Lecture Notes: Assets and Liabilities of Commercial Banks
1. Introduction to Commercial Banks
● Definition: A commercial bank is a financial institution that accepts deposits from the
public and provides loans for the purpose of consumption, investment, and other needs.
2. Balance Sheet Overview
● Balance Sheet: A financial statement showing a bank's assets and liabilities at a specific
point in time.
● Assets: Resources owned by the bank.
● Liabilities: Obligations the bank owes to others.
3. Assets of Commercial Banks
● Loans and Advances: The largest category of assets. This includes various types of loans
provided to individuals and businesses.
○ Personal Loans: Loans to individuals for personal use, such as mortgages or car
loans.
○ Commercial Loans: Loans to businesses for operational and capital needs.
○ Overdrafts: Short-term credit facility allowing customers to withdraw more money
than they have in their account.
● Investments: Securities and bonds purchased by the bank, usually government or
corporate bonds, which earn interest over time.
○ Government Securities: Considered very safe; include treasury bills and bonds.
○ Corporate Bonds: Issued by companies; higher risk than government securities but
also offer higher returns.
● Cash and Cash Equivalents: Highly liquid assets including physical cash, deposits with
other banks, and short-term money market instruments.
○ Reserve Requirements: The cash reserves that banks are required to hold by
regulatory authorities.
● Fixed Assets: Physical assets like bank buildings, equipment, and technology
infrastructure.
○ Premises and Equipment: Real estate owned by the bank and the physical
infrastructure within.
● Interbank Loans: Short-term loans made to other banks, often to manage liquidity.
● Other Assets: Miscellaneous assets such as receivables, intangible assets (like patents),
and prepaid expenses.
4. Liabilities of Commercial Banks
● Deposits: The largest category of liabilities. Money deposited by customers in various
types of accounts.
○ Demand Deposits: Deposits that can be withdrawn at any time without notice, such
as checking accounts.
○ Time Deposits: Deposits that cannot be withdrawn before a specific date or without
giving notice, such as fixed deposits.
○ Savings Deposits: Accounts that earn interest and can be withdrawn with some
limitations.
● Borrowings: Funds borrowed from other banks or financial institutions.
○ Interbank Borrowings: Short-term loans from other banks.
○ Central Bank Borrowings: Loans from the central bank, often used to manage
liquidity.
● Other Liabilities: Includes various obligations such as expenses payable, dividends
payable, and deferred tax liabilities.
○ Accrued Expenses: Costs that the bank has incurred but not yet paid, like salaries
and utilities.
○ Provisions: Funds set aside to cover potential losses, like loan loss provisions.
● Capital and Reserves: The bank’s own funds contributed by shareholders and retained
earnings.
○ Share Capital: Money raised from issuing shares.
○ Retained Earnings: Profits that are reinvested in the bank rather than paid out as
dividends.
5. Key Ratios and Indicators
● Loan-to-Deposit Ratio (LDR): Measures the bank's liquidity by comparing its total loans
to its total deposits.
○ Formula:
● Net Interest Margin (NIM): Shows the difference between the interest income generated
and the interest paid out to lenders.
○ Formula:
● Capital Adequacy Ratio (CAR): Measures the bank's capital in relation to its risk-weighted
assets, ensuring the bank can absorb a reasonable amount of loss.
○ Formula:
