Meaning of a balance sheet of a bank:

Balance sheet of a commercial bank is a statement of his liabilities and

assets on a particular date at the end of the year. The liabilities are shown on the
left hand side and assets are shown on the right hand side of the balance sheet.
As in the case of a company the assets and liabilities of a commercial bank must
balance. Conventionally commercial banks publish their balance sheets in their
annual reports.
Assets items are credit items indicating the wealth and claims possessed by
the bank. Assets are the items from which a bank hopes to get income. Thus,
assets are the amounts owed by others to the bank.
Liability items refer to all debit items indicating the obligations of the bank.
Liabilities are the amounts which are to be paid by the bank to its shareholder or
depositors.
The fact that commercial banks, as financial intermediaries deal mainly in
financial assets is clearly revealed in its balance sheet. The balance sheet of a
commercial bank shows the manner in which the bank has raised funds and
invested them in various assets.
The format of the balance sheet which every commercial bank in India is
required to publish once on a year is presented below:

BALANCE SHEET OF A COMMERCIAL BANK

LIABILITIES ASSETS
1) Paid up Capital 2) Cash balance
2)Cash Reserves 2)Money at call & Short notice
3) Deposits 3)Short term Bills
4)Borrowing 4) Investments
5) Other Liabilities 5) Loans and Advances

2)Liabilities of the commercial banks:

1) Paid up Capital : This represents the amount of share capital actually
contributed by the owners , that is, share holders. Paid up capital
constitutes owned funds of the commercial bank. The amount of share
capital is the liability of the bank to its share holders.
2) Reserves : Reserves are retained earnings or undistributed profits of banks
accumulated over their working lives. The law requires that not all the
earned profits are distributed among the share holders. The banks also find
it provident to build up reserves to improve their capital position and to
meet unforeseen liabilities or unexpected losses. The reserved funds are
also the liability of the bank to its share holders.

3) Deposits : The own funds ( Paid up capital & reserves ) constitute a small
source of funds for the bank. The principal sources of funds for the banks is
deposits from the public. The deposits ( both the time and demand
deposits) are the debts of the banks to their customers. These are to be
returned to the customers. By keeping a certain percentage of its deposits
in cash a commercial bank lends the remaining amount on interest. Thus,
deposits are the main source of income for the commercial banks.

4) Borrowings : Banks as a whole borrow from the RBI , IDBI, NABARD and
from the non-bank financial institutions such as LIC and UTI which are
permitted to lend by the RBI in their bank call money market. Individual
banks borrow from each other as well through the call money market and
otherwise.

5) Other Liabilities : These are the liabilities incurred by the bank in the course
of its business, fir example. Liabilities are incurred by accepting and
endorsing bills of exchange on behalf of the customers. The bank is
technically liable to meet these bills on maturity.

3) Assets of the Commercial Banks :

The assets portfolio of a commercial bank represents the nature of
its functions and its investment policy. It indicates the manner in which the funds
entrusted to the banks are deployed. These assets are arranged in the descending
order of liquidity and ascending order of profitability.

1) Cash Balance : In the first place the banks maintain a certain amount in
actual cash. This cash is kept either in the form of coins or in the form of
currency notes or as a balance with central bank.
Besides maintaining cash on hand with themselves, the banks also
maintain a certain proportion of their deposits as cash reserves with the
central bank of the country. This proportion is again determined either by
law or by convention and is known as cash reserve ratio. For example. In
India the scheduled banks are required by law to maintain 3 percent (3%)
of their total deposits ( both demand deposits and time deposits ) as cash
reserves with the reserve bank and the latter is empowered to increase this
ratio upto 15%. It may, however, be also mentioned that the variation in
the cash reserve ratio is an important tool in the hands of the central bank
for controlling the lending policy of the commercials banks.

2) Money at Call and Short Notice : Besides cash, the banks also maintain
some highly liquid but earning assets which can be converted into cash
quickly and without loss. These assets are broadly of two types :

a) Money at call and Short Notice : These are loans to brokers in the
stock market, dealers in the discount market and to other banks. Such
loans can be recalled either on demand or at a very short notice.
b) Short term treasury bills : These assets can be quickly converted into
cash and without loss as and when the banks want. Hence, banks
consider such assets as secondary reserves as different from cash
which is their primary reserves
3) Short terms Bills : Commercial banks also acquire certain assets for short
periods ( generally 90 days ) which are easily marketable and hence are
sufficiently liquid and at the same time bring in some interests income to
the bank. Such assets are sometimes also known as self- liquidating
because there is an evidence of genuine commercial transaction, at the end
of which the necessary finance will be realized to repay the original loan.
These self liquidating bills mainly consist of bills of exchange having a
maturity period of 90 days. Besides , they also include short- term treasury
bills through which the government borrows funds for short periods.
4) Investments : Investments by banks are mainly in government securities.
But sometimes bank also invest in bonds and debentures of well
establishment commercial enterprises which vield fixed interest. Such
investments are known as investment in gilt edged securities. These
investments are preferred by a bank because (a) there is practically no risk
in such investments. (b) they are highly shift able, (c) they have good
income yielding capacity.
However, if the need arises to sell these securities and if the time of
selling them; their market price is lower than the price at which the bank
originally purchased them, the bank would have to incur a loss to the extent.
Investments thus yield a good income to the bank but they possess low liquidity.
5) Loans and Advances : loans and advances by far are the most profitable of
all the assests