Meaning and Types of Deposits
Deposits are funds placed in a bank or financial institution for safekeeping and earning interest.
Types of Deposits:
- Savings Deposits: Low-interest accounts for individuals, allowing easy access to funds.
- Fixed Deposits (FD): Funds deposited for a fixed term at a higher interest rate, with penalties for early withdrawal.
- Recurring Deposits: Regular deposits made monthly for a fixed period, encouraging savings.
- Current Accounts: Non-interest bearing accounts for businesses, providing unlimited withdrawals.
Advances
Advances are loans or credit extended by banks to individuals or businesses.
Types of Advances:
- Term Loans: Loans for a specific period for capital expenditure or asset purchase.
- Overdrafts: Allowing account holders to withdraw more than their account balance.
- Cash Credit: Short-term loans against inventory or receivables.
Concept of NPAs (Non-Performing Assets)
NPAs are loans or advances that are in default or arrears. An asset is classified as NPA if:
- The borrower fails to repay the principal or interest for more than 90 days.
- High NPAs indicate poor asset quality and affect bank profitability.
Capital Adequacy
Capital adequacy refers to the sufficiency of a bank's capital to absorb losses and support risk. It is measured using the Capital Adequacy Ratio (CAR), which is the ratio of a bank's capital to its risk-weighted assets. Adequate capital ensures stability and protects depositors.
Practical: Preparation of Profit and Loss Account & Balance Sheet of Banking Companies
A bank's Profit and Loss Account summarizes income (interest, fees) and expenses (interest paid, operational costs), resulting in net profit. The Balance Sheet displays assets (loans, investments) and liabilities (deposits, borrowings), showcasing the bank's financial health.
Key Schedules Include:
- Schedule of Advances
- Schedule of Investments
- Schedule of Deposits
These documents are crucial for assessing a bank's financial performance and stability.