A bank is a business firm. Its main aim is to earn profit. In order to achieve this objective it provides services to the customers. The main sources of bank funds are as follows:
Banks Own Funds
The banks own funds are as follows:
- Authorized Capital: The amount with which a banking company is registered is called nominal or authorized capital. It is the minimum amount of capital which is mentioned in the capital clause of the memorandum of association of the company. Capital is further divided into:
- Paid-up capital
- Subscribed capital
The banks in India raise authorised capital by issuing ordinary shares of R.s 10/- each which are fully paid up.
2. Shareholder’s Capital: Some commercial banks that trade on the stock exchange can use shareholder’s capital to receive the money it needs to stay in business. Ex: If a company sells shares on the market, it increases both its cashflow and its share capital. This process is also known as equity financing. Banks can only report the amount of capital that was initially on their balance sheet. Appreciation and depreciation of shares do not count toward the total sum of a shareholder’s capital.
3. Reserve Funds: A commercial bank builds a reserve fund with deposits so it can pay interest on accounts and complete withdrawals. Ideally, a bank’s reserve fund should be equal on its capital. A bank builds its reserve fund by accumulating surplus profits during healthy financial years so that the funds can be used in leaner times. On average, a bank tires to accumulate approximately 12 per cent of its net profit to build and maintain its reserve fund.
4. Profit: This is another source to a bank for the purpose of business. Profits signify the credit balance of the profit and loss account which has not been distributed. The accumulated profits over the years increase the working capital of the and strengthens its financial position.
Borrowed funds comes from deposits which are accepted on varying terms in different accounts:
1. Borrowing from Central Bank: The commercial banks in times of emergency borrow loans from the central bank of the country. The Central Bank extends help as and when financial help is required by the commercial banks.
2. Other Sources: Banks also raise funds by issuing bonds, debentures,cash certificates etc. Through it is not common but is a dependable source of borrowing. The other sources of borrowing funds are as follows:
- Cash certificates
- Retained earnings