Banking sector

  • October 17, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Banking sector

Subject :Economy

Context:

The Nobel in Economics has been awarded to Bernanke, Diamond and Dybvig for their “research on banks and financial crises” undertaken in the early 1980s which have formed the foundations of what constitutes most modern banking research.

Details:

  • Diamond and Dybvig  postulated theoretical models on banks’ role in an economy and what makes them vulnerable to ‘runs’ on their deposits.
  • Depositors want any-time access to their savings while banks don’t keep the money idle but lend it onwards to borrowers for longer tenures.
    • This tenure mismatch in banks’ asset-liability profiles increases the risk of simultaneous withdrawal rush and bank run.
  • It provided solutions such as deposit insurance or a ‘lender of last resort’ policy that governments can consider to avoid such failures.

Concept:

Banks’ asset-liability profiles 

  • A balance sheet is an accounting tool that lists assets and liabilities.
  • Every scheduled bank is required to furnish in the prescribed form  to the Reserve Bank of India on a fortnightly basis on reporting Fridays and Last Fridays of the month statement showing its liabilities and assets in India in terms of Section 42(2) of the Reserve Bank of India Act, 1934.
  • This return provides up-to-date information on deposits, advances and investments etc of banks.
Asset Liability
 Assets comprise such items that can be comprehended as the components of the property, which a company or an individual owns. They possess a certain worth which can be used to meet their respective accountabilities such as commitments, legacies and debts.A liability is a debt or something which banks owe.

Liabilities refer to the accountabilities of an entity or individual, which is necessary to be accomplished.

Various assets:

  • Assets with the Banking System–include balances and advances of the bank with the banking system
    • Balances with Other Banks
    • Money at Call and Short Notice
    • Advances to Banks
    • Other Assets
  • Investments–Investments indicate the outstanding position of the total investment in Government and other approved securities by the banks.
    • Government Securities
    • Other approved securities
  • Bank credit
    • Food credit
    • Non food credit
    • Loans, Cash credit and Overdrafts
    • Inland Bills – Purchased— Inland Bills represent the total bills drawn and payable in India, including the demand drafts and cheques, purchased and discounted by all the scheduled banks. This excludes bills rediscounted with the Reserve Bank of India and other financial institutions.
    • Discounted
    • Foreign Bills – Purchased–represent the foreign bills which cover all import and export bills including demand draft drawn in foreign currencies and payable in India, purchased and discounted by all the scheduled banks.
    • Discounted
Various liabilities:

  • Liabilities to the Banking System—Banks invest in demand and time deposits of other banks, certificates of deposit (CDs), borrow from other banks in call/money/notice market, market repo etc.It in divided into:
    • Demand and Time Deposits from Banks
    • Borrowings from Banks
    •  Other Demand and Time Liabilities
  • Liabilities to Others–It includes customer deposits, borrowings by the banks and other time and demand liabilities.
    • Aggregate Deposits–Demand and time
    • Borrowings
    • Other Demand and Time Liabilities
  • Borrowings from Reserve Bank–Borrowing from Reserve Bankrepresents the total borrowings from the Reserve Bank of India. Borrowing under Repo account and other refinance facilities are included under this head.
  • Cash in Hand and Balances with Reserve Bank–Cash in hand and Balances with Reserve Bank represents the total of cash in hand with banks and their balances with the Reserve Bank of India.
Banking sector economy