it is a liability to the bank.

Acceptance, endorsement and other obligation - These are the claims on the bank which it has to meet
when the bills mature.

Contingents liabilities - relate to those claims on the bank which are unforeseen such as outstanding forward
exchange contracts, claims on acknowledge debts, etc.

Profit and loss - shown profits payable to the shareholders which are a liability on the bank.
7.3 The Sources of Bank Funds

Deposits
The major source of funds for commercial banks is saving. Deposits are gathered in local markets
and typical have lower interest rate. They are relatively stable. Deposits can be classified as demand deposit
(current deposits), etc. In case of demand deposits, the sources of funds are simply checking account that
do not pay interest and permit unlimited check writing.
Saving deposits are interest bearing sources of fund left with the banks for a period of weeks,
month, or years with no minimum required maturity. Money market deposits account can pay whatever
interest rate the offering bank feel is competitive and have limited check writing privileges attached. No
minimum denomination or maturing is required by law. A time deposit is simply a deposit account that pays
interest for fixed term and the fund cannot be withdrawn before maturity.

Liabilities Management
The another important source of fund for commercial bank is liabilities management. They have to
manage it very carefully to minimize risk and achieve goal. The various items included in the liabilities of
commercial banks are equity, reserves, borrowings, deposits, new account, money market liabilities,
deposit account, wholesale and retail certificate of deposits, negotiable instructs, brokered deposits,
interest paying liabilities, short term loan, bills payable and other outstanding expenses.

Repurchase agreement
This represents the temporary borrowing in money market, mainly from excess required reserves
loaned to it by other banks or the bank has borrowed fund collateralize by some of its own securities from
other bank or a large corporate customer.

Mortgage loans
Long term loans taken generally for constructing building and building under construction serves as
collateral are mortgage loans. The principal source of long term borrowing include real estate mortgage
and this type of loan may have maturity up to thirty years.

Capital funds
It refers to the long term funds contributed to a bank primarily by its owners. It represents the
owner's equity interest in the bank. From the regulator point view, bank capital is divided into two groups
- tier 1 and tier 2 capital. Tier 1 capital is known as core or primary capital and tier 2 capital is known as
supplementary capital. Under this fund includes common stocks, suppliers, retained earnings and
undivided profit.

7.9 Reserve Requirement and Liquidity

The reserve requirement is the amount of funds a bank must have on hand each night. It is a
percent of the bank's deposits. The nation's central bank sets the percentage rate. It is applies
to commercial banks, savings banks, savings and loan associations, and credit unions. It also pertains to U.S.
branches and agencies of foreign banks, Edge Act corporations, and agreement corporations
The use of reserve requirements by the monetary authorities is intended to complement OMO as
tools of liquidity management in the economy. The targeted reserves are usually bank vault cash and
deposits with the Central Bank. Reserve requirements can be used to effect changes in the volume of
money and credit to the economy because it is usually targeted at and affects the demand for reserve
money, with some impact also on the money multiplier.
The two variants of reserve requirements are cash reserve ratio and liquidity ratio. Cash reserve
requirement is used to complement OMO to achieve effective liquidity management—especially within the
banking system. It is measured by the ratio of a bank’s cash deposits with the Central Bank to the total
banking system deposit liabilities. The authorities might require that the cash reserve ratio be met by the
banks on daily average basis as was the case in Nigeria in the early 1990s when liquidity management
became a major issue in the observed rising price levels in the economy. The authorities may fix the cash
ratio at desired percentage of total deposit liabilities of all the banks. In the case of liquidity ratio, a
minimum statutory target of desired percentage of total deposit liabilities may also be set.
However, there are certain qualifications to liquidity ratio targeting aimed at achieving the desired effect.
In some countries, monetary policy circular which the Central Banks regularly issue may stipulate:
1. The ratio of share of T–bills and T–certificates in each bank’s liquid assets to the bank’s total deposit
liabilities.

2. Whether a bank’s net placement with discount houses shall count as part of the bank’s liquid assets for
the purpose of meeting statutory liquidity ratio.

3. If only interbank placements which are fully collateralized by eligible instruments and readily re-
discountable at the central bank shall count as part of a bank’s liquid assets.

4. Whether compulsory deposits with the central bank in respect of the following shall qualify for inclusion
in computing the statutory liquidity ratio:

a. Excess credit by banks that are still subject to aggregate credit ceiling.

b. Shortfalls of loans to agriculture, manufacturing, exports, solid minerals, and small–scale

enterprises.

c. Cash deposits to meet the cash reserve requirement.

Reserve requirements may have adverse impact on the economy for the fact that they are often treated as
sterile or till-funds and, therefore, attract zero or below-market interest rates. This taxation element is a
disincentive to banks and other market operators. It may also dampen the spirit of financial intermediation
of the banks and market development in the long-run. Unfortunately, the ratios are enforced with
regulatory fiat and banks are obliged to submit to them.

Reference:
7.2 Balance Sheet of a Commercial Bank

http://www.yourarticlelibrary.com/banking/commercial-bank-the-balance-sheet-of-a-
commercial-bank-banking/10984
https://kalyan-city.blogspot.com/2010/09/balance-sheet-of-commercial-bank.html
7.3 The Sources of Bank Funds

https://www.sapling.com/7498318/sources-funds-commercial-banks

7.9 Reserve Requirement and Liquidity

https://www.sciencedirect.com/topics/economics-econometrics-and-finance/reserve-
requirements
https://www.thebalance.com/reserve-requirement-3305883