FIN 6002 – Session 5 - 7

Pradeepta Sethi
TAPMI
Financial Statements
of Bank
Source: Kjeldsen, K. (2004). The Role of Capital in Banks. Danmarks National bank Monetary Review, 57-69
Source: Admati A. R. (2012), Bank Capital How much is “Enough?” Federal Reserve Bank of Chicago 48th Annual Conference on Bank Structure and
Competition
Source: Ghosh, S. and Chatterjee, G.(2015), Capital Structure, Ownership and Crisis: How Different Are Banks? RBI WPS (DEPR): 06/2015
 Traditional balance
sheet
Assets Liabilities

Reserves Deposit
Short-term loans Short-term
debt
Long-term loans
Long-term
Other
debt
investments

Share holder
equity
 Financial statements of bank
¢ Preparation and finalization of financial statements of a bank are governed by Banking
Regulation Act 1949.

¢ RBI devised a format for preparing balance sheet and each bank has to follow the same
format.

¢ Section 29 - Every bank has to publish the balance sheet as on last working day of March
every year on the prescribed Form “A” & profit and loss account on Form “B” as per the 3rd
schedule of this Act.

¢ Section 30 - Balance sheet is to be audited from qualified auditors.

¢ Section 31 - Each bank is required to submit balance sheet and auditor’s report within three
months from the end of period.

¢ Rule 15 - Banking Regulation Act 1949 prescribes that accounts and auditors' report shall
be published in the news paper.

¢ The RBI has powers to modify and suggest certain changes in the financial reporting format
from time to time.
 Balance sheet
¢ Bank’s ‘sources of funds’ on one side (liabilities and capital) and its ‘use of funds’ (assets) on
the other side.

¢ Banks fund their activities by a mixture of borrowed funds (‘liabilities’) and their own funds
(‘capital’).

¢ Liabilities — retail deposits from households and firms, such as current, savings accounts,
fixed deposits, wholesale funding: borrowing funds from institutional investors, borrowing from
other banks.

¢ Assets — loans to households, business, lending to wholesale market, interbank market &
investments

¢ Investments are classified into three categories – Held to Maturity (HTM – Need not be mark
to market [MTM]), Available for Sale (AFS – MTM Quarterly) and Held for Trading (HFT –
MTM monthly).

¢ Instruments for investment - Government securities, Other approved securities, Shares,

Bonds & Debentures, Subsidiaries & Joint Ventures; other (CP, MFs etc.)
 As on (Current As on (Previous
Items Schedule No
year) ₹ in crore year) ₹ in crore
CAPITAL AND LIABILITIES:
Capital 1
Reserves & Surplus 2
Deposits 3
Borrowings 4
Other Liabilities & Provisions 5
ASSETS:
Cash and balances with R.B.I 6
Balances with banks & Money at
7
call and short notice
Investments 8
Loans & Advances 9
Fixed Assets 10
Other Assets 11
TOTAL
Contingent liabilities 12
Bills for collection
 Capital

¢ For PSUs –

• Capital owned by Central Government (major portion).

¢ Other Indian banks –

• Authorized, Subscribed, and Paid-up capital should be given

separately.

¢ Banking Companies incorporated outside India –

• operate on wholly-owned subsidiary (WOS) model with initial

minimum paid-up capital of ₹500 crores.
 Capital

¢ For supervisory purposes capital is split into two categories.

¢ Tier – I Capital
l Capital which is first readily available to protect the unexpected losses.
l Tier I items are deemed to be of the highest quality.
l Hence it is also known as Core Capital.

l It consists mainly of paid up capital, statutory reserves & capital reserves.

¢ Tier – II Capital
l Capital which is second readily available to protect the unexpected losses.
l The loss absorption capacity of Tier II capital is lower than that of Tier I capital.
l Hence, it is known as Supplementary Capital.
l Tier II capital consists subordinated debt, undisclosed reserves, perpetual preferred
shares & general provisions and loan-loss reserves.
 Reserves

¢ Statutory Reserve
¢ Reserve created in terms of section 17(1) section of Banking Regulation Act,
1949.
¢ Every banking company incorporated in India shall transfer a sum not less
than 20% of the profit of each year before declaring a dividend.
¢ Capital Reserve
l That portion of a bank's profits not paid out as dividends to shareholders.
l Surplus on revaluation or sale of fixed assets should be treated as capital
reserves.
l Premium on issue of share capital may be shown separately under this head.
¢ Revenue Reserve
l Any reserve other than capital reserve, other than those separately classified.
Item Schedule Coverage
Interest earned 13 I. Interest /discount on advances/bills.
II. Income on investments
III Interest on balances with Reserve Bank of India and other interbank funds
Other income 14 I. Commission, Exchange & brokerage
II. Profit / (Loss) on sale of investments (Net)
III. Profit / (Loss) on revaluation of investments (Net)
IV. Profit / (Loss) on sale of land, building and other assets (Net)
V. Profit / (Loss) on exchange transactions (Net)
VI. Income earned by way of dividends, etc. from subsidiaries/companies
and/or joint ventures abroad/in India
VII. Miscellaneous Income
Interest
15 I. Interest on deposits
expended
II. Interest on RBI/ Inter-Bank borrowings & III. Others
Operating
16 I. Payments to and provisions for employees II. Rent, Taxes & Lighting
expenses
III. Printing & Stationery IV. Advertisement and Publicity
V. Depreciation on Banks’ property, VI. Directors’ fees, allowances and
expenses VII. Auditors’ fees & expenses (including branch auditors)
VIII. Law charges IX. Legal and other expenses debited in respect of PB
Accounts X. Postage, Telegram, Telephones, etc. XI. Repairs & Maintenance,
XII. Insurance XIII. Other Expenditure
Provisions & Provisions & Contingencies made for i) Income Tax ii) Other Taxes iii) NPAs iv)
Contingencies Investments v) Others
I. Transfer to Statutory Reserves II. Transfer to Capital
 Bank earnings

¢ Principal source of banks’ earning –

l Net Interest Income (NII) = Interest income – Interest expense
¢ It accounts for at least 70% of bank’s income.
¢ Net Interest Margin (NIM)
l Net Interest Income / total average interest earnings assets over the period
¢ NIM is measured as the excess of interest income over interest expense scaled
by total asset.
¢ This indicates as to how effectively the banks deploy their funds to generate
income from credit and investment operations.
¢ At bank level, the bank with high NIM is considered more efficient as compared
to a bank with low NIM.
¢ The net interest margin (NIM) is driven by the composition of the balance sheet
and by the interest rates applicable to the individual asset and liability accounts.
 Why bank earnings are important?

¢ Burden is defined as the difference between non-interest Income and non-

interest expenses.
¢ The burden ratio is the measure of the difference between non-interest Income
and non-interest expenses expressed as a ratio to average assets.
¢ The burden ratio measures how the net asset yield (net interest income/average
assets) will be burdened by the net expenses of the institution.
¢ Banks earnings provide for internal capital formation.
¢ Healthy profits are needed to absorb loan losses and to build adequate
provisions.
¢ A consistent earnings performance builds public confidence in the bank - attract
new investor capital.
¢ Public confidence - is the most valuable banking asset - it allows to minimize
funding costs and provides access to the best borrowers.