INVESTMENT POLICY AND BALANCE SHEET OF A BANK ercial bank, like any other business enterprise, is to make profit. The capacity of a vestment policy of a bank, in turn, depends on the lio management refers to the management of a ion of profit, liquidity and safety. The basic aim of a comm bank to earn profit depends upon its investment policy. The in manner in which it manages its investment portfolio. Portfol bank's assets and liabilities in order to seek optimum combinati The three main objectives of portfolio management are safety, liquidity and profitability and these three attributes are interrelated. To achieve one, the banker will have to sacrifice other objectives. So, a prudent banker is one who follows a wise investment policy which brings maximum profits to shareholders and provides maximum security to the dep¢ @ OBJECTIVES OF PORTFOLIO MANAGEMENT (1) Liquidity By liquidity we mean, the capacity of the banks to produce cash. The liabilities of the bank are repayable on demand. The confidence of the depositors on the bank depends upon its ability to produce cash when demanded. So, the banks must maintain sufficient liquid assets. Such assets may be in the form of cash or readily realisable assets. Cash is the most liquid asset. But it does not earn income for the banker. After making provision for cash reserve, the banker should invest money in assets which are liquid in nature. Liquid assets are those which can be converted into cash without loss and within a short period. Shiftability is another attribute added to the concept of liquidity. Shiftability implies that the assets should be easily shiftable to other banks or central bank to acquire cash. An asset is shiftable to the central bank ifit fulfils certain eligibility rules of the bank. The central bank is willing to pay cash in exchange for the 23setw ; STENT POUCY Ao brane ee en is 083 FAI ete ce OFA Ban tan with the central bank, treasury bi tremens ee acu eater loar we acon eae ther banks, deolen annem ils ued by the Central and State stock exchange are some of the a2ets isntion BeLEEN SOIVENCY and Hguidty shou 2 ol ‘or equal to its liabilities. On ser pan the other hand, a bac ed ete: A bank is solvent when its assets are ee ‘Abank sh s. Abank should by fi ores * solvent 25 wellastiquia '2nk is liquid when its assets can be converted into eto cial bank is in the ‘me commer nature of a trustee i of mon Mine greatest care and vigiance in the matter ef nanny celine to the public. Therefore, it must Inits anxiety to make profit, it * investing its funds re ef ess pala har it should not invest in risky assets aa from the public in the form Fe a i sna «able to meet the demands ofthe which may vl a higher return follows es ly by holding only the safest assets, itwillror be atle cere ea “must estimate the amount of the risk attached to the sit will not be able to earn income. So, a i variou an erential consider both long-un and short-run can aus tips of arable ass, compare estimated ike a balance. (jProfitability ‘one of the principal objectives of a bank is to earn income to meet all its expenses and pay a fair return to isstareholders. A bank will, therefore, distribute its funds among various assets in such a me to de sient income. Generally, the securities which yield higher income are long-term secuitles which cannot be veal converted into cash to meet the demands of the depositors. By keeping liquid cash, the bank can meet (Syemands of the depositors at anytime. But, cash isa barren asset which yields no income. Therefore, a bank Guut afford to hold a large amount of fund in cash. tis to be remembered always that liquidity should not be grrficed at the cost of profitability. At the same time, excess liquidity should not be maintained to sacrifice serings because without income, the banking operations cannot be carried on successfully. Thus, liquidity and gofaiity are conflicting considerations. The banker while employing the funds should pay regard to both pofitability and liquidity. Crowther aptly remarks that, ‘the secret of successful banking is to distribute resources ‘etween various forms of assets in such a way as to get a sound balance between liquidity and profitability’. Inorder to secure a balance between liquidity, profitability and security, a bank should adhere to certain Pintiples as shown below: (1) Liquidity: A bank should choose such sect (enrl and State Governments and semi-governmen' tic The shares and debentures of reputed industrial concer Bets, (2) Safety: Government securities are safer th : ‘be Government are greater than the industrial concerns T ee ‘rings. The banker should, therefore, choose the securities whict fhe bank should invest its fund ¢ of the country urities which possess sufficient liquidity. Securities such as t bonds are easly saleable without affecting their market ns also possess liquidity. A bank can invest in these an the securities of industrial concerns. Because the resources alue of industrial securities are tied to their atisty the principle of safety. (oi ise risk, tl Js in different types of securities of ‘versity: In order to minimise ris ferent industries si ee da i ustries situated in different region , Se 4) Stability: The bank should invest in those securities which possess 2 high degree of stability in their The bank sho i ively stable, In case of terest, Their value is relatively st W8 Gove ry a fixed rate of in mment bonds and debentures C4 companies. "€Sof companies, the bank should choose the shares of reputed cOmP: &BANKING - THEORY, LAW AND PRACTICE (5) Profitability: The bank should invest In such securities whit eee fair ond stable F2te of funds. The earning capacity of the securities depends PE ee ea ste {3 ane a a General ities carry exemption of thel ank shou ‘ ally, the government securities ry ee Spares of new companies also are not safe ing? ry est invest in such securities than in the shares 0! a THE BALANCE SHEET OF ABANK . - yiabilities and assets at a particular tim i tatement of its liabilities an a . The bas The balance sheet of a bank is 2 statem ert Oo of the bank is made known through the pe t or not. The balance sheet of a bank is of 22 Breg the bank is reflected in the balance sheet. Th ind and solvent 5 deals in others’ money and as such, the + MN entire sheet. It indicates whether the bank Is sou 0! importance than that of a trading concern, because, 2 bani community is interested in it. Banks in india have to prepare their profit and loss account and balance sheet in a prescribed form se 1949. The RBI has given guidelines for compiling the balge nee in the Schedule Ill of the Banking Regulation Act, 94 i sheet of banks, The specimen Balance Sheet (Form A) is shown below: Form ‘A’ Balance sheet of ...Co. as on 31st March Particulars Schedule Current Previous Year (2) Year (2) Capital and Lial Capital 1 Kx xxx Reserves and Surplus 2 OK 1K Deposits 3 YOK OOK Borrowings 4 OK XXX, Other Liabilities and Provisions 5 0000 XXX Total Assets: Cash and Balances with RB! 6 000K HOXK Balances with Bank and Money at call 7 0K 0006 and Short Notice Investments po} am Advances 9 4 100% Fixed Assets 10 00 oon Other Assets 1 Det a Total Contingent Liabilities, Bills for collections, Acceptances/Endorsements/Guarantees 2 oer 00 Total soo rooLes aca 7. For Nationalised banks 11, For Banks incorporated o usta Other Banks ee ._(Authorised/issued/subs, cribed/calte 00 UD + fore ited — un 00 a ae yet nerenes and Sumlig se rer 1, Statutory Reserves (Op Bal. + Addtions ih. Capital Reserves eductions) in, Share premium IV. Revenue and other reserves Vv. Balance in Profit and Loss A/e 5 Total edule ~ 3: Deposits am 7 |. Demand Deposits : I Savings Bank Deposits 000 tn, Term Deposits von Z wm Y [est = sdedule - 4: Borrowings [- 1. Borrowings in India: @ Ra won (i) Other Banks 000 Il, Borrowings outside India 1000 Total wot, Schedule ~5: Other Liabilities and Provisions re |. Bills Payable vom Ul. Inter office Adjustments - Wl. Interest Accrued ‘m0 Cash and Balances with RBI Cash in Hand Balances with RBIICE BANKING — THEORY, LAW AND PRACT! rt Notice Schedule ~ 7: Balances with Banks and Money at Call and Sho "on 1 Inindia xm M.__Outside India = on Total Schedule ~ 8: Investments [1 tnvestments in india Government Securities a Approved Securities 0K Shares securities cos Debentures/Bonds 000 Outside india = [Total 2000 Schedule - 9: Advances [Bills Purchased and Discounted a I, Loan, Cash Credit and ODs 000 t_Term Loans 0x Total 0x Schedule 10: Fixed Assets |. Premises (Op. Bal. + Additions — Deductions) = Il Other Fixed Assets a Total aa Schedule ~ 11: Other Assets 1. Interoffice Adjusted "00K I. Interest accrued oo MN. TDS/Tax Paid in Advance oot IV, Stationery and stamps oo V._NBA Acquired oo Total 00% Schedule ~ 12: Contingent Liabilities '\ Gaim against the bank not acknowledged ac debt ML Uabilty for party paid investments om Mi iabilty on account of outstanding forward exchange coy oa 'V. Guarantees given on endorseme, ee 0001 V. Acceptances, viINVESTM| IENT POLICY AND BALANCE stiteT of ADANW ide shows the sources from wi page hich a bank secures f cxplained below: es funds for its business. The various items O° ies aban secu porised copital: The authorised capital is the maxi fi the public. Only a part of the authorised ximum amount up to which the bank can | steep The other part is kept in reserve to Rear is issued in the form of shares for public at ae eee sued later in times of business expansion oi ed al which is offered to the public for subscriptio rf subscribed copital: Itis the part i issued capital which is actually subscribed by the public. poid-uP capital: The paid-up capital is the actual amount which is paid by the public. pecring v0 tH Banking Regulation Ac, the subscribed capital ofa bank shall not be tes cased capital and the paid-up capital shall not be less than 50% of the subscribed capital id surpluses: eserves.” ve Fund’ every year. The dis built uP tO meet unforeseen fength for the bank as it ~ withstand heavy losses. It also operates a: unt in the See Fund i invested in first class securities. fe the largest single item on the liabilities side of th has savings deposits, current deposits, fixed deposit, recurring de x because they are to be repaid to the depositors. At the same times west them in income yielding assets. res capital by issue of shares to the public nis 5 than 50% of the ‘A bank generally transfers a portion of its profits to ‘Rese and unexpected contingencies. It is a source of str san additional security to the customers. The amo e balance sheet. A bank accepts posits, etc. These its: Deposits art these funds ros types of deposits Suc ‘Zasare liabilities of the bart zeassets to the bank since the bank can in sorowing from banks: Under this hea riebank takes loans from other banks, especially the central b These items include drafts, travellers’ cheques, bai other liabilities and provisions: wegaphe transfers, mail transfers payable, vnterest accrued and inter-office adjustments. 1, the bank shows the loans which it has received from other banks. nk in times of emergency. nkers’ cheques, jained below: t side of the balance sheet is cash in hand tit is not an earning asset. Keeping ASSETS SIDE The nature of various items appearing on the asset side is expt ing on the asset Cash in hand and with RBI: The first item appear of all assets. But adcash reserve at the central bank. Cash is the most liquid ning of the bank and less cash reserve wi affect liquidity. So, 3 bank ist the balance in income yielding lege amount of cash will affect the profitabilty sould maintain sufficient cash to meet the ‘demands of the depositors and inves 1 %6tts, The success of the bank depends upon the proper management lof cash reserves. By his experience, 9 bse can decide the portion of his deposit to be Kept in cash. THs iret represents the ‘Fest Line of Defence’ of bank, seltainng cash reserve with the ce to be maintained cannot be withdra a wey {a cal and short notice: Balance with other Mes ans ean vand to stock brokers in Amer ant loans are repayable by the Borrowe®s "28€ over cash reserve. It satisfies both ga statutory obligation in ina since the minimum cash uid asset. and money atcalland short noice 376 granted to Tn india, such loans are Biven by one bank to another. iris made of after 2 SHOT notice. This asset has an ‘sound banking asset, Viz» profitability as well as intra! bank i .wn, itis not a latBANKING ~ THEORY, LAW AND PRACTICE n Government bonds, shares and debentures oy, ‘ibedtoncistetonin heir funds i ment: Banks invest a part of their Ind. Banks prefer to Ivet i these ge established business enterprises and units of Unit Trust o because: (A) They yield a steady income, (ii) Repayment is assured, (ii) They can be sold easily without loss and (iv) They can be shifted to the central bank or other banks. Securities provide a convenient medium of investment during slack season when the demand for fund alow level. Advances: Under this head, the bank shows the total amount of loans and advances granted to jy ‘customers. Loans and advances are the most profitable of all assets. A major part of bank's earnings are derive from this asset. Loans and advances carry a high rate of interest. So, from the point of view of profitability, they are good assets. But, these assets have low liquidity and no shiftability at all. This item represents the ‘Fourth Line of Defence’ of the bank. Under this head, the total volume of movable and immovable properties of the bank are often referred to as ‘dead stocks’. They cannot be realised without much loss of value. Fixed asset included. This Other assets: This item includes non-banking assets as acquired in satisfaction to claims, taxes paid in advance, interest accrued, etc. -@): EST YOUR Oy ea SF Objective Type: 1. Fill up the blanks with suitable wordhwords: 1 are the largest single item on the liabilities side of the balance sheet. 2. The first item appearing are the asset side of the B/S is she