1.

1 Structure of Indian Banking System

The Indian financial system comprises a large number of commercial and

cooperative banks, specialized developmental banks for industry,
agriculture, external trade and housing, social security institutions,
collective investment institutions, etc. The banking system is at the heart of
the financial system.
The Indian banking system has the RBI at the apex. It is the central bank
of the country under which there are the commercial banks including public
sector and private sector banks, foreign banks and local area banks. It also
includes regional rural banks as well as cooperative banks.

1.2 Reserve Bank of India

The central bank plays an important role in the monetary and banking
structure of nation. It supervises controls and regulates the activities of the
banking sector. It has been assigned to handle and control the currency and
credit of a country. In older days, the central banks were empowered to
issue the currency notes and bankers to the Union governments. The first
central bank in the world was Riks Banks of Sweden which was established in
1656. The Reserve Bank of India, the central bank of our country, was
established in 1935 under the aegis of Reserve Bank of India Act, 1934. It
was a private shareholders institution till January 1949, after which it
became a state-owned institution under the Reserve Bank of India Act, 1948.
It is the oldest central bank among the developing countries. As the apex
 bank, it has been guiding, monitoring, regulating and promoting the destiny
of the Indian financial system.
Objectives of RBI
It plays a more positive and dynamic role in the development of a country.
The financial muscle of a nation depends upon the soundness of the policies
of the central banking. The objectives of the central banking system are
presented below:
1. The central bank should work for the national interest of the
country.
2. The central bank must aim for the stabilization of the mixed
economy.
3. It aims at the stabilization of the price level at average prices.
4. Stabilization of the exchange rate is also essential.
5. It should aim for the promotion of economic activities.
Constitution and Management
Reserve Bank of India has been constituted as a corporate body having
perpetual succession and a common seal. Its capital is Rs. 5 crore wholly
owned by the Government of India. The general superintendence and
direction of the affairs and business of the Bank has been vested in the
Central Board of Directors. The Central Government, however, is
empowered to give such directions to the Bank as it may, after consultation
with its Governor, consider necessary in the public interest.
The Central Board of Directors consists of the following:
a) A Governor and not more than four Deputy Governor to be
appointed by the Central Government.
b) Four directors to be nominated by the Central Government, one
from each of the four local boards.
c) Ten directors to be nominated by the Central Government.
d) One Government official to be nominated by the Central
Government.
Besides the Central Board of Directors, four Local Boards have also been
constituted for each of the four areas specified in the first schedule to the
Act. A Local Board has five members appointed by the Central Government
to represent as far as possible, territorial and economic interests and the
interests of cooperative and indigenous banks. A Local Board advises the
Central Board on matters referred to it by the Central Board and performs
such duties as are delegated to it by the Central Board.
 Functions of RBI
The RBI functions are based on the mixed economy. The RBI should maintain
a close and continuous relationship with the Union Government while
implementing the policies. If any differences arise, the government’s
decision will be final. The main functions of the RBI are presented below:
1. Welfare of the public
2. To maintain the financial stability of the country.
3. To execute the financial transactions safely and effectively.
4. To develop the financial infrastructure of the country.
5. To allocate the funds effectively without any partiality.
6. To regulate the overall credit volume for price stability.
Authorities
The RBI has the full authority in the following aspects:
1. Currency issuing authority
2. Monitoring authority
3. Banker to the Union Government
4. Foreign exchange control authority
5. Promoting authority.

1. Currency Issuing Authority- The RBI has the sole authority to

issue the currency notes and coins. It is the fundamental right
of the RBI. The coins and one rupee notes are issued by the
Government of India and they are circulated through the RBI. The
notes issued by the RBI issues by the RBI will have legal identity
everywhere in India. The RBI issues the notes of the denomination
of RS. 1000, 500, 100, 50, 20 and 10. The RBI has the authority to
circulate and withdraw the currency from circulation. It has also the
authority to exchange notes and coins from one denomination to
other denominations as per the requirement of the public. The
currency notes may be distributed throughout the country through
its 15 full pledged offices, 2 branch offices, and more than 4000
currency chests. The currency chests are maintained by different
banks in various locations. The RBI issues currency notes, based on
the availability of balances of gold, bullion, foreign securities,
rupees, coins and permitted bills.
2. Monitoring Authority- The RBI has the full authority to control
all the aspects of the banking system in India. The RBI is known as
the Banker’s Bank. The banking system in India works according to
the guidelines issued by the RBI. The RBI is the premier banking
 institute among the commercial banks. All the commercial banks,
foreign banks and cooperative urban banks in India should obey the
rules and regulations which are issued by the RBI from time to time.
The RBI controls the deposits of the commercial banks through the
CRR and the SLRs. Every bank should deposit a certain amount in
the RBI. The commercial banks have the power to borrow the
money from the RBI when they are in need of finance. Hence it is
known as the lender of the last resort. The RBI has the authority to
control the credit supply in the economy or monetary systems of the
nation.
3. Banker to the Union Government- Generally in any country all
over the world the Central bank dominates the banking sector. It
advises the government on monetary policies. The RBI is the
bankers to the Union Government and also to the state
governments in the country. It provides a wide range of banking
services to the government. It also transfers the funds, collects the
receipts and makes the payment on behalf of the Government. It
also manages the public debts. The Government will not pay any
remuneration or brokerage to the RBI for rendering the financial
services. Any deficit or surplus in the Central Government account
with the RBI will be adjusted by creation or cancellation of the
treasury bills. The treasury bills are known as the Adhoc Treasury
bills.
4. Foreign Exchange Regulation Authority- The RBI’s another
major function is to control the foreign exchange reserves position
from time to time. It maintains the stability of the external value of
the rupee through its domestic policies and forex market. The RBI
has the full authority to regulate the market as discussed below:
· To monitor the foreign exchange control.
· To prescribe the exchange rate system.
· To maintain a better relation between rupee and other
currencies.
· To interact with the foreign counterparts.
· To manage the foreign exchange reserves.
It administers the FERA, 1973. It is replaced by the FEMA which would be
consistent with full capital account convertibility with policies of the
Central Government.
The RBI administers the control through the authorized forex dealers. The
RBI is the custodian of the country’s foreign exchange reserves. The foreign
exchange is precious and it takes the responsibility of the better utilization.
5.Promoting Authority:
The RBI’s function is to look after the welfare of the financial system. It
renders the promotion services to strengthen the country’s banking and
financial structure. It helps in mobilizing the savings and diverting them
towards the productive channel. Thus the economic development can be
achieved. After the nationalization of the commercial banks, the RBI has
taken a number of series of actions in various sectors such as agriculture
sector, industrial sector, lead bank scheme and cooperative sector.

1.3 Commercial Banks

Amongst the banking institutions in the organized sector, commercial banks
are the oldest institutions, some of them having their genesis in the
nineteenth century. Initially, they were set up in large numbers, mostly as
corporate bodies with shareholdings by private individuals. In the sixties of
the twentieth century, a large number of weaker and smaller banks were
merged with other banks. As a consequence, a stronger banking system
emerged in the country. Subsequently, there has been a drift towards state
ownership and control. Today 27 banks constitute strong public sector in
Indian commercial banking. Commercial banks operating in India fall under
different sub-categories on the basis of their ownership and control over
management.
Public Sector Banks
Public sector in Indian banking emerged to its present position in three
stages. First, the conversion of the then existing Imperial Bank of India into
the State Bank of India in 1955, followed by the taking over of the seven
state associated banks as its subsidiary banks, second the nationalization of
14 major commercial banks on July 19, 1969 and last, the nationalization of
6 more commercial banks on April 15, 1980. Thus 27 banks constitute the
Public sector in Indian Commercial Banking.
Private Sector Banks
After the nationalization of major banks in the private sector in 1969 and
1980, no new bank could be set up in India for about two decades, though
there was no legal bar to that effect. The Narasimham Committee on
Financial Sector Reforms recommended the establishment of new banks in
India. Reserve Bank of India, thereafter, issued guidelines for the setting up
of new private sector banks in India in January 1993.
 These guidelines aim at ensuring that the new banks are financially viable
and technologically up-to-date from the start. They have to function in a
professional manner, so as to improve the image of commercial banking
system and to win the confidence of the public.
In January 2001 Reserve Bank of India issued new rules for the licensing of
new banks in the private sector. The salient features are as follows:
1. A new bank may be started with a capital of Rs. 200 crore. The
net worth is to be raised to Rs. 300 crore in three years.
2. The promoter’s minimum holding in the capital shall be 40 per
cent with a lock-in-period of 5 years. Excess holding over 40 per
cent will have to be diluted within a year.
3. Non-resident Indians can pick up 40 per cent equity share in the
new bank. Any foreign bank or finance company may join as
technical collaborators or as co-promoter, but their equity
participation will be restricted to 20 per cent, which will be within
the ceiling of 40 per cent allowed to Non –resident Indians.
4. Corporates have been allowed to invest up to meet existing
priority sector norms and prudential norms and also to open 25 %
of their branches in rural and semi-urban areas. Preference will be
given to promoters with expertise in financing priority areas and
rural and agro based industries.
5. Non-banking finance companies may convert themselves into
banks if their net worth is Rs. 200 crore, capital adequacy ratio is
12%, non performing assets below 5% and possess triple A credit
rating.
In addition to the above guidelines, the new banks are governed by the
provisions of the Reserve Bank of India Act, the Banking Regulation Act and
other relevant statutes.

1.4 Local Area Bank

In 1996, Government decided to allow new local area banks with the twin
objectives of Providing an institutional mechanism for promoting rural and
semi-urban savings, and For providing credit for viable, economic activities
in the local areas.
Such banks can be established as public limited companies in the private
sector and can be promoted by individuals, companies, trusts and societies.
The minimum paid up capital of such banks would be Rs. 5 crore with
promoter’s contribution at least Rs. 2 crore. They are to be set up in district
towns and the area of their operations would be limited to a maximum of 3
geographically contiguous districts. At present, five Local Area Banks are
 functional, one each in Punjab, Gujrat, Maharashtra and two in Andhra
Pradesh.

1.5 Foreign Bank

Foreign Commercial Banks are the branches in India of the joint stock banks
incorporated abroad. Their number has increased to forty as on 31st March,
2002. These banks, besides financing the foreign trade of the country,
undertake normal banking business in the country as well.
Licensing of Foreign Bank: In order to operate in India, the foreign banks
have to obtain a license from the Reserve Bank of India. For granting this
license, the following factors are considered:

1. Financial soundness of the bank.

2. International and home country rating.
3. Economic and political relations between home country and
India.
4. The bank should be under consolidated supervision of the home
country regulator.
5. The minimum capital requirement is US $ 25 million spread over
three branches - $ 10 million each for the first and second branch
and $5 million for the third branch.
6. Both branches and ATMs require licenses and these are given by
the RBI in conformity with WTO’s commitments.
Function of Foreign Banks: The main business of foreign banks is
the financing of India’s foreign trade which they can handle most
efficiently with their vast resources. Recently, they have made
substantial inroads in internal trade including deposits, advances,
discounting of bills, mutual funds, ATMs and credit cards. A large
part of their credit is extended to large enterprises and MNCs
located mostly in the tier one cities- mainly the metros, though
some banks are now foraying in the rural sector as well. Technology
used by these banks has been a major driver of change in the
Indian banking industry. A highly trained and efficient workforce
and the huge pool of capital resources at the disposal of these
banks have created tremendous goodwill and prestige of foreign
banks in India.
Apart from their main businesses, foreign banks are also instrumental in
shaping the attitudes, perceptions and policies of foreign governments,
corporates and other clients towards India, especially in the following areas:
1. Bringing together foreign institutional investors and Indian
companies.
2. Organizing joint ventures.
3. Structuring and syndicating project finance for
telecommunication, power and mining sectors.
4. Providing a thrust to trade finance through securitization of export
loan.
5. Introducing new technology in data management and information
systems.

Performance: Foreign banks are not subject to the stringent norms

regarding opening of rural branches, priority sector lending or
bound by the social philosophy of Indian banks. These factors
combined with the financial, technical and human resources of the
foreign banks have ensured a healthy growth of these banks in
India.

1.6 Co-operative Banks

Besides the commercial banks, there exist in India another set of banking
institutions called co-operative credit institutions. These have been in
existence in India since long. They undertake the business of banking both in
urban and rural areas on the principle of co-operation. They have served a
useful role in spreading the banking habit throughout the country. Yet, their
financial position is not sound and a majority of co-operative banks has yet
to achieve financial viability on a sustainable basis.
The cooperative banks have been set up under the various Co-operative
Societies Acts enacted by the State Governments. Hence the State
Governments regulate these banks. In 1966, need was felt to regulate their
activities to ensure their soundness and to protect the interests of
depositors. Consequently, certain provisions of the Banking Regulation Act
1949 were made applicable to co-operative banks as well. These banks have
thus fallen under dual control viz., that of the State Govt. and that of the
Reserve Bank of India which exercises control over them so far as their
banking operations are concerned.
Features of Cooperative banks
· These banks are government sponsored government supported
and government subsidized financial agencies in India.
· Unlike commercial banks which focus on profits, cooperative
banks are organized and managed on principles of cooperation, self
help and mutual help. They function on a “no profit, no loss” basis.
· They perform all the main banking functions but their range of
services is narrower than that of commercial banks.
· Some of them are scheduled banks but most are unscheduled
banks.
· They have a federal structure of three-tier linkages and vertical
integration.
· Cooperative banks are financial intermediaries only, particularly
because a significant amount of their borrowings is from the RBI,
NABARD, the central and state governments and cooperative apex
institutions.
· There has been a shift of cooperative banks from the rural to the
urban areas as the urban and non-agricultural business of these
banks has grown over the years.

Weaknesses: Cooperative banks suffer from too much dependence on RBI,

NABARD and the government.
· They are subject to too much officialization and politicization.
Both the quality of loans assets and their recovery are poor. The
primary agricultural cooperative societies- a vital link in the
cooperative credit system- are small in size, very week and many of
them are dormant.
· The cooperative banks suffer from existence of multiple
regulation and control authorities.
· Many urban cooperative banks have failed or are in the process
of liquidation.
· Cooperative banks have increasingly been facing competition
from commercial banks, LIC, UTI and small savings organizations.

1.7 Regional Rural Banks

Regional Rural Banks are relatively new banking institutions which
supplement the efforts of the cooperative and commercial banks in catering
to the credit requirements of the rural sector. These banks have been set up
in India since October 1975, under the Regional Rural Banks Act, 1976. At
present there are 196 RRBs functioning in 484 districts. The distinctive
feature of a Regional Rural Bank is that though it is a separate body
corporate with perpetual succession and a common seal. It is very closely
linked with the commercial bank which sponsors the proposal to establish it
 and is called the sponsor bank. The central government establishes a RRB, at
the request of the sponsor bank and specifies the local limits within which it
shall establish its branches and agencies.
Business of a Regional Rural Bank
A Regional rural bank carries on the normal banking business i.e., the
business of banking as defined in section 5(b) of the Banking Regulation Act,
1949 and engages in one or more forms of businesses specified in Section 6
(1) of that Act. A Regional rural bank may in particular, undertake the
following types of businesses, namely:
1. The granting of loans and advances, particularly to small and
marginal farmers and agricultural laborers, and to cooperative
societies for agricultural operations or for other connected purposes,
and
2. The granting of loans and advances, particularly to artisans,
small entrepreneurs and persons of small means engaged in trade,
commerce or industry or other productive activities within the
notified areas of a rural bank.
Regional Rural Banks are thus primarily meant to cater to the needs of the
poor and small borrower in the countryside.
Capital
The authorized capital of a RRB shall be Rs. 5 crore which may increased or
reduced(not below Rs. 25 lakh) by the Central Government in consultation
with NABARD and the sponsor bank. The issued capital shall not be less than
Rs. 25 lakh. Of the issued capital, the Central Government shall subscribe
fifty percent, the sponsor bank thirty five percent and the concerned State
Government fifteen percent.
The shares of the Rural Banks shall be deemed to be included in the
securities enumerated in Section 20 of the Indian Trusts Act, 1882 and shall
also be deemed to be approved securities for the purpose of the Banking
Regulation Act 1949.
Management
Each Rural Bank is managed by a Board of Directors. The general
superintendence, direction and management of the affairs and business vest
in the Board. In discharging its functions the Board of Directors acts on
business principles and shall have due regard to public interests. A regional
rural bank is guided by the directions, issued by the Central Government in
regard to matters of policy involving public interest.

1.8 Annual Report

 An annual report is a reflection of the company’s philosophy, policies,
achievements and shortcomings. The annual report gives general
information regarding the name(s) of the chairman/MD, chief executive
officer and all the directors, the bankers and auditors of the company,
registered office, date, time and venue of the annual general meeting. An
annual report comprises two parts.

Part I: It includes
Ø Notice of the meeting of the shareholders.
Ø Directors’ Report: The chairman of the company presents the
Director’s report which usually highlights the company’s
achievements in the given macro and micro-environment, new
initiatives/ products/ technology, etc. proposed to be used,
constraints if any faced by the company, future plans for
modernization, diversification, etc.
Ø The company’s philosophy that describes how the company does
business, is delineated in a separate section.
Ø Social responsibility report: It has initiatives for environment
conservation and corporate social responsibility. Since banks do not
manufacture goods, therefore, treatment of effluents is not
relevant. However, most banks do conduct a number of social
outreach programmes for education, training etc. for the poor and
underprivileged sectors of the society.
Ø Corporate Governance report: Corporate Governance deals with
conducting the affairs of the organization with integrity,
transparency and commitment to principles of good governance. It
has to be certified that all mandatory requirements as stipulated by
Securities and Exchange Board of India (SEBI) have been complied
with.
Ø Declaration of dividend (if any) is provided.
Ø Retirement, reappointment of existing directors or appointment of
new directors.
Ø For the sake of uniformity and transparency in reporting, banks are
also supposed to give details of their non-performing assets (NPA).
NPAs are those assets which have remained unpaid for a period of
ninety days. They are further categorized as sub-standard, doubtful
and loss.
Part II: The second part of the report deals with performance
highlights of the organization.
Ø It includes a balance sheet, a profit and loss account, cash flow
statement and other statements and explanatory material that are
an integral part of the financial statements.
Ø An auditors’ report certifying that the financial statements together
present a true and fair view of the company’s affairs, and are in
compliance with existing accounting standards, applicable laws and
regulations.

1.9 Balance Sheet of a Commercial Bank

One of the best ways to learn about the business of banking is through a
perusal of a typical bank’s balance sheet. Balance sheet of a commercial
bank is a statement of its assets and liabilities at a particular point of
time. It throws light on the financial health or otherwise of the bank.
Another way of viewing a balance sheet is as a statement of the
sources and uses of bank funds. Banks obtain funds in the form of
deposits (fixed, savings and current) by borrowing from other banks (RBI,
commercial banks, etc.) and by obtaining equity funds from the owners
(i.e. the shareholders of the bank) through the capital account. All these
constitute the liabilities of the bank. Banks use these funds to grant
loans, invest in securities, purchase equipment and hold cash items such
as currency and deposits in other banks. All these are the assets of the
bank.
According to section 29 of the Banking Regulation Act, 1949, at the
expiration of each calendar year (or at the expiration of a period of
twelve months ending with such date as the Central Government may, by
notification in the official gazette, specify in this behalf), every banking
company incorporated in India, in respect of all business transacted
through its branches in India, in respect of all business transacted
through its branches in India, shall prepare with reference to that year or
period, as the case may be, a balance sheet and profit and loss account
as on the last working day of the year or the period, as the case may be,
in the forms set out in the third schedule or as near thereto as
circumstances admit.
The balance sheet and profit and loss account shall be signed:
in the case of a banking company incorporated in India, by the manager
or the principal officer of the company. Where there are more than three
directors of the company, by at least three are more than three
directors. Where there are not more than three directors, by all the
directors, and
in the case of a banking company incorporated outside India by the
manager or agent of the principal office of the company in India.

Audit
The balance sheet and profit and loss account prepared in accordance
with section 29 shall be audited by a person duly qualified under any law
for the time being in force to be an auditor of companies.
Where the Reserve Bank is of opinion that audit is necessary in the
interest of the public or the banking company or its depositors, it may, at
any time order a special audit of the banking company’s accounts, for
any such transaction or class of transactions or for some specific period
or periods as it deems necessary. The RBI may through its order either
appoint a person duly qualified under any law for the time being in force
to be an auditor of companies or direct the auditor of companies or
direct the auditor of the banking company himself to conduct such
special audit.
Submission of Returns
The accounts and balance sheet referred to in sanction 29 together with
the auditor’s report shall be published in the prescribed manner, and
three copies thereof shall be furnished as returns to the Reserve Bank
within three months from the end of the period to which they refer.
A banking company which furnishes its accounts and balance sheet in
accordance with the provisions of section 31 shall send three copies of
such accounts, balance sheet and the auditor’s report to the registrar.
It is mandatory for all banking companies incorporated outside India
that before the first Monday in August of any year in which it has carried
on business, it must display a copy of its last audited Balance Sheet and
profit and Loss Account prepared under section 29, in a conspicuous
place in its principal office and every branch office in India. These should
be kept on display until they are replaced by a copy of the subsequent
Balance Sheet and profit and Loss Account.

Items of the Balance Sheet of a Bank

The balance sheet of a commercial bank like any other balance
sheet comprises two sides; conventionally the left side shows
liabilities and capital, while the right side shows assets. A bank’s
assets are indications of what the bank owns or the claims that
the bank has on external entities: individuals, firms,
governments, etc. A bank’s liabilities are indications of what the
bank owes as claims which are held by external entities of the
bank. The net worth or capital is calculated by subtracting total
liabilities from total assets.
Assets-Liabilities = Net worth
Or
Assets= Liabilities+ Net worth

Liabilities and Assets of a Bank

Many institutions offer financial services. It is the taking of deposits and
granting of loans that single out a bank from other financial institutions.
Deposits are liabilities for banks, which must be managed if the bank is to
maximize profits. Likewise they need to manage the assets created by
lending. The liabilities and assets of a bank explained below:
Liabilities of a Bank
Liabilities of a commercial bank are claims on the bank. They represent
the amounts which are due from the bank to its shareholders, depositors,
etc. Bank liabilities are the funds that banks obtain and the debts they
incur, primarily to make loans and purchase securities. The major
components of the liabilities of a bank are as follows:
1. Capital: Capital and reserves what the customer regards
as an asset, the same bank deposit is a liability for the bank
as the customer gains claims over them. The paid up share
capital implies the liability of the bank to its shareholders. It
is the amount actually received by the bank out of the total
subscribed capital. Adequate share capital is considered as a
source of strength for the bank as it provides confidence to
the depositors about the solvency of the bank.
2. Reserve Fund: Reserves are created out of the
undistributed profits which are retained over a period of
years by the bank. Creation of reserve fund is a statutory
requirement in most of the countries of the world. Reserve
requirements limit the portion of the bank’s funds that it can
use to give loans and purchase securities. Banks build up
reserves to strengthen their financial position and also to
meet unforeseen liabilities or unexpected losses. Reserve
fund, together with capital represents the capital structure
or net worth of the bank. Net worth is a residual term that is
calculated by subtracting total liabilities from total assets.
3. Deposits: Deposits constitute the major sources of
funds for banks. What the customer regards as an asset,
 the same bank deposit is a liability for the bank as the
customer gains claim over them. Banks get funds from
investment and these are indirectly the source of its income.
Banks keep a certain percentage of its time and demand
deposits in cash and after meeting the liquidity requirement,
they lend the remaining amount on interest. Indian banks
accept two main types of deposits, demand deposits and
term deposits. Demand deposits, as the name suggests, are
repayable on particular period. The prosperity, growth and
goodwill of the bank depend upon the amount of these
deposits. Fixed deposits have specific maturity and so can
be used by banks to earn income. Demand deposits can be
further subdivided into current and savings. Current
deposits are chequeable accounts with no restriction on the
number of withdrawals. It is possible to obtain clean on
secured overdraft on these accounts. Saving deposits are
more liquid than fixed deposits as money can be withdrawn
when needed, though some banks restrict the number of
withdrawals per-month or per-quarter.
4. Borrowing from Other Sources: In case of need, banks
can borrow from the Reserve Bank of India, other
commercial banks, development banks, non-bank financial
intermediaries like LIC, UTI, GIC, etc. Secured loans are
obtained on the basis of some recognized, securities
whereas unsecured loans are out of its reserve funds lying
with the central bank.
5. Other Liabilities: Other liabilities include bills payable,
bills sent for collection, acceptance, endorsement, etc. The
amounts of all such bills are shown on the liability side of
the balance sheet.
6. Contingent Liability: Contingent liabilities are those
liabilities which may arise in future but cannot be
determined accurately, e.g. guarantee given on behalf of
others, outstanding forward exchange contracts, etc. These
are shown on the liability side as a rough estimate.
7. Profit or loss: Profit is unallocated surplus or retained
earnings of the year after paying tax and dividends to
shareholders. As shareholders have claim over the bank’s
 profit, it is shown as a liability. In case of loss, the figure will
be shown on the assets side.

Assets of a Bank
Like all other business firms banks also strive for profit. Commercial
banks use their funds primarily to purchase income earning assets, mainly
loans and investments. These assets are shown in the balance sheet of
the bank in decreasing order of the liquidity. The major assets of the
bank include:
1. Cash: Cash in hand and cash balances with the Reserve
Bank of India are the most liquid assets of a bank. Cash
assets provide bank funds to meet the withdrawals of
deposits and to accommodate new loan demand.
Maintaining of cash reserve ratio with RBI is a statutory
requirement for the banks.
2. Money at Call and Short Notice: This is the money lent
by the banks to other banks, bill brokers, discount houses
and other financial institutions for a very short period of
time varying from 1 to 14 days. When these funds are
repayable on demand without prior notice, it is called money
at call. On the other hand, if some prior notice is required, it
is known as money at short notice. In the balance sheet,
both are shown as a single item on the asset side. Banks
charge very low rate of interest on these. If the cash
position continues to remain comfortable, these loans may
be renewed day after day.
3. Loans and Advances: Loans and advances are the bank’s
earning assets. The interests earned from these assets
generate the bulk of commercial bank revenues. Loans may
be demand loans or term loans which may be repayable is
single or in many installments. Advances are usually made
in the form of cash credit and overdraft.
4. Investments: Commercial banks use funds for
investment in various types of securities like the gilt edged
securities of the central and state government as well as
shares and debentures of corporate undertakings. The
securities issued by government are safe from the risk of
default though they are subject to risk from change in rate
of interest. These securities include treasury bills, treasury
 deposit certificates, etc. The long-term investments have
the greatest profitability.
5. Bills Receivable: Bills receivable and other credit
instruments accepted by the commercial banks on behalf of
their customers are also shown on the asset side of the
balance sheet. The reason is that the bank has a claim on
the payee, on whose behalf it has accepted the bills. Thus,
the same amount appears on assets as well as liabilities
sides of the balance sheet of the bank.
6. Other Assets: These include the physical assets of a
bank like the bank premises, furniture, computers, machine
equipment, etc. These also include the collaterals which the
bank has repossessed from the borrowers in default.

1.10 Conclusion
The Indian financial system comprises a large number of commercial and
cooperative banks, specialized developmental banks for industry,
agriculture, external trade and housing, social security institutions,
collective investment institutions, etc. The banking system is at the heart
of the financial system. The Indian banking system has the RBI at the
apex. It is the central bank of the country under which there are the
commercial banks including public sector and private sector banks,
foreign banks and local area banks. It also includes regional rural banks
as well as cooperative banks. In India, only those banks are called
Commercial Banks which have been established in accordance with Indian
Companies Act 1913. Important commercial banks in India are Punjab
National Bank, Bank of Baroda, Indian Bank, Central Bank of India, etc.
State Bank of India and its 7 subsidiaries are not included in the category
of commercial banks because these were established under a separate
act. One of the best ways to learn about the business of banking is
through a perusal of a typical bank’s balance sheet. Balance sheet of a
commercial bank is a statement of its assets and liabilities at a particular
point of time. It throws light on the financial health or otherwise of the
bank.