CHAPTER 1

1.1 Introduction
Finance is the life blood of trade, commerce and industry. Now-a-days, banking sector
acts as the backbone of modern business. Development of any country mainly
depends upon the banking system.
The term bank is either derived from Old Italian word banca or from a French
word banque both mean a Bench or money exchange table. In olden days, European
money lenders or money changers used to display (show) coins of different countries
in big heaps (quantity) on benches or tables for the purpose of lending or exchanging.
A bank is a financial institution which deals with deposits and advances and other
related services. It receives money from those who want to save in the form of
deposits and it lends money to those who need it.

1.2

Definition of a Bank
Oxford Dictionary defines a bank as
"An establishment for custody of money, which it pays out on customer's order."

1.3

History of Banking
Banking industry in India goes back to the 18thcentury when two banks the General
Bank of India and Bank of Hindustan operated under the British rule. These banks are
no longer operational. Around 1796, three important presidency banks were
1

established. Later, these were merged post-independence. The Indian government

owned its first bank the State Bank of India (SBI). It was formed after the merger of
Bank of Bengal. SBI is still functional today.
During the pre-independent era, banks in India operated with a small capital. They
were established and owned mostly by the Indian merchants. The bank officials
collected money from people for safe-keeping. Syndicate Bank for instance, became
quite popular with its pygmy deposit. The Union Bank was formed in 1839 but
dwindled soon after the economic downturn in 1849.
Kolkata became a centre for the banking industry. The primary reason was that
Kolkata port was crowded with people conducting trade and commerce. Soon, many
foreign banks, such as HSBC and the ComptoiredEscompt de Paris of France opened
their shops in Kolkata. However, many of these banks had to close down post
independence. Some Indian banks also opened their offices in foreign countries. For
instance, Bank of India opened its branch in London in 1946. In 1976, it opened an
overseas branch in Paris.
Apart from SBI, another noted bank that has survived till now is the Punjab National
Bank. Established in 1895 in Lahore, the bank is still working in the country. During
pre-independent era, three types of banks were noticed in the banking industry. These
are:
Presidency Banks, which operated as quasi-central bank and was owned by the
government of the pre-independence era.
Exchange Banks, which were under the British merchants and tapped the foreign
exchange market
.
Indian Joint Stock Banks, where the bank was owned by private groups. They were
basically shareholders. The bank issued the stock. The profit was shared by the
shareholders.
After India became independent, a lot of changes took place in the Indian economy
and the banking industry. The British were no longer a part of the Indian economy.
The Indian government took proactive measures to streamline the economy and boost
industrialization. For stability in the economy, it created banking regulations, such as:

The Reserve Bank of India (RBI) was created in 1949 as the central bank of India
under the Reserve Bank of India (Transfer to Public Ownership) Act. It had the
authority to direct other banks. The RBI could regulate, direct, or inspect other banks.
No two banks could have common Directors.
No bank could open another branch without the permission from the RBI. A license
would be issued if permission is granted.

1.4 Types of Banks

 Savings banks: These banks function with the intention to culminate saving habits
among people, especially those who belong to low income groups or those who are
salaried. The money these people deposit in the banks are invested in securities, bonds
etc. These days, many commercial banks perform the dual functions of savings bank.
The postal department is also in a way a saving bank.
Commercial banks: These banks function to help the entrepreneurs and businesses.
They give financial services to these businessmen like debit cards, banks accounts,
short term deposits, etc. with the money people deposit in such banks. They also lend
money to businessmen in the form of overdrafts, credit cards, secured loans,
unsecured loans and mortgage loans to businessmen. The commercial banks in the
country were nationalized in 1969. So the various policies regarding the loans, rates
of interest and loans etc are controlled by the Reserve Bank. These days, the
commercialized banks provide some services given by investment banks to their
clients.
The commercial banks can be further classifies as: public sector bank, private sector
banks, foreign banks and regional banks.
The public sector banks are owned and operated by the government, who has a major
share in them. The major focus of these banks is to serve the people rather earn
profits. Some examples of these banks include State Bank of India, Punjab National
Bank, Bank of Maharashtra, etc.
The private sector banks are owned and operated by private institutes. They are free to
operate and are controlled by market forces. A greater share is held by private players
and not the government. For example, Axis Bank, Kotak Mahindra Bank etc.
The foreign banks are those that are based in a foreign country but have several
branches in India. Some examples of these banks include; HSBC, Standard Chartered
Bank etc.
The regional rural banks were brought into operation with the objective of providing
credit to the rural and agricultural regions and were brought into effect in 1975 by
RRB Act. These banks are restricted to operate only in the areas specified by
government of India. These banks are owned by State Government and a sponsor
4

bank. This sponsorship was to be done by a nationalized bank and a State Cooperative
bank. Prathama Bank is one such example, which is located in Moradabad in U.P.
Cooperative banks: These banks are controlled, owned, managed and operated by
cooperative societies and came into existence under the Cooperative Societies Act in
1912. these banks are located in the urban as well in the rural areas. Although these
banks have the same functions as the commercial banks, they provide finance to
farmers, salaried people, small scale industries, etc. and their rates of interest of
interest are lower as compared to other banks.
There are three types of cooperative banks in India, namely:
Primary credit societies: These are formed in small locality like a small town or a
village. The members using this bank usually know each other and the chances of
committing fraud are minimal.
Central cooperative banks: These banks have their members who belong to the
same district. They function as other commercial banks and provide loans to their
members. They act as a link between the state cooperative banks and the primary
credit societies.

State cooperative banks: these banks have a presence in all the states of the country
and have their presence throughout the state.
Investment banks: These are financial institutions that provide financial and advisory
assistance to their customers. Their clients can be individuals, businesses, or
government organizations. They assist their customers to raise funds when required.
These banks act as the underwriters for their customers when they want to raise
capital by issuing securities. In some cases, they also help their customers to issue
securities.
When there is a merger or an acquisition, they provide their customers with the
necessary support like marketing, foreign trading, foreign exchange, sale of equities,
fixed income instruments etc. Apart from raising capital, these banks render valuable
financial advise to their customers and various kinds of businesses. Some examples of
these banks include, Bank of America, Barclays Capital, Citi Bank, Deutsche Bank
etc
.
5

 Specialized banks: These provide unique services to their customers. Some such
banks include, foreign exchange banks, development banks, industrial banks, export
import banks etc. These banks also provide huge financial support to businesses and
various kinds projects and traders who have to import or export their goods or
services.
Central bank: The central bank is also called the banker's bank in any country. In
India, the Reserve Bank of India is the central bank. The Federal Reserve in USA and
the Bank of England in UK function as the central bank. This bank makes various
monetary policies, decides the rates of interest, controlling the other banks in the
country, manages the foreign exchange rate and the gold reserves and also issues
paper currency in a country. The monetary control is the primary function of a central
bank in most countries and so they are considered as the lender of last resort to
various commercial banks.
The banking system has witnessed a huge growth and the competition amongst
various banks has increased these days. The boom in e-commerce industry,
globalization, and increased popularity of internet has made it vital for the banks keep
up with the latest technology trends. With the entry of the private and global banks in
the market, the competition amongst the banks has increased in the country. They
provide a wide variety of services other than borrowing and lending money to people.

CHAPTER 2
LOANS & ADVANCE

2.1 INTRODUCTION OF LOAN

In finance, a loan is the lending of money from one individual, organization or entity to
another individual, organization or entity. A loan is a debt provided by an entity (organization
or individual) to another entity at an interest rate, and evidenced by a promissory note which
specifies, among other things, the principal amount of money borrowed, the interest rate the
lender is charging, and date of repayment. A loan entails the reallocation of the
subject asset(s) for a period of time, between the lender and the borrower.
In a loan, the borrower initially receives or borrows an amount of money, called the principal,
from the lender, and is obligated to pay back or repay an equal amount of money to the lender
at a later time.

The loan is generally provided at a cost, referred to as interest on the debt, which provides an
incentive for the lender to engage in the loan. In a legal loan, each of these obligations and
restrictions is enforced by contract, which can also place the borrower under additional
restrictions known as loan covenants. Although this article focuses on monetary loans, in
practice any material object might be lent.
Acting as a provider of loans is one of the principal tasks for financial institutions such as
banks and credit card companies. For other institutions, issuing of debt contracts such
as bonds is a typical source of funding.

2.2 DEFINITION OF LOANS

The amount lent by the lender to the borrower for a specific purpose like the construction of
the building, capital requirements, purchase of machinery and so on, for a particular period of
time is known as Loan. In general, loans are granted by the banks and financial institutions. It
is an obligation which needs to be repaid back after the expiry of the stipulated period.
The loan carries an interest rate on the debt advanced. Before advancing loans, the lending
institution checks the credit report of the customer, to know about his credibility, financial
position and capacity to pay. Loan is classified in the following categories:
On the basis of Security:
Secured Loan: The loan which is backed by securities is Secured Loan.
Unsecured Loan: The loan on which no asset is pledged as security is Unsecured
Loan.
On the basis of Repayment:
Demand Loan: The loan which is repaid on demand of the lender is Demand Loan.
Time Loan: Loan, which is repaid in full at a future specified date is Time Loan.
Installment Loan: Loans which are to be repaid in evenly distributed monthly

installments is Installment Loan.

On the basis of Purpose:
Home Loan
Car Loan
Education Loan
8

Commercial Loan
Industrial Loan

2.3 TYPES OF LOANS

Secured
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or
property) as collateral.
A mortgage loan is a very common type of loan, used by many individuals to
purchase things. In this arrangement, the money is used to purchase the property. The
financial institution, however, is given security a lien on the title to the house until
the mortgage is paid off in full. If the borrower defaults on the loan, the bank would
have the legal right to repossess the house and sell it, to recover sums owing to it.
In some instances, a loan taken out to purchase a new or used car may be secured by
the car, in much the same way as a mortgage is secured by housing. The duration of
the loan period is considerably shorter often corresponding to the useful life of the
car. There are two types of auto loans, direct and indirect. A direct auto loan is where
9

a bank gives the loan directly to a consumer. An indirect auto loan is where a car
dealership acts as an intermediary between the bank or financial institution and the
consumer.
Unsecured
Unsecured loans are monetary loans that are not secured against the borrower's assets.
These may be available from financial institutions under many different guises or

marketing packages:
credit card debt
personal loans
bank overdrafts
credit facilities or lines of credit
corporate bonds (may be secured or unsecured)
peer-to-peer lending

The interest rates applicable to these different forms may vary depending on the lender and
the borrower. These may or may not be regulated by law. In the United Kingdom, when
applied to individuals, these may come under the Consumer Credit Act 1974.
Interest rates on unsecured loans are nearly always higher than for secured loans, because an
unsecured lender's options for recourse against the borrower in the event of default are
severely limited. An unsecured lender must sue the borrower, obtain a money judgment for
breach of contract, and then pursue execution of the judgment against the borrower's
unencumbered assets (that is, the ones not already pledged to secured lenders). In insolvency
proceedings, secured lenders traditionally have priority over unsecured lenders when a court
divides up the borrower's assets. Thus, a higher interest rate reflects the additional risk that in
the event of insolvency, the debt may be uncollectible.
Demand
Demand loans are short term loans[1] that are typically in that they do not have fixed dates for
repayment and carry a floating interest rate which varies according to the prime lending rate.
They can be "called" for repayment by the lending institution at any time. Demand loans may
be unsecured or secured.
Subsidized
A subsidized loan is a loan on which the interest is reduced by an explicit or hidden subsidy.
In the context of college loans in the United States, it refers to a loan on which no interest is
accrued while a student remains enrolled in education.[2]
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Concessional
A concessional loan, sometimes called a "soft loan", is granted on terms substantially more
generous than market loans either through below-market interest rates, by grace periods or a
combination of both.[3] Such loans may be made by foreign governments to developing
countries or may be offered to employees of lending institutions as an employee benefit.

2.4 DEFINITION OF ADVANCES

Advances are the source of finance, which is provided by the banks to the companies to meet
the short-term financial requirement. It is a credit facility which should be repaid within one
year as per the terms, conditions and norms issued by Reserve Bank of India for lending and
also by the schemes of the concerned bank. They are granted against securities which are as
under:

Primary Security: Hypothecation of Debtors, Stock Pro-notes, etc.

Collateral Security: Mortgage of land and buildings, machinery, etc.

Guarantees: Guarantees given by partners, directors or promoters, etc.

The following are the forms of bank advances:

Short term loans: Advance in which the entire amount is provided to the borrower at
one time.

Overdraft: A facility provided by the bank in which the customer can overdraw
money from his account up to a specified limit.

Cash Credit: A facility granted by the bank in which the customer can advance
money up to a certain limit against the asset pledged.

Bills Purchased: An advance facility provided by the bank against the security of
bills.

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2.5 Types of Advances

Advances can be broadly classified into: fund-based lending and non-fund based lending.

Fund based lending:

This is a direct form of lending in which a loan with an actual cash outflow is given
to the borrower by the Bank. In most cases, such a loan is backed by primary and/or
collateral security. The loan can be to provide for financing capital goods and/or

working capital requirements.

Non-fund based lending:
In this type of facility, the Bank makes no funds outlay. However, such arrangements
may be converted to fund-based advances if the client fails to fulfill the terms of his
contract with the counterparty. Such facilities are known as contingent liabilities of
the bank. Facilities such as 'letters of credit' and 'guarantees' fall under the category of
nonfund based credit. Let us explain with an example how guarantees work. A
company takes a term loan from Bank A and obtains a guarantee from Bank B for its
loan from Bank A, for which he pays a fee. By issuing a bank guarantee, the
guarantor bank (Bank B) undertakes to repay Bank A, if the company fails to meet its
primary responsibility of repaying Bank A. In this chapter, we will discuss only some
important types of fund-based lending.

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2.6 UTILITY OF LOANS AND ADVANCES

Loans and advances granted by commercial banks are highly beneficial to individuals, firms,
companies and industrial concerns. The growth and diversification of business activities are
effected to a large extent through bank financing. Loans and advances granted by banks help
in meeting short-term and long term financial needs of business enterprises.
The role played by banks in the business world by way of loans and advances as
follows:

Loans and advances can be arranged from banks in keeping with the flexibility in
business operations. Traders, may borrow money for day to day financial needs
availing of the facility of cash credit, bank overdraft and discounting of bills. The
amount raised as loan may be repaid within a short period to suit the convenience of
the borrower. Thus business may be run efficiently with borrowed funds from banks

for financing its working capital requirements.

Loans and advances are utilized for making payment of current liabilities, wage and

salaries of employees, and also the tax liability of business.

Loans and advances from banks are found to be economical for traders and
businessmen, because banks charge a reasonable rate of interest on such
loans/advances. For loans from money lenders, the rate of interest charged is very
high. The interest charged by commercial banks is regulated by the Reserve Bank of

India.
Banks generally do not interfere with the use, management and control of the
borrowed money. But it takes care to ensure that the money lent is used only for
business purposes.

13

Bank loans and advances are found to be convenient as far as its repayment is
concerned. This facilitates planning for future and timely repayment of loans.

Otherwise business activities would have come to a halt.

Loans and advances by banks generally carry element of secrecy with it. Banks are
duty-bound to maintain secrecy of their transactions with the customers. This
enhances peoples faith in the banking system.

CHAPTER 3
PROCEDURE OF GRANTING LOANS AND ADVANCES
The procedure of applying for and sanction of loans and advances differs from bank to bank.
However, the steps which are taken in SBM are as follow:
(i)Filling up of loan application form
Each bank has separate loan application forms for different categories of borrowers.When
you want to borrow money from a bank, you will have to fill up a loan applicationform
available with the bank free of cost. The loan application form contains differentcolumns to
be filled in by the applicant. It includes all information required about the borrower, purpose
of loan, nature of facility (cash-credit, overdraft etc) required, period of `repayment, nature of
security offered, and the financial status of the borrower. Arunning business limit may be
required to furnish additional information in respect of :

assets and liabilities

profit and loss for the last 2 to 3 years.

The names and addresses of three persons (which may include borrowers, suppliers,
customers and bankers) for reference purposes.

(ii) Submission of form along with relevant documents

The loan application form duly filled in should be submitted to the bank along with the
relevant documents.
(iii) Sanctioning of loan
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The bank scrutinizes the documents submitted and determines the credit worthiness of the
applicant. If it is found to be feasible, the loan is sanctioned. If the loan is for Rs 5000 or less,
normally the Branch Manager himself can take the decision and sanction the loan. In case the
amount of loan is more than Rs 5000, the application is considered at regional, zonal or head
office level, depending on the amount of loan.

(iv) Executing the Agreement

When the loan is sanctioned by the bank and the borrower is informed about it, he will have
to execute an agreement with the bank regarding terms and condition for the amount of loan
raised.
(v) Arrangement of Security for Loan
The borrower will now arrange for security against the loan. These securities may be
immovable properties, shares, debentures, fixed deposit receipts, and other documents, like,
Kisan Vikas Patra, National Savings Certificate, as per agreement. When the borrower
completes all the formalities, he is allowed to get the amount of loan/advance/ over draft as
sanctioned by the bank. In case of discounting of bills, the bank credits the amount of bill to
the customers account before the realization of the bill and thus, makes available the fund. In
case, the bill is dishonored on due date, the amount due on the bill together with interest and
other charges are payable by the party whose bill is discounted.

15

3.1 STATUTORY RESTRICTIONS

3.1.1 Advances against bank's own shares
In terms of Section 20(1) of the Banking Regulation Act, 1949, a bank cannot grant any loans
and advances on the security of its own shares.
3.1.2 Advances to bank's Directors
Section 20(1) of the Banking Regulation Act, 1949 also lays down the restrictions on loans
and advances to the directors and the firms in which they hold substantial interest.
Banks are prohibited from entering into any commitment for granting any loans or advances
to or on behalf of any of its directors, or any firm in which any of its directors is interested as
partner, manager, employee or guarantor, or any company (not being a subsidiary of the
banking company or a company registered under Section 25 of the Companies Act, 1956, or a
Government company) of which, or the subsidiary or the holding company of which any of
the directors of the bank is a director, managing agent, manager, employee or guarantor or in
which he holds substantial interest, or any individual in respect of whom any of its directors
is a partner or guarantor.
There are certain exemptions in this regard. In terms of the explanation to the Section, loans
or advances shall not include any transaction which the Reserve Bank may specify by
general or special order as not being a loan or advance for the purpose of this Section. While
doing so the RBI shall, keep in view the nature of the transaction, the period within which,
and the manner and circumstances in which, any amount due on account of the transaction is
likely to be realised, the interest of the depositors and other relevant considerations.

16

If any question arises whether any transaction is a loan or advance for the purpose of this
Section, it shall be referred to RBI, whose decision thereon shall be final. FAQs regarding
applicability of Section 20 of BR Act, 1949 .

For the above purpose, the term 'loans and advances' shall not include the following:
a. loans or advances against Government securities, life insurance policies or fixed
deposit;
b. loans or advances to the Agricultural Finance Corporation Ltd;
c. such loans or advances as can be made by a banking company to any of its directors
(who immediately prior to becoming a director, was an employee of the banking
company) in his capacity as an employee of that banking company and on the same
terms and conditions as would have been applicable to him as an employee of that
banking company, if he had not become a director of the banking company. The
banking company includes every bank to which the provisions of Section 20 of the
Banking Regulation Act, 1949 apply;
d. such loans or advances as are granted by the banking company to its Chairman and
Chief Executive Officer, who was not an employee of the banking company
immediately prior to his appointment as Chairman/ Managing Director/CEO, for the
purpose of purchasing a car, personal computer, furniture or constructing/ acquiring a
house for his personal use and festival advance, with the prior approval of the RBI
and on such terms and conditions as may be stipulated by it;
e. such loans or advances as are granted by a banking company to its whole-time
director for the purpose of purchasing furniture, car, Personal Computer or
constructing/acquiring house for personal use, festival advance with the prior
approval of RBI and on such terms & conditions as may be stipulated by it;
f. call loans made by banking companies to one another;

17

g. facilities like bills purchased/discounted (whether documentary or clean and sight or

usance and whether on D/A basis or D/P basis), purchase of cheques, other non-fund
based facilities like acceptance/co-acceptance of bills, opening of L/Cs and issue of
guarantees, purchase of debentures from third parties, etc.;
h. line of credit/overdraft facility extended by settlement bankers to National Securities
Clearing Corporation Ltd.(NSCCL) / Clearing Corporation of India Ltd. (CCIL) to
facilitate smooth settlement; and
i. a credit limit granted under credit card facility provided by a bank to its directors to
the extent the credit limit so granted is determined by the bank by applying the same
criteria as applied by it in the normal conduct of the credit card business.

CHAPTER 4
BALANCE SHEET

4.1 INTRODUCTION
In financial accounting, a balance sheet or statement of financial position is a summary of the
financial balances of an individual or organisation, whether it be a sole proprietorship,
a business partnership, a corporation, Private limited company or other organization such as
Government or not-for-profit entity. Assets, liabilities and ownership equity are listed as of a
specific date, such as the end of its financial year. A balance sheet is often described as a
"snapshot of a company's financial condition".[1] Of the four basic financial statements, the

18

balance sheet is the only statement which applies to a single point in time of a business'
calendar year.
A standard company balance sheet has three parts: assets, liabilities, and ownership equity.
The main categories of assets are usually listed first, and typically in order of liquidity. Assets
are followed by the liabilities. The difference between the assets and the liabilities is known
as equity or the net assets or the net worth or capital of the company and according to
the accounting equation, net worth must equal assets minus liabilities.
Another way to look at the balance sheet 3equation is that total assets equals liabilities plus
owner's equity. Looking at the equation in this way shows how assets were financed: either
by borrowing money (liability) or by using the owner's money (owner's or shareholders'
equity). Balance sheets are usually presented with assets in one section and liabilities and net
worth in the other section with the two sections "balancing".
A business operating entirely in cash can measure its profits by withdrawing the entire bank
balance at the end of the period, plus any cash in hand. However, many businesses are not
paid immediately; they build up inventories of goods and they acquire buildings and
equipment. In other words: businesses have assets and so they cannot, even if they want to,
immediately turn these into cash at the end of each period. Often, these businesses owe
money to suppliers and to tax authorities, and the proprietors do not withdraw all their
original capital and profits at the end of each period. In other words, businesses also
have liabilities

.
4.2 MAJOR HEADS OF BALANCE SHEET:

LIABILITIES

ASSETS

1.Share capital

1.Fixed Assets

2.Reserve and Surplus

2.Investment

3.Secured Loans

3.Current Assets, Loans of Advances

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4.Unsecured Loans

4.Miscellaneous Expenses

5.Current Liabilities and Provisions

5.Profit and Loss Account (Debit Balance)

Assets which are likely to be collectible in the short term (usually within 12 months)
are considered a current asset, while anything owed by the company in the same
time frame is considered as acurrent liability.

CHAPTER 5
BALANCE SHEET OF COMMERCIAL BANK-LIABILITIES AND
ASSETS
5.1 INTRODUCTION
Commercial bank's balance sheet has two main sides i.e. the liabilities and the assets. From
the study of the balance sheet of a bank we come to know about a system which a bank has
followed for raising funds and allocation of these funds in different asset categories. Bank can
have others money with it. It can be in terms of shareholders share capita, or depositors
deposits. This money is the bank's liabilities. On the other hand bank's own sources of income
leads to generation of assets for bank.

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The Distribution of Assets:

The assets of a bank are those items from which it receives income and profit. The first item
on the assets side is the cash in liquid form consisting of coins and currency notes lying in
reserve with it and in its branches. This is a certain percentage of its total liabilities which it is
required to keep by law. Cash reserves do not yield income to the bank but are essential to
satisfy the claims of its depositors.
The second item is in the form of balances with the central bank and other banks. The
commercial banks are required to keep a certain percentage of their time and demand deposits
with the central bank. They are the assets of the bank because it can withdraw from them in
cash in case of emergency or when the seasonal demand for cash is high.
The third item, money at call and short notice, relates to very short-term loans advanced to
bill brokers, discount houses and acceptance houses. They are repayable on demand within
fifteen days. The banks charge low rate of interest on these loans. The fourth item of assets
relates to bills discounted and purchased.
The bank earns profit by discounting bills of exchange and treasury bills of 90 days duration.
Some bills of exchange are accepted by a commercial bank on behalf of its customers which i
ultimately purchases. They are a liability but they are included under assets because the bank
can get them rediscounted from the central bank in case of need.
The fifth item, investments by the bank in government securities, state bonds and industrial
shares, yields a fixed income to the banks. The bank can sell its securities when there is need
for more cash. The sixth item relating to loans and advances is the most profitable source of
bank assets as the bank changes interest at a rate higher than the bank rate.
The bank makes advances on the basis of cash credits and overdrafts and loans on the basis of
recognised securities. In the seventh item are included liabilities of the banks customers
which the bank has accepted and endorsed on their behalf. They are the assets of the bank
because the liabilities of customers remain in the custody of the bank.
The bank charges a nominal commission for all acceptances and endorsements which is a
source of income. The eighth item relates to the value of permanent assets of the bank in the
form of property, furniture, fixtures, etc. They are shown in the balance sheet after allowing
21

for depreciation every year. The last item includes profits retained by the bank after paying
corporation tax and profits to shareholders.
The Distribution of Liabilities:
The liabilities of commercial banks are claims on it. These are the items which form the
sources of its funds. Of the liabilities, the share capital of the bank is the first item which is
contributed by its shareholders and is a liability to them. The second item is the reserve fund.
It consists of accumulated resources which are meant to meet contingencies such as losses in
any year.
The bank is required to keep a certain percentage of its annual profits in the reserve fund. The
reserve fund is also a liability to the shareholders. The third item compresses both the time
and demand deposits. Deposits are the debts of the bank to its customers.
They are the main source from which the bank gets funds for investment and are indirectly
the source of its income. By keeping a certain percentage of its time and demand deposits in
cash the bank lends the remaining amount on interest. Borrowings from other banks are the
fourth item.
The bank usually borrows secured and unsecured loans from the central bank. Secured loans
are on the basis of some recognised securities, and unsecured loans out of its reserve funds
lying with the central bank. The fifth item bills payable refer to the bills which the bank pays
out of its resources. The sixth items relates to bills for collection.
These are the bills of exchange which the bank collects on behalf of its customers and credits
the amount to their accounts. Hence it is a liability to the bank. The seventh item is the
acceptance and endorsement of bills of exchange by the bank on behalf of its customers.
These are the claims on the bank which it has to meet when the bills mature.
The eighth item contingents liabilities relate to those claims on the bank which are unforeseen
such as outstanding forward exchange contracts, claims on acknowledge debts, etc. In the last
item, profit and loss, are shown profits payable to the shareholders which are a liability on the
bank.

22

The various items of the balance sheet shown in Table 1 are a rough indicator of the assets
and liabilities of commercial banks. The balance sheet of a particular bank showed its
financial soundness. By studying the balance sheets of the major commercial banks of a
country, one can also know the trend of the monetary market. The bank balance sheet
reflects bank credit extension on its asset side in loans and investments, and on the liabilities
side reflects the banks operations as an intermediary in time deposits and its role as an
element in the nations monetary system in demand deposits.

5.2 BALANCE SHEET OF A COMMERCIAL BANK

Liabilities

Assets

a. Share Capital a.

i. Cash in Hand

b. Reserve Funds

ii. Cash with the Central Bank (RBI)

c. Deposits

iii. Cash with the other banks

i. Fixed Deposits

b . Money at short

ii. Saving Deposits

c. Bills and securities discounted

iii.Current Deposits

d. Investment of bank

iv. Other Deposits

e. Loans and Advances given

d. Borrowings

f. Other Assets

e. Other liabilities

23

BANKS LIABILITIES AND ASSETS

Bank's Liabilities
Bank's liabilities constitute five major items. The share capital, the contribution which
shareholders have contributed for starting the bank. Reserve funds are the money,
which the bank has accumulated over the years from its undistributed profits.
Deposits are the money owned by customers and therefore it is a liability of a bank.
There can be various kinds of deposits and recurring deposits. Apart from these items
a bank can borrow from central and other commercial banks. These borrowings are
also treated as bank's liabilities.

Bank's Assets
Bank's assets comprises cash, money at short notice, bills and securities discounted,
bank's investments, loans sanctioned by the bank, etc. Bank's cash in hand, cash with
other banks and cash with central bank (RBI) are its assets. When a bank makes
money available at short notice to other banks and financial institutions for a very
short period of 1-14 days it is also treated as bank's asset. Apart from these items bank
always make money available to people on the form of loans and advances. They are
also become bank's assets.

24

5.3 TYPES OF BANK LOANS OFFERED BY BANKS IN INDIA

Home loan
Home Loans are taken by people for a variety of home-related purposes such as
construction of home, home renovation, home extension, buying of property or land,
or payment of stamp duties. Home loans comprise an adjustable or fixed interest rate

and payment terms. Some types of home loans are mentioned below: Home Purchase Loan
Land Purchase Loan
Home Construction Loan
Home Extension Loan
Home Renovation Loan
Stamp Duty Loan
NRI Home Loans Loan
Against Property

Personal loan:
This type of loan is given to individuals after accessing their credentials based on their
profession or business, or any other sources of income. The loan can be utilised for
any purpose, for example, paying debt, marriage expenses or vacation expenditure.
No collateral security is required for this type of loan. The span of personal loan
repayment varies from 12 months to 60 months depending upon the principal amount
and the EMIs. The interest rate ranges from 15 percent to 28 percent varying from
bank to bank. Approximately 2 percent of the total loan amount is charged as the loan
25

processing fee. Generally, banks rules prohibit prepayment of loan for the initial six
months; otherwise 2 percent to 4 percent of the outstanding amount is charged as the
prepayment fees. The EMI starts once the disbursement of loan has been made.

Business loan:
This type of loan is provided to either existing businesses or those venturing into new
business. As banks provide loans on the basis of individual's credentials, it is bit
difficult to get a loan for starting a business. It is very important for individuals
(starting a business) to have a clear cut business plan as it is the most important
requirement to convince the banks that your business has the capability of repayment.
Banks then rely on individual's background, assets/property, previous loan history and
dedication towards work. Banks also prefer those individuals who have already
insured the property for their business. Nowadays, banks are working on providing
more lucrative and easy business loans options for the first time business owners.
Term loans Amount provided for a fixed tenure at the applicable interest

rate: three years for short term loan and 10-15 years for long term loans.
Bank overdraft limits Ability to withdraw more money than what is

deposited.
Bill Discounting Short-term borrowing used to improve a company's

working capital and cash flow position.

Letter of credit for international business Bank guaranteeing of a buyer's

payment to a seller in specified period.Education loan:

Required by and provided to students who want to pursue higher education in resident
country or abroad. Students should have an admission offer from an institution before
they apply for an education loan. The loan takes care of the fees of the institution
including examination and library fees; travel expenses for abroad; cost of books and
equipments required; any insurance for the student, if applicable; and any additional
expenses such as tours, thesis, project work, etc. The terms of education loans vary
from bank to bank. The RBI has fixed certain norms on the total amount of loan that
can be disbursed; however, banks can increase or decrease the limit depending on the
institution. For studying in India, Rs. 10 lakh is the average and for studying abroad,
the average is Rs. 20 lakh. For a loan amount up to Rs. 4 lakh, parents should be the
joint borrowers and above that amount, a guarantee or some security in terms of
tangible assets is required, depending upon the bank. Simple rate of interest is charged
26

depending upon the base rate of the bank. It is not mandatory to pay the interest
during the study period; however, if paid regularly during the study period, some
concession is also provided by a few banks. The repayment tenure varies between 10
years and 15 years depending upon the loan amount and repayment begins between
six months and two years of the course completion. Early repayment has no
associated charges.

Gold loan:
Gold loan is imparted only on providing gold as security to a bank or any other
lending institution. It is considered as one of the safest methods as the loan amount is
provided on the basis of the security submitted. Amount ranging from Rs. 5k to 25
lakh can be taken as loan against gold. Amount equivalent to 80 percent to 90 percent
(varying from bank to bank) of the total value of the gold is given as loan to the
borrower. Depending upon the bank, the tenure of gold loan varies from one day to
two years. The extension of tenure is also allowed by few banks. The rate of interest
usually ranges from 14 percent to 24 percent, depending upon the financial institution.
The banks charge processing fees of up to 1.5 percent. There is no prepayment fee.
You can repay the gold loan any time during the tenure. EMI policy also varies from
bank to bank; few banks prefer EMIs where interest and principal are charged
monthly, whereas few only charge the interest on a monthly basis and offer flexibility
for the payment of the interest amount.

Vehicle/ Car Loan

Compared to other loans, it is easier and simpler to take vehicle loans. Vehicle loans
involve less paperwork and around three to six working days are required to get the
clearance. The interest rates vary from bank to bank based on their base rate. The
repayment process involves monthly EMIs and early repayment option.

Loan against Insurance Policy

Any individual having an insurance policy can take loan against it from the insurance
company. The amount of loan depends upon the type and period of the policy. It is
27

generally up to 80 percent of the surrender value of the policy. The rate of interest on
loan against insurance is very less and varies with the companies. The tenure (during
the policy term) and repayment options are decided by the insurer company as per
their policies. The unpaid loan amount/ interest amount is adjusted to the policy
amount before any payment against the policy is made.
Loan against PPF Loan against PPF is one of the easiest and most beneficial loan
options in India. The loan is disbursed easily. The loan against PPF is usually of a
small amount depending upon the money in the PPF account. The rate of interest is 2
percent more than the rate of interest given for the PPF at the time when loan is taken.
The loan is available from the second year of account opening, i.e., after completion
of one year of account opening. The loan can be availed within five years of account
opening. If five financial years have passed since the account opening, the account
holder cannot apply for the loan. The repayment of the loan should be made in next
36 months, i.e., three years from the date of loan.

CHAPTER 6
COMPARATIVE BALANCE SHEETS
6.1 INTRODUCTION
A comparative balance sheet presents side-by-side information about an entity's assets,
liabilities, and shareholders' equity as of multiple points in time. For example, a comparative
balance sheet could present the balance sheet as of the end of each year for the past three
years. Another variation is to present the balance sheet as of the end of each month for the
past 12 months on a rolling basis. In both cases, the intent is to provide the reader with a
28

series of snapshots of a company's financial condition over time, which is useful for
developing trend line analyses (though this works better when the reader has the entire set of
financial statements to work with and not just the balance sheet).
The comparative balance sheet is not required under GAAP for a privately-held company or a
nonprofit entity, but the SEC does require it in numerous circumstances for the reports issued
by publicly-held companies, particularly the annual Form 10-K and the quarterly Form 10-Q.
The usual SEC requirement is to report a comparative balance sheet for the past two years
(with additional requirements for quarterly reporting).
There is no standard format for a comparative balance sheet. It is somewhat more common to
report the balance sheet as of the least recent period furthest to the right, though the reverse is
the case when you are reporting balance sheets in a trailing twelve-months format.
Here is an example of a comparative balance sheet that contains the balance sheet as of the
end of a company's fiscal year for each of the past three years:

ABC International
Statement of Financial Position
as
Current assets
Cash
Accounts receivable
Inventory
Total current assets
Total fixed assets

of as

of as

of

12/31/20X3

12/31/20X2

12/31/20X1

$1,200,000
4,800,000
3,600,000
$9,600,000
6,200,000

$900,000
3,600,000
2,700,000
$7,200,000
5,500,000

$750,000
3,000,000
2,300,000
$6,050,000
5,000,000

29

Total Assets

$15,800,000

$12,700,000

$11,050,000

Current liabilities
Accounts payable
Accrued expenses
Short-term debt
Total current liabilities
Long-term debt
Total liabilities
Shareholders equity
Total liabilities and equity

$2,400,000
480,000
800,000
$3,680,000
9,020,000
12,700,000
3,100,000
$15,800,000

$1,800,000
360,000
600,000
$2,760,000
7,740,000
10,500,000
2,200,000
$12,700,000

$1,500,000
300,000
400,000
$2,200,000
7,350,000
9,550,000
1,500,000
$11,050,000

The comparative balance sheet reveals that ABC has increased the size of its current
assets over the past few years, but has also recently invested in a large amount of additional
fixed assets that have likely been the cause of a significant boost in its long-term debt.

30

31

Interpretation for the period 2009-2010 and 2010-20113

There has been overall increase in total assets of the bank in the 2011 by 60.00%.

This shows the performance was good in the year.

The share capital is increased by 35.22% in 2011 as compared to 2010. So the

position of equity has also increased.

In the year 2011, the investment scheme of the bank is good. It was increased by
40.47% as compared to 2010. It shows bank come out with good investment

scheme.
A cash balance and bank balance was decreased by 66.17% and 76.16%
respectively in 2011 compared to 2010. This shows the bank does not have

sufficient cash reserve to meet the emergency demand.

The position of other liabilities has unable to made payment and it shows that the

bank was increase in net profit.

The provision for Interest is decrease by 32.40 in the 2011 compared to 2010.The

bank has to make provisions more to meet uncertainty in future course.

There were issues of shares increased by 35.22% in the year 2011. So the position

of equity has also increased.

The position of other liabilities has increased by 49.11% it shows that the bank

was unable to made payment.

In the year 2011, there was an increase in net profit of the bank up to 0.578%. But
still the bank should operate more efficiently.

32

33

Interpretation for the period 2010-2011 and 2011-2012

There has been overall increase in total assets of the bank in the 2012 by 8.83%. Thi
shows the performance was good in the year.
In the year 2012, the investment scheme of the bank as very good. It was increased by

535.68% in this year. Compared to increase of 40.47 last year.

A cash balance and bank balance was increased by 63.42% and 249.94% in 2012
compared to last year. This shows the bank have sufficient cash reserve to meet the

emergency requirements.
There was a paid off of shares decreased by 0.46% in the year 2012. So the position

of equity has also decreased.

The position of other liabilities has increased by 189.23% it shows that the bank was

unable to made payment.

+In the year 2012, there was an increase in net profit of the bank up to 18.92% this
indicates the operational efficiency of the bank compared to 2011 and 2010.

34

35

Interpretation for the period 2011-2012 and 2012-2013

In the year 2013, the investment scheme of the bank as good. It was increased by
48.93% in 2013 as compared to 2012.There has been overall increase in total assets

of the bank in the 2012 by 12.60%. This shows the performance was good in the year
There were issues of shares increased by 1.47 % in the year 2013. So the position of
equity has also increased.The bank has also had an increased bank balance in 2013
by 172.47%. compared to 2012. It decrease cash balance by 10.10% in present year,

compared to 2012.
The position of other liabilities has decreased by 52.81% compared to 2012.and it was

a good sing.
In the year 2013, there was an increase in net profit of the bank up to 26.50% this
indicates the operational efficiency of the bank compared to 2012.

Comparative income sheet

36

The income statement gives the results of the operations of a business. The
comparative income statement gives an idea of the progress of a business over a
period of time. The changes in absolute data of money values & percentages can be
determined to analysis the probability of the business. Like, comparative balance
sheet, income statement has also 4 columns. First two columns give figure of various
items for two years. 3 & 4th columns are used to show increase/decrease in figures in
absolute amounts and %s respectively.

37

NNS
Other Expenses
Profit
Total

1925869
5055701
21239300

3711781
5084887
34831377

Interpretation for the period 2009-2010 and 2010-2011

38

1785912
29186
13592077

92.73
0.58
94.00

The operating efficiency of the bank was satisfactory & favorable as compared to

2010.
The operating incomes have increased 13592077 for the 2011. When compared to

2010.
The operating expenses have also increased in the year 2011. When compared to

2010.
The profit for the year 2011 has increased to 0.58%. When it is compared to 2010.
Banks profit has increased but it is able to maintain the operating efficiency
during the year.

From the above analysis, the operating efficiency of the The Millennium Credit Cooperative Society Ltd is quite satisfactory. More efforts should be taken to get better
utilization of deposits so that operating profit increase in the future coming year.

39

40

Interpretation for the period 2010-2011 and 2011-2012

The operating efficiency of the bank was satisfactory &favorable as compared to

2011.
The operating incomes have increased 6127964 for the year 2012. When compared to

2011.
The operating expenses have also increased in the year 2012. When compared to

2011.
The profit for the year 2012 has increased to 18.92%. When it is compared to 2011.
Banks profit has increased but it is able to maintain the operating efficiency during

the year.
Other incomes has decreased by 1087735 compared to last year 2011.the bank has to
concentrate on other activities as well.

From the above analysis, the operating efficiency of The Millennium Credit Co-operative
Society Ltd is satisfactory. More efforts should be taken to get better utilization of deposits so
that operating profit & net profit may increase in the future coming year.

CHAPTER 7

41

RESTRICTIONS ON LOANS AND ADVANCES

BANKING REGULATION ACT, 1949

Notwithstanding anything to the contrary contained in section 77 of the Companies

Act, 1956 (1 of 1956), no banking company shall(a) grant any loans or advances on the security of its own shares, or
(b) enter into any commitment for granting any loan or advance to or on behalf of

any of its Directors,

any firm in which any of its Directors is interested as Partner,

Manager, Employee or Guarantor, or

any company (not being a subsidiary of the banking company or a
company registered under section 25 of the Companies Act, 1956 (1 of
1956), or a government company, of which 15[or the subsidiary or the
holding company of which] any of the Directors of the banking
company is a Director, Managing Agent, Manager, Employee or

Guarantor or in which he holds substantial interest, or

any individual in respect of whom any of its Directors is a partner or

guarantor.
Where any loan or advance granted by a banking company is such that a commitment
for granting it could not have been made if clause (b) of sub-section (1) had been in
force on the date on which the loan or advance was made or is granted by a banking
company after the commencement of section 5 of the Banking Laws (Amendment)
Act, 1968 (58 of 1968), but in pursuance of a commitment entered into before such
commencement, steps shall be taken to recover the amounts due to the banking
company on account of the loan or advance together with interest, if any, due thereon
42

within the period stipulated at the time of the grant of the loan or advance, or where
no such period has been stipulated, before the expiry of one year from the
commencement of the said section 5:
PROVIDED that the Reserve Bank may, in any case, on an application in writing
made to it by the banking company in this behalf, extend the period for the recovery
of the loan or advance until such date; not being a date beyond the period of three
years from the commencement of the said section 5, and subject to such terms and
conditions, as the Reserve Bank may deem fit:
PROVIDED FURTHER that this sub-section shall not apply if and when the
Director concerned vacates the office of the Director of the banking company,
whether by death, retirement, resignation or otherwise.

No loan or advance, referred to in sub-section (2), or any part thereof shall be remitted
without the previous approval of the Reserve Bank, and any remission without such
approval shall be void and of on effect.

Where any loan or advance referred to in sub-section (2), payable by any person, has
not been repaid to the banking company within the period specified in that subsection, then, such person shall, if he is a Director of such banking company on the
date of the expiry of the said period, be deemed to have vacated his office as such on
the said date.
Explanation : In this section(a) "loan or advance" shall not include any transaction which the Reserve Bank may,
having regard to the nature of the transaction, the period within which, and the
manner and circumstances in which, any amount due on account of the transaction is
likely to be realized, the interest of the depositors and other relevant considerations,
specify by general or special order as not being a loan or advance for the purpose of
this section;
(b) "Director" includes a member of any board or committee in India constituted by a
banking company for the purpose of managing, or for the purpose of advising it in
regard to the management of, all or any of its affairs.
If any question arises whether any transaction is a loan or advance for the purposes of
this section, it shall be referred to the Reserve Bank, whose decision thereon shall be
final.

43

CHAPTER 8
SUMMARY OF FINDING & SUGGESTIONS

44

8.1 FINDINGS:

Allocation of loans has been increased in 2012-2013, when compared to the financial

year 2010-11 & 2011-2012.

Profit position is increased by the year comparing to year 2010-2011 and 2011-2012.
The deposit position of the bank is increased in 2012-2013. When compared to 2010-

2011 and 2011-2012.

Bank operates mostly to customers of middle class and lower middle class people.
Small enterprises are provided loans under business loan. The bank repeat loans

when previous loans are refunded.

Bank lacks in ATM centre.
Bank does not have online banking.
The bank lacks in branches.
The bank uses only Kannada in its most transactions.
The bank operations are fluctuating year by year.
The ban has stopped giving lic bond loans to customers and the staff.

SUGGESTIONS
The profit position can be improved by reducing the interest rates on loans.
The providing of loans must be increased so it will help raising the income.
Online banking should be adopted so that customers can transact easily.
The bank should provide loans on lic bonds. So that the bank can secure of

lending and make profit as well.

The bank should include English and Hindi with Kannada which helps to different

communities. It helps to gain more customers.

The bank has to open the branches throughout state and cities so that they meet
needs of all customers. Bank has to introduce new loan schemes to encourage
more and more different classes of people.

45

9 CONCLUSION:
The study has been conducted on comparative study on loans and advances. The
Millennium Credit Co-operative Society Ltd, Bangalore. According to the objectives
through the study As we know the population is been increasing day by day the more and
more people will not have employment opportunity due to this, the interested people will
come for the loans to start their own business, but the people who are in middle class
people they have the basic needs due to less income the middle class people will come to
take loans to fulfill their needs, the needs in the sense like house construction and for
vehicle. The bank also provides the loans for the staff who are working in the bank for
less rate of interest. The loans like, festival advance, staff vehicle loans, staff house
building etc. If an account holders wants they need to have the loan the bank will help
the customers to have huge amount for less rate of interest. If the customers performance
/ transaction are good in the bank the banks will provide advances, over draft etc.

46

10.QUESTIONNAIRE

Q.1) Do banking structures support loan and advances

Yes

No

Q.2) people aware of the loan policies?

Yes

No

Q.3) What are current assets and current liabilities for bank?
Q.4) what is difference between loan and advance?
Q.5) Why do we calculate loan & advance on the asset side of the balance sheet?
Q.5) what is Comparative Balance Sheets?

47

11.BIBLIOGRAPHY:

Www.slideshare.net/Yeshurock/a-comparative-study-on-loans-and-advances
Authors 1- Adrian Buckley- Multinational Finance- Phi-Learning Pvt Ltd 2Appannaiah

Reddy-

Financial

Management-

Himalaya

3-

Eun.C.S/Resnic.B.G- International Financial Management- TMH 4- Khan M

Y- Financial Services- Tata MGraw Hill 5- Maiya- A Textbook Of Financial
Management-

Himalaya

6-

Narendra

Singh-

Advanced

Financial

Management- Himalaya 7- VyuptakeshSharan- Fundamentals Of Financial

Management- Dorling 8- Sunil K Parameswaran- An Introduction To Money

New-Century.
Company Profile and Journals.
Www.Google.Com
Www.Rbi.Org
Finance Related News Papers

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