When you deposit your salary into a savings account or take out a home loan, you are plugging into a much larger financial engine. Commercial banks do not lend out money they conjure from nowhere – they depend on very specific funding sources to stay liquid, profitable, and solvent. Understanding where a bank’s money actually comes from is essential to understanding how the entire banking system, and by extension the economy, functions. This post breaks down the five major sources of funds for commercial banks: deposits, reserve funds, retained earnings, shareholders’ capital, and borrowings from other banks.

Table of Contents

Deposits: the lifeblood of banking

Deposits are, by a wide margin, the largest source of funds for commercial banks. Data cited by Business Standard from a Reserve Bank of India Deputy Governor’s speech shows that deposits at scheduled commercial banks stood at around โ‚น217 lakh crore at the end of FY2024, accounting for roughly 77% of total liabilities, while capital funds and borrowings each made up about 9%. This dominance explains why banks compete so hard for your savings account, fixed deposit, or salary account – deposits are the raw material their entire lending business runs on.

Demand deposits

Demand deposits are funds customers can withdraw at any time without giving prior notice – savings accounts and current accounts fall into this category. Because customers can pull this money out instantly, banks pay little to no interest on it, particularly on current accounts. What makes demand deposits usable for lending is behavioural stability: not everyone withdraws at the same time, so a predictable core balance remains available, letting banks safely deploy a portion of it even for medium-term loans.

Term deposits

Term deposits, also called fixed or time deposits, are locked in for a specified period ranging from a few days to several years. Since customers commit not to withdraw before maturity, banks pay a higher rate of interest and can use these funds more confidently for longer-duration lending, such as auto loans or working capital finance. Interestingly, the composition of India’s deposit base is shifting. As household savings increasingly move into mutual funds and equities, the Reserve Bank of India has been in direct discussions with banks on how to attract larger, more stable deposits rather than relying on institutional money that can move out quickly.

Feature Demand deposits Term deposits
Withdrawal Anytime, no notice required Locked in until maturity
Interest rate Low or nil Higher, linked to tenure
Common examples Savings account, current account Fixed deposit, recurring deposit
Primary use for banks Short-term liquidity, everyday operations Medium- and long-term lending

Reserve funds: a statutory safety cushion

Beyond deposits, banks are legally required to set aside a portion of their profits into a reserve fund. Under Section 17 of the Banking Regulation Act, 1949, every banking company incorporated in India must transfer at least 20% of its annual net profit to this reserve fund before declaring any dividend. This is a statutory reserve, not part of divisible profits, which means it cannot simply be handed out to shareholders. The rule exists to force banks to build a financial cushion strong enough to absorb unexpected losses and protect depositor money. A bank can only be exempted from this requirement if its accumulated reserve fund, together with its share premium account, already equals or exceeds its paid-up capital – a signal that it is already well-capitalised.

Retained earnings: profits ploughed back

Retained earnings are profits a bank chooses not to distribute as dividends, reinvesting them into the business instead. These profits typically come from two places: net interest income, which is the spread between what a bank earns on loans and what it pays out on deposits, and fee-based income such as processing charges, account maintenance fees, and transaction commissions. Retained earnings quietly strengthen a bank’s net worth over time without requiring it to approach shareholders or debt markets for fresh money.

Under the Basel III capital framework that Indian banks now follow, retained earnings and other disclosed free reserves are classified as part of Common Equity Tier 1 (CET1) capital – the highest-quality, most loss-absorbing form of capital a bank can hold. This is one reason profitable banks that retain a larger share of their earnings, rather than paying out large dividends, tend to have stronger capital ratios and more headroom to grow their loan books.

Shareholders’ capital: equity ownership

For banks structured as public limited companies – which includes most private sector banks and several listed public sector banks – shareholders’ capital is another critical funding source. This is money raised by issuing equity shares, whether through an initial public offering, a follow-on public offer, or a rights issue to existing shareholders. Unlike deposits, shareholders’ capital does not need to be repaid on demand, and it is the first layer of capital used to absorb losses if a bank runs into trouble. That is precisely why regulators watch it so closely.

The Reserve Bank of India requires commercial banks to maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) of 9%, a stricter benchmark than the 8% minimum prescribed under the global Basel III framework. Shareholders’ capital, together with statutory reserves and retained earnings, forms the core Tier 1 capital banks use to meet this requirement. A bank that falls short on capital adequacy can face restrictions on further lending and dividend payouts, which is why raising fresh equity is often the fastest way for a bank to fund rapid growth in its loan book.

Borrowings from other banks: managing short-term liquidity

Even well-funded banks occasionally face a temporary mismatch between the cash they need on a given day and what is actually sitting in their accounts. This is where interbank borrowing steps in. A bank facing a shortfall can borrow overnight, or for a few days, from another bank with surplus funds through the call money market, which functions under close Reserve Bank of India oversight and lets institutions manage day-to-day liquidity without disturbing their core deposit base or selling off investments in a hurry.

These borrowings are not unlimited. Prudential norms cap how much a bank can borrow through this route relative to its own capital funds, precisely to prevent excessive dependence on short-term interbank money. Notably, interbank trades now account for only about 2% of total money-market turnover in India, down sharply from roughly 20% a decade ago, as banks increasingly turn to alternatives like the repo market and collateralised repo instruments for short-term funds. Even so, the call money rate remains a closely tracked benchmark that the RBI monitors while transmitting monetary policy through the banking system.

Putting it all together

Each of these five sources plays a distinct role in a bank’s balance sheet. Deposits provide the bulk of low-cost, everyday funding. Reserve funds and retained earnings build internal strength over time without external fundraising. Shareholders’ capital brings in fresh, loss-absorbing money, especially useful during expansion. Interbank borrowings offer short-term flexibility when day-to-day cash positions run tight.

Source of funds Approx. share of liabilities (FY2024) Key role
Deposits ~77% Primary, low-cost funding base
Capital funds (shareholders’ capital, reserves, retained earnings) ~9% Loss absorption, regulatory capital adequacy
Borrowings (including interbank) ~9% Short-term liquidity management
Other liabilities ~5% Miscellaneous obligations

Together, this funding mix determines how much a bank can lend, how resilient it is during downturns, and how quickly it can grow. A bank overly dependent on deposits alone may struggle if depositor behaviour shifts; one that leans too heavily on borrowings risks liquidity stress if wholesale funding dries up. The balance between these sources is a core part of what commercial banking, and by extension corporate accounting for banks, is really about.

What do you think? If Indian household savings keep moving from bank deposits into mutual funds and equities, how should banks redesign their funding strategy to stay competitive? And should a bank facing this shift lean more on shareholders’ capital or on interbank borrowings to fill the gap?

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References
  1. https://www.business-standard.com/amp/markets/capital-market-news/deposits-continue-to-be-primary-source-of-funds-for-scbs-while-nbfcs-depend-primarily-on-borrowings-125012100533_1.html
  2. https://www.bloomberg.com/news/articles/2026-04-15/india-s-rbi-holds-talks-with-banks-on-ways-to-boost-deposits
  3. https://indiankanoon.org/doc/569017/
  4. https://bankopedia.co.in/banking/capital-adequacy-norms-indian-banks-rbi-basel-iii
  5. https://agrudpartners.com/prudential-norms-for-banks/
  6. https://www.bajajamc.com/glossary/what-is-call-money
  7. https://www.business-standard.com/finance/news/rbi-pushes-lenders-to-revive-funding-market-vital-for-monetary-policy-125051500096_1.html

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Corporate Accounting

1 General Introductions

  1. Meaning of Company
  2. Special Features of a Company
  3. Kinds of Companies
  4. Distinction between a Company and a Partnership
  5. Formation of a Company
  6. Allotment of Shares
  7. Statutory Books
  8. Books of Account
  9. Share Capital
  10. Classes of Shares

2 Accounting for Share Capital

  1. Procedure for Issue of Shares
  2. Basic Accounting Entries for Issue of Shares
  3. Issue of Shares for Consideration other than Cash
  4. Issue of Shares for Cash
  5. Oversubscription of Shares
  6. Calls in Arrears
  7. Calls in Advance
  8. Forfeiture of Shares
  9. Reissue of Forfeited Shares
  10. Concept and Process of Book Building
  11. Issue of Right Shares

3 Buy Back of Shares

  1. Conditions for Buy Back of Shares
  2. Motives of Buy Back of Shares
  3. SEBI Guidelines Regarding Buy Back of Shares
  4. Methods of Buy Back of Shares
  5. Advantages of Buy Back of Shares
  6. ESCROW Account
  7. Accounting for Buy Back of Shares

4 Redemption of Preference Shares

  1. Conditions for Redemption of Preference Shares
  2. Accounting/Methods for Redemption of Preference Shares
  3. Issue of Bonus Shares
  4. SEBI Guidelines for Issue of Bonus Shares
  5. Circumstances for Issue of Bonus Shares
  6. Sources for the Issue of Bonus Shares
  7. Advantages of Issue of Bonus Shares

5 Issues and Redemption of Debentures

  1. What is a Debenture?
  2. Difference between Shares and Debentures
  3. Types of Debentures
  4. Issue of Debentures
  5. Issue of Debentures as a Collateral Security
  6. Debentures Issued at Different Terms
  7. Writing off Loss on Issue of Debentures
  8. Redemption of Debentures
  9. Sinking Fund Method

6 Final Accounts-I

  1. Company Final Accounts
  2. Legal Requirements as to Profit and Loss Account
  3. Income
  4. Expenses and Provisions
  5. Appropriation of Profits
  6. Forms of Profit and Loss Account
  7. Special Features of Company Profit and Loss Account
  8. Legal Requirements as to Company Balance Sheet
  9. Proforma of Balance Sheet
  10. Liabilities
  11. Assets
  12. Summarized Balance Sheet (Vertical Form)

7 Final Accounts-II

  1. Preliminary Expenses
  2. Expenses on Issue of Shares and Debentures
  3. Discount on Issue of Shares and Debentures
  4. Premium on Issue of Shares
  5. Calls in Arrears and Calls in Advance
  6. Forfeited Shares
  7. Depreciation on Fixed Assets
  8. Provision for Taxation
  9. Dividends
  10. Interest on Debentures
  11. Transfer to Reserves
  12. Balance of Profit and Loss Account
  13. Preparation of Final Accounts

8 Cash Flow Statement

  1. Need for Cash Flow Statement
  2. Cash Flow Statements vs. Other Financial Statements
  3. Preparation of Cash Flow Statement
  4. Regulations Relating to Cash Flow Statement
  5. Cash Flow Statement Formats
  6. Cash Flow from Operating Activities
  7. Cash Flow From Investing and Financing Activities
  8. Uses of Cash Flow Analysis
  9. Distinctions between Funds Flow and Cash Flow Analysis

9 Accounts of Holding Companies-I

  1. Concept
  2. Objectives of Holding Company
  3. Types of Holding Company
  4. Advantages of Holding Company
  5. Limitations of Holding Company
  6. Preparation of Final Account of Holding Company without Adjustment

10 Accounts of Holding Companies-II

  1. Difference between Wholly owned and Partly owned Subsidries
  2. Exemptions from Preparation of Consolidated Financial Statements
  3. Consolidated Financial Statement
  4. Advantages of Consolidated Financial Statements
  5. Disadvantages of Consolidated Financial Statements
  6. Procedure of Preparing Consolidated Financial Statements

11 Valuation of Goodwill

  1. Meaning of Goodwill
  2. Characteristics of Goodwill
  3. Nature of Goodwill
  4. Factors Affecting Value of Goodwill
  5. Need for the Valuation of Goodwill
  6. Average Profit Method
  7. Weighted Average Profit Method
  8. Super Profit Method
  9. Capitalization Method
  10. Annuity Method
  11. Purchase Method

12 Valuation of Shares

  1. Meaning of Valuation of Shares
  2. Factors affecting Valuation of Shares
  3. Need for the Valuation of Shares
  4. Methods of Valuation of Shares
  5. Average Profit Method
  6. Weighted Average Profit Method
  7. Super Profit Method
  8. Capitalization Method
  9. Annuity Method

13 Amalgamation of Companies – Basic Concepts

  1. Objectives of Amalgamation
  2. Reconstruction
  3. Difference between Amalgamation, Absorption and Reconstruction
  4. Important Terms in Amalgamation
  5. Methods of Accounting for Amalgamation
  6. Treatment of Reserves on Amalgamation
  7. Treatment of Goodwill arising on Amalgamation
  8. Purchase Consideration

14 Amalgamation of Companies – Accounting Treatment

  1. Accounting Entries in the Books of Transferee (Purchasing) Company
  2. Accounting Entries in the Books of Transferor Company
  3. Preparation of Balance Sheet in the Books of Transferee Company
  4. Pooling of Interest Method
  5. Purchase Consideration Method

15 Internal Reconstruction

  1. Meaning and Objectives of Internal Reconstruction
  2. Steps Involved in Internal Reconstruction
  3. Methods or Modes of Internal Reconstruction and Accounting Procedure

16 Banking and Non-Banking Companies – Basic Concepts

  1. Banking Companies
  2. Non-Banking Financial Company
  3. Residuary Non-Banking Company
  4. Difference between NBFCs and Banks
  5. Depositors Concern and NBFC Regulations
  6. Periodical Returns to be Submitted to RBI
  7. Balance Sheet of NBFCs
  8. Stockinvest Scheme

17 Accounts of Banking Companies – Accounting Treatment

  1. Minimum Capital & Reserve
  2. Books of Accounts
  3. Some Important Terms
  4. P&L Account and Balance Sheet of Banking Companies

18 Commercial Bank

  1. Meaning
  2. Functions of Commercial Bank
  3. Structure of Indian Commercial Banks
  4. Sources of Funds
  5. Investment Norms
  6. Asset Structure of Commercial Banks

19 Non-Performing Assets

  1. Meaning and Definition
  2. Classification of Non-performing Assets
  3. Reasons for Growing Non-performing Assets
  4. Provisions for Non-performing Assets
  5. Suggestions to Reduce Non-performing Assets
  6. Non-performing Assets Recovery Mechanism