Where a Financial Institution Gets the Money It Lends
Three institutions carry every rupee below, and not one of them trades anywhere. Suvarna Commercial Bank Limited, Rukmini Finance Limited and Chandrika Life Insurance Limited have figures that divide cleanly, so a funding side can be taken apart line by line with pen and paper. What an institution must hold against the money it has raised is revised from time to time. So seven rows near the foot carry the body that decides each one in place of a value: a figure typed into one of those rows would read as settled when it is merely old.
Almost nothing a financial institution works with belongs to it. Everything else about a lender follows from that one fact. A shop puts its own savings into stock. A lender puts other people's money into loans, and the terms on which it got that money are terms it has to keep, whatever happens to the loans. So the first honest question to ask about any lender is not what it lends. The question is where the money came from, and what was promised to whoever handed it over.
Think about a household running on one salary plus a sum borrowed from a relative. The salary costs nothing to keep and the borrowing costs something. The salary can stop without notice and the borrowing cannot be called back before the agreed date. Cost and notice are two different facts about the same household, and neither one predicts the other. Cost, speed of withdrawal and how much the money supports are three separate consequences of one decision, and they do not move together. Every difficult judgement in this subject comes from that.
Suvarna Commercial Bank Limited, invented, reports total assets of Rs 2,40,000 crore for the stated year, funded by deposits of Rs 1,92,000 crore and net worth of Rs 24,000 crore. Its interest earned is Rs 18,600 crore and its interest expended is Rs 11,160 crore.
Rukmini Finance Limited, also invented, takes no deposits at all. The company reports assets under managementThe total value of the assets an institution runs, whether it holds them on its own books or manages them for somebody else. It is a size measure, not an income measure. of Rs 18,000 crore, borrowings of Rs 14,400 crore raised in the market at 8.50 per cent a year, and net worth of Rs 3,600 crore.
Chandrika Life Insurance Limited, invented, holds policyholder funds of Rs 72,000 crore against net worth of Rs 7,200 crore. One stated year of each is the whole of what exists. A single year holds no downturn and no failure, and a way of funding a business is judged over several years rather than one.
What is a funding mix, and what does it actually show?
A funding mix is a list of arrivals. Every rupee an institution works with arrived from somewhere, and the list of those somewheres, with an amount against each, is the mix. A list of arrivals sounds like bookkeeping, and it is, right up until three questions get asked of each line. Asked line by line, the list becomes the most useful statement in the accounts.
The three questions are always the same. How much does this money cost, per year. How fast can it leave. And how many rupees of assets does it let the institution run per rupee of its own money. The three answers do not line up. The cheapest money is very often the fastest to leave, and that tension is what the whole subject sits on. A lender that chases only the first question ends up with a balance sheet that can empty in a week. One that chases only the second pays for the privilege every year.
What does a bank's deposit funding cost, and what makes it cheap?
Suvarna Commercial Bank Limited holds depositsMoney a customer places with a bank, which the bank owes back to them either on demand or on an agreed date. It is the customer's asset and the bank's liability. of Rs 1,92,000 crore against total assets of Rs 2,40,000 crore. Divide one by the other and deposits fund 80.0 per cent of everything the bank holds. An 80.0 per cent share is large, and largeness is the least interesting thing about it.
Go one level down. Of those deposits, 42.0 per cent sit in current and savings accounts. In rupees that is Rs 80,640 crore of the Rs 1,92,000 crore. Now the interesting part. A share is worth nothing until the price attached to it is said out loud: those balances are the cheapest money the bank has, and the share matters because of what it buys rather than because it is large. An account that reports 42.0 per cent and stops has handed the reader a statistic instead of teaching them anything.
Why are they cheap? Because the holder is paid little or nothing for money they can take back the same afternoon. The low price is the bargain, and both sides understand it. The holder keeps the money where it can be reached, and accepts that reaching it is most of what is being given. The bank, on its side, gets a very large pool of money at a very low price and accepts that any part of it can walk out on any working day.
Suvarna Commercial Bank Limited reports that 42.0 per cent of its deposits sit in current and savings accounts. Which of these has that sentence alone actually established?
How does a lender that takes no deposits fund itself instead?
Rukmini Finance Limited does not take deposits. Taking no deposits is the whole difference between Rukmini Finance Limited and the bank, and everything that follows about the finance company is a consequence. The company funds itself by borrowing in the market instead: Rs 14,400 crore of borrowings against assets under management of Rs 18,000 crore. At 8.50 per cent a year, those borrowings cost Rs 1,224 crore of interest in the stated year.
The obvious difference is the price. The important difference is who is on the other side. A depositor is a customer with a balance. A market lender is a counterpartyThe other side of a transaction or an agreement. The word is neutral about who they are: what matters is that each side has obligations to the other. with terms, a maturity dateThe date on which a borrowing has to be repaid in full. On that date the arrangement ends, and any continuation is a new arrangement rather than the old one carrying on. and a view. A balance and a contract are not two grades of the same relationship. The two fail in different ways.
Picture a food stall that sells to whoever walks past, and next to it a stall that supplies one office canteen on a monthly contract. The first can lose customers gradually. The second can lose everything on one renewal date, decided by somebody in a meeting it was not invited to. Rukmini Finance Limited is closer to the second. Rukmini Finance Limited cannot be asked for its money back tomorrow, and it can be refused new money on a date it did not choose. The vulnerability is different rather than bigger.
A lender that takes no deposits at all faces which problem that a deposit-taking lender does not?
Two lenders each fund 80.0 per cent of their assets from somebody else. Would they be expected to run similar leverage?
Why do two lenders with the same funding share run different leverage?
One agreement between the two institutions is worth setting up carefully. Deposits are 80.0 per cent of Suvarna Commercial Bank Limited's assets. Borrowings are 80.0 per cent of Rukmini Finance Limited's assets. The two shares agree to the decimal. Agreement to the decimal looks like two institutions funded the same way and to the same degree.
The two institutions are not. The bank runs 10.0 rupees of assets per rupee of its own money and the finance company runs 5.0, a factor of two apart. Split the funding side and the agreement disappears at once. At the bank, net worth of Rs 24,000 crore against Rs 2,40,000 crore of assets is 10.00 per cent. At the finance company, net worth of Rs 3,600 crore against Rs 18,000 crore is 20.00 per cent. The funding share never gives leverage; only the equity share does, and 80.0 per cent of assets funded externally is compatible with almost any equity share at all.
Before going further, ask a question that saves a great deal of trouble later: in which units does that 80.0 per cent agreement actually survive? As a share, it is exact. In rupees the agreement collapses at once. Rs 1,92,000 crore against Rs 14,400 crore is a multiple of 13.33 times, and that is precisely the multiple separating the two asset totals. The two lenders agree about a fraction and about nothing else at all.
Look at the two bars again and notice where the reader's eye is drawn. The long block is 80.0 per cent of the picture, so the eye goes there. The long block is also exactly the part that carries no information about leverage. The short block at the right hand end of each bar is the one doing the work, and it is the one a reader skimming a summary never reaches.
The relationship between that short block and leverage is not a rule of thumb. The relationship is a division turned upside down. One hundred divided by ten is ten, so net worth of 10.00 per cent of assets means each rupee of the institution's own money is carrying ten rupees of assets. Net worth of 20.00 per cent means each rupee is carrying five. Leverage is one hundred divided by the equity share. Doubling the equity share therefore halves the leverage, and the two readings always run in opposite directions.
One line is still unaccounted for at the bank, and it is worth stopping on rather than stepping over. Assets of Rs 2,40,000 crore, less deposits of Rs 1,92,000 crore, less net worth of Rs 24,000 crore, leaves Rs 24,000 crore of funding that is neither. The subtraction gives the size of that line and says not one word about what is in it, and what has been set down for these institutions does not describe it either.
So the line is named and left at that. The line is a residualA balance sheet line arrived at by subtracting everything known from the total, rather than by reading a disclosed figure. Its size is derived; its contents are whatever was not itemised.: a line reached by subtraction, of known size and unknown composition. An invented composition reads exactly like a disclosed one to everybody who comes after. So where a record leaves a line unlabelled, naming the residual is the output and inventing a composition for it is not. Naming the residual is the whole discipline, and it costs one sentence.
Subtracting deposits and net worth from the bank's assets leaves Rs 24,000 crore. How should that line be recorded?
Deposits are 80.0 per cent of one lender's assets and borrowings are 80.0 per cent of the other's. In which units does that agreement survive?
What does the institution's own money do in the mix?
Net worth is easy to leave out of a funding list, because it does not feel like funding. Nobody handed it over this year and nobody is waiting to be repaid. But it paid for a share of the assets exactly as the deposits did, and it belongs on the list for a reason that matters more than tidiness: it is the only line with no interest attached, no date attached and no holder who can ask for it.
Net worth does have first place in the queue for losses. When something goes wrong, the institution's own money absorbs it before anybody else's is touched, and that is precisely why how much of it there is decides how much of everything else the institution may run. Net worth costs no interest, cannot be withdrawn and absorbs loss first. Assets divided by net worth, the leverage figure, is therefore the second limb of every return on equity.
Which brings both institutions to the same number, and it is worth being blunt about why. Suvarna Commercial Bank Limited earns 9.38 per cent on equity. Rukmini Finance Limited earns 9.38 per cent on equity. The two returns are equal, and the equality is the point: a ranking built on return on equity alone cannot tell these two institutions apart. Two identical figures with no word about why look exactly like a copying mistake, and a reader who writes the pair off as one learns nothing from either.
One limb on its own is what caused the confusion, so both limbs go in the same place. The bank gets there on a return on assetsProfit after tax divided by total assets, which says how much the institution earned per rupee of everything it holds. It is a separate reading from what it earned per rupee of its own money. of 0.9375 per cent multiplied by 10.0 times assets to net worth. The finance company gets there on 1.875 per cent multiplied by 5.0 times. Half the return per rupee of assets, twice the leverage, and the same answer arrives twice.
Now the rounding, said out loud rather than left as a trap. The reported returns on assets are 0.94 and 1.88 per cent, and 0.94 multiplied by 10.0 is 9.40 while 1.88 multiplied by 5.0 is also 9.40. Neither of those is 9.38. The product ties only before anything has been tidied: 0.9375 taken ten times lands on 9.375 per cent, 1.875 taken five times lands on the same 9.375 per cent, and 9.375 is what 9.38 was rounded from. The case record is sound throughout; a reader who multiplies two tidied figures and arrives at 9.40 has done the arithmetic correctly on numbers that were smoothed before they were printed.
| The decomposition, both limbs | Suvarna Commercial Bank Limited | Rukmini Finance Limited |
|---|---|---|
| Return on assets, exact | 0.9375 per cent | 1.875 per cent |
| Return on assets, as reported | 0.94 per cent | 1.88 per cent |
| Assets per rupee of net worth | 10.0 times | 5.0 times |
| Exact limb multiplied by leverage | 9.375 per cent | 9.375 per cent |
| Reported limb multiplied by leverage, and not the answer | 9.40 per cent | 9.40 per cent |
| Return on equity, as reported | 9.38 per cent | 9.38 per cent |
Splitting a return on equity into a return per rupee of assets and a leverage multiple is algebra rather than anybody's frame: assets sit in the numerator of one term and the denominator of the other and cancel. Four divisions audit the whole of it: Rs 1,92,000 crore over Rs 2,40,000 crore, Rs 24,000 crore over Rs 2,40,000 crore, Rs 14,400 crore over Rs 18,000 crore and Rs 3,600 crore over Rs 18,000 crore. Pen and paper, two minutes, nothing carried in from elsewhere.
How does an insurer's funding differ from a lender's?
Chandrika Life Insurance Limited holds policyholder funds of Rs 72,000 crore against net worth of Rs 7,200 crore. The ratio is ten to one. Per Rs 100.00 of its own money it holds Rs 1,000.00 of somebody else's, and the shape of that looks a great deal like a leveraged lender. The insurer is not one.
The Rs 72,000 crore is neither borrowing nor deposits: it is money collected against claims that have not happened yet, and the whole of it is somebody else's claim on the future. A depositor's claim is for a stated amount whenever they ask. A policyholder's claim is for an amount nobody yet knows, if an event happens that nobody yet knows about. An institution treating that money as its own to deploy freely has missed the liability sitting behind it. The Insurance Regulatory and Development Authority of India (IRDAI) sets what an insurer must hold above its liabilities, at irdai.gov.in, and that requirement changes.
Chandrika Life Insurance Limited holds Rs 72,000 crore against net worth of Rs 7,200 crore. Is that Rs 72,000 crore money it can put to work as it likes?
What does the mix cost, and where does the record stop?
Start with the clean side. Rukmini Finance Limited pays 8.50 per cent a year on borrowings of Rs 14,400 crore. The interest comes to Rs 1,224 crore in the stated year. The rate is stated, the base is stated, the period is stated, and the multiplication reconciles. There is nothing to argue about.
Now the side that will not divide cleanly. Suvarna Commercial Bank Limited reports interest expended of Rs 11,160 crore and deposits of Rs 1,92,000 crore. The division gives 5.81 per cent a year, and every instinct says to write that down as the deposit rate. The 5.81 per cent is not the deposit rate. The numerator covers interest on everything the bank owes, and the denominator covers deposits alone, and Rs 24,000 crore of the bank's funding is neither deposits nor net worth and may carry interest of its own.
So 5.81 per cent a year is an upper boundThe most a figure could possibly be, given what is known. The true value sits at or below it, and the gap between the two cannot be measured without information the record does not carry. on what the bank pays depositors rather than the deposit rate, and wherever it is used it is labelled as such in the same sentence that prints it. Push any rupee of that expense onto another line and the implied deposit cost falls, never rises. The direction is worth holding on to: knowing which way the figure can be wrong is what makes it useful rather than merely uncertain.
A ceiling on one side is still enough to bound the difference between the two lenders. Take 8.50 per cent a year, the stated rate, and subtract 5.8125 per cent a year, the most the bank's deposits could be costing. The answer is 2.6875 points, and 2.6875 prints as 2.69. Because the bank's side is a ceiling, that 2.69 points is a floor: the finance company pays at least 2.69 points a year more for its money, and the true gap can only be wider.
One small thing is worth checking rather than assuming. Rounding is the kind of thing that quietly goes wrong. The gap worked from the exact figures is 2.6875, and rounds to 2.69. Worked from the two printed figures, 8.50 less 5.81, it is also 2.69. The two routes agree this time, and they do not always: a span taken from rounded inputs can land a hundredth away from the span taken from the exact ones.
| The cost of the money in the stated year | Suvarna Commercial Bank Limited | Rukmini Finance Limited |
|---|---|---|
| Interest earned | Rs 18,600 crore | Rs 2,610 crore |
| Interest expended | Rs 11,160 crore | Rs 1,224 crore |
| Net interest income | Rs 7,440 crore | Rs 1,386 crore |
| What the expense reads on the external funding | 5.81 per cent a year of deposits, a ceiling | 8.50 per cent a year of borrowings, stated |
Interest expended of Rs 11,160 crore over deposits of Rs 1,92,000 crore is 5.81 per cent a year. Can that be called the deposit rate?
Rukmini Finance Limited pays 8.50 per cent a year and the bank's division reads 5.81 per cent a year. How should the 2.69 point difference be read?
Rank the four funding sources from cheapest to dearest, then rank them by how fast each can leave. How similar are the two lists?
How fast can each source of funding leave?
This is a different question from what the money costs, and it is answered by a different column of the same list. A current or savings balance can leave the same day, without notice and without anybody's permission. A term depositA deposit placed for a fixed period at an agreed rate. The holder gives up reaching the money for that period, and is paid more than a demand balance for doing so. leaves on a date that is known in advance. A market borrowing does not leave early at all. The borrowing falls due instead, and has to be found again from somewhere, and that is where it can be refused. Net worth does not leave.
Set the two rankings side by side and they run close to opposite. The cheapest money is the money payable on demand and the dearest is the money committed for a period. A funding mix is therefore a liquidity question as much as a cost one, and neither can be improved without moving the other. The mirror image is not a coincidence or a quirk of one market. One relationship is being read from two ends: the holder who can walk away today accepts less for the money, and the counterparty who cannot walk away is paid more for staying.
What do the two funding sides look like set out together?
Put both structures on the same base, per Rs 100.00 of assets, and read straight down. Suvarna Commercial Bank Limited, for the stated year: Rs 80.00 of deposits, of which the current and savings balances are 42.0 per cent of deposits and therefore Rs 33.60; Rs 10.00 of a line this record leaves undescribed; and Rs 10.00 of net worth. Rukmini Finance Limited, same year: Rs 80.00 of borrowings, nothing sitting between, and Rs 20.00 of net worth.
| Per Rs 100.00 of assets, stated year | Suvarna Commercial Bank Limited | Rukmini Finance Limited |
|---|---|---|
| Funded by somebody else | Rs 80.00, deposits | Rs 80.00, borrowings |
| of which the cheapest balances | Rs 33.60 | no split in this record |
| A line this record does not describe | Rs 10.00 | nothing |
| The institution's own net worth | Rs 10.00 | Rs 20.00 |
| Total | Rs 100.00 | Rs 100.00 |
| Assets per rupee of net worth | 10.0 times | 5.0 times |
The first row agrees exactly and the fourth row does not, and the fourth row is the one that sets leverage: Rs 2,40,000 crore over Rs 24,000 crore is 10.0 times, and Rs 18,000 crore over Rs 3,600 crore is 5.0 times. Read from the top, the table gives the agreement first and the difference last. A hurried reader gives up in exactly that order.
Neither way of funding a lender is put ahead of the other here. Running ten rupees of assets on a rupee of equity is not carelessness, and earning a wider gap on the money is not skill. Both institutions were written for teaching, each is a single year of a single balance sheet, and what has been set down for them holds no downturn, no failure and no earlier year to compare against.
So neither of them can settle anything about the merits of how it funds itself. The arithmetic stands, and a verdict beyond the arithmetic would sound sensible and rest on nothing at all.
How does somebody reading two lenders actually use this?
An analyst comparing two lenders starts on the funding side rather than the lending side, and for a practical reason: the lending side shows what happened last year and the funding side shows what can happen next year. The three questions get asked in order. How much does the money cost, on what base and over what period. How much of it can leave without notice. And what does the equity share say about how much of everything else is riding on it.
A person choosing where to place their own savings is asking one of the same questions from the other side, whether or not they put it that way. Money that can be reached today is paid least; money committed for a period is paid more; and the difference between those two prices is what the institution pays for staying. Reading a funding mix well is mostly the discipline of asking what each line costs, when it can go, and what happens to everything else if it does.
A lender's own treasury desk reads the same three columns, from the inside, every working day. The desk knows what proportion of its funding matures this quarter, what it would have to pay to replace it today rather than at last year's price, and how much of the demand money has historically stayed put. The desk is asking the same three questions with better information, and the answers are what a ratio computed from published accounts stands in for.
The mistake that a matching funding share invites
A reader sees that deposits are 80.0 per cent of one lender's assets and borrowings are 80.0 per cent of the other's, concludes that the two are funded to the same degree, and expects them to carry similar leverage. The two do not: 10.0 times against 5.0 times, a factor of two.
The reader took the share of the largest source and treated it as the share of everything that is not the institution's own money, and at Suvarna Commercial Bank Limited those are different numbers. Rs 24,000 crore of its funding is neither deposits nor net worth, so 80.0 per cent of deposits leaves 20.0 per cent to be divided rather than 20.0 per cent of equity.
The cost is a leverage figure wrong by a factor of two, carried into every return calculation done afterwards, and it will never announce itself as an error because both of the numbers that produced it were real. The reader who does this is usually working from a summary rather than from the balance sheet, where a residual is visible only by subtraction. The fix is one habit: leverage is read off net worth over assets and never off the funding share, and where the two do not reconcile there is a line in between that has not been looked at.
Seven rows below decide what an institution must hold against the money it has raised. Each is set by the body printed beside it, each of them moves, and not one is written out anywhere above. A row taken to the address sitting next to it, on the morning a figure is needed, yields the live one.
| The row left blank | Who fills it, and where to check |
|---|---|
| The balances a bank must keep with the central bank against its deposits | Reserve Bank of India, rbi.org.in |
| The liquid assets a bank must hold against its deposits | Reserve Bank of India, rbi.org.in |
| The liquidity a bank must hold against an outflow over a stated period | Reserve Bank of India, rbi.org.in |
| The conditions attached to a non-banking finance company raising money from the public | Reserve Bank of India, rbi.org.in |
| The cover a deposit insurance arrangement provides, and what it reaches | Deposit Insurance and Credit Guarantee Corporation, dicgc.org.in |
| The limits on exposure to a single counterparty or group | Reserve Bank of India, rbi.org.in |
| The conditions attached to a bank or a finance company issuing capital instruments | Reserve Bank of India, rbi.org.in |
A second market arrives as further rows underneath these, carrying whichever body decides them there. None of the arithmetic above leans on a figure from any of these rows.
The edges of this subject, and what sits beyond each of them. A deposit, the types of deposit and the workings of a savings account were all settled earlier and are put to work above rather than explained. Net interest margin and the base it is struck on were settled earlier too. Taking the two returns apart against each other in full is covered separately, and what appears above is the leverage limb built here plus the decomposition that has to be printed beside any return on equity quoted here.
Capital adequacy and what counts as capital are covered separately. The minimum, the buffers and the risk weights behind them belong to the Reserve Bank of India at rbi.org.in. The margin an insurer must hold above its liabilities belongs to IRDAI at irdai.gov.in. The cost to income ratio and the efficiency measures are covered separately, the assessment of a borrower belongs to the credit material, and what a borrowing instrument is worth belongs to the bond arithmetic material.
Seven requirements are named above and not one is quantified: the balances kept with the central bank, the liquid assets held, the liquidity held against an outflow over a stated period, the conditions on a finance company raising money from the public, the deposit cover and its scope, the limits on exposure to one counterparty or group, and the conditions on issuing capital instruments.
Where do the seven blank rows get filled in?
Seven times above, a number was left out on purpose and an address put in its place. The address is still right after the value has been revised twice, so where to look outlasts a value. Each minimum, buffer, weight, limit and condition sits with the body named beside it.
| Named at | What to read there | Site | Confirmed |
|---|---|---|---|
| Reserve Bank of India | What a bank keeps with the central bank against its deposits, and what it holds in liquid assets against them | rbi.org.in | 23 August 2026 |
| Reserve Bank of India | The liquidity a bank holds against an outflow over a stated period, and the conditions attached to a non-banking finance company raising money from the public | rbi.org.in | 23 August 2026 |
| Reserve Bank of India | The limits on exposure to a single counterparty or group, and the conditions attached to issuing capital instruments | rbi.org.in | 23 August 2026 |
| Deposit Insurance and Credit Guarantee Corporation | What deposit cover exists, and what it reaches | dicgc.org.in | 23 August 2026 |
| IRDAI | What an insurer holds above its liabilities | irdai.gov.in | 23 August 2026 |
Suvarna Commercial Bank Limited, Rukmini Finance Limited and Chandrika Life Insurance Limited are invented.
Educational material. Not advice on any investment, tax, budget or market position.