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Banking and Insurance - Laws and Practice · Analysis of Financial Statements of Banks

Key Items of Bank Balance Sheet and Income Explained

Updated 11 October 2026 · Fact-checked

A bank balance sheet lists liabilities (capital, reserves, deposits, borrowings) and assets (cash, balances with RBI, investments, advances, fixed assets). The profit and loss account shows income (interest earned, other income) against expenses (interest expended, operating expenses, provisions). Net interest income is interest earned minus interest expended. NIM expresses it as a percentage of earning assets.

Understand Key Items of Bank Balance Sheet and Income

A bank trades in money. It collects money from the public and lends or invests it. So its balance sheet looks different from that of a manufacturing company. Deposits, which a company would not normally have, are the biggest item on the liabilities side. Loans and investments, which a company would hold as small items, are the biggest items on the assets side.

Liabilities side. The main items are: capital (money brought in by owners), reserves and surplus (statutory reserve, capital reserve, share premium, revenue reserve and balance in profit and loss account), deposits (demand, savings and term deposits), borrowings (from RBI, other banks and institutions), and other liabilities and provisions (bills payable, interest accrued, provisions).

Assets side. The main items are: cash and balances with RBI (including the cash reserve held with RBI), balances with banks and money at call and short notice, investments (mostly government and other approved securities), advances (loans, cash credit, overdrafts and bills discounted, shown net of provisions), fixed assets and other assets. Advances are the main earning asset. Cash earns little or nothing.

Income side of the profit and loss account. Income has two parts. Interest earned comes from advances, investments, balances with RBI and other banks. Other income comes from commission, exchange and brokerage, fees, profit on sale of investments, profit on exchange transactions and similar sources. Expenses have three parts. Interest expended is the interest paid on deposits and borrowings. Operating expenses include staff pay, rent, depreciation and other running costs. Provisions and contingencies cover bad loans, tax and similar items.

The gap between interest earned and interest expended is net interest income (NII). It is the bank's core earning. Add other income, deduct operating expenses, and you reach operating profit. Deduct provisions and tax to reach net profit. The presentation format for banking companies is laid down in the Third Schedule to the Banking Regulation Act, 1949: Form A for the balance sheet and Form B for the profit and loss account. In the exam, link each number to what it says about the bank's strength.

Key rules to remember

Balance sheet identity
Total assets = Capital + Reserves and surplus + Deposits + Borrowings + Other liabilities and provisions
Both sides of the bank balance sheet must always be equal.
Net interest income (NII)
NII = Interest earned − Interest expended
Measures the core spread earned from lending and investing.
Net interest margin (NIM)
NIM = NII ÷ Average earning assets × 100
A percentage. Earning assets mean advances, investments and interest-bearing balances. Use the average where data allows.
Total income
Total income = Interest earned + Other income
Form B shows these as two main heads.
Operating profit
Operating profit = Total income − Interest expended − Operating expenses
This is before provisions and contingencies.
Net profit
Net profit = Operating profit − Provisions and contingencies (including tax)
Provisions include those for bad loans, investment depreciation and tax.
Cost to income ratio
Cost to income = Operating expenses ÷ (NII + Other income) × 100
Shows how much of net income is spent on running the bank. Definitions of the denominator vary, so state yours.

How to solve Key Items of Bank Balance Sheet and Income questions

Use this method for theory questions on items and for numerical questions on statements of banks.

  1. 1Identify what is asked: explanation of items, a computation, or an interpretation of the figures.
  2. 2Split the answer into the two statements: balance sheet (liabilities and assets) and profit and loss account (income and expenses).
  3. 3Name each item in the order of the Third Schedule format and say in one line what it contains.
  4. 4For a numerical question, list the figures given and classify each as interest earned, interest expended, other income, operating expense or provision.
  5. 5Compute step by step: total income, NII, operating profit, net profit. Show each subtotal.
  6. 6Compute ratios such as NIM with the stated formula. Say which base you used for earning assets.
  7. 7Interpret the result in one or two sentences: for example, a rising NIM means a better spread.
  8. 8Close with a short conclusion that answers the exact question.

Quickest way: Classify, subtotal, compute

When to use it: When a numerical question gives a list of figures and you have limited time.

  1. Write four labels: IE (interest earned), IX (interest expended), OI (other income), OE (operating expenses).
  2. Tag each figure with a label. Set aside provisions and tax separately.
  3. Compute NII = IE − IX first. Many questions stop here or at NIM.
  4. Then operating profit = NII + OI − OE, and net profit after provisions.
  5. Check that a balance sheet total of assets equals liabilities before moving on.

Common mistakes in Key Items of Bank Balance Sheet and Income

  • Treating deposits as an asset because the bank holds the money.

    The cash is in the bank's hands, so it feels like the bank's own asset.

    Fix: Deposits are owed to customers. They are a liability. The bank's asset is the loan or investment made from them.

  • Confusing interest earned with interest expended.

    The names sound alike and students read them from the customer's point of view.

    Fix: Take the bank's point of view. Interest on loans and investments is earned. Interest on deposits and borrowings is expended.

  • Using NII and NIM as if they were the same.

    Both measure the spread.

    Fix: NII is an amount in rupees. NIM is a percentage of average earning assets. State both units in your answer.

  • Dividing NII by total assets for NIM.

    Total assets are easier to find than earning assets.

    Fix: Use earning assets. Use total assets only if the question says so, and mention that choice.

  • Counting provisions as part of operating expenses.

    Both are deductions from income.

    Fix: Operating profit is before provisions and contingencies. Show provisions only after operating profit.

  • Showing advances at gross figure without noting the provisions.

    Students ignore the 'net of provisions' presentation.

    Fix: Say that advances are shown net of provisions in the balance sheet, with detail in the schedule.

Worked examples

Example 1

A bank reports the following (₹ in crore): interest on advances 900, interest on investments 300, other interest income 50, commission and fees 120, profit on sale of investments 30, interest on deposits 700, interest on borrowings 100, staff cost 200, other operating expenses 150, provisions and contingencies 80. Calculate NII, total income, operating profit and net profit before tax adjustment.

Show the solution
  1. Interest earned = 900 + 300 + 50 = ₹1,250 crore.
  2. Interest expended = 700 + 100 = ₹800 crore.
  3. NII = 1,250 − 800 = ₹450 crore.
  4. Other income = 120 + 30 = ₹150 crore.
  5. Total income = 1,250 + 150 = ₹1,400 crore.
  6. Operating expenses = 200 + 150 = ₹350 crore.
  7. Operating profit = 1,400 − 800 − 350 = ₹250 crore.
  8. Net profit after provisions = 250 − 80 = ₹170 crore (the provisions figure is taken as all-inclusive).

Answer: NII ₹450 crore; total income ₹1,400 crore; operating profit ₹250 crore; net profit ₹170 crore.

Example 2

A bank has interest earned of ₹2,400 crore and interest expended of ₹1,500 crore. Its average earning assets are ₹30,000 crore. Calculate NII and NIM, and explain in two lines what NIM tells you.

Show the solution
  1. NII = 2,400 − 1,500 = ₹900 crore.
  2. NIM = NII ÷ Average earning assets × 100.
  3. NIM = 900 ÷ 30,000 × 100 = 3%.
  4. Interpretation: the bank earns ₹3 of net interest on every ₹100 of earning assets.
  5. A higher NIM, other things equal, shows a wider spread and better lending and funding efficiency.

Answer: NII is ₹900 crore and NIM is 3%. It measures the spread earned on earning assets.

Exam tips

  • In theory answers, list items in the order of Form A and Form B. It shows you know the format.
  • For every figure, state the side (asset or liability, income or expense) before using it.
  • Write the formula before substituting. Method marks are given in a written paper.
  • Add one line of interpretation after each ratio. Case-based questions reward analysis.
  • Always give units: ₹ crore for amounts and % for margins.

Practice questions from Analysis of Financial Statements of Banks

Key Items of Bank Balance Sheet and Income in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Key Items of Bank Balance Sheet and Income: frequently asked questions

What are the main liabilities and assets in a bank balance sheet?

Main liabilities are capital, reserves and surplus, deposits, borrowings and other liabilities and provisions. Main assets are cash and balances with RBI, balances with banks, investments, advances, fixed assets and other assets. Deposits and advances are the largest items for most banks.

What is the difference between interest earned and interest expended?

Interest earned is income the bank receives on loans, investments and balances placed with others. Interest expended is the interest the bank pays on deposits and borrowings. The difference is net interest income.

What is the difference between net interest income and net interest margin?

Net interest income is an amount: interest earned minus interest expended. Net interest margin is a percentage: NII divided by average earning assets. NIM lets you compare banks of different sizes.

Which format do banks follow for their financial statements?

Banking companies follow the Third Schedule to the Banking Regulation Act, 1949. Form A is the balance sheet and Form B is the profit and loss account. Read the form together with the RBI directions on disclosures.