Previous Year Question

The assets and liabilities in a bank’s balance sheet are recorded from the bank’s perspective. Money deposited by a customer is therefore a financial asset of the customer but a liability of the bank.

Option (a)—Advances are bank assets.

Loans, cash credit, overdrafts and bills purchased or discounted by a bank are included under advances. The borrower is required to repay the principal and interest to the bank; consequently, these amounts are assets of the bank.

Advances are a major source of interest income. They also carry credit risk because failure by a borrower to make the required payments may cause an advance to become a Non-Performing Asset.

Option (b)—Deposits are liabilities, not assets, of a bank.

When a customer deposits money in an account, the bank assumes an obligation to repay that amount to the customer. Savings deposits, current deposits and term deposits are therefore recorded as liabilities of the bank.

The bank may use the deposited funds for lending and investment, but its repayment obligation towards the depositor continues.

Option (c)—Investments are bank assets.

Banks may invest in government securities, approved securities, bonds, debentures and other permitted financial instruments. Such investments may provide interest, coupon income or capital gains and are therefore recorded on the asset side of the balance sheet.

Option (d)—Money at call and short notice is a bank asset.

Money at call and short notice includes funds lent by a bank to other banks or eligible financial institutions for very short periods. Since the amount is receivable by the lending bank, it constitutes an asset.

Other important assets of a commercial bank include cash, balances with the RBI, balances with other banks, fixed assets and other assets.