This document discusses managing the cost of funds, capital, and liquidity in banks. It covers key components of bank liabilities including capital, reserves and surplus, deposits, borrowings, and other liabilities. It explains the features of bank liabilities and components of the bank balance sheet. The document also discusses the cost of deposits/funds and how net demand and time liabilities (NDTL) are calculated. Finally, it provides details on the calculation of the marginal cost of funds based lending rate (MCLR), including the key components involved like marginal cost of funds, operating expenses, negative carry on CRR and SLR, and average return on net worth.

1. UNIT 2
MANAGING COST OF FUNDS,
CAPITAL AND LIQUIDITY IN
BANKS:
:
Anubha Srivastava, M.Com, Ph.D, UGC NET, CertIFR(ACCA)
Email ID – anubhasrivastava@christuniversity.in
Mob No- 09667251429

2. Points to discuss
• Features of Bank Liabilities,
• Cost of Deposits / Funds,
• NDTL, MCLR Calculation,

3. Features of Bank Liabilities
• Bank liabilities refer to a debt or financial obligation of the bank, such as interest
owed to others
• Liabilities are items that the bank owes to someone else, including deposits and
bank borrowing from other institutions other banks and other debts owed.

4. Components of a Bank Balance sheet
Liabilities Assets
1. Capital
2. Reserve & Surplus
3. Deposits
4. Borrowings
5. Other Liabilities
1. Cash & Balances with
RBI
2. Bal. With Banks &
Money at Call and
Short Notices
3. Investments
4. Advances
5. Fixed Assets
6. Other Assets
Contingent Liabilities

5. Components of Liabilities
1.Capital:
Capital represents owner’s contribution/stake in the
bank.
- It serves as a cushion for depositors and creditors.
- It is considered to be a long term sources for the bank.

6. Components of Liabilities
2. Reserves & Surplus
Components under this head includes:
I. Statutory Reserves-Reserve created in terms of section 17 or any other section of Banking
RegulationAct must be separately disclosed.
II. Capital Reserves- The expression ‘capital reserves’ shall not include any amount regarded as
free for distribution through the profit & loss account. Surplus on revaluation or sale of fixed assets
should be treated as capital reserves.
III. Revenue and Other Reserves-The expression ‘Revenue Reserves’ shall mean any reserve other
than capital reserve.This item will include
a) Investment Fluctuation Reserve -all reserves, other than those separately classified.The
expression ‘reserve’ shall not include any amount written off or retained by way of providing for
depreciation, renewals in value of assets
b) Balance in Profit and Loss Account way of providing for any known liability. Includes balance of
profit after appropriations. In case of loss the balance may be shown as a deduction

7. Components of Liabilities
3. Deposits- This is the main source of bank’s funds.The deposits are classified as deposits
payable on ‘demand’ and ‘time’.They are reflected in balance sheet as under:
1. Demand Deposits
2. Savings Bank Deposits
3. Term Deposits
Includes all banks deposits repayable on demand. Includes all demand deposits of the non-bank
sectors. Credit balances in overdrafts, cash credit accounts deposits payable at call, overdue
deposits, inoperative current accounts, matured time deposits and cash certificates, etc. are to
be included under this category. Includes all savings bank deposits (including inoperative savings
bank accounts).Includes all types of banks deposits repayable after a specified term.Includes all
types of deposits of the non-bank sector repayable after a specified term. Fixed deposits,
cumulative and recurring deposits, cash certificates, annuity deposits, deposits mobilised under
various schemes, ordinary staff deposits, foreign currency non-resident deposits accounts, etc.
are to be included under this category.
.https://rbi.org.in/Scripts/PublicationsView.aspx?id=9457

8. Components of Liabilities
4. Borrowings- (Borrowings include Refinance / Borrowings from RBI, Inter-bank & other
institutions)
I. Borrowings in India
i) Reserve Bank of India
ii) Other Banks
iii) Other Institutions & Agencies
II. Borrowings outside India
Includes borrowings/refinance obtained from Reserve Bank of India. Includes
borrowings/refinance obtained from commercial banks (including co operative banks)Includes
borrowings/refinance from Industrial Development Bank of India, Export-Import Bank of India,
National Bank for Agricultural and Rural Development and other institutions, agencies
(including liability against participation certificates, if any)

9. Components of Liabilities
5. Other Liabilities & Provisions -It is grouped as under:
I. Bills Payable
II. Inter Office Adjustments (Net)
III. Interest Accrued
IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
V. Others(including provisions)
• Includes drafts, telegraphic transfers, pay slip, bankers cheques, other miscellaneous items, etc. The inter-
office adjustments balance, if in credit, should be shown under this head. Only net position of inter- office
accounts, inland as well as foreign should be shown here. Includes interest due and payable and interest
accrued , Includes net provision for income tax and other taxes, surplus provisions in bad debts provision
account, surplus provisions for depreciation in securities, contingency funds which are not disclosed as
reserves but are actually in the nature of reserves, proposed dividend/transfer to Government, other
liabilities which are not disclosed under any of the major heads such as unclaimed dividend, provisions and
funds kept for specific purposes, outstanding charges like rent, conveyance, etc.

10. Contingent Liability
Bank’s obligations under LCs, Guarantees, Acceptances on behalf of constituents and Bills
accepted by the bank are reflected under this heads. Outstanding forward exchange
contracts may be included here. Guarantees given for constituents in India and outside India
may be shown separately.
This item will include letters of credit and bills accepted
by the bank on behalf of its customers. Arrears of cumulative dividends, estimated amount
of contracts remaining to be executed on capital account and not provided for etc. are to be
included here.

11. Cost of Deposits / Funds
• The term cost of funds refers to how much banks and financial institutions spend
in order to acquire money to lend to their customers. Its average cost of deposit on
the basis of total deposits mobilised and total interest paid during a year. If
they spend ₹1000000 by interest and secure ₹50000000 all types of deposit, the
average cost of deposit will be 1000000/50000000=1/50*100=2%.
• https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=1476
#1

12. DTL/NDTL and MCLR Calculation..
• Computation of DTL- Liabilities of a bank may be in the form of demand or time deposits or
borrowings or other miscellaneous items of liabilities. As defined under Section 42 of the RBI
Act, 1934, liabilities of a bank may be towards the banking system or towards others in the
form of demand and time deposits or borrowings or other miscellaneous items of liabilities.
The Reserve Bank of India has been authorized in terms of Section 42(1C) of the RBI Act,
1934, to classify any particular liability and hence for any doubt regarding classification of a
particular liability, banks are advised to approach the RBI for necessary clarification.
• Demand Liabilities- Demand Liabilities of a bank are liabilities which are payable on
demand. These include current deposits, demand liabilities portion of savings bank deposits,
margins held against letters of credit/guarantees, balances in overdue fixed deposits, and
cumulative/recurring deposits, Demand Drafts (DDs), unclaimed deposits, credit balances in
the Cash Credit account and deposits held as security for advances which are payable on
demand.

13. Cont…
• Time Liabilities
• Time Liabilities of a bank are those which are payable otherwise than on demand. These
include fixed deposits, cumulative and recurring deposits, time liabilities portion of savings
bank deposits, staff security deposits, margin held against letters of credit, if not payable on
demand, deposits held as securities for advances which are not payable on demand and Gold
deposits.
• Other Demand andTime Liabilities (ODTL)
• ODTL include interest accrued on deposits, bills payable, unpaid dividends, suspense account
balances representing amounts due to other banks or public, any amounts due to the banking
system which are not in the nature of deposits or borrowing. Such liabilities may arise due to
items like (i) collection of bills on behalf of other banks, (ii) interest due to other banks and so
on. If a bank cannot segregate the liabilities to the banking system, from the total of ODTL,
the entire ODTL may be shown against item II (c) 'Other Demand and Time Liabilities' of the
return in Form 'A'.

14. Cont..
Liabilities not to be included for DTL/NDTL computation
The under-noted liabilities will not form part of liabilities for the purpose of CRR and SLR:
a) Paid up capital, reserves, any credit balance in the Profit & Loss Account of the bank,
amount of any loan taken from the RBI and the amount of refinance taken from Exim Bank,
NHB, NABARD, SIDBI;
b) Net income tax provision;
c) Amount received from DICGC towards claims and held by banks pending adjustments
thereof;
d) Amount received from ECGC by invoking the guarantee;
e) Amount received from insurance company on ad-hoc settlement of claims pending
judgment of the Court;
f) Amount received from the Court Receiv

15. Cont.. • Net Demand and Time Liability (NDTL) is
basically the sum of demand and time
liabilities including ODTL of scheduled
commercial banks minus deposits in other
banks. NDTL is used by banks for the
computation of the Cash Reserve Ratio
(CRR), Statutory Liquidity Ratio (SLR), and
Liquidity Adjustment Facility (LAF)
• Deposits with the banking system include
balances with banks in current accounts,
balances with banks and notified financial
institutions in other accounts etc..

16. MCLR (Marginal Cost of Funds based
Lending Rate) Calculation
• The banks in India set their lending rates on loans and advances with reference to ‘Base Rate’
which is computed on the basis of the cost of funds to the bank. The Base rate system was
introduced by the banks on July 1, 2010. However, the method of computing Base Rate was
followed by different banks in different methods like ‘Average Cost Funds’, ‘Marginal Cost
Funds’, etc...
• The Reserve Bank on September 1, 2015 proposed a uniform marginal cost of funds
methodology for all the banks, for calculation of their base lending rates. The apex bank has
shown its faith in marginal cost of funds as it appears to be more sensitive to changes in
policy rates compared to other methods. The new guideline now proposed by RBI is in line
with the monetary policy announced on July 1, 2015, and renewed on August 4, 2015. The
banking regulator said that for effective transmission of its policy rates, the lending rates
should be sensitive to the policy rates and linked to the policy rates. Hence, with effect from
April 1, 2016, all the commercial banks in India shall implement Marginal Cost of Funds Based
Lending Rate (MCLR) for all rupee loans/ credit limits sanctioned or renewed by them

17. • The Method of computing MCLR:
• The MCLR is a tenor linked internal benchmark of an individual bank. The MCLR varies for
different maturities of loans and advances.The important components are taken into account
for calculating the MCLR are (A). Marginal Cost of funds. (B).Operating Expenses. (C). Negative
carry on CRR and SLR (D).Average Return on return
• (A). Marginal Cost of Funds:
• The marginal cost of funds is arrived at by taking into consideration of all sources of the fund
other than the equity and same is calculated using the latest interest rate/card rate payable on
current and savings deposits and the term deposits of various maturities. The cost of
borrowings thus arrived at using the average rates at which funds were raised in the last one
month preceding the date of review. Each of these rates is weighted by the proportionate
balance outstanding on the date of review. Hence, based on interest/Premium paid to raise
long- term funds, the cost of funds will change along with the tenor of the Deposits.
Consequently, the lending rates under MCLR is different for loans with different tenors.The
majority of the banks have therefore introduced the Overnight MCLR, One- month MCLR,
Three months MCLR, Six months MCLR, and One year MCLR..

18. • (B). Negative carry on CRR and SLR
• Negative carry on the mandatory CRR arises because the return on CRR balances is nil. Negative
carry on SLR balances may arise if the actual return thereon is less than the cost of funds.
• (C).Un-allocable Operating Expenses:
• The Cost of deposits is not just restricted to interest paid on deposits for various tenors. There
are other expenses like salaries, premises rent, stationery, electricity bills, telephone bills etc.
that are not directly charged to the customers. These operating costs will be taken into account
while determining the lending rate. However, as per RBI guidance, the un-allocable overhead
expenses cannot be allocable to any particular business activity/unit, therefore, the costs should
comprise solely of costs incurred to the bank as a whole. The components of un-allocable
overhead expenses would be fixed for 3 years, subject to review thereafter.
• (D) Average Return on net worth:
• The average return on net worth is the hurdle rate of return on equity determined by the Board
or management of the bank. The component representing ‘return on net worth’ shall remain
fairly constant. If the bank wishes to make any change, it would be made only in case of a major
shift in the business strategy of the bank.

19. THANKYOU