Meaning and Types of Banking Companies
Banking companies are financial institutions that accept deposits from the public and provide loans. They play a crucial role in the economy by facilitating financial transactions and providing liquidity.
Types of Banking Companies
- Commercial Banks: Offer a wide range of services including savings, loans, and payment services.
- Cooperative Banks: Operate on a cooperative basis, focusing on the needs of their members.
- Development Banks: Provide long-term financial assistance for development projects.
- Investment Banks: Specialize in underwriting and facilitating corporate mergers and acquisitions.
Types of Deposits
- Savings Deposits: Accounts that allow individuals to save money while earning interest.
- Current Deposits: Accounts for businesses that allow unlimited withdrawals and deposits.
- Fixed Deposits: Money deposited for a fixed tenure at a specified interest rate.
- Recurring Deposits: Small, fixed amounts deposited regularly for a predetermined period.
Types of Advances
- Term Loans: Loans given for a fixed period to meet specific financial needs.
- Overdrafts: Allow customers to withdraw more than their account balance up to a limit.
- Cash Credit: A short-term loan facility against inventory or receivables.
Concept of NPAs (Non-Performing Assets)
NPAs are loans or advances that are in default or arrears. They are classified as:
- Substandard Assets: Assets that are overdue for more than 90 days.
- Doubtful Assets: Assets that have remained in the substandard category for over 12 months.
- Loss Assets: Assets considered uncollectible and are written off.
Capital Adequacy
Capital adequacy refers to the minimum capital a bank must hold to absorb losses and protect depositors. Regulatory authorities set these requirements to ensure the bank's stability and solvency.
Preparation of Profit and Loss Account & Balance Sheet
The profit and loss account summarizes the bank's revenues and expenses, while the balance sheet provides a snapshot of assets, liabilities, and equity. Key components include:
- Interest Income: Earnings from loans.
- Interest Expense: Cost of deposits.
- Net Profit: Revenue after expenses.
The balance sheet lists:
- Assets: Loans, investments, and cash.
- Liabilities: Deposits and borrowings.
- Equity: Share capital and reserves.
Understanding these fundamentals provides insight into the banking sector’s functioning and financial health.