Unaudited Financial Statement Major Understanding.

#Major Things to know while analyzing financial highlight of financial institution:

Ø Profit Growth compared to previous fiscal year

Ø Interest income compared to previous fiscal year

Ø Paid up capital and reserve growth in current report

Ø Collection of deposit compared to previous fiscal year

Ø Extension of Loan compared to previous fiscal year

Ø Comparison of non-performing loan.

Ø  EPS,NETWORTH PER SHARE,P/E Ratio comparison.

Paid Up capital: - Paid-up capital is the amount of money a company has received from shareholders in exchange for shares of stock. Paid-up capital is only created when a company sells its shares on the primary market directly to investors. When shares are bought and sold between investors on the secondary market, no additional paid-up capital is created because the proceeds of those transactions go to the selling shareholders, not the issuing company. 

Reserve: A reserve is profits that have been appropriated for a particular purpose. Reserves are sometimes set up to purchase fixed assets, pay an expected legal settlement, pay bonuses, pay off debt, pay for repairs and maintenance, and so forth. This is done to keep funds from being used for other purposes, such as paying dividends or buying back shares. The board of directors is authorized to create a reserve.

A reserve is something of an anachronism, because there are no legal restrictions on the use of funds that have been designated as being reserved. Thus, funds designated as a reserve can actually be used for any purpose.

In other words, reserve means certain amount taken from the profit and loss account to meet the sudden losses due natural calamities or to pay the premium to the shareholders when profits are insufficient. 

Surplus: - The excess of income over expenditure is known as surplus. A surplus is the amount of an asset or resource that exceeds the portion that is utilized.

A surplus is used to describe many excess assets including income, profits, capital and goods. A surplus often occurs in a budget, when expenses are less than the income taken in or in inventory when fewer supplies are used than were retained. Economic surplus is related to supply and demand. 

Deposit: - A transaction involving a transfer of funds to another party for safekeeping. 

Loan: -A loan is the act of giving money, property or other material goods to another party in exchange for future repayment of the principal amount along with interest or other finance charges. A loan may be for a specific, one-time amount or can be available as an open-ended line of credit up to a specified limit or ceiling amount.

Funds borrowed by an entity from another entity, repayable after a specific period carrying interest rate is known as Loans.

It is a debt for long term. It has more legal formalities with secured or not secured.

Types of Loan:

On the basis of Security:

Secured Loan: The loan which is backed by securities is Secured Loan.

Unsecured Loan: The loan on which no asset is pledged as security is Unsecured Loan.

On the basis of Repayment:

Demand Loan: The loan which is repaid on demand of the lender is Demand Loan.

Time Loan: Loan, which is repaid in full at a future specified date is Time Loan.

Installment Loan: Loans which are to be repaid in evenly distributed monthly installments is Installment Loan.

On the basis of Purpose:

Home Loan

Car Loan

Education Loan

Commercial Loan

Industrial Loan 

Advance: - Funds provided by the bank to an entity for a specific purpose, to be repayable after a short duration is known as Advances.

It has a credit facility for a short term with less legal formalities. For a security purpose, it may have primarily collateral or a bank guarantee. 

The following are the forms of bank advances: 

Short term loans: Advance in which the entire amount is provided to the borrower at one time.

Overdraft: A facility provided by the bank in which the customer can overdraw money from his account up to a specified limit.

Cash Credit: A facility granted by the bank in which the customer can advance money up to a certain limit against the asset pledged.

Bills Purchased: An advance facility provided by the bank against the security of bills. 

Net Interest Income: -Income generated form Above loan & advance.In other words, 

Net Interest Income = Interest Received - Interest Paid

In regard to banks, net interest income should go up as the yield curve steepens (long-term rates rise faster than short-term rates) because the bank is able to pay depositors a relatively low rate, but it can charge its borrowers a higher rate.

[Note:Liabalities- Any type of borrowing from persons or banks for improving a business or personal income that is payable during short or long time. Liabilities are debts and obligations of the business they represent as creditor's claim on business assets.]

Provision: - A provision is an amount that you put in aside in your accounts to cover a future liability.

Write Back: -To restore or increase the value of an asset on a balance sheet after a previous write-off or write-down.

Write Off: - A write off is the process of removing an asset or liability from the accounting records and financial statements of a company. Companies tend to write off assets because the assets are no longer available or valid.

Example 

The best example of a write off is a bad debt. A bad debt is an account receivable that can no longer be collected. In other words, the company or customer that owes you money either refuses to pay or is unable to pay back the money it owes. Rather than keeping this bad receivable on the books, companies remove or write off the receivable. There are two main write off methods: the direct write off method and the allowance method.

The inverse of this example is the customer or business that has its debt written off. Depending on the debt and the state, this customer may or may not legally owe the business still. If the debt has been forgiven, the customer can then write off the liability on his books because the liability is no longer valid.

Another example of a write off is a building destroyed by a storm. The company will write off or remove the building from the books and report a casualty loss from the storm. Sometimes companies will get reimbursements from insurance companies to offset the corresponding casualty loss. Either way, these assets are removed from the books because they are no longer in existence and no longer valid.

Operating income: -It is an accounting figure that measures the amount of profit realized from a business's operations, after deducting operating expenses such as cost of goods sold (COGS), wages and depreciation. Operating income takes a company's gross income, which is equivalent to revenue minus COGS, and subtracts all operating expenses and depreciation. A business's operating expenses are costs incurred from operating activities and include items such as office supplies, heat and electricity.

Operating profit is the income earned from the core operations of a business, excluding any financing or tax-related issues. The concept is used to investigate the profit-making potential of a business, excluding all extraneous factors. Operating profit information is particularly valuable when monitored on a trend line, to see how a business is performing over a long period of time. If operating income is negative, a business will likely require additional outside funding to remain in operation.

EXAMPLE:

As an example of operating profit, Dillinger Designs has revenue of $10,000,000, cost of goods sold of $4,000,000, general and administrative expenses of $3,000,000, interest expense of $400,000, and income taxes of $900,000. The operating profit is $3,000,000, which includes the revenue, cost of goods sold, and general and administrative expenses. The interest expense and income taxes are excluded from the calculation.

Capital Adequacy Ratio (CAR): -It is the ratio of a bank's capital in relation to its risk weighted assets and current liabilities. It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

Base Rate: The prime rate is the interest rate that commercial banks charge their most credit-worthy customers.

Cost of funds: -It is the interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one of the most important input costs for a financial institution, since a lower cost will generate better returns when the funds are deployed in the form of short-term and long-term loans to borrowers. The spread between the cost of funds and the interest rate charged to borrowers represents one of the main sources of profit for most financial institutions.

CD Ratio(Credit to Deposit): -It is the ratio of how much a bank lend out deposit it has mobilized.A low ratio means bank are not using full of their resource.

Alternatively, a high ratio means more reliable on deposit for lending and likely a pressure on resource.

CD ratio helps accessing a liquidity of cash and indicate its health.a low ratio means banks may not be earning as much as they could be.If ratio is too high it means that banks might not have enough liquidity to cover any unforeseen fund requirements.It may affect capital adequency and asset-liablity mismatch.

It can be calculated as:

Credit-Deposit Ratio=Total advances*100/Total Deposit

Indicators(in 000)	FY 2073/74 Q2	FY 2072/73 Q2	Difference In %
Paid Up Capital