Erra Jhenn M.

Lopez

1. What are the primary sources and use of funds of a commercial bank?
Deposits are the largest source of commercial banks' assets. Other sources
of funds are other banks' borrowings, capital, deposits and surpluses. Commercial
banks' deposits are from deposits of investments, deposits of current accounts and
term deposits. Most of their funds are used by commercial banks to either provide
loans or to buy debt securities. They act as creditors in both cases, offering credit to
those borrowers who need funds.

2. Give and explain the nature of a commercial bank’s asset

 Cash in hand - It reflects the keeping of notes and coins by a bank to satisfy
its customers' immediate requirements. There is currently no cap on the
amount of cash that banks in India must keep and it is taken for granted that
they will hold enough to retain the confidence of their depositors. The
general rule tends to be to keep anything in the form of cash in the area of 4
percent of total assets
 Cash at the central bank - It reflects the accounts of the commercial banks
with the central bank. They obtain them from the Central Bank when banks
in India need notes or maize by drawing on their accounts there in the same
way as their customers obtain it from them. Banks often use their central
bank accounts to create debts between them. The clearing method is known
as this process.
 Money at call and short notice - This consists primarily of day-to-day loans to
the money market, but also involves certain loans to the same body and to
the stock exchange for seven and fourteen days. This asset is very liquid by
nature and allows a bank to rapidly recall loans to boost its cash.
 Bills Discounted - The manner in which banks acquire their own portfolios of
bills is another link between banks and the money market. The banks do not
bid for these bills directly by negotiation, but instead purchase them from the
discount houses when they have two months or less to operate. They often
purchase them in such a way that each week a regular number matures,
thereby offering an opportunity to boost their cash bases.
 Government securities with one year or less maturity - These securities
compose of government-guaranteed stocks of central government stocks
and nationalized industries. They can be exchanged for sums very close to
that value because they are so close to the date when they are due for
redemption, i.e., reimbursement at their face value. Banks can then sell
them to obtain capital without causing any losses. They are assets that are
really liquid.
 Certificate of deposits - These are receipts for specified amounts which have
been deposited with a banking sector institution for a specified period of up
to five years. They earn a fixed interest rate and can be freely purchased
and sold.
 Investment - These consist mainly of government stock that is still
marketable on the stock exchange, even if at an inopportune moment a loss
can be associated with a sale. The classification of investments as more
liquid than advances can be explained by the greater ease with which
investments can be transformed into cash, for the latter, while they can
theoretically be remembered at a time's notice, can simply only be converted
into cash if the borrower is willing to repay and, of course, at the risk of the
bank losing its customer if there is any inconvenience.
 Loans and Advances - These are the commercial banks' principal profit
generating reserves. They consist primarily of overdrafts from borrowers,
 whereby banks agree to over-draw their accounts, i.e., running into debt, up
to specified amounts, in exchange for interest being charged on the amount
actually drawn. These installations are typically limited to a relatively short
period of time, i.e. between 6 and 12 months, but are renewable by
agreement.
 Special Deposits - If the central bank wants to limit the ability of banks to
lend credit to their customers, they may be called upon to do so. Conversely,
bank lending would be facilitated by the release of existing special deposits.
Because any release of such deposits depends entirely on the central bank,
they are illiquid and are not lucrative assets because they only bear a low
interest rate.

3. Give and explain briefly the primary liabilities of a commercial bank.

 Capital and reserves are the balance sheet differential between total
assets and total liabilities. It reflects the shareholders' equity interest in an
entity and is the amount available for absorbing undisclosed losses.
 A financial word that means money deposited at a bank is a deposit. A
deposit is a transaction involving a transfer of money for safekeeping to
another entity. A deposit, however, may apply to a portion of money used as
security or collateral for the provision of a good
 The borrowing base is the cumulative amount of collateral against which a
corporation can be lent funds by a lender. This offers a maximum limit on
how much asset-based debt a corporation can receive. This usually involves
multiplying each type of asset used as collateral by a discount factor.

4. How is return on assets of (ROA) of commercial banks computed?

Return on Assets Ratio = Net income / Average total Assets

5. How is return on equity (ROE) of commercial banks computed?

Return on Asset Ratio = Net income / Shareholder Equity