Functions of Banks in an Economy - Bank Management - Lecture Slides, Slides of Banking and Finance

Download Functions of Banks in an Economy - Bank Management - Lecture Slides and more Slides Banking and Finance in PDF only on Docsity! Functions of Banks in an Economy Docsity.com Functions Performed by Banks • Link the fund-deficit organizations with fund-surplus organizations. • Mobilize deposits from public and provide financial assistance to business. • Reduce market imperfections. • Evaluation and analysis of risks of business entities and provide the needed tools for risk reduction. • Credit creation to meet surplus fund requirement. • Provide upfront finance to meet business commitments. Docsity.com Balance sheet of a Hypothetical Bank Liabilities Assets 1) Share Capital 500 1) Reserves with Central Bank and Cash in hand 1200 2) Reserve Fund 1000 2) Call Money 1500 3) Saving (Demand) Deposits 3500 3) Bills Discounted 4300 4) Fixed (Time) Deposits 4000 4) Investments, Loans and Advances 2200 5) Borrowing from other banks 1000 5) Premises, Property etc. 800 Total 10,000 Total 10,000 Docsity.com Balance Sheet As At 31st March, Current Year (Amount in 000’s) As at 31-03 Current year As at 31-03 Previous year I. CAPITAL AND LIABILITIES Capital 52,59,146 52,59,146 Reserves & Surplus 12,96,90,067 10,06,34,764 Deposits 1,89,70,84,797 1,50,01,19,812 Borrowings 9,48,69,763 7,17,24,490 Other Liabilities and Provisions 12,81,13,898 11,05,61,565 TOTAL 2,25,50,17,671 1,78,82,99,777 II. ASSETS Cash and Balances with Reserve Bank of India 8,91,52,845 11,74,18,505 Balances with Banks and Money at Call and Short Notice 12,84,59,711 5,97,55,389 Investments 52,60,71,791 41,80,28,767 Advances 1,42,90,93,738 1,13,47,63,264 Fixed Assets 2,53,19,347 2,42,60,671 Other Assets 5,69,20,239 3,40,73,181 TOTAL 2,25,50,17,671 1,78,82,99,777 Docsity.com PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH (Amount in 000‘s) For the Year ended 31-03-Current year For the Year ended 31-03-Previous year I. INCOME Interest earned 16,34,73,579 12,35,52,212 Other income 3,05,18,627 2,11,69,261 TOTAL 19,39,92,206 14,47,21,473 II. EXPENDITURE Interest expended 10,84,84,531 8,12,59,517 Operating expenses 3,09,39,633 2,64,49,874 Provisions and Contingencies 2,44,94,579 1,69,18,056 TOTAL 16,39,18,743 12,46,27,447 III. PROFIT Net Profit for the year 3,00,73,463 2,00,94,026 Add: Profit brought forward 0 54,17,591 TOTAL 3,00,73,463 2,55,11,617 IV. APPROPRIATIONS Transfer to Statutory Reserve 80,00,000 70,00,000 Transfer to Revenue Reserve 99,74,714 1,50,96,101 Transfer to Capital Reserve 56,92,579 4,28,209 Transfer (from) / to Special Reserve - Currency Swap -9,261 29,594 Interim Dividend (includeing dividend tax) 18,43,287 0 Final Dividend (including dividend tax) 30,72,144 24,57,713 Special Reserve (u/s Sec 36(1) (viii) of Income Tax Act, 1961 15,00,000 5,00,000 Balance in Profit and Loss Account 0 0 TOTAL 3,00,73,463 2,55,11,617 Earnings Per Share (Rs.) 57 41 Docsity.com Composition of Deposits Foreign Sector 2% Current Deposits Docsity.com Composition of Deposits Government Private 9% Corporate 0% Foreign Sector 6% Finance Sector 1% Savings Deposits Docsity.com Composition of Deposits Foreign Sector 4% Term Deposits Docsity.com Market Function 0 0.5 1 1.5 2 2.5 3 3.5 SBI Nationalised banks Private banks Foreign banks Interest Income as a percentage of Non‐interest  Income 2009 2010 Reference: http://www.rbi.org.in/scripts/publications.aspx?publication=Annual Docsity.com Intermediation Function • Households and Corporate enterprises. • Government and Corporate enterprises. • Social enterprises and Government. Docsity.com Credit Creation • Credit creation refers to the process of creating new purchasing power out of deposits. • Only the central bank and the commercial banking system have the power to create credit. Docsity.com Private Liquidity •Bank credit creation and credit creation in the private financial sector. •Liquidity position as disclosed by Reserve Bank of India is given in the next slide. Docsity.com Outstanding as on LAF (Liquidity  Adjustment  Facility) MSF (Marginal  Standing  Facility) Centre's  Surplus Total Previous Year April 35,720 2,737 ‐28,868 9,589 May 6,215 317 ‐7,531 ‐999 June ‐74,795 317 76,431 1,953 July 1,775 0 16,688 18,463 August 11,815 0 20,054 31,869 September ‐30,250 0 65,477 35,227 October ‐1,17,660 0 86,459 ‐31,201 November ‐1,03,090 0 93,425 ‐9,665 December ‐1,13,415 0 1,44,437 31,022 Current Year January ‐76,730 0 1,18,371 41,641 February ‐72,005 0 77,397 5,392 March ‐1,06,005 0 16,416 ‐89,589 April ‐39,605 0 ‐35,399 ‐75,004 May ‐75,795 0 ‐9,544 ‐85,339 June ‐96,205 0 8,339 ‐87,866 July ‐48,555 0 ‐25,983 ‐74,538 August ‐49,215 0 ‐21,192 ‐70,407 September ‐82,645 0 ‐24,387 ‐1,07,032 October ‐54,270 0 ‐32,883 ‐87,153 Liquidity Position of Banks in India Source: http://www.rbi.org.in/scripts/AnnualReportMainDisplay.aspx, accessed on August 28, 2011. Docsity.com Use of Bank Liquidity • Lead time of broad credit aggregates over the economic and equity market cycle: approximately 9 to 15 months, central lead-time 1 year. • The credit or liquidity approach is recommended for strategic asset allocation decisions whose time horizon is sufficiently long. Docsity.com Credit Creation by Banks Deposits Reserves Advances 01. 10,000 1,000 9,000 02. 9,000 900 8,100 03. 8,100 810 7,290 04. 7,290 729 6,561 05. 6,561 656 5,905 06. 5,905 591 5,314 07. 5,314 531 4,789 08. 4,789 478 4,305 09. 4,305 431 3,874 10. 3,874 387 3,486 ---- --- --- Final Total 1,00,000 10,000 90,000 Ability of Banks to Create Credit Docsity.com Credit Creation in Practice • Varies from 3 to 6 times of original deposits • Convention • Permission of the central bank • General market conditions • Demand for loans • Alternative sources of issuing financial resources Docsity.com Leakage in Credit Creation • When the borrower of the loan immediately demands payment of it in cash. • When depositors change their habits from investment to consumption. • When the central bank reserve requirement is changed. • When bankers emphasize safe business transactions to reduce their business risk. Docsity.com