Monday, February 2, 2015

Bank Assets and Liabilities

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Bank Assets
Assets are something that you own, meaning you are the legal owner of the asset. Similarly, bank assets are those things that a bank owns. It can be physical property (like land, equipment, buildings, etc.) or financial property.

Banks generally have four types of assets -

  1. Physical Assets - These are relatively minor assets of banks, that generally doesn't earn money for bank. Physical assets include land, furniture, equipment, buildings, etc.
  2. Loans / Advances - These are the most important assets of bank, because these are the primary source of their earning. Banks get interest from the loans / advances they lend to customer.
  3. Reserves - Banks need to maintain some reserves, so that they can meet the demands of their customers and facilitate daily transactions (e.g., a customer comes to a bank, and demands to withdraw money, or encash a cheque. Banks need to maintain reserve in its vault to meet these).
  4. Investments - Banks invest some of its money in government securities, or other investment instruments (like, buying shares, etc.). Investments are less riskier than loan (loans can become NPA), and have less return (loans bear high interest return) for a bank.

Bank Liabilities
Liabilities are something that you owe, meaning assets (of some other person) you hold, which you need to return to its original owner. Similarly, bank liabilities are those things that a bank owes to its customers, or investors. It includes financial property and debts (for electricity, office supplies, employee wages, etc.)

Banks generally have several type of liabilities. (Note that this is not exhaustive list)
  1. Customer Deposits - These are the most important liabilities of a bank. These are the assets for customers, but liabilities for banks. Banks need to return the money on demand or after a maturity period.
  2. Certificate of Deposits (CD) - Banks issue Certificate of Deposits to the general public to raise money. These are also liabilities of a bank, because banks need to return the amount invested by the investor.
  3. Borrowings - Banks can borrow from other banks or financial institutions, including External Commercial Borrowings (ECB), which need to be returned. These are also liabilities of a bank.
  4. Other liabilities - There are several other type of liabilities, like wages, taxes, leases, pension obligations, etc.

(You can add more in these lists)
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