Functions of Banks in an Economy

Transcription

1 Functions of Banks in an Economy

2 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.

3 Factors Necessitating Banker s Role in the Economy Maturity preference differentials. Risk preference differentials. Denomination preference differentials. Existence of information and search cost. Existence of transaction and contracting cost.

4 Unique Nature of Banking Sector Low proportion of fixed assets. Dominant financial assets. Liabilities constitute larger percentage of assets. Most of the liabilities are short-term. Returns are interest components and expenses are also interest components. Indian banks have a unique characteristic of large Non Performing Assets (NPA)!.

5 Balance sheet of a Hypothetical Bank Liabilities Assets 1) Share Capital 500 1) Reserves with Central Bank and Cash in hand ) Reserve Fund ) Call Money ) Saving (Demand) Deposits 4) Fixed (Time) Deposits ) Bills Discounted ) Investments, Loans and Advances ) Borrowing from other banks ) Premises, Property etc. 800 Total 10,000 Total 10,000

6 Balance Sheet As At 31st March, Current Year (Amount in 000 s) As at Current year As at 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

7 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH (Amount in 000 s) For the Year ended Current year For the Year ended 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, ,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

8 Business of Scheduled Banks in India All Scheduled Banks Mar-Previous Mar-Current No. of Reporting Banks I. Liabilities to the banking system (a) Demand and time deposits from banks (b) Borrowings from banks (c) Other demand and time liabilities II. Liabilities to others in India (a) Aggregate deposits (i) Demand deposits (ii) Time Deposits (b) Borrowings (other than from RBI, NABARD,EXIM Bank) (c) Other demand and time liabilities III. Assets with the banking system Money at call and short notice IV. Cash in Hand & Balances with RBI V. Investment in India (a) Government securities (b) Other approved securities VI Bank Credit (a) Loans cash credit and overdrafts (b) Inland bills purchased (c) Inland bills discounted (d) Foreign bills purchased (e) Foreign bills discounted Reference:

9 Deposits with Scheduled Banks Current Deposits Savings Deposits Term Deposits Total Previous Current Previous Current Previous Current Previous Current I. Government Sector II. Private Corporate Sector III. Financial Sector IV. Household Sector E E+06 V. Foreign Sector Reference:

10 Composition of Deposits Current Deposits

11 Composition of Deposits Savings Deposits

12 Composition of Deposits Term Deposits

13 Bank Credit of Scheduled Banks Sector Amount Mining & Quarrying (including Coal) Food Processing Beverage & Tobacco Textiles Leather & Leather Products 6232 Wood & Wood Products 4371 Paper & Paper Products Petroleum, Coal Products & Nuclear Fuels Chemicals & Chemical Products Rubber, Plastic & their Products Glass & Glassware 4831 Cement & Cement Products Basic Metal & Metal Product All Engineering Vehicles, Vehicle Parts & Transport Equipment Gems & Jewellery Construction Infrastructure Industry Total Reference:

14 Composition of Credit Deployment Credit Deployment

15 Market Function 3.5 Interest Income as a percentage of Non interest Income SBI Nationalised banks Private banks Foreign banks Reference:

16 Intermediation Function Households and Corporate enterprises. Government and Corporate enterprises. Social enterprises and Government.

17 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.

18 Credit Approach There is no net new economic activity without net new purchasing power. The net purchasing power is created by the central bank and the banking system. This process is called credit approach to net new economic activity. Economic term for this credit creation process is termed as liquidity. Monitoring credit creation provides the best possible way to forecast economic activity, the expected business cycle and trend in financial markets.

19 Broad Liquidity Aggregation of bank lending and central bank credit creation. Reference:

20 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.

21 Liquidity Position of Banks in India LAF (Liquidity Adjustment Facility) MSF (Marginal Standing Facility) Centre's Surplus Outstanding as on Total Previous Year April 35,720 2,737 28,868 9,589 May 6, , June 74, ,431 1,953 July 1, ,688 18,463 August 11, ,054 31,869 September 30, ,477 35,227 October 1,17, ,459 31,201 November 1,03, ,425 9,665 December 1,13, ,44,437 31,022 Current Year January 76, ,18,371 41,641 February 72, ,397 5,392 March 1,06, ,416 89,589 April 39, ,399 75,004 May 75, ,544 85,339 June 96, ,339 87,866 July 48, ,983 74,538 August 49, ,192 70,407 September 82, ,387 1,07,032 October 54, ,883 87,153 Source: accessed on August 28, 2011.

22 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.

23 Credit Creation A major source of bank profit is creation and supply of credit money. Transactions in credit money are much in excess of the original cash deposits that the bank receives. Banks create credit and liabilities much in excess of their cash holding. The banking business is therefore a risky activity.

24 Modus Operandi In their credit creation activity commercial banks go by the saving habits of their depositors. Every advance creates a deposit.

25 Ability of Banks to Create Credit Credit Creation by Banks Deposits Reserves Advances ,000 1,000 9, , , , , , , , , , , , , , , , , , , Final Total 1,00,000 10,000 90,000

26 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

27 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.