Chapter 3 – Management of Banking and Financial Services, 2nd Edition

Chapter Three


1. The basic nature of banking business is similar in all countries. Only nomenclatures and disclosures may differ.

2. The burden will be a negative figure in most banks. Hence, the burden is measured as a ratio with the denominator as total assets—the lower the absolute difference in the numerator, the more profitable the bank.

3. Excerpt from RBI: Guidelines on Ownership and Governance in Private Sector Banks, dated 28 February 2005.

4. RBI, 2002. Core Principles for Effective Banking Super-vision—An Assessment of the Position in India.

5. Section 17 of the Banking Regulation Act reads as follows: Reserve Fund—(1) Every banking company incorporated in India shall create a reserve fund and [* * *] shall, out of the balance of profit of each year as disclosed in the profit and loss account prepared under Section 29 and before any dividend is declared, transfer to the reserve fund, a sum equivalent to not less than twenty per cent of such profit. (1A) Notwithstanding anything contained in sub-section (1), the central government may, on the recommendation of the Reserve Bank and having regard to the adequacy of the paid-up capital and reserves of a banking company in relation to its deposit liabilities, declare by order in writing that the provisions of sub-section (1) shall not apply to the banking company for such period as may be specified in the order:
Provided that no such order shall be made unless, at the time it is made, the amount in the reserve fund under sub-section (1), together with the amount in the share premium account is not less than the paid-up capital of the banking company.

6. For a discussion on the ‘Investment Reserve’, please refer to Chapter on ‘Investments’.

7. Bills rediscounted with SIDBI/IDBI are reflected in the balance sheet as a contra entry. It therefore forms part of the ‘contingent assets’. The amount presents credit extended to a borrower, in which the bank has subsequently rediscounted the bills financed against with these apex institutions under a special scheme meant for the purpose. Hence, such rediscounted amounts do not get reflected in the balance sheet under ‘advances.'

8. This approach is followed in ‘Bank Management’, Chapter 4, by Timothy Koch and Scott Macdonald, 4th edition, The Dryden Press, USA.

9. Ibid.

10. Also called ‘CRAMELs’ (capital adequacy, risk, asset quality, management, earnings, liquidity, and systems).

11. Refer chapter on ‘Capital Risk Regulation and Adequacy’.

12. Represents ‘non-performing assets’, where payment of interest or repayment of principal is in arrears. For more details, refer to chapter on ‘Credit Risk’. Net NPAs = Gross NPAs LESS Provisions.

13. For an analysis of the ROE in its decomposed form, refer to Section III of this chapter.

14. David Cates [1996], quoted in Koch, Timothy and Scott Macdonald Bank Management, Chapter 4, 4th ed. (2000). The Dryden Press.

15. We will discuss more on these approaches in the section on ‘Loan Pricing’.

16. The terms ‘credit risk’, ‘liquidity risk’ and ‘interest rate risk’ are explained comprehensively in later chapters.

17. Hannan, Timothy H & Hanweck, Gerald A, 1988. ‘Bank Insolvency Risk and the Market for Large Certificates of Deposit,’ Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 203–11, May.

18. Various RBI reports sourced from

19. For more detail on these modes of funds transfer, visit