ACCOUNTING FOR BANKINFG COMPANIES
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INDEX
SR. NO.
PARTICULARS
1
Introduction
2
Definition and Functions of bank
3
REQUIRMENTS OF BANKING COMPANIES AS TO
ACCOUNTS
Submission of Accounts (Sec 31 and 32)
4
5
SIGNIFICANT FEATURES OF ACCOUNTING
SYSTEMS OF BANKS
6
PRINCIPAL BOOKS OF ACCOUNT
7
PREPRATION AND PRESANTATION OF FINANCIAL
STATEMENTS OF BANKS
8
Form of Balance Sheet and Schedules
9
Form of Profit and Loss account and Schedules
10
DISCLOSURE REQUIRMENTS OF BANKS TO BE
ADDED AS NOTES TO ACCOUNTS ( in Schedule 17)
11
Bibliography
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INTRODUCTION
A banking company means and includes any company which carries on
business or which transacts banking business in India. A banking business is
generally governed by the provisions of the Companies Act 1956 and
specifically by the Banking Regulation Act. The Banking regulation Act of 1949
came into force on 16th March 1949 as a result of long-felt need to regulate
the banking business in India and protect the interest of number of depositors.
The existence of well- organized, regulated and efficient banking system is
pre-requisite for economic growth. Banks are agencies responsible for
mobilizing and channeling of funds in a country. The major institutions carrying
business,
in India, include:
(a) Nationalized banks
(b) State bank of India and Associates banks
(c) Foreign banks having branches in India
(d) Co-operative banks
(e) Rural banks and
(f) Private sector banks.
DEFINITION AND FUNCTIONS OF A BANK
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Banking has been defined by section 5 of the Banking Regulation Act and
means:
(a) accepting deposits of money from public
(b) for the purpose of lending or investment and deposits are repayable on
demand or otherwise by cheque, draft, and order or otherwise. It
should be noted that company which is engaged in manufacturing
goods and for the purpose of financing business accepts deposits from
the public should not be deemed to transact business of banking.
In addition to banking business, a bank is permitted under Section 6 of the
Banking Regulation Act to engage in certain class of business which is
incidental to the business of banking. Section 8 of the Banking Regulation Act
prohibits a bank from buying and selling or dealing in goods except in
connection with realization of a security held by it or in connection with the
business of collections or negotiating bills of exchange.
Some of the main functions of modern commercial banks are:
(a) Accepting deposits and providing facilities to depositors of payment by
cheques.
(b) Granting loans and advances (cash credits, overdraft, term loans, etc.).
(c) Dealing in securities on its own account or on behalf of its customers.
(d) Opening letters of credits.
(e) Issuing guarantees.
(f) Dealing in foreign exchange.
(g) Transferring money from one place to another through demand draft,
telegraphic transfers, traveler’s cheques, bills, etc.
(h) Merchant banking, i.e. acting as managers to public issues, etc.
However, any company which is engaged in the manufacturer of goods or
carries on any trade and which accepts deposits of money from the public
merely for the purpose of financing its business as manufacturer or trader
shall not be deemed to transact the business of banking. It may be mentioned
that the Banking Regulation Act, 1949 is not applicable to a primary
agricultural society, a co-operative land mortgage bank and any other cooperative society except in the manner and to the extent specified in Part V of
the Act.
Some banks are included in the Second Schedule to the Reserve Bank of
India Act, 1934; these are called Scheduled Banks. The Reserve Bank
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includes a bank in this schedule if it fulfils certain conditions. The Reserve
Banks gives certain facilities to schedule banks including the following:
(a) The purchase, sale, and re-discounting of certain bills of exchange, or
promissory notes;
(b) Purchase and sale of foreign exchange;
(c) Purchase, sale and re-discounting of foreign bills of exchange;
(d) Making of loans and advances to scheduled banks;
(e) Maintenance of accounts of the scheduled bank in its banking department
and issue department;
(f) Remittance of money between different branches of scheduled banks
through the offices, branches or agencies of Reserve Bank free of cost or at
nominal rates.
Section 6 of the Banking Regulation Act, 1949 specifies the forms of business
in which a banking company may engage. These are :
(i) borrowing, raising or taking up of money; lending or advancing of money;
drawing, making, accepting, discounting, buying, selling, collecting and
dealing in bills of exchange, hundies, promissory notes, etc.;
(ii) acting as agents for any government or local authority or any other person;
(iii) directing for public and private loans and negotiating and issuing the
same;
(iv) effecting, insuring, guaranteeing, under-writing, participating in managing
and carrying out of any issue of shares, stock, debentures etc.;
(v) carrying on and transacting every kind of guarantee and indemnity
business;
(vi) managing, selling and realising property which may come into the
possession of the banking company in satisfaction of its claim;
(vii) acquiring and holding and generally dealing with any property or any
right, title or interest in such property which may form the security for any
loans and advances;
(viii) underwriting and executing trusts;
(ix) establishing and supporting or aiding in the establishment and support of
institutions, funds, trusts etc.
(x) acquisition, construction, maintenance and alteration of any building and
works necessary for the purpose of the banking company;
(xi) selling, improving, managing, developing, exchanging, leasing,
mortgaging, depositing of or turning into account or otherwise dealing with all
or any part of the property and rights of the company;
(xii) acquiring and undertaking whole or any part of the business of any
person or company;
(xiii) doing all such other things as are incidental or conductive to the
promotion or advancement of the business of the banking company;
(xiv) any other business which the Central Government may specify by
notification in the Official Gazette.
No banking company shall engage in any form of business other than those
referred to above.
? PROHIBITION OF TRADING (SECTION 8)
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A banking company cannot directly or indirectly deal in the buying or selling or
bartering of goods. However, it may buy, sell or barter in connection with the
bills of exchange received for collection or negotiation or can undertake the
administration of estates as executors, trustees or otherwise.
? DISPOSAL OF NON-BANKING ASSETS (SECTION 9)
A banking company can only acquire immovable property for its own use.
Other immovable properties acquired must be disposed off within seven years
from the date of acquisition. However, in any particular case, the Reserve
Bank of India may extend such period of seven years if it is satisfied, that
such extension would be in the interest cof the depositors of the banking
company.
? MANAGEMENT (SECTION 10)
Under section 10(a), not less than 51% of the total number of members of the
board of directors of a banking company shall consist of persons having
special knowledge or practical experience in one or more of the following
fields :
1. Accountancy;
2. Agriculture and rural economy;
3. Banking;
4. Co-operation;
5. Economics;
6. Finance;
7. Law;
8. Small scale industry.
It is also required that not less than two directors should have special
knowledge or practical experience in respect of agriculture and rural economy
and co-operation or small-scale industry. Under section 10(b)(1), every
banking company shall have one of its directors as Chairman of its board of
directors. The Chairman is entrusted with the management of the whole of the
affairs of the banking company. Such Chairman is the whole-time employee of
the banking company and can hold office for a period not exceeding five
years. Other directors who are whole-time directors can hold office
continuously for a period not exceeding eight years.
REQUIRMENTS
ACCOUNTS
OF
BANKING
COMPANIES
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AS
TO
? Bank Accounting
The book-keeping system of a banking company is substantially different from
that of a trading or manufacturing enterprise. A bank maintains a large number
of accounts of various types for its customers. As a safeguard against any
payment being made in the account of a customer in excess of the amount
standing to his credit or a cheque of a customer being dishonoured due to a
mistake in the balance in his account, it is necessary that customers’ accounts
should be kept up-to-date and checked regularly. In many other mercantile
enterprises, books of primary entry (i.e., day books) are generally kept up-todate while their ledgers including the general ledger and subsidiary ledgers for
debtors, creditors etc. are written afterwards. A bank cannot afford to ignore
its ledgers particularly those concerning the accounts of its customers and
has to enter into the ledgers every transactions as soon as it takes place. In
bank accounting, relatively less emphasis is placed on day books. These are
merely treated as a means to an end-the end being to keep up-to-date
detailed ledgers and to balance the trial balance everyday and to keep all
control accounts in agreement with the detailed ledgers.
In this Unit, we shall concentrate on accounting system followed in, bank and
books of accounts maintained for that purpose. That apart, we shall take a
stock of the returns which a bank is required to file with the Reserve Bank.
Another important aspect in the bank accounts is preparation of final
accounts. The third schedule to the Banking Regulation Act provides formats
for that purpose. Formats of bank final accounts are also covered
The tendency of modern accounting is to adapt the books to a business,
rather than the business to the books, and this practice is particularly
noticeable in bank bookkeeping. Systems and devices may differ among
banks, and even between branches of the same bank, but the basic principles
are the same. Once a clear understanding of bank bookkeeping in general is
obtained, there will be found little or no difficulty in mastering any of the
methods or systems in use by banks.
To grasp thoroly all the underlying principles of bank accounting, it is
necessary to bear in mind that practically everything handled by a bank, in the
ordinary course of its business, is either money itself, or a written claim or
right to money. Consequently the cash book in a bank is the principal book,
and thru its pages must pass a record of every transaction made by the bank,
either in detail or as a total from a supplementary book. Thus the cash book
gives a bird's-eye view each day of all the work of the bank. Some banks still
use, in addition to the cash book, a modified form of the old-fashioned journal,
but it is preferable to make the cash book the only posting medium of
the general ledger.
It would be quite possible for a newly-opened branch to conduct its business
for the first six months or so with the aid of a cash book and a ledger, which
would serve for all accounts. A register would, however, soon be necessary.
As the business grew it would be found convenient to have a special ledger
for individual accounts, with the control or key account carried in the original
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led-ger, and to have the checks and deposits entered in a supplementary
cash book, with only the totals entered in the general cash book. Similarly, it
would be found necessary in time to open up a discount register and a liability
ledger to look after the increased number of loans.
As the volume of business increases, the deposit ledger is capable of being
indefinitely subdivided, either alphabetically or numerically. Generally, the
ordinary deposit ledger is divided alphabetically and the savings bank
ledger numerically.
From the above it will be noticed that bank bookkeeping, although based
primarily on the cash book and ledger, is susceptible of indefinite expansion in
any direction to meet increased volume of business or other local exigencies.
? Preparation of Financial Statements and Accounting Date
(Section 29)
A Company registered under the Companies Act 1956 is required to present
its financial statements, i.e. balance sheet and profit and loss account in the
format laid down in Schedule VI annexed to the Companies Act. Similarly,
banking company, (since it is a company) is also required to prepare and
submit its accounts in specified format. The Banking Regulation Act gives the
format of balance sheet and the profit and loss account in which accounts of
banks should be presented and this format is given in the third schedule
annexed to the Banking Regulation Act. RBI has issued guidelines to follow
the new form A (proforma balance sheet) and form B (proforma profit and loss
account) by all companies doing banking business in India. The government
has notified that the books of accounts of the banking companies shall be
closed on 31st March every year as against 31 st December earlier. In practice,
banks also close books on 30th September for internal purpose.
? Audit (Section 30)
Accounts must be audited by a person duly qualified under any law, for the
time being in force, to be an auditor of companies. However every banking
company is before appointing, reappointing or removing any auditor, required
to obtain the prior approval of Reserve Bank of India .
? Submission of Accounts (Sec 31 and 32)
Three copies of the balances sheet and profit and loss account prepared
under Section 29 together with auditors’ report under Section 30 must be
submitted to the Reserve Bank of India within three months from the period to
which they refer. However, it can be extended up to the period of further three
months by RBI.
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? Publication of Accounts
Rule 15 of the Banking Regulating (Companies) Rules, 1949 prescribed that
accounts and auditors’ report shall be published in newspaper circulating in a
place where a banking company has its principal office, within six months
from the end of period to which they relate.
SIGNIFICANT FEATURES OF ACCOUNTING SYSTEMS OF
BANKS
Banks, like most of the other large-sized institutions, follow the mercantile
system of accounting. Thus, the system of recording classifying and
summarizing the transactions in bank is in substance no different from that
followed in other entities having similar volume of operations. However in the
case of banks the need for the ledger accounts, especially those of
customers, being accurate and up to date is much stronger than most of other
types of enterprises. A bank cannot afford to ignore its ledgers particularly
those containing the accounts of its customers and has to enter into the
ledgers every transaction as soon as it takes place. In the case of banks,
relatively lesser emphasis is placed on books of prime entry such as cash
books or journals. This is unlike most other types of enterprises where books
of prime entry are generally kept up to date while ledgers, including the
general ledger and subsidiary books ledgers for debtors, creditors are written
up afterwards.
Banks follow the accounting procedure of ‘voucher posting’ under which the
vouchers are straightway posted to the individual accounts in the subsidiary
ledgers. (Only in case of Personal Ledger) At the end of each day, the debit
and credit vouchers relating to a particular type of transactions (e.g. savings
bank accounts, current accounts, demand loans cash credit account etc.) are
entered on separate vouchers summery sheets and the total thereof is posted
to the respective control account in the general ledger. The general ledger trial
balance is prepared every day.
? Types of Transactions
The transactions in banks are of two types, cash and non-cash. In the case of
letter, also called ‘transfer transactions’, one or both of account concerned
may be of customers or internal accounts of bank. For example, if ‘A’ deposits
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a cheque drawn in his favor by ‘B’, who is also customer of the branch, the
accounts of the two customers will be affected. On the other hand, if ‘A’
deposits a draft drawn on branch the ‘Draft Account, an internal account of
bank, will be debited’. Likewise, on payment of interest on deposit accounts,
the ‘Interest Account’ at the branch will be debited and various personal
accounts will be credited.
? Vouchers
Both the debit and credit operations on all accounts, either by customers or by
the banks itself, are made by means of vouchers. There are two kind of
vouchers, one, which evidences only debit to an account and which other,
which contains both debit and credit in different accounts. For the sake of
convenience, the latter kinds of vouchers may be called ‘composite vouchers’.
The debit vouchers are of many kinds, broadly following:
1. Cheques issued by customers.
2. Cheques/ Pay orders issued by banks.
3. Withdrawal of money by saving bank account holders.
4. Drafts issued by another branches of banks payable at branch.
5. Draft issued by another banks on branch, in terms of an approved
arrangement between the two banks.
6. Dividend / Interest warrants issued by bank’s customers and payable
by branch in terms of an approved arrangement.
7. Traveler’s cheques issued by any branch of the bank which presented
to the branch for payment.
8. Drafts / Pay orders issued by the branch itself which are cancelled at
the request of customer and amount is refunded to him.
9. Letters of authority signed by the customers, containing standing
instructions.
10.
Instruments like traveler’s cheques/gift cheques, etc.of other
banks which are paid by branch in terms of an approved arrangement.
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11.
Debit vouchers prepared by the branch on its printed stationary
which are authorized by a designated official of the bank and may also
carry authority from the customers in some cases to debit his account
at the branch.
12.
In respect of realization of collection instrument sent to other
branches of the bank, a debit advice (which may be known by different
names in different banks) prepared by the other branch may itself as a
debit voucher.
13.
In case of remittance of funds by one branch to the other branch
by means of telegraphic transferor mail transfer, the bank may treat the
advice of transfer itself as debit voucher or may prepare a separate
debit voucher.
The credit vouchers are also of many kinds, broadly the
following:
1. Pay –in-slip filled by customers (depositors as well as borrowers) for
deposit the amounts in their accounts. Generally, the pay-in-slips are in
standard format adopted by the bank but there may be cases of a
special kind of pay-in-slips in respect of some customers pursuant a
formal agreement between the bank and customer.
2. Applications for issue of demand drafts, mail transfer telegraphic
transfer, banker’s cheques, pay orders, gifts cheques, traveler’s
cheques, and other similar instruments. Some of these application may
be made on behalf of the branch itself it has to make.
3. Credit vouchers prepared by the branch on its printed stationary which
are authorized by an official of the bank. Normally theses vouchers are
signed on behalf of the branch only but there may be some instance
where the customer concerned also signs on the voucher as evidence
that the transaction actually pertains to him. Examples are: deposits of
locker charges (credit to an income account of the bank), deposits of
money for purchase of non-judicial stamps requires for execution of
document in favor of the bank, etc.
4. Challans for deposit into the account of Central/State Government,
e.g. on account of Direct/Indirect taxes or under schemes like public
provident fund, etc.
5. On payment of collection instruments from other branches of the bank,
a credit advice (which may be known by different names in different
banks) or copy of the collection schedule received from the other
branch may itself be treated as a credit voucher.
It may be stated here in case of debits or credits of similar nature to a large
no. of accounts in the same ledger or group of ledgers (e.g. debit on account
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of periodic interest, inspection charges, etc. or credit on account of periodic
payment of interest to depositors), it is a common practice among the banks
to prepare a consolidated voucher on their stationary and enclosed thereto a
list containing details of accounts debited/credited and the amount of
debit/credit.
As stated earlier apart from debit vouchers and credit vouchers, there is also
category of ‘composite vouchers’. These vouchers record the particulars of
both debit and credit accounts. Most of the transactions covered by composite
vouchers pertain to the internal accounts to the bank, i.e. non-customers
accounts. Examples are: bills received for collection, letters of credit issued by
the branch, guarantee issued by the branch, etc. Such vouchers may also be
prepared to rectify an error while debiting or crediting accounts. For example,
in case of current account is debited in general ledger instead of cash credit
account by mistake, the composite vouchers will show debit to cash credit
account with corresponding credit to current account.
All entries in personal ledgers and the summary sheets are checked by
persons other than those who have made entries. Most clerical errors are thus
detected immediately.
A trial balance of personal ledgers is prepared periodically, usually every two
weeks and agreed with general ledger control accounts. In banking parlance,
this exercise is referred to as ‘balancing of books’.
? Banker’s Books
According to Section 2 (3) of the Banker’s Books Evidence
Act, ‘Bankers Books’ include ledgers, day book, cash books,
account books and all other books used in ordinary business
of a bank.
Generally the following books are maintained by the bank to keep
up-to-date records of its customers.
? Cash Book
All cash receipts and payments are recorded in the receiving cashier’s cash
book and paying cashier’s cash respectively. After this on the basis of pay-in
slips received by receiving cashier and cheques and withdrawal slips received
by paying cashier, these transactions are entered first in the accounts of
customers and after that Day Book are written. This is called ‘Slip System’ of
posting.
? Ledger Book
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General Ledger contains the total accounts of each ledger. Besides the GL,
the following ledger books are maintained:
1. Current Accounts Ledger
2. FD Accounts Ledger
3. RD Accounts Ledger
4. Loan Ledger
5. Investment Ledger
6. Bills discounted and purchased Ledger
? Other Books
1. Clearing Register
2. Securities Register
3. Draft Register
4. Bills for collection Register
5. Dishonored cheques Register
6. Safe deposit vault Register
7. Letter of credit Register
? Teller's Records
The teller's cash book or blotter consists of a skeleton ruling with no printed
headings, these being written in daily by the teller according to his
requirements. Were the headings printed it would require a specially printed
book for each class of teller, and even then it might not be suitably spaced for
local requirements.
A teller should arrange his entries, debit, and credit to conform with the
general system of the office. Cheque should be sorted out and entered
according to the divisions of the ledger, thus balancing with the various
supplementaries. If the checks are very numerous, separate sheets, suitably
ruled, can be used; these can be entered on an adding machine or by an
assistant.
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A teller's book is, in reality, a skeleton cash book, and the entries should be so
arranged that the books of the various departments should balance with the
combined entries of the tellers.
All parcels of money received are acknowledged, and entered in a special
book. If the advice comes in first it should be at once entered in this book, and
the parcel inquired for if necessary. Money parcels dispatched are also
entered in a book. Great care is necessary in handling money parcels. Both
sent and received parcels should be counted by two men in each other's
presence and, in the case of the former, it is necessary to have the parcel in
the uninterrupted custody of two men from the time it is counted and sealed
until it is delivered to the express company or post office.
The relative advices and acknowledgments should be carefully watched and
any delay immediately inquired into.
? Supplementary Cash Book
In this book are entered all the deposit slips, checks, and other vouchers
pertaining to the ordinary deposit and savings bank ledgers. The ruling is
simple, requiring no printed headings, and consists of columns for folio,
names of customers and amount of vouchers - two sets of columns to a page.
Two pages will easily contain a day's entries for a small branch, the first or
left-hand column being used for deposits and the remaining three for checks,
the latter being much more numerous. The savings deposits and checks,
being comparatively few in number, are entered at the end of the day under
their own headings at the foot of the ordinary checks and deposits
respectively, though in some small branches they are entered in the
general cash book.
In offices where it is found necessary to split up the deposit ledger into two or
more alphabetical divisions, a special "supplementary" is devoted to each
division including the savings bank ledger. It is not necessary to open up an
account in the general ledger for each division of the deposit ledgers.
If the savings ledger contains a large number of accounts, it will be found of
great advantage to split it up into several sections or blocks of accounts, as
this greatly facilitates the location of errors when balancing. A special form of
supplementary cash book should be used with a money column for each
block of accounts.
In the case of a current account which has an unusual number of checks at a
certain period of the month or year - for instance, payroll or dividend checks it is permissible to detail a day's checks once, either in the supplementary
cash book or ledger, and enter the total only with a reference in the other
book.
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In the larger offices of some of the banks, where the volume of checks is
unusually heavy, a loose-leaf form of supplementary cash book is used in
connection with the adding machine, the names being typewritten in
afterward. Where this form is adopted, care should be taken to see that the
sheets are consecutively numbered and filed, and that each sheet is signed
by the two checking officers.
PRINCIPAL BOOKS OF ACCOUNT
The principal books of accounts, subsidiary books and statistical records
generally maintained by banks are described in the following. It may, however,
be emphasized that the exact nature of such books may differ from one book
to another, depending upon the individual requirement of each bank.
? General Ledger
The general Ledger contains the control accounts of all personal ledgers, the
profit and loss account and different asset and liabilities accounts. There are
certain additional accounts also (known as contra accounts) which are kept
with the view to keeping control over transactions which have no direct effect
on the asset and liabilities of bank and represent agency business handled by
bank on which it earns service charges, (or commission) e.g. Letters of credit
opened, bills received or sent for collection, guarantees given, etc.
? Types of General Ledger:
1. Old Style
Although bank book-keeping is supposed to be very simple, there are many
ways of doing the same thing and therefore every bank may find something in
the methods of some other bank, which would be worth its while to adopt.
The general ledger most often found is the old-fashioned ledger, this ledger
needs no explanation. It is sometimes ruled with two columns on each side,
the inside columns being used to bring down the totals from day to day,
instead of directly under the day's work. These additional columns prove a
blessing, when an analysis of previous work is desired. The footings are
usually made in a hurry and are often so large and heavy that it is hard to tell
them from the actual debits and credits. It should be borne in mind that the
general ledger is continually used to prepare statements of all kinds. Every
item of unusual nature should be properly explained on the ledger. For
example, the profit and loss account frequently contains debits
representing loans, discounts, or overdrafts charged off. Money subsequently
recovered from these losses is credited to this account. The record on each
side should be so plain that any item may be traced back, in order to show
both debit and credit without referring to tickets or journal of any kind. It is
worth while to itemize the expense account in the same way unless a detailed
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expense account is kept separately. Do not debit expense with "Hargood &
Co.'s bill, $122.30," but "Stationery, $122.30." A few years hence the bank
may be dealing with another stationer.
Three Column Ledger
Another form of ledger has the money columns together, making it much
easier to strike the balance. The debit balances should be struck in red and
the credit balances in black ink when using this form.
? Profit and Loss Ledger
Some banks maintain a profit and loss account in the general ledger and
maintain separate books for each revenue and expense heads/sub-heads.
Some banks maintain columnar books having separate columns for each
revenue and expense heads/sub-heads. These books are prepared from
vouchers. The total of debits and credits of each day are posted on profit and
loss account in general ledger from voucher summery sheets. In some banks,
the revenue accounts too maintained in general ledger itself, while in others,
board revenue heads are kept in general ledger and their details are kept in
subsidiary ledgers.
For managerial purpose, the accounts in profit and loss ledgers are more
detailed than those shown in published profit and loss accounts of banks. For
example, there are separate accounts for basic salary, dearness allowance,
and various others allowances, which are grouped together in published
accounts. Similarly various accounts comparing general charges, interest
paid, and interest received, etc. are maintained in the profit and loss ledgers.
? Subsidiary Books
? Personal ledgers
Each control account in the general ledger is supported by a subsidiary ledger
(or more than one subsidiary ledger if the number of accounts is large). Thus
in respect to control accounts relating to accounts relating to accounts of
customers, subsidiary ledgers are maintained for:
a) Various types of deposits accounts (saving bank accounts, recurring
account, current accounts, etc) which contains accounts of individuals
customers. Each account holder is allotted a separate folio in the
ledger:
b) various types of loans and advances related accounts (cash credit,
term loans, demand loans, bills purchased and discounted, letters of
credit, bank guarantees issued, etc.) wherein the liability of each
customer is reflected. Generally there is no separate ledger for
overdraft accounts which are granted in current account. However
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some branches maintain these accounts in separate ledgers
depending upon the number of regular borrowers under the facility.
Separate registers are maintained to record the particulars of term deposits
(including derivatives like call deposits, certificate of deposits, etc.) Banks
generally do not allot separate folios to each customer. The register divided in
to various sections, each section for particular period of deposits and/or the
rate of interest payable on deposits. As mentioned earlier, postings to these
ledgers are made directly from summary sheets. The voucher summary
sheets prepared in the department which originates the transactions, by the
persons other than who writes the legers they are subsequently checked with
the vouchers by persons generally unconnected with writing of
ledgers/registers or the voucher summery sheets.
? Current Deposit Ledger
The ordinary or current deposit ledger is a very active and important book in a
bank, and one which calls for both accuracy and dispatch on the part of the
clerk in charge, as errors can easily be made, involving the bank in serious
loss. The deposit ledger is invariably a loose-leaf book and ruled as shown in
Figure 22. This form is invariably used by all the banks. The so-called Boston
ledger has been tried several times, but was not found practicable in Canada,
owing perhaps to the method of marking or accepting checks by a direct debit
to the account. The accounts are arranged alphabetically, and are therefore
self-indexing, but an index is usually kept on the tagged sheet dividing the
alphabet.
In small offices there is usually only one current ledger used, A-Z. As work
increases and becomes too much for one ledger-keeper, a second ledger can
be opened divided A-K and L-Z. For three ledgers the divisions generally run
A-G, H-O, and P-Z, and for four the divisions are A-C, D-K, L-R and S-Z.
As the ledger is loose-leaf there is no accumulation of dead leaves, but the
general regulations regarding loose-leaf ledgers given in Section 3 of this
chapter should be observed closely.
BANK
Sheet No.
Name
Address
Dat
Particular
e
s
Account No.
Debi
t
Credi
t
Dr.
or
Cr.
Balanc
e
Dat
e
Particular
s
Debi
t
Credi
t
Dr.
or
Cr.
Current Deposit Ledger
Page17
Balanc
e
? Bills Registers
Details of different types of bills are kept in separate registers which have
suitable columns. For example, bill purchased inward bills for collection;
outward bills for collection, etc. are entered serially on a daily basis in
separate registers. In the case of bill purchased or discounted party-wise
details are also kept in normal ledger form this is done to ensure that
sanctioned limits of parties are not exceeded.
Entries in registers are made by reference to the original documents. A
voucher of the total amount of the transactions of each day is prepared in
respect of each register. This voucher is entered in the day book. When the
bill is realized or returned its original entry in register is marked off. A daily
summery of such realization or returns is prepared in separate registers
whose totals are taken to vouchers which are posted in day book.
In respect of bills for collection, contra vouchers reflecting both sides of
transactions are the prepared at the time of the original entry is reversed on
realization.
Outstanding entries are summarized at stipulated intervals and their totals
agreed with the balance of the respective control accounts in general ledger.
? DEPARTMENTAL JOURNALS
Each department of the Bank maintains a journal to note the transfer entries
passed by it. These journals are memoranda books only, as all the entries
made there are also made in the Day Book through Voucher Summary
Sheets. Their purpose is to maintain a record of all the transfer entries
originated by each department. For example, the Loans and Overdraft Section
will pass transfer entries for interest charged on various accounts every
month, and as all these entries will be posted in the journal of that
department, the office concerned can easily find out the accounts in respect of
which the interest entry has been passed. Since all vouchers passed during
the day are entered into the Day Book only in a summary form, it may not be
possible to get this information from the Day Book without looking into the
individual vouchers. Moreover, as the number of departments in a banks is
quite large, the Day Book may not be accessible at all times to all
departments.
As has been mentioned earlier, two vouchers are generally made for each
transaction by transfer entry, one for debit and the other for credit. The
vouchers are generally made by and entered into the journal of the
department which is affording credit to the other department. For example, if
any amount is to be transferred from Current Account of a customer to his
Saving Bank Account, the voucher will be prepared by the Current Accounts
Department and entered in the journal of that department.
Page18
? Other Registers/Records
There are different Registers/Records to record the detail particulars of
various types of transactions. These Registers/Records do not from part of
the books of accounts but support the entries/balances in the various
accounts some of the important Registers/Records relate to the following:
(a) Drat issued (separated registers may be maintained for drafts issued by
the branch on other branches of same bank and those on the branch of
its correspondents in India or abroad). Depending upon the value of
business, some branches may have separated registers on some other
basis also like weather the draft issued advised is prepared or not,
registers exclusively for some high volume customers of the bank, the
range, within which amount of draft falls, e.g. below Rs. 1 lakh, Rs 1-10
lakh, Rs 10 -100 lakhs, etc.
(b) Drafts paid (separate registers may be maintained on the same pattern
as an in case of draft issued)
(c) Issue and payment of:
1. Telephonic transfers
2. Mail transfers
3. Bankers cheques/Pay orders/traveler’s cheques/Gift cheques
4. Letters of credit.
5. Letters of guarantee
Entries in these registers are made from original documents which are also
summarized on vouchers every day. These vouchers are posted in Day book.
Outstanding entries are summarized at stipulated intervals and their totals are
agreed with respective control accounts in the ledger.
There are frequent transactions amongst the branch of bank which are settled
through the mechanism of inter-office accounts. The examples of such
transaction include payment/realization of bills/cheques, etc. sent for the
collection by one branch to other e.g. for government related business. All
such transfers of funds are canalized through nodal account (this has different
names in different banks such as Head-office account, Inter-office account,
and so on.). This is a circular account for the banks as well as the auditors for
two reasons: first many funds have been prepared on banks through this
account and second, banks are now required to make provision for entries
routed through this account which remain unreconciled beyond a time period
specified by Reserve Bank of India.
Page19
Banks maintain a Suspense Ledger to record various suspense accounts. As
mentioned earlier a trial balance is prepared in banks every day. Sometimes
due to clerical errors e.g. preparing the voucher summery sheet balance and
the trial balance may not tally. In such situation the difference is temporarily
transferred to a suspense account (in case of short debit) or to sundry
deposits account (in case of short credit).
Similarly transaction of transitory nature e.g. travel advance to employees, Are
also recorded in suspense account pending their adjustment related
income/expenses account. Some banks maintains separate ledger for
suspense account and sundry deposit accounts. The amounts lying in theses
accounts need regular monitoring to clear them.
Suitable registers with back-up registers to record classification under
numerous sub-heads are maintained for:
a) Establishment expenses
b) Interest and discount income
c) Incomes by way of commission
d) Interest expenditure
e) Provision for interest accrued but not due on deposits
f) Fixed Assets
g) Stationary consumed/in hand
h) Interest payable to and receivable from head office, in respect of
advances and depositors respectively. A peculiar feature of accounting
systems in banks is that the branches, nationally, have no funds of their
own. All deposits accepted at branch are deemed to have been passed
on bank’s head office and all loans made at branch are deemed to have
been made out of funds received from the head office. The head office
pays interest to branch for its deposits and charges interest from the
branch for its loans and advances. The rates of such interest charged
and paid by head office are decided by the head office during the course
of the year and are an important factor in calculating profit and loss of
branch. The mechanism may be known by different names in different
banks. All calculation in this regard is done at the branches only and
suitable entries are passed, generally at year end. These entries
however get offset in the process of consolidation of accounts and have
no effect on financial statement of the bank as a whole.
i) Instruments received from customers for payment/collection by branch.
Clearing of locally payable instruments is an important function of banks.
Some banks maintains separate registers to maintain details of various
types of instruments lodged by customers where as some other banks
Page20
use a common book
customers.
to record all kind of instruments lodged by
Separate Registers are maintained to record summaries the transactions
relating to a particular head of account like Current Account, Saving Bank
Account, Cash Credit, Term loans. Such books may be called ‘Log Books’,
‘Day Book’, etc. The totals of these books are carried over to Cash book.
Some other registers may be: Stop Payment Register, Locker Access
Register, Demat Register, Drawing Power Register used for monitoring of CC
Accounts etc.
? OTHER MEMORANDA BOOKS
Besides the books mentioned above, various departments of the bank have to
maintain a number of memoranda books to facilitate their work. Some of the
important books are described below:Cash Department
(a) Receiving Cashiers’ cash book
(b) Paying Cashiers’ cash book
(c) Main cash book
(d) Cash Balance book
The main Cash Book is maintained by persons other than the cashiers. Each
cashier keeps a separate cash book. When cash is received, it is
accompanied by pay-in-slip or other similar document. The cashier makes the
entry in this book
This book contains a record of all the vouchers and entries representing the
transactions of each day. Theoretically, the particulars of every item in the
cash book should be entered in detail, but owing to the wide extension of
banking facilities and the constantly increasing volume of checks and other
entries, it has been found necessary to use supplementary books for
recording particulars of any class of items whose volume is sufficient to
warrant a separate book - only the day's totals are carried into the general
cash book. The majority of entries, especially in a large office, are therefore in
the form of totals, and very few detailed entries have to be made; but all
entries, when made, should be definite as to source and sufficiently selfexplanatory to be understood by any one at any time - ten years after, if
necessary.
In the larger offices, the officers in charge of the different departments after
balancing their books hand to the cash-book clerk the totals in the form of a
signed memorandum, and even in the smaller offices it is advisable to have
the clerks entering up the various supplementary books, give a similar
memorandum of their totals. This limits the responsibility and adds to the
efficiency of the staff.
Page21
Debit and credit entries for cash book, other than the totals referred to above,
are represented by vouchers giving the necessary particulars, signed by
the manager, accountant or other authorized officer, and it should be an
imperative rule that any slip, which does not contain sufficient particulars or
which lacks the necessary signature, should be refused by the cash-book
clerk and referred back to the teller for completion. In order to facilitate the
sorting and checking of these vouchers, distinctive colored paper or printing
should be used; for instance, yellow, debit slips and white, credit slips.
It should constantly be borne in mind that as the cash book and its
supplementary books are recognized in a court of law as the books of original
entry, faulty or meager particulars might cause serious trouble. Verbal
explanation, even if available, would not be admitted. Examine a bank cash
book of twenty or thirty years ago: there could be no better object lesson of
what a cash book should be. Copper-plate writing and ample particulars are
characteristic.
Quick Payment System - Banks introduce different systems so that their
customers may receive payment of cash etc. quickly. The most prevalent
system is the teller system. Under this system tellers keep cash as well as
ledger cards and the specimen signature cards of each customer in respect of
Current and Saving Bank Accounts. A teller is authorised to make payment up
to a particular amount, say, Rs. 1,000. On receipt of the cheque, he checks it,
passes it for payment, enters it in the ledger card and makes the payment to
customer. The teller also receives cash deposited in these accounts.
Outward Clearing:
(a) A Clearing Cheques Received Book for entering cheques received from
customers for clearing.
(b) Bank wise list of the above cheques, one copy of which is sent to the
Clearing House together with the cheques.
A person checks the vouchers (foil of pay-in slips) and lists with the Clearing
Cheque Received Book. The vouchers are then sent to appropriate
departments, where customers’ accounts are immediately credited. If any
cheque is received back unpaid the entry is reversed. Normally, no drawings
are allowed against clearing cheques deposited on the same day but
exceptions are often made by the manager in the case of established
customers.
Inward Clearing
Cheques received are checked with the accompanying lists. They are then
distributed to different departments and the number of cheques given to each
department is noted in a Memo Book. When the cheques are passed and
posted into ledgers, their number is independently agreed with the Memo
Page22
Book. If any cheques are found unplayable, they are returned back to the
Clearing House. The cheques themselves serve as vouchers. Book which is
checked by the chief cashier. The pay-in-slip then goes to the Main Cash
Book writer who makes an entry in his books. The cash book checker checks
the entry with the slip and then the counter-foil of the slip is returned back to
the customer and the foil is sent to the appropriate department for entering
into the ledger. The foil is used as a voucher. Cash is paid against a cheque
or other document (e.g. traveller’s cheque, demand draft, pay order, etc.) after
it has been duly passed and entered in the appropriate account in the ledger.
Cheques, demand drafts, pay orders, etc. are themselves used as vouchers.
Loans & Overdraft Departments
(a) Registers for shares and other securities held on behalf of each customer.
(b) Summary Books of Securities giving details of Government securities,
shares of individual companies etc.
(c) Godown registers maintained by the godown-keeper of the bank.
(d) Price register giving the wholesale price of the commodities pledged with
the bank.
(e) Overdraft Sanction registers.
(f) Drawing Power book.
(g) Delivery Order books.
(h) Storage books.
Deposits Department
(a) Account Opening & Closing registers.
(b) For Fixed Deposits, Rate registers giving analysis of deposits according to
rates.
(c) Due Date Diary.
(d) Specimen signature book.
Establishment department
(a) Salary and allied registers, such as attendance register, leave register,
overtime register, etc.
(b) Register of fixed assets, e.g., furniture and fixtures, motor cars, vehicles,
etc.
(c) Stationery registers.
(d) Old records register.
General
(a) Signature book of bank’s officers.
(b) Private Telegraphic Code and Cyphers.
Page23
? STATISTICAL BOOKS
Statistical records kept by different banks are in accordance with their
individual needs. For example, there may be books for recording
(i) Average balance in loans and advances etc.
(ii) Deposits received and amount paid out each month in the various
departments,
(iii) Number of cheques paid,
(iv) Number of cheques, bills and other items collected.
The above is not an exhaustive list of accounting records kept by a bank.
PREPRATION
AND
PRESANTATION
STATEMENTS OF BANKS
OF
FINANCIAL
A banking company is not required to prepare financial statements in
accordance with Schedule VI of the Companies Act, 1956.
Form A of third schedule gives the format of a balance sheet and form B gives
the format of a profit and loss account. These formats have been revised
w.e.f. 1st April 1991 and the profit and loss account and balance sheet of
banking company for the year ended 31 st March 1992 and onwards have to be
prepared in new form as discussed below.
FORMS OF BALANCE SHEET AND PROFIT AND LOSS
ACCOUNT
With the nationalisation of major commercial banks and changes brought
about in the economic and financial policies by the Government, the
environment in which the banks operate has undergone a complete change.
However, there was little effort to bring about a change in the financial
statements of banks to reflect the reality of the impact of the environment.
There were suggestions emphasising a need for revising formats in which
banks publish their financial statements as prescribed under the Banking
Regulation Act, 1949. A Committee under the Chairmanship of Shri A. Ghosh,
Deputy Governor, RBI, was constituted to examine, inter alia the desirability of
greater or full disclosure in the published accounts of banks having regard to
the need for disclosure, public accountability of banks, requirement and
maintenance of confidentiality between banker and customer and the
requirement of maintaining the reputation and credit-worthiness of banks. The
Committee
after
due
deliberation
has
suggested
suitable
changes/amendments in the forms of balance sheet and profit and loss
account of banks, having regard to :
1. Need for better disclosure
Page24
2. Expansion of banking operations both area-wise and sector-wise over the
period, Need for improving the presentation of accounts etc. The revised
formats are given below which include Form A for Balance Sheet, Form B for
Profit and Loss Account and eighteen other schedules of which two relates to
notes and accounting policies.
THIRD SCHEDULE: FORM A
Form of balance sheet
Balance Sheet as on 31st March………..
(000’s omitted)
Particulars
Schedul
e
No.
As on 31.3.__
(current year)
CAPTIAL AND LIABILITES
Capital
1
Resaves and surplus
2
Minorities Interest
2A
Deposits
3
Borrowings
4
Other Liabilities and Provision
5
TOTAL
ASSETS
Cash and balance with RBI
6
Balance with banks and money at call
and short notice
7
Investments
8
Advances
9
Fixed Assets
10
Other Assets
11
TOTAL
Contingent liabilities
12
Page25
As on 31.3.__
(pervious
year)
The Following schedules are required to be furnished with
The Balance Sheet of Banking Companies:
PARTICULARS
Schedule 1 Capital
RS.
I. For nationalized banks
Capital (fully owned central government)
Rs.
…
II. For banks incorporated outside India
i) Capital ( the amount brought in by banks by way of startup capital prescribed by RBI should be shown under this
head)
ii) Amount of deposit kept with RBI under Section 11(2) of The
Banking Regulation Act, 1949.
…
…
Total
…
III.For other banks:
Authorized capital (… shares of Rs. … each)
Issued capital (… shares of Rs. … each)
Subscribed capital (… shares of Rs. … each)
Call-up capital (… shares of Rs. … each)
Less: Calls unpaid
Add: Forfeited shares
…
…
…
…
…
…
Total
…
Schedule 2 Reserves and Surplus
I
Statutory Reserves
Opening balance
Additions during the year
Deductions during the year
…
…
…
…
Capital Reserves
Opening balance
Additions during the year
Deductions during the year
…
…
…
…
III Share premium
Opening balance
Additions during the year
Deductions during the year
…
…
…
…
IV Revenue and the other reserves
Opening balance
…
II
Page26
Additions during the year
Deductions during the year
V
…
…
Balance in Profit and Loss Account
…
…
Total ( I + II + III + IV + V )
…
Schedule 3 Deposits
A I. Demand Deposits
From banks
From others
II. Savings banks accounts
III. Term Deposits
From banks
From others
Total ( I, II, and III)
B
i) Deposits of branches in India
ii) Deposits of branches outside India
…
…
…
…
…
…
Grand total ( A and B )
…
…
…
…
…
…
Schedule 4 Borrowings
I. Borrowings in India
i) Reserve Bank of India
ii) Other Banks
iii) Other institutions and agencies
…
…
…
…
II. Borrowings outside India
…
Total ( I and II )
Secured borrowings in I and II above
…
…
Schedule 5 Other liabilities and provisions
i) Bills payable
ii) Inter office adjustment (net)
iii) Interest accrued
iv) Others ( including provisions)
…
…
…
…
Total
…
Schedule 6 Cash and bank with RBI
I. Cash in hands ( including foreign currency notes)
II. Balance with RBI in:
…
Page27
i) Current Account
ii) Other Accounts
…
…
Total I and II
…
Schedule 7
Balance with banks and Money at Call and Short notice
I. In India
i) Balance with banks:
a) in Current Accounts
b) in Other Accounts
ii) Money at call and Short notice
a) With banks
b) With other institutions
Total ( i and ii )
…
…
…
…
…
…
…
II. Outside India
i) In Current Accounts
ii) In other Deposits Accounts
iii) Money at Call and Sort notice
Total ( i, ii, and iii)
…
…
…
…
Grand Total ( I and II)
…
Schedule 8 Investment
I. Investments in India in
i) Government Securities
ii) Other approved Securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and/or joint ventures
vi) Others to be specified
Total
II. Investments outside India in
i) Government Securities ( including local authorities )
ii) Subsidiaries and/or joint ventures abroad
iii) Other investment ( to be specified)
Total
…
…
…
…
…
…
…
…
…
…
…
Grand Total ( I and II)
…
Schedule 9 Advances
A i) Bills Discounted and Purchased
ii) Cash Credits, Overdraft, and Loans payable on
…
…
Page28
Demand
iii) Term loans
Total
…
…
B i) Secured by tangible Assets
ii) Covered by bank/Govt. guarantees
iii) Unsecured
Total
…
…
…
…
C I Advances in India
i) Priority Sector
ii) Public Sector
iii) Banks
iv) Others
Total
…
…
…
…
…
II Advances out side India
i) Due from banks
ii) Due from others:
a) Bills purchased discounted
b) Syndicate Loans
c) Others
Total
Grand Total ( CI. and C II)
…
…
…
…
…
…
…
Schedule 10 Fixed Assets
I Premises
At cost as on 31st March of the preceding year
Additions during the year
Deduction during the year
Depreciation to date
II Other fixed assets ( incl. furniture and fixtures)
At cost as on 31st March of the preceding year
Additions during the year
Deduction during the year
Depreciation to date
Total ( I and II )
…
…
…
…
…
…
…
…
Schedule 11 Other Assets
I. Inter office adjustment (net)
II. Interest acrrude
III. Tax paid in advance/ Tax deducted at source
IV. Stationary and stamps.
V. Non-banking assets acquired in satisfaction of claims
VI. Others*
Total
Page29
…
…
…
…
…
…
…
* In the case there is any unadjusted balance of loss (i.e. when the loss
exceeds the aggregate of capital, reserves and surplus), the same may be
shown under appropriate footnote.
Schedule 12 Contingent liabilities
I. Capital against the bank not acknowledged as debts
II. Liability for partly paid investment
III. Liability on Account of outstanding forward
Exchange contracts
IV. Guarantees given on behalf of constituents
In India
Outside India
V. Accepts endorsements and other obligation
VI. Other items for which the bank is contingently
Liable
Total
…
…
…
…
…
…
…
…
..
…
PREPARATION OF PROFIT AND LOSS ACCOUNT
Form B
Third Schedule
Form of Profit and Loss Account
Profit and Loss Account for the year ended 31st March ……
Particulars
Schedule
Year ended
Number
(Rs.)
I. Income:
Interest Earned
13
….
Other income
14
….
II. Expenditure:
Interest Expended
15
….
Operating Expenses
16
….
Provisions and Contingencies
…
….
III. Profit/Loss:
Net Profit/(Loss) of the year
….
Total
….
IV. Appropriations:
Transfer to Statutory Reserves
…..
Transfer to other Reserves
….
Transfer to Government Proposed Dividend
….
Balance Carried over to Balance Sheet
….
Total
….
Schedules to be annexed with Profit and Loss Account
Page30
Particulars
Rs.
Schedule 13: Interest Earned
(I) Interest/ Discounts on Advances/Bills
(II) Income on Investments
(III) Interest on balances with RBI and other inter bank funds
(IV) Others
Total
...
…
…
…
…
Schedule 14: Other Incomes
(I) Commission, Exchange and Brokerage
(II) Profit on Sale of investment
Less: Loss on Sale of investment
(III) Profit on revaluation of Investment
Less: Loss on revaluation of Investment
(IV) Profit on Sale of Land/Building and Other Assets
Less: Loss on Sale of Land/Building and Other Assets
(V) Profit on Exchange transactions
Less: Loss on Exchange transactions
(VI) Income earned by way of dividend, etc., from subsidiaries
Companies and/or joint ventures abroad/in India.
(VII) Misc. Income
Total
Note: Under items II to V loss figures be shown in brackets
Schedule 15 : Interest Expended
(I) Interest on Deposits
(II) Interest on RBI/Inter-Bank Deposits
(III) Others
Total
Schedule 16: Operating Expenses
(I) Payment to and Provisions for Employees
(II) Rent, Taxes and Lighting
(III) Printing and Stationary
(IV) Advertisement and Publicity
(V) Depreciation on Banks Property
(VI) Directors’ Fees, Allowances and Expenses
(VII) Auditors’ Fee and Expenses
(Including Branch Auditors)
(VIII) Law Charges
(IX) Postage, Telegrams, Telephones, etc.
(X) Repairs and Maintenance
(XI) Insurance
(XII) Other Expenditure
Total
Page31
…
Note: Corresponding figures for the immediately preceding
financial year should be shown in separate columns
9. IMPORTANT ITEMS OF BALANCE SHEET
Let us consider some of the peculiar items of assets and liabilities appearing
in the bank’s balance sheet.
Balance sheet: Assets Side
The various items of assets in the balance sheet are arranged according to
liquidity order.
1. Money at Call and Short Notice
These are related to inter-bank transactions. Under this arrangement money
borrowed one bank from other bank usually for one to fourteen days. Banks
having surplus money advance such loans. Banks having short supply of
money, contacts the banks having surplus funds or vice versa for this
purpose. Alternatively, they may approach the primary dealers in the money
market for deploying their surplus funds or making good the deficit. The rate
of interest on which money is supplied fluctuates every day even within the
day.
2. Advances
Under this head, the following items are covered:
1. Loans
2. Cash credit
3. Overdraft
Loans: A loan is advance of fixed amount given to customer for a specific
period.
Cash credit: A is an arrangement by which the bank agrees to lend money up
to a fixed limit against pledge or hypothecation of some securities. Customers
need not draw the whole at home.
Overdraft: Under this arrangement, the customer is permitted to over draw
the money from his current account up to a certain limit against some specific
securities like L.I.C policy banks fixed deposits receipts national savings
certificates, quoted shares.
3. Bills Receivable being Bills for Collection as Per Contra
Page32
Customers deposit into bank the draft and the bills for collection and credit to
their accounts. The bank keeps the register for recording the bills for
collection. On collection, cash account is debited and customers account is
credited. At end of the accounting year, when some bills are left uncollected,
following entry is passed:
Bills received being bills for collection a/c…………Dr.
To bills for collection being bills receivable account
It is contra item in the balance sheet. The first account denotes the amount
receivable and it is shown on assets side. The second one denotes the
amount payable to the customer and is shown on the liabilities side of the
balance sheet.
4. Acceptance Endorsement and other Obligations
They represent the liabilities which the bank has assumed on behalf of its
customers, the bank may accommodate his customer in the following ways:
1. by opening letters of credit
2. by accepting bills on behalf of the customer
3. by making endorsement on promissory notes prepared by the
customer
4. by issuing letters of guarantee to make payments if the customers fail
to pay
In all these cases, the bank is liable to third parties. Hence, it is liability. While
undertaking such liabilities the bank obtains customer guarantee from its
customers which enables it to claim the amounts from its customers.
Therefore, it is an asset. At the end of the accounting year, the following entry
is passed for recording unrecorded bills:
Constituent’s Liability for Acceptance, Endorsement or other
Obligations a/c ………………………..DR.
To Acceptance, Endorsement or other Obligations.
It is contra item in the balance sheet. The first accounts appears on assets
side while the other on liabilities side.
5. Non-Banking Assets
A bank cannot acquire certain assets but it can always lend against the
security of such assets. This means that some times, in case of failure on part
of the loanee to repay the loans, the bank may have to take possession of
such assets. Profit or loss on disposal of such assets should be disclosed
separately in the profit and loss account.
6. Gold and Silver
Page33
Gold appears under ‘Investment’ and silver appears under ‘other assets’
7. Lockers or Safe Deposits Vaults
These are assets and are included are included under furniture
8. Branch Adjustment Account
There are many transactions that take place between the head office and the
branches and between one branch to another towards the end of financial
year. When such transactions appear they are properly recorded in books of
branch or head office when the transactions take place but in the absence of
any advice or completion of the transactions, they remain unrecorded in the
books of other party. Because of these transactions there is always balance
left in branch account in the head office books. This balance is called ‘Branch
adjustment account’. This appears on assets side of the balance sheet if it
has a debit balance and on liability side if it has credit balance.
Balance Sheet: Liabilities side
9. Share Capital
Under this head, authorised, subscribed and issued and paid up capital are
shown separately. As in the case of any other limited company, calls in arrears
are reduced from paid up capital and forfeited shares amount is added to it.
10. Reserves Fund and Other Reserves
Every banking company incorporated in India shall before declaring a
dividend, transfer a sum equal to twenty per cent of net profit each year (as
per profit and loss account) to reserve fund.
11. Deposits and Other Accounts
There are amounts lying in the credit of customers accounts. Fixed deposits
are for a fixed period whereas savings bank and current accounts balances
are repayable on demand. Contingency accounts, include the provision for
contingencies, provision for taxation, etc. These are merged with current
accounts.
12. Bills for Collection and Acceptances and Endorsements are Contra
Items
10. DISCLOSURE REQUIRMENTS OF BANKS TO BE ADDED
AS NOTES TO ACCOUNTS ( in Schedule 17)
Page34
1. Non- performing Assets (NPA)
The banks have to classify their advances into four broad groups (i) standard
assets, (ii) sub-standard assets, (iii) doubtful assets and (iv) loss assets.
Broadly speaking, classification of assets into the above categories should be
done taking into account the degree of well defined credit weaknesses and
extent of dependence on collateral security for realisation of dues. Banks
should, therefore, keep the following definitions in mind while classifying the
assets.
Financial Statements of Banking Companies
(i) Standard Assets - Standard asset is one which does not disclose any
problems and which does not carry more than normal risk attached to the
business. Such an asset is not a NPA.
(ii) Sub-standard Assets - Sub-standard asset is one which has been
classified as NPA for a period not exceeding 12 months. In such cases, the
current net worth of the borrower/guarantor or the current market value of the
security charged is not enough to ensure recovery of the dues to the bank in
full. In other words, such an asset will have well-defined credit weaknesses
that jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the bank will sustain some loss, if deficiencies are not
corrected. In the case of term loans, those where installments of principal are
overdue for period exceeding one year should be treated as sub-standard. An
asset where the terms of the loan agreement regarding interest and principal
have been renegotiated or rescheduled after commencement of production,
should be classified as sub-standard and should remain in such category for
at least two years of satisfactory performance under the renegotiated or
rescheduled terms. In other words, the classification of an asset should not be
upgraded merely as a result of rescheduling, unless there is satisfactory
compliance of the above condition.
(iii) Doubtful Assets - A doubtful asset is one which has remained NPA for a
period exceeding 18 months. In the case of term loans, those where
instalments of principal have remained overdue for a period exceeding 18
months should be treated as doubtful. Here too, as in the case of substandard assets, rescheduling does not entitle a bank to upgrade the quality
of an advance automatically.
A loan classified as doubtful has all the weaknesses inherent in that classified
as sub-standard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently known facts, conditions
and values, highly questionable and improbable.
(iv) Loss Assets - A loss asset is one where loss has been identified by the
bank or internal or external auditors or the RBI inspection but the amount has
not been written off, wholly or partly. In other words, such an asset is
considered uncollectible and of such little value that its continuance as a bank
asset is not warranted although there may be some salvage or recovery
value.
It may be noted that the above classification is meant for the purpose of
computing the amount of provision to be made in respect of advances and not
Page35
for the purpose of presentation of advances in the balance sheet. The balance
sheet presentation of advances is governed by the Third Schedule to the
Banking Regulation Act, 1949, which requires classification of advances
altogether differently.
Taking into account the time lag between an accounts becoming doubtful of
recovery, its recognition as such, the realization of the security and the
erosion over time in the value of security charged to the banks, it has been
decided that banks should make provision against sub-standard assets,
doubtful assets and loss assets on the following basis:
(a) Loss assets: The entire amount should be written off or full provision
should be made for the amount outstanding.
(b) Doubtful assets: (i) Full provision to the extent of the unsecured portion
should be made. In doing so, the realizable value of the security available to
the bank should be determined on a realistic basis. DICGC/ECGC cover is
also taken into account (this aspect is discussed later in this chapter). In case
the advance covered by CGTSI guarantee becomes non-performing, no
provision need be made towards the guaranteed portion. The amount
outstanding in excess of the guaranteed portion should be provided for as per
the extant guidelines on provisioning for non-performing advances.
(ii) Additionally, 20% - 100% of the secured portion should be provided for,
depending upon the period for which the advance has been considered as a
doubtful asset, as follows:
Period for which the advance has been
Considered as doubtful
Up to 1 year
More than 1 year and up to 3 years
More than three years
% of provision on secured portion
i. Outstanding stock of NPA’s as on 31.03.2004
w.e.f. 31.03.2005
w.e.f. 31.03.2006
w.e.f. 31.03.2007
20%
30%
50%
60%
75%
100%
ii. Advances classified as doubtful for more than three years on or after
01.04.2004
w.e.f. 31.03.2005
100%
(c) Sub-standard assets : A general provision of 10% on total outstanding
should be made without making any allowance for DICGC/ECGC cover and
securities available. An additional provision of 10% (i.e., total 20% of total
outstanding) is required to be made on ‘unsecured exposure’ ab initio sanction
of loan. Generally such a situation may arise in case of personal and
education loans etc. Unsecured exposure is defined as ‘an exposure where
the realizable value of security is not more than 10% of the outstanding
exposure (fund based and non-fund based). Security should not include
guarantees, comfort letters etc
Page36
(d) Standard assets : A general provision of a minimum of 0.40% of total
standard assets should be made. It has been clarified that the provision
should be made on global laon portfolio basis and not on domestic advances
alone.
Provision for Certain Specific Types of Advances
The guidelines also deal with provisioning for certain specific types of
advances as follows :
Advances Secured Against Term Deposits, National Savings Certificates,
Surrender Value of Life Policies, etc.
Advances secured against term deposits, NSCs eligible for surrender, Indira
Vikas Patras, Kisan Vikas Patras and life insurance policies are exempted
from provisioning requirements. Accordingly, the banks need not treat such
accounts as NPAs. It may be noted that advances against gold ornaments,
government securities, and all other kinds of securities are not exempted from
provisioning requirements.
Advances Guaranteed by Government of India and/or State Governments
According to the guidelines, credit facilities where government guarantees are
available, although overdue, should not be treated as NPA. However, it needs
to be noted that such exemption from classification of advances as NPA is
only for the purposes of assets classification and provisioning norms and not
for the purposes of recognition of income. In other words, if such a credit
facility meets the criteria for being classified as NPA, income in respect of the
facility should not be recognised until it is actually realized. Also, in the case of
state government guarantees, this exemption is available only where the
guarantees have not been invoked. The State Government guaranteed
accounts which have been invoked upon becoming NPA are to be treated at
par with other advances for purpose of asset classification, income
recognition and provisioning norms. Advances Under Rehabilitation Packages
Where additional facilities are granted to a unit under rehabilitation packages
approved by the Board for Industrial and Financial Reconstruction (BIFR) or
by term-lending institutions or the bank (on its own or under a consortium
arrangement), provision should continue to be made for the dues in respect of
existing credit facilities. As regards the additional facilities, provision need not
to be made for a period of one year from the date of disbursement in respect
of additional facilities sanctioned under rehabilitation packages approved by
BIFR/term-lending institutions. Similarly, no provision need be made for a
period of one year in respect of additional facilities granted to a sick smallscale industrial unit in accordance with a rehabilitation package/nursing
programme drawn up by the bank itself or under a consortium arrangement.
After the period of one year, the bank in consultation with its auditors would
take a view whether there is need for making provision in respect of the
additional facilities sanctioned.
Take-out Finance
In the case of take-out finance, if based on record of recovery, the account is
classified by their lending bank as NPA, it should make provision for loan
losses as per the guidelines. The provision should be reversed when the
Page37
account is taken over by the taking-over institution. On taking over the
account, the taking-over institution should make provisions as per the
guidelines. For this purpose, the account should be considered to have
become NPA from the actual date of its becoming so, even though the
account was not on the books of the taking-over institution on that date.
Provisioning in advances covered by the guarantees of DICGC/ECGC : In
the case of advances guaranteed by Export Credit Guarantee Corporation
(ECGC) or by Deposit Insurance and Credit Guarantee Corporation (DICGC),
provision is required to be made only for the balance in excess of the amount
guaranteed by these corporations. In case the bank also holds a security in
respect of an advance guaranteed by ECGC/DICGC, the realizable value of
the security should be deducted from the outstanding balance before the
ECGC/DICGC guarantee is off-set. The Reserve Bank of India has also
clarified that if the banks are following more stringent method of provisioning
in respect of advances guaranteed by ECGC/DICGC, such banks may
continue to do so.
The manner of determining the amount of provision in respect of
ECGC/DICGC guaranteed advances in accordance with the above guidelines
is illustrated below. (It may be noted that these illustrations are merely
intended to facilitate understanding of the RBI guidelines; they have not been
issued by the RBI.)
4. Asset Classification, Income Recognition and Provision
Norms
Assets classification
(a) A bank’s advances are divided between performing and non-performing
assets. An advance giving income on continuous basis is called a
performing asset. A non–performing asset, on other hand, is one
remains out of order for ninety days.
A term loan is treated as NPA, if the interest instalment remains
overdue for more than 180 days while a cash credit/overdraft account
treated as NPA, if the outstanding amount remains over and above
sanctioned limits/drawing power more than ninety days
The bill purchased/discounted is treated as NPA, if bill remains overdue
and unpaid for ninety days. In other case (i.e. where the outstanding
amount is less than drawing power) it is treated as NPA it there is no
credit is less than the debit to the account on account of interest,
interest during the ninety days preceding the date of the balance sheet.
(b) Incoming Recognition
The income from performing assets is recognised on accrual basis and
interest income from non-performing assets is recognised on cash
basis. In case interest on NPA is already recognised in the books of
Page38
accrual basis, the same should be adjusted by making provisions for
income recorded but not received on NPA.
(c)
Assets classification for provisioning requirement
The rules regarding classification and provisioning requirements are
listed below:
Category
Definitional
requirements
Provisioning
requirement
Standard
Assets
A performing
asset with
just normal
risk attached
0.40%
Sub-Standard
Assets
Which has
remained
NPA for a
period not
exceeding
eighteen
months
10% of total
outstanding
Doubtful
Assets
Which has
remained
NPA for a
period
exceeding
eighteen
months
Unsecured
portion
-100%
Secured
portion –
Debt doubtful
20% up to
one year 1 to
3 years 30%
more than 3
years 50%
Loss Assets
Which has been
identified by
internal and
external auditors,
RBI inspectors
100% of total
outstanding
(d) Investment Classification
1.
2.
3.
4.
5.
6.
7.
Investment by banks include as under:
Government Securities
Approved securities
Shares
Debenture and bonds
Subsidiaries/joint venture
Others (commercial paper, units of mutual funds, etc)
The first two, viz., Government securities and Approved securities are
generally used for meeting statutory liquidity ratio and are called SLR
securities. The remaining securities are known as non-SLR securities.
The banks were required to bifurcate their SLR securities into ‘current’ and
‘permanent’ categories. The minimum ratio prescribed most recently was 75;
25 for current and permanent investments. The current SLR securities and
entire non-SLR securities were to be written down to market value. This leads
Page39
to depreciation being shown in account. The permanent securities were
carried at cost.
As per new guidelines, both SLR and Non SLR securities are to be divided in
three categories viz.,
1. Held to maturity
2. Available for sale
3. Held for trading
Category 1 is like old permanent category 2 and 3 are like current category.
The investment under ‘Held to maturity’ should not exceed 25% of banks total
investment. The banks have the freedom to decide on extent of holding under
‘available for sale’ and held for trading category.
The securities acquired by banks to the intension to hold them up to maturity
are classified as under Hold to the maturity. The security, acquired by banks
with intention of trading, by taking advantage of short term price/interest rate
movement, is classified under ‘held for trading’. The remaining securities are
classified under the category ‘available for sale’. The securities held for
trading are to be sold within ninety days. The profit and loss on securities
‘held to maturity’ is to be transferred to Profit and Loss account. The profit is
subsequently transferred to Capital Reserves Account. The securities ‘held to
maturity need not to be marked to market. The remaining two categories are
marked to market.
List of Disclosure Items
• Capital adequacy ratio
• Capital adequacy ratio-tier T capital
• Capital adequacy ratio-tier II capital
• Percentage of shareholding of the Government of India
in nationalized banks
• Amount of subordinated debt raised as tier II capital
• Gross value of investments, etc.
• Provisions made towards depreciation in the value of investments
• Movement of provisions held towards depreciation on investments
• Repo transactions
• Non-SLR investment portfolio
• Forward rate agreement/interest rate swap
• Exchange traded interest rate derivatives
• Disclosures on risk exposure m derivatives
• Percentage of net NPAs to net advances
• Movement in NPAs
• Amount of provisions made towards NPAs
• Movement of provisions made towards NPAs
• Details of Loan assets subjected to restructuring
• Restructuring under CDR
• Details of financial assets sold to a SC/RC for asset reconstruction
• Provision on standard assets
Page40
• Interest income as a percentage to working funds
• Non-interest Income as a percentage to working funds
• Operating profit as a percentage to working funds
• Return on assets
• Business (deposits plus advances) per employee
Profit per employee
• Maturity pattern of loans and advances
• Maturity pattern of investment securities
• Maturity pattern of deposits
• Maturity pattern of borrowings
- • Foreign currency assets and liabilities
• Exposure to real estate sector
• Exposure to capital market: investment in equity shares, etc.
• Bank financing for margin trading
• Exposure to country risk
• Details of single borrower/group borrower limit exceeded by the bank
• Provision made towards income tax during the year
• Disclosure of penalties imposed by RBI
• Consolidated financial statements —AS 21
• Segment reporting —AS 17
• Related party disclosure — AS 18
• Other disclosures as required under the relevant accounting standards
Page41
Bibliography
www.icai.org/resource.../19019comp_sugans_pe2_accounting_cp
10
www.icaiknowledgegateway.org/.../chapter-6-financial-statementsof-banking...
www.wikipedia.com
Page42
doc_582786009.doc
Page1
INDEX
SR. NO.
PARTICULARS
1
Introduction
2
Definition and Functions of bank
3
REQUIRMENTS OF BANKING COMPANIES AS TO
ACCOUNTS
Submission of Accounts (Sec 31 and 32)
4
5
SIGNIFICANT FEATURES OF ACCOUNTING
SYSTEMS OF BANKS
6
PRINCIPAL BOOKS OF ACCOUNT
7
PREPRATION AND PRESANTATION OF FINANCIAL
STATEMENTS OF BANKS
8
Form of Balance Sheet and Schedules
9
Form of Profit and Loss account and Schedules
10
DISCLOSURE REQUIRMENTS OF BANKS TO BE
ADDED AS NOTES TO ACCOUNTS ( in Schedule 17)
11
Bibliography
Page2
INTRODUCTION
A banking company means and includes any company which carries on
business or which transacts banking business in India. A banking business is
generally governed by the provisions of the Companies Act 1956 and
specifically by the Banking Regulation Act. The Banking regulation Act of 1949
came into force on 16th March 1949 as a result of long-felt need to regulate
the banking business in India and protect the interest of number of depositors.
The existence of well- organized, regulated and efficient banking system is
pre-requisite for economic growth. Banks are agencies responsible for
mobilizing and channeling of funds in a country. The major institutions carrying
business,
in India, include:
(a) Nationalized banks
(b) State bank of India and Associates banks
(c) Foreign banks having branches in India
(d) Co-operative banks
(e) Rural banks and
(f) Private sector banks.
DEFINITION AND FUNCTIONS OF A BANK
Page3
Banking has been defined by section 5 of the Banking Regulation Act and
means:
(a) accepting deposits of money from public
(b) for the purpose of lending or investment and deposits are repayable on
demand or otherwise by cheque, draft, and order or otherwise. It
should be noted that company which is engaged in manufacturing
goods and for the purpose of financing business accepts deposits from
the public should not be deemed to transact business of banking.
In addition to banking business, a bank is permitted under Section 6 of the
Banking Regulation Act to engage in certain class of business which is
incidental to the business of banking. Section 8 of the Banking Regulation Act
prohibits a bank from buying and selling or dealing in goods except in
connection with realization of a security held by it or in connection with the
business of collections or negotiating bills of exchange.
Some of the main functions of modern commercial banks are:
(a) Accepting deposits and providing facilities to depositors of payment by
cheques.
(b) Granting loans and advances (cash credits, overdraft, term loans, etc.).
(c) Dealing in securities on its own account or on behalf of its customers.
(d) Opening letters of credits.
(e) Issuing guarantees.
(f) Dealing in foreign exchange.
(g) Transferring money from one place to another through demand draft,
telegraphic transfers, traveler’s cheques, bills, etc.
(h) Merchant banking, i.e. acting as managers to public issues, etc.
However, any company which is engaged in the manufacturer of goods or
carries on any trade and which accepts deposits of money from the public
merely for the purpose of financing its business as manufacturer or trader
shall not be deemed to transact the business of banking. It may be mentioned
that the Banking Regulation Act, 1949 is not applicable to a primary
agricultural society, a co-operative land mortgage bank and any other cooperative society except in the manner and to the extent specified in Part V of
the Act.
Some banks are included in the Second Schedule to the Reserve Bank of
India Act, 1934; these are called Scheduled Banks. The Reserve Bank
Page4
includes a bank in this schedule if it fulfils certain conditions. The Reserve
Banks gives certain facilities to schedule banks including the following:
(a) The purchase, sale, and re-discounting of certain bills of exchange, or
promissory notes;
(b) Purchase and sale of foreign exchange;
(c) Purchase, sale and re-discounting of foreign bills of exchange;
(d) Making of loans and advances to scheduled banks;
(e) Maintenance of accounts of the scheduled bank in its banking department
and issue department;
(f) Remittance of money between different branches of scheduled banks
through the offices, branches or agencies of Reserve Bank free of cost or at
nominal rates.
Section 6 of the Banking Regulation Act, 1949 specifies the forms of business
in which a banking company may engage. These are :
(i) borrowing, raising or taking up of money; lending or advancing of money;
drawing, making, accepting, discounting, buying, selling, collecting and
dealing in bills of exchange, hundies, promissory notes, etc.;
(ii) acting as agents for any government or local authority or any other person;
(iii) directing for public and private loans and negotiating and issuing the
same;
(iv) effecting, insuring, guaranteeing, under-writing, participating in managing
and carrying out of any issue of shares, stock, debentures etc.;
(v) carrying on and transacting every kind of guarantee and indemnity
business;
(vi) managing, selling and realising property which may come into the
possession of the banking company in satisfaction of its claim;
(vii) acquiring and holding and generally dealing with any property or any
right, title or interest in such property which may form the security for any
loans and advances;
(viii) underwriting and executing trusts;
(ix) establishing and supporting or aiding in the establishment and support of
institutions, funds, trusts etc.
(x) acquisition, construction, maintenance and alteration of any building and
works necessary for the purpose of the banking company;
(xi) selling, improving, managing, developing, exchanging, leasing,
mortgaging, depositing of or turning into account or otherwise dealing with all
or any part of the property and rights of the company;
(xii) acquiring and undertaking whole or any part of the business of any
person or company;
(xiii) doing all such other things as are incidental or conductive to the
promotion or advancement of the business of the banking company;
(xiv) any other business which the Central Government may specify by
notification in the Official Gazette.
No banking company shall engage in any form of business other than those
referred to above.
? PROHIBITION OF TRADING (SECTION 8)
Page5
A banking company cannot directly or indirectly deal in the buying or selling or
bartering of goods. However, it may buy, sell or barter in connection with the
bills of exchange received for collection or negotiation or can undertake the
administration of estates as executors, trustees or otherwise.
? DISPOSAL OF NON-BANKING ASSETS (SECTION 9)
A banking company can only acquire immovable property for its own use.
Other immovable properties acquired must be disposed off within seven years
from the date of acquisition. However, in any particular case, the Reserve
Bank of India may extend such period of seven years if it is satisfied, that
such extension would be in the interest cof the depositors of the banking
company.
? MANAGEMENT (SECTION 10)
Under section 10(a), not less than 51% of the total number of members of the
board of directors of a banking company shall consist of persons having
special knowledge or practical experience in one or more of the following
fields :
1. Accountancy;
2. Agriculture and rural economy;
3. Banking;
4. Co-operation;
5. Economics;
6. Finance;
7. Law;
8. Small scale industry.
It is also required that not less than two directors should have special
knowledge or practical experience in respect of agriculture and rural economy
and co-operation or small-scale industry. Under section 10(b)(1), every
banking company shall have one of its directors as Chairman of its board of
directors. The Chairman is entrusted with the management of the whole of the
affairs of the banking company. Such Chairman is the whole-time employee of
the banking company and can hold office for a period not exceeding five
years. Other directors who are whole-time directors can hold office
continuously for a period not exceeding eight years.
REQUIRMENTS
ACCOUNTS
OF
BANKING
COMPANIES
Page6
AS
TO
? Bank Accounting
The book-keeping system of a banking company is substantially different from
that of a trading or manufacturing enterprise. A bank maintains a large number
of accounts of various types for its customers. As a safeguard against any
payment being made in the account of a customer in excess of the amount
standing to his credit or a cheque of a customer being dishonoured due to a
mistake in the balance in his account, it is necessary that customers’ accounts
should be kept up-to-date and checked regularly. In many other mercantile
enterprises, books of primary entry (i.e., day books) are generally kept up-todate while their ledgers including the general ledger and subsidiary ledgers for
debtors, creditors etc. are written afterwards. A bank cannot afford to ignore
its ledgers particularly those concerning the accounts of its customers and
has to enter into the ledgers every transactions as soon as it takes place. In
bank accounting, relatively less emphasis is placed on day books. These are
merely treated as a means to an end-the end being to keep up-to-date
detailed ledgers and to balance the trial balance everyday and to keep all
control accounts in agreement with the detailed ledgers.
In this Unit, we shall concentrate on accounting system followed in, bank and
books of accounts maintained for that purpose. That apart, we shall take a
stock of the returns which a bank is required to file with the Reserve Bank.
Another important aspect in the bank accounts is preparation of final
accounts. The third schedule to the Banking Regulation Act provides formats
for that purpose. Formats of bank final accounts are also covered
The tendency of modern accounting is to adapt the books to a business,
rather than the business to the books, and this practice is particularly
noticeable in bank bookkeeping. Systems and devices may differ among
banks, and even between branches of the same bank, but the basic principles
are the same. Once a clear understanding of bank bookkeeping in general is
obtained, there will be found little or no difficulty in mastering any of the
methods or systems in use by banks.
To grasp thoroly all the underlying principles of bank accounting, it is
necessary to bear in mind that practically everything handled by a bank, in the
ordinary course of its business, is either money itself, or a written claim or
right to money. Consequently the cash book in a bank is the principal book,
and thru its pages must pass a record of every transaction made by the bank,
either in detail or as a total from a supplementary book. Thus the cash book
gives a bird's-eye view each day of all the work of the bank. Some banks still
use, in addition to the cash book, a modified form of the old-fashioned journal,
but it is preferable to make the cash book the only posting medium of
the general ledger.
It would be quite possible for a newly-opened branch to conduct its business
for the first six months or so with the aid of a cash book and a ledger, which
would serve for all accounts. A register would, however, soon be necessary.
As the business grew it would be found convenient to have a special ledger
for individual accounts, with the control or key account carried in the original
Page7
led-ger, and to have the checks and deposits entered in a supplementary
cash book, with only the totals entered in the general cash book. Similarly, it
would be found necessary in time to open up a discount register and a liability
ledger to look after the increased number of loans.
As the volume of business increases, the deposit ledger is capable of being
indefinitely subdivided, either alphabetically or numerically. Generally, the
ordinary deposit ledger is divided alphabetically and the savings bank
ledger numerically.
From the above it will be noticed that bank bookkeeping, although based
primarily on the cash book and ledger, is susceptible of indefinite expansion in
any direction to meet increased volume of business or other local exigencies.
? Preparation of Financial Statements and Accounting Date
(Section 29)
A Company registered under the Companies Act 1956 is required to present
its financial statements, i.e. balance sheet and profit and loss account in the
format laid down in Schedule VI annexed to the Companies Act. Similarly,
banking company, (since it is a company) is also required to prepare and
submit its accounts in specified format. The Banking Regulation Act gives the
format of balance sheet and the profit and loss account in which accounts of
banks should be presented and this format is given in the third schedule
annexed to the Banking Regulation Act. RBI has issued guidelines to follow
the new form A (proforma balance sheet) and form B (proforma profit and loss
account) by all companies doing banking business in India. The government
has notified that the books of accounts of the banking companies shall be
closed on 31st March every year as against 31 st December earlier. In practice,
banks also close books on 30th September for internal purpose.
? Audit (Section 30)
Accounts must be audited by a person duly qualified under any law, for the
time being in force, to be an auditor of companies. However every banking
company is before appointing, reappointing or removing any auditor, required
to obtain the prior approval of Reserve Bank of India .
? Submission of Accounts (Sec 31 and 32)
Three copies of the balances sheet and profit and loss account prepared
under Section 29 together with auditors’ report under Section 30 must be
submitted to the Reserve Bank of India within three months from the period to
which they refer. However, it can be extended up to the period of further three
months by RBI.
Page8
? Publication of Accounts
Rule 15 of the Banking Regulating (Companies) Rules, 1949 prescribed that
accounts and auditors’ report shall be published in newspaper circulating in a
place where a banking company has its principal office, within six months
from the end of period to which they relate.
SIGNIFICANT FEATURES OF ACCOUNTING SYSTEMS OF
BANKS
Banks, like most of the other large-sized institutions, follow the mercantile
system of accounting. Thus, the system of recording classifying and
summarizing the transactions in bank is in substance no different from that
followed in other entities having similar volume of operations. However in the
case of banks the need for the ledger accounts, especially those of
customers, being accurate and up to date is much stronger than most of other
types of enterprises. A bank cannot afford to ignore its ledgers particularly
those containing the accounts of its customers and has to enter into the
ledgers every transaction as soon as it takes place. In the case of banks,
relatively lesser emphasis is placed on books of prime entry such as cash
books or journals. This is unlike most other types of enterprises where books
of prime entry are generally kept up to date while ledgers, including the
general ledger and subsidiary books ledgers for debtors, creditors are written
up afterwards.
Banks follow the accounting procedure of ‘voucher posting’ under which the
vouchers are straightway posted to the individual accounts in the subsidiary
ledgers. (Only in case of Personal Ledger) At the end of each day, the debit
and credit vouchers relating to a particular type of transactions (e.g. savings
bank accounts, current accounts, demand loans cash credit account etc.) are
entered on separate vouchers summery sheets and the total thereof is posted
to the respective control account in the general ledger. The general ledger trial
balance is prepared every day.
? Types of Transactions
The transactions in banks are of two types, cash and non-cash. In the case of
letter, also called ‘transfer transactions’, one or both of account concerned
may be of customers or internal accounts of bank. For example, if ‘A’ deposits
Page9
a cheque drawn in his favor by ‘B’, who is also customer of the branch, the
accounts of the two customers will be affected. On the other hand, if ‘A’
deposits a draft drawn on branch the ‘Draft Account, an internal account of
bank, will be debited’. Likewise, on payment of interest on deposit accounts,
the ‘Interest Account’ at the branch will be debited and various personal
accounts will be credited.
? Vouchers
Both the debit and credit operations on all accounts, either by customers or by
the banks itself, are made by means of vouchers. There are two kind of
vouchers, one, which evidences only debit to an account and which other,
which contains both debit and credit in different accounts. For the sake of
convenience, the latter kinds of vouchers may be called ‘composite vouchers’.
The debit vouchers are of many kinds, broadly following:
1. Cheques issued by customers.
2. Cheques/ Pay orders issued by banks.
3. Withdrawal of money by saving bank account holders.
4. Drafts issued by another branches of banks payable at branch.
5. Draft issued by another banks on branch, in terms of an approved
arrangement between the two banks.
6. Dividend / Interest warrants issued by bank’s customers and payable
by branch in terms of an approved arrangement.
7. Traveler’s cheques issued by any branch of the bank which presented
to the branch for payment.
8. Drafts / Pay orders issued by the branch itself which are cancelled at
the request of customer and amount is refunded to him.
9. Letters of authority signed by the customers, containing standing
instructions.
10.
Instruments like traveler’s cheques/gift cheques, etc.of other
banks which are paid by branch in terms of an approved arrangement.
Page10
11.
Debit vouchers prepared by the branch on its printed stationary
which are authorized by a designated official of the bank and may also
carry authority from the customers in some cases to debit his account
at the branch.
12.
In respect of realization of collection instrument sent to other
branches of the bank, a debit advice (which may be known by different
names in different banks) prepared by the other branch may itself as a
debit voucher.
13.
In case of remittance of funds by one branch to the other branch
by means of telegraphic transferor mail transfer, the bank may treat the
advice of transfer itself as debit voucher or may prepare a separate
debit voucher.
The credit vouchers are also of many kinds, broadly the
following:
1. Pay –in-slip filled by customers (depositors as well as borrowers) for
deposit the amounts in their accounts. Generally, the pay-in-slips are in
standard format adopted by the bank but there may be cases of a
special kind of pay-in-slips in respect of some customers pursuant a
formal agreement between the bank and customer.
2. Applications for issue of demand drafts, mail transfer telegraphic
transfer, banker’s cheques, pay orders, gifts cheques, traveler’s
cheques, and other similar instruments. Some of these application may
be made on behalf of the branch itself it has to make.
3. Credit vouchers prepared by the branch on its printed stationary which
are authorized by an official of the bank. Normally theses vouchers are
signed on behalf of the branch only but there may be some instance
where the customer concerned also signs on the voucher as evidence
that the transaction actually pertains to him. Examples are: deposits of
locker charges (credit to an income account of the bank), deposits of
money for purchase of non-judicial stamps requires for execution of
document in favor of the bank, etc.
4. Challans for deposit into the account of Central/State Government,
e.g. on account of Direct/Indirect taxes or under schemes like public
provident fund, etc.
5. On payment of collection instruments from other branches of the bank,
a credit advice (which may be known by different names in different
banks) or copy of the collection schedule received from the other
branch may itself be treated as a credit voucher.
It may be stated here in case of debits or credits of similar nature to a large
no. of accounts in the same ledger or group of ledgers (e.g. debit on account
Page11
of periodic interest, inspection charges, etc. or credit on account of periodic
payment of interest to depositors), it is a common practice among the banks
to prepare a consolidated voucher on their stationary and enclosed thereto a
list containing details of accounts debited/credited and the amount of
debit/credit.
As stated earlier apart from debit vouchers and credit vouchers, there is also
category of ‘composite vouchers’. These vouchers record the particulars of
both debit and credit accounts. Most of the transactions covered by composite
vouchers pertain to the internal accounts to the bank, i.e. non-customers
accounts. Examples are: bills received for collection, letters of credit issued by
the branch, guarantee issued by the branch, etc. Such vouchers may also be
prepared to rectify an error while debiting or crediting accounts. For example,
in case of current account is debited in general ledger instead of cash credit
account by mistake, the composite vouchers will show debit to cash credit
account with corresponding credit to current account.
All entries in personal ledgers and the summary sheets are checked by
persons other than those who have made entries. Most clerical errors are thus
detected immediately.
A trial balance of personal ledgers is prepared periodically, usually every two
weeks and agreed with general ledger control accounts. In banking parlance,
this exercise is referred to as ‘balancing of books’.
? Banker’s Books
According to Section 2 (3) of the Banker’s Books Evidence
Act, ‘Bankers Books’ include ledgers, day book, cash books,
account books and all other books used in ordinary business
of a bank.
Generally the following books are maintained by the bank to keep
up-to-date records of its customers.
? Cash Book
All cash receipts and payments are recorded in the receiving cashier’s cash
book and paying cashier’s cash respectively. After this on the basis of pay-in
slips received by receiving cashier and cheques and withdrawal slips received
by paying cashier, these transactions are entered first in the accounts of
customers and after that Day Book are written. This is called ‘Slip System’ of
posting.
? Ledger Book
Page12
General Ledger contains the total accounts of each ledger. Besides the GL,
the following ledger books are maintained:
1. Current Accounts Ledger
2. FD Accounts Ledger
3. RD Accounts Ledger
4. Loan Ledger
5. Investment Ledger
6. Bills discounted and purchased Ledger
? Other Books
1. Clearing Register
2. Securities Register
3. Draft Register
4. Bills for collection Register
5. Dishonored cheques Register
6. Safe deposit vault Register
7. Letter of credit Register
? Teller's Records
The teller's cash book or blotter consists of a skeleton ruling with no printed
headings, these being written in daily by the teller according to his
requirements. Were the headings printed it would require a specially printed
book for each class of teller, and even then it might not be suitably spaced for
local requirements.
A teller should arrange his entries, debit, and credit to conform with the
general system of the office. Cheque should be sorted out and entered
according to the divisions of the ledger, thus balancing with the various
supplementaries. If the checks are very numerous, separate sheets, suitably
ruled, can be used; these can be entered on an adding machine or by an
assistant.
Page13
A teller's book is, in reality, a skeleton cash book, and the entries should be so
arranged that the books of the various departments should balance with the
combined entries of the tellers.
All parcels of money received are acknowledged, and entered in a special
book. If the advice comes in first it should be at once entered in this book, and
the parcel inquired for if necessary. Money parcels dispatched are also
entered in a book. Great care is necessary in handling money parcels. Both
sent and received parcels should be counted by two men in each other's
presence and, in the case of the former, it is necessary to have the parcel in
the uninterrupted custody of two men from the time it is counted and sealed
until it is delivered to the express company or post office.
The relative advices and acknowledgments should be carefully watched and
any delay immediately inquired into.
? Supplementary Cash Book
In this book are entered all the deposit slips, checks, and other vouchers
pertaining to the ordinary deposit and savings bank ledgers. The ruling is
simple, requiring no printed headings, and consists of columns for folio,
names of customers and amount of vouchers - two sets of columns to a page.
Two pages will easily contain a day's entries for a small branch, the first or
left-hand column being used for deposits and the remaining three for checks,
the latter being much more numerous. The savings deposits and checks,
being comparatively few in number, are entered at the end of the day under
their own headings at the foot of the ordinary checks and deposits
respectively, though in some small branches they are entered in the
general cash book.
In offices where it is found necessary to split up the deposit ledger into two or
more alphabetical divisions, a special "supplementary" is devoted to each
division including the savings bank ledger. It is not necessary to open up an
account in the general ledger for each division of the deposit ledgers.
If the savings ledger contains a large number of accounts, it will be found of
great advantage to split it up into several sections or blocks of accounts, as
this greatly facilitates the location of errors when balancing. A special form of
supplementary cash book should be used with a money column for each
block of accounts.
In the case of a current account which has an unusual number of checks at a
certain period of the month or year - for instance, payroll or dividend checks it is permissible to detail a day's checks once, either in the supplementary
cash book or ledger, and enter the total only with a reference in the other
book.
Page14
In the larger offices of some of the banks, where the volume of checks is
unusually heavy, a loose-leaf form of supplementary cash book is used in
connection with the adding machine, the names being typewritten in
afterward. Where this form is adopted, care should be taken to see that the
sheets are consecutively numbered and filed, and that each sheet is signed
by the two checking officers.
PRINCIPAL BOOKS OF ACCOUNT
The principal books of accounts, subsidiary books and statistical records
generally maintained by banks are described in the following. It may, however,
be emphasized that the exact nature of such books may differ from one book
to another, depending upon the individual requirement of each bank.
? General Ledger
The general Ledger contains the control accounts of all personal ledgers, the
profit and loss account and different asset and liabilities accounts. There are
certain additional accounts also (known as contra accounts) which are kept
with the view to keeping control over transactions which have no direct effect
on the asset and liabilities of bank and represent agency business handled by
bank on which it earns service charges, (or commission) e.g. Letters of credit
opened, bills received or sent for collection, guarantees given, etc.
? Types of General Ledger:
1. Old Style
Although bank book-keeping is supposed to be very simple, there are many
ways of doing the same thing and therefore every bank may find something in
the methods of some other bank, which would be worth its while to adopt.
The general ledger most often found is the old-fashioned ledger, this ledger
needs no explanation. It is sometimes ruled with two columns on each side,
the inside columns being used to bring down the totals from day to day,
instead of directly under the day's work. These additional columns prove a
blessing, when an analysis of previous work is desired. The footings are
usually made in a hurry and are often so large and heavy that it is hard to tell
them from the actual debits and credits. It should be borne in mind that the
general ledger is continually used to prepare statements of all kinds. Every
item of unusual nature should be properly explained on the ledger. For
example, the profit and loss account frequently contains debits
representing loans, discounts, or overdrafts charged off. Money subsequently
recovered from these losses is credited to this account. The record on each
side should be so plain that any item may be traced back, in order to show
both debit and credit without referring to tickets or journal of any kind. It is
worth while to itemize the expense account in the same way unless a detailed
Page15
expense account is kept separately. Do not debit expense with "Hargood &
Co.'s bill, $122.30," but "Stationery, $122.30." A few years hence the bank
may be dealing with another stationer.
Three Column Ledger
Another form of ledger has the money columns together, making it much
easier to strike the balance. The debit balances should be struck in red and
the credit balances in black ink when using this form.
? Profit and Loss Ledger
Some banks maintain a profit and loss account in the general ledger and
maintain separate books for each revenue and expense heads/sub-heads.
Some banks maintain columnar books having separate columns for each
revenue and expense heads/sub-heads. These books are prepared from
vouchers. The total of debits and credits of each day are posted on profit and
loss account in general ledger from voucher summery sheets. In some banks,
the revenue accounts too maintained in general ledger itself, while in others,
board revenue heads are kept in general ledger and their details are kept in
subsidiary ledgers.
For managerial purpose, the accounts in profit and loss ledgers are more
detailed than those shown in published profit and loss accounts of banks. For
example, there are separate accounts for basic salary, dearness allowance,
and various others allowances, which are grouped together in published
accounts. Similarly various accounts comparing general charges, interest
paid, and interest received, etc. are maintained in the profit and loss ledgers.
? Subsidiary Books
? Personal ledgers
Each control account in the general ledger is supported by a subsidiary ledger
(or more than one subsidiary ledger if the number of accounts is large). Thus
in respect to control accounts relating to accounts relating to accounts of
customers, subsidiary ledgers are maintained for:
a) Various types of deposits accounts (saving bank accounts, recurring
account, current accounts, etc) which contains accounts of individuals
customers. Each account holder is allotted a separate folio in the
ledger:
b) various types of loans and advances related accounts (cash credit,
term loans, demand loans, bills purchased and discounted, letters of
credit, bank guarantees issued, etc.) wherein the liability of each
customer is reflected. Generally there is no separate ledger for
overdraft accounts which are granted in current account. However
Page16
some branches maintain these accounts in separate ledgers
depending upon the number of regular borrowers under the facility.
Separate registers are maintained to record the particulars of term deposits
(including derivatives like call deposits, certificate of deposits, etc.) Banks
generally do not allot separate folios to each customer. The register divided in
to various sections, each section for particular period of deposits and/or the
rate of interest payable on deposits. As mentioned earlier, postings to these
ledgers are made directly from summary sheets. The voucher summary
sheets prepared in the department which originates the transactions, by the
persons other than who writes the legers they are subsequently checked with
the vouchers by persons generally unconnected with writing of
ledgers/registers or the voucher summery sheets.
? Current Deposit Ledger
The ordinary or current deposit ledger is a very active and important book in a
bank, and one which calls for both accuracy and dispatch on the part of the
clerk in charge, as errors can easily be made, involving the bank in serious
loss. The deposit ledger is invariably a loose-leaf book and ruled as shown in
Figure 22. This form is invariably used by all the banks. The so-called Boston
ledger has been tried several times, but was not found practicable in Canada,
owing perhaps to the method of marking or accepting checks by a direct debit
to the account. The accounts are arranged alphabetically, and are therefore
self-indexing, but an index is usually kept on the tagged sheet dividing the
alphabet.
In small offices there is usually only one current ledger used, A-Z. As work
increases and becomes too much for one ledger-keeper, a second ledger can
be opened divided A-K and L-Z. For three ledgers the divisions generally run
A-G, H-O, and P-Z, and for four the divisions are A-C, D-K, L-R and S-Z.
As the ledger is loose-leaf there is no accumulation of dead leaves, but the
general regulations regarding loose-leaf ledgers given in Section 3 of this
chapter should be observed closely.
BANK
Sheet No.
Name
Address
Dat
Particular
e
s
Account No.
Debi
t
Credi
t
Dr.
or
Cr.
Balanc
e
Dat
e
Particular
s
Debi
t
Credi
t
Dr.
or
Cr.
Current Deposit Ledger
Page17
Balanc
e
? Bills Registers
Details of different types of bills are kept in separate registers which have
suitable columns. For example, bill purchased inward bills for collection;
outward bills for collection, etc. are entered serially on a daily basis in
separate registers. In the case of bill purchased or discounted party-wise
details are also kept in normal ledger form this is done to ensure that
sanctioned limits of parties are not exceeded.
Entries in registers are made by reference to the original documents. A
voucher of the total amount of the transactions of each day is prepared in
respect of each register. This voucher is entered in the day book. When the
bill is realized or returned its original entry in register is marked off. A daily
summery of such realization or returns is prepared in separate registers
whose totals are taken to vouchers which are posted in day book.
In respect of bills for collection, contra vouchers reflecting both sides of
transactions are the prepared at the time of the original entry is reversed on
realization.
Outstanding entries are summarized at stipulated intervals and their totals
agreed with the balance of the respective control accounts in general ledger.
? DEPARTMENTAL JOURNALS
Each department of the Bank maintains a journal to note the transfer entries
passed by it. These journals are memoranda books only, as all the entries
made there are also made in the Day Book through Voucher Summary
Sheets. Their purpose is to maintain a record of all the transfer entries
originated by each department. For example, the Loans and Overdraft Section
will pass transfer entries for interest charged on various accounts every
month, and as all these entries will be posted in the journal of that
department, the office concerned can easily find out the accounts in respect of
which the interest entry has been passed. Since all vouchers passed during
the day are entered into the Day Book only in a summary form, it may not be
possible to get this information from the Day Book without looking into the
individual vouchers. Moreover, as the number of departments in a banks is
quite large, the Day Book may not be accessible at all times to all
departments.
As has been mentioned earlier, two vouchers are generally made for each
transaction by transfer entry, one for debit and the other for credit. The
vouchers are generally made by and entered into the journal of the
department which is affording credit to the other department. For example, if
any amount is to be transferred from Current Account of a customer to his
Saving Bank Account, the voucher will be prepared by the Current Accounts
Department and entered in the journal of that department.
Page18
? Other Registers/Records
There are different Registers/Records to record the detail particulars of
various types of transactions. These Registers/Records do not from part of
the books of accounts but support the entries/balances in the various
accounts some of the important Registers/Records relate to the following:
(a) Drat issued (separated registers may be maintained for drafts issued by
the branch on other branches of same bank and those on the branch of
its correspondents in India or abroad). Depending upon the value of
business, some branches may have separated registers on some other
basis also like weather the draft issued advised is prepared or not,
registers exclusively for some high volume customers of the bank, the
range, within which amount of draft falls, e.g. below Rs. 1 lakh, Rs 1-10
lakh, Rs 10 -100 lakhs, etc.
(b) Drafts paid (separate registers may be maintained on the same pattern
as an in case of draft issued)
(c) Issue and payment of:
1. Telephonic transfers
2. Mail transfers
3. Bankers cheques/Pay orders/traveler’s cheques/Gift cheques
4. Letters of credit.
5. Letters of guarantee
Entries in these registers are made from original documents which are also
summarized on vouchers every day. These vouchers are posted in Day book.
Outstanding entries are summarized at stipulated intervals and their totals are
agreed with respective control accounts in the ledger.
There are frequent transactions amongst the branch of bank which are settled
through the mechanism of inter-office accounts. The examples of such
transaction include payment/realization of bills/cheques, etc. sent for the
collection by one branch to other e.g. for government related business. All
such transfers of funds are canalized through nodal account (this has different
names in different banks such as Head-office account, Inter-office account,
and so on.). This is a circular account for the banks as well as the auditors for
two reasons: first many funds have been prepared on banks through this
account and second, banks are now required to make provision for entries
routed through this account which remain unreconciled beyond a time period
specified by Reserve Bank of India.
Page19
Banks maintain a Suspense Ledger to record various suspense accounts. As
mentioned earlier a trial balance is prepared in banks every day. Sometimes
due to clerical errors e.g. preparing the voucher summery sheet balance and
the trial balance may not tally. In such situation the difference is temporarily
transferred to a suspense account (in case of short debit) or to sundry
deposits account (in case of short credit).
Similarly transaction of transitory nature e.g. travel advance to employees, Are
also recorded in suspense account pending their adjustment related
income/expenses account. Some banks maintains separate ledger for
suspense account and sundry deposit accounts. The amounts lying in theses
accounts need regular monitoring to clear them.
Suitable registers with back-up registers to record classification under
numerous sub-heads are maintained for:
a) Establishment expenses
b) Interest and discount income
c) Incomes by way of commission
d) Interest expenditure
e) Provision for interest accrued but not due on deposits
f) Fixed Assets
g) Stationary consumed/in hand
h) Interest payable to and receivable from head office, in respect of
advances and depositors respectively. A peculiar feature of accounting
systems in banks is that the branches, nationally, have no funds of their
own. All deposits accepted at branch are deemed to have been passed
on bank’s head office and all loans made at branch are deemed to have
been made out of funds received from the head office. The head office
pays interest to branch for its deposits and charges interest from the
branch for its loans and advances. The rates of such interest charged
and paid by head office are decided by the head office during the course
of the year and are an important factor in calculating profit and loss of
branch. The mechanism may be known by different names in different
banks. All calculation in this regard is done at the branches only and
suitable entries are passed, generally at year end. These entries
however get offset in the process of consolidation of accounts and have
no effect on financial statement of the bank as a whole.
i) Instruments received from customers for payment/collection by branch.
Clearing of locally payable instruments is an important function of banks.
Some banks maintains separate registers to maintain details of various
types of instruments lodged by customers where as some other banks
Page20
use a common book
customers.
to record all kind of instruments lodged by
Separate Registers are maintained to record summaries the transactions
relating to a particular head of account like Current Account, Saving Bank
Account, Cash Credit, Term loans. Such books may be called ‘Log Books’,
‘Day Book’, etc. The totals of these books are carried over to Cash book.
Some other registers may be: Stop Payment Register, Locker Access
Register, Demat Register, Drawing Power Register used for monitoring of CC
Accounts etc.
? OTHER MEMORANDA BOOKS
Besides the books mentioned above, various departments of the bank have to
maintain a number of memoranda books to facilitate their work. Some of the
important books are described below:Cash Department
(a) Receiving Cashiers’ cash book
(b) Paying Cashiers’ cash book
(c) Main cash book
(d) Cash Balance book
The main Cash Book is maintained by persons other than the cashiers. Each
cashier keeps a separate cash book. When cash is received, it is
accompanied by pay-in-slip or other similar document. The cashier makes the
entry in this book
This book contains a record of all the vouchers and entries representing the
transactions of each day. Theoretically, the particulars of every item in the
cash book should be entered in detail, but owing to the wide extension of
banking facilities and the constantly increasing volume of checks and other
entries, it has been found necessary to use supplementary books for
recording particulars of any class of items whose volume is sufficient to
warrant a separate book - only the day's totals are carried into the general
cash book. The majority of entries, especially in a large office, are therefore in
the form of totals, and very few detailed entries have to be made; but all
entries, when made, should be definite as to source and sufficiently selfexplanatory to be understood by any one at any time - ten years after, if
necessary.
In the larger offices, the officers in charge of the different departments after
balancing their books hand to the cash-book clerk the totals in the form of a
signed memorandum, and even in the smaller offices it is advisable to have
the clerks entering up the various supplementary books, give a similar
memorandum of their totals. This limits the responsibility and adds to the
efficiency of the staff.
Page21
Debit and credit entries for cash book, other than the totals referred to above,
are represented by vouchers giving the necessary particulars, signed by
the manager, accountant or other authorized officer, and it should be an
imperative rule that any slip, which does not contain sufficient particulars or
which lacks the necessary signature, should be refused by the cash-book
clerk and referred back to the teller for completion. In order to facilitate the
sorting and checking of these vouchers, distinctive colored paper or printing
should be used; for instance, yellow, debit slips and white, credit slips.
It should constantly be borne in mind that as the cash book and its
supplementary books are recognized in a court of law as the books of original
entry, faulty or meager particulars might cause serious trouble. Verbal
explanation, even if available, would not be admitted. Examine a bank cash
book of twenty or thirty years ago: there could be no better object lesson of
what a cash book should be. Copper-plate writing and ample particulars are
characteristic.
Quick Payment System - Banks introduce different systems so that their
customers may receive payment of cash etc. quickly. The most prevalent
system is the teller system. Under this system tellers keep cash as well as
ledger cards and the specimen signature cards of each customer in respect of
Current and Saving Bank Accounts. A teller is authorised to make payment up
to a particular amount, say, Rs. 1,000. On receipt of the cheque, he checks it,
passes it for payment, enters it in the ledger card and makes the payment to
customer. The teller also receives cash deposited in these accounts.
Outward Clearing:
(a) A Clearing Cheques Received Book for entering cheques received from
customers for clearing.
(b) Bank wise list of the above cheques, one copy of which is sent to the
Clearing House together with the cheques.
A person checks the vouchers (foil of pay-in slips) and lists with the Clearing
Cheque Received Book. The vouchers are then sent to appropriate
departments, where customers’ accounts are immediately credited. If any
cheque is received back unpaid the entry is reversed. Normally, no drawings
are allowed against clearing cheques deposited on the same day but
exceptions are often made by the manager in the case of established
customers.
Inward Clearing
Cheques received are checked with the accompanying lists. They are then
distributed to different departments and the number of cheques given to each
department is noted in a Memo Book. When the cheques are passed and
posted into ledgers, their number is independently agreed with the Memo
Page22
Book. If any cheques are found unplayable, they are returned back to the
Clearing House. The cheques themselves serve as vouchers. Book which is
checked by the chief cashier. The pay-in-slip then goes to the Main Cash
Book writer who makes an entry in his books. The cash book checker checks
the entry with the slip and then the counter-foil of the slip is returned back to
the customer and the foil is sent to the appropriate department for entering
into the ledger. The foil is used as a voucher. Cash is paid against a cheque
or other document (e.g. traveller’s cheque, demand draft, pay order, etc.) after
it has been duly passed and entered in the appropriate account in the ledger.
Cheques, demand drafts, pay orders, etc. are themselves used as vouchers.
Loans & Overdraft Departments
(a) Registers for shares and other securities held on behalf of each customer.
(b) Summary Books of Securities giving details of Government securities,
shares of individual companies etc.
(c) Godown registers maintained by the godown-keeper of the bank.
(d) Price register giving the wholesale price of the commodities pledged with
the bank.
(e) Overdraft Sanction registers.
(f) Drawing Power book.
(g) Delivery Order books.
(h) Storage books.
Deposits Department
(a) Account Opening & Closing registers.
(b) For Fixed Deposits, Rate registers giving analysis of deposits according to
rates.
(c) Due Date Diary.
(d) Specimen signature book.
Establishment department
(a) Salary and allied registers, such as attendance register, leave register,
overtime register, etc.
(b) Register of fixed assets, e.g., furniture and fixtures, motor cars, vehicles,
etc.
(c) Stationery registers.
(d) Old records register.
General
(a) Signature book of bank’s officers.
(b) Private Telegraphic Code and Cyphers.
Page23
? STATISTICAL BOOKS
Statistical records kept by different banks are in accordance with their
individual needs. For example, there may be books for recording
(i) Average balance in loans and advances etc.
(ii) Deposits received and amount paid out each month in the various
departments,
(iii) Number of cheques paid,
(iv) Number of cheques, bills and other items collected.
The above is not an exhaustive list of accounting records kept by a bank.
PREPRATION
AND
PRESANTATION
STATEMENTS OF BANKS
OF
FINANCIAL
A banking company is not required to prepare financial statements in
accordance with Schedule VI of the Companies Act, 1956.
Form A of third schedule gives the format of a balance sheet and form B gives
the format of a profit and loss account. These formats have been revised
w.e.f. 1st April 1991 and the profit and loss account and balance sheet of
banking company for the year ended 31 st March 1992 and onwards have to be
prepared in new form as discussed below.
FORMS OF BALANCE SHEET AND PROFIT AND LOSS
ACCOUNT
With the nationalisation of major commercial banks and changes brought
about in the economic and financial policies by the Government, the
environment in which the banks operate has undergone a complete change.
However, there was little effort to bring about a change in the financial
statements of banks to reflect the reality of the impact of the environment.
There were suggestions emphasising a need for revising formats in which
banks publish their financial statements as prescribed under the Banking
Regulation Act, 1949. A Committee under the Chairmanship of Shri A. Ghosh,
Deputy Governor, RBI, was constituted to examine, inter alia the desirability of
greater or full disclosure in the published accounts of banks having regard to
the need for disclosure, public accountability of banks, requirement and
maintenance of confidentiality between banker and customer and the
requirement of maintaining the reputation and credit-worthiness of banks. The
Committee
after
due
deliberation
has
suggested
suitable
changes/amendments in the forms of balance sheet and profit and loss
account of banks, having regard to :
1. Need for better disclosure
Page24
2. Expansion of banking operations both area-wise and sector-wise over the
period, Need for improving the presentation of accounts etc. The revised
formats are given below which include Form A for Balance Sheet, Form B for
Profit and Loss Account and eighteen other schedules of which two relates to
notes and accounting policies.
THIRD SCHEDULE: FORM A
Form of balance sheet
Balance Sheet as on 31st March………..
(000’s omitted)
Particulars
Schedul
e
No.
As on 31.3.__
(current year)
CAPTIAL AND LIABILITES
Capital
1
Resaves and surplus
2
Minorities Interest
2A
Deposits
3
Borrowings
4
Other Liabilities and Provision
5
TOTAL
ASSETS
Cash and balance with RBI
6
Balance with banks and money at call
and short notice
7
Investments
8
Advances
9
Fixed Assets
10
Other Assets
11
TOTAL
Contingent liabilities
12
Page25
As on 31.3.__
(pervious
year)
The Following schedules are required to be furnished with
The Balance Sheet of Banking Companies:
PARTICULARS
Schedule 1 Capital
RS.
I. For nationalized banks
Capital (fully owned central government)
Rs.
…
II. For banks incorporated outside India
i) Capital ( the amount brought in by banks by way of startup capital prescribed by RBI should be shown under this
head)
ii) Amount of deposit kept with RBI under Section 11(2) of The
Banking Regulation Act, 1949.
…
…
Total
…
III.For other banks:
Authorized capital (… shares of Rs. … each)
Issued capital (… shares of Rs. … each)
Subscribed capital (… shares of Rs. … each)
Call-up capital (… shares of Rs. … each)
Less: Calls unpaid
Add: Forfeited shares
…
…
…
…
…
…
Total
…
Schedule 2 Reserves and Surplus
I
Statutory Reserves
Opening balance
Additions during the year
Deductions during the year
…
…
…
…
Capital Reserves
Opening balance
Additions during the year
Deductions during the year
…
…
…
…
III Share premium
Opening balance
Additions during the year
Deductions during the year
…
…
…
…
IV Revenue and the other reserves
Opening balance
…
II
Page26
Additions during the year
Deductions during the year
V
…
…
Balance in Profit and Loss Account
…
…
Total ( I + II + III + IV + V )
…
Schedule 3 Deposits
A I. Demand Deposits
From banks
From others
II. Savings banks accounts
III. Term Deposits
From banks
From others
Total ( I, II, and III)
B
i) Deposits of branches in India
ii) Deposits of branches outside India
…
…
…
…
…
…
Grand total ( A and B )
…
…
…
…
…
…
Schedule 4 Borrowings
I. Borrowings in India
i) Reserve Bank of India
ii) Other Banks
iii) Other institutions and agencies
…
…
…
…
II. Borrowings outside India
…
Total ( I and II )
Secured borrowings in I and II above
…
…
Schedule 5 Other liabilities and provisions
i) Bills payable
ii) Inter office adjustment (net)
iii) Interest accrued
iv) Others ( including provisions)
…
…
…
…
Total
…
Schedule 6 Cash and bank with RBI
I. Cash in hands ( including foreign currency notes)
II. Balance with RBI in:
…
Page27
i) Current Account
ii) Other Accounts
…
…
Total I and II
…
Schedule 7
Balance with banks and Money at Call and Short notice
I. In India
i) Balance with banks:
a) in Current Accounts
b) in Other Accounts
ii) Money at call and Short notice
a) With banks
b) With other institutions
Total ( i and ii )
…
…
…
…
…
…
…
II. Outside India
i) In Current Accounts
ii) In other Deposits Accounts
iii) Money at Call and Sort notice
Total ( i, ii, and iii)
…
…
…
…
Grand Total ( I and II)
…
Schedule 8 Investment
I. Investments in India in
i) Government Securities
ii) Other approved Securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and/or joint ventures
vi) Others to be specified
Total
II. Investments outside India in
i) Government Securities ( including local authorities )
ii) Subsidiaries and/or joint ventures abroad
iii) Other investment ( to be specified)
Total
…
…
…
…
…
…
…
…
…
…
…
Grand Total ( I and II)
…
Schedule 9 Advances
A i) Bills Discounted and Purchased
ii) Cash Credits, Overdraft, and Loans payable on
…
…
Page28
Demand
iii) Term loans
Total
…
…
B i) Secured by tangible Assets
ii) Covered by bank/Govt. guarantees
iii) Unsecured
Total
…
…
…
…
C I Advances in India
i) Priority Sector
ii) Public Sector
iii) Banks
iv) Others
Total
…
…
…
…
…
II Advances out side India
i) Due from banks
ii) Due from others:
a) Bills purchased discounted
b) Syndicate Loans
c) Others
Total
Grand Total ( CI. and C II)
…
…
…
…
…
…
…
Schedule 10 Fixed Assets
I Premises
At cost as on 31st March of the preceding year
Additions during the year
Deduction during the year
Depreciation to date
II Other fixed assets ( incl. furniture and fixtures)
At cost as on 31st March of the preceding year
Additions during the year
Deduction during the year
Depreciation to date
Total ( I and II )
…
…
…
…
…
…
…
…
Schedule 11 Other Assets
I. Inter office adjustment (net)
II. Interest acrrude
III. Tax paid in advance/ Tax deducted at source
IV. Stationary and stamps.
V. Non-banking assets acquired in satisfaction of claims
VI. Others*
Total
Page29
…
…
…
…
…
…
…
* In the case there is any unadjusted balance of loss (i.e. when the loss
exceeds the aggregate of capital, reserves and surplus), the same may be
shown under appropriate footnote.
Schedule 12 Contingent liabilities
I. Capital against the bank not acknowledged as debts
II. Liability for partly paid investment
III. Liability on Account of outstanding forward
Exchange contracts
IV. Guarantees given on behalf of constituents
In India
Outside India
V. Accepts endorsements and other obligation
VI. Other items for which the bank is contingently
Liable
Total
…
…
…
…
…
…
…
…
..
…
PREPARATION OF PROFIT AND LOSS ACCOUNT
Form B
Third Schedule
Form of Profit and Loss Account
Profit and Loss Account for the year ended 31st March ……
Particulars
Schedule
Year ended
Number
(Rs.)
I. Income:
Interest Earned
13
….
Other income
14
….
II. Expenditure:
Interest Expended
15
….
Operating Expenses
16
….
Provisions and Contingencies
…
….
III. Profit/Loss:
Net Profit/(Loss) of the year
….
Total
….
IV. Appropriations:
Transfer to Statutory Reserves
…..
Transfer to other Reserves
….
Transfer to Government Proposed Dividend
….
Balance Carried over to Balance Sheet
….
Total
….
Schedules to be annexed with Profit and Loss Account
Page30
Particulars
Rs.
Schedule 13: Interest Earned
(I) Interest/ Discounts on Advances/Bills
(II) Income on Investments
(III) Interest on balances with RBI and other inter bank funds
(IV) Others
Total
...
…
…
…
…
Schedule 14: Other Incomes
(I) Commission, Exchange and Brokerage
(II) Profit on Sale of investment
Less: Loss on Sale of investment
(III) Profit on revaluation of Investment
Less: Loss on revaluation of Investment
(IV) Profit on Sale of Land/Building and Other Assets
Less: Loss on Sale of Land/Building and Other Assets
(V) Profit on Exchange transactions
Less: Loss on Exchange transactions
(VI) Income earned by way of dividend, etc., from subsidiaries
Companies and/or joint ventures abroad/in India.
(VII) Misc. Income
Total
Note: Under items II to V loss figures be shown in brackets
Schedule 15 : Interest Expended
(I) Interest on Deposits
(II) Interest on RBI/Inter-Bank Deposits
(III) Others
Total
Schedule 16: Operating Expenses
(I) Payment to and Provisions for Employees
(II) Rent, Taxes and Lighting
(III) Printing and Stationary
(IV) Advertisement and Publicity
(V) Depreciation on Banks Property
(VI) Directors’ Fees, Allowances and Expenses
(VII) Auditors’ Fee and Expenses
(Including Branch Auditors)
(VIII) Law Charges
(IX) Postage, Telegrams, Telephones, etc.
(X) Repairs and Maintenance
(XI) Insurance
(XII) Other Expenditure
Total
Page31
…
Note: Corresponding figures for the immediately preceding
financial year should be shown in separate columns
9. IMPORTANT ITEMS OF BALANCE SHEET
Let us consider some of the peculiar items of assets and liabilities appearing
in the bank’s balance sheet.
Balance sheet: Assets Side
The various items of assets in the balance sheet are arranged according to
liquidity order.
1. Money at Call and Short Notice
These are related to inter-bank transactions. Under this arrangement money
borrowed one bank from other bank usually for one to fourteen days. Banks
having surplus money advance such loans. Banks having short supply of
money, contacts the banks having surplus funds or vice versa for this
purpose. Alternatively, they may approach the primary dealers in the money
market for deploying their surplus funds or making good the deficit. The rate
of interest on which money is supplied fluctuates every day even within the
day.
2. Advances
Under this head, the following items are covered:
1. Loans
2. Cash credit
3. Overdraft
Loans: A loan is advance of fixed amount given to customer for a specific
period.
Cash credit: A is an arrangement by which the bank agrees to lend money up
to a fixed limit against pledge or hypothecation of some securities. Customers
need not draw the whole at home.
Overdraft: Under this arrangement, the customer is permitted to over draw
the money from his current account up to a certain limit against some specific
securities like L.I.C policy banks fixed deposits receipts national savings
certificates, quoted shares.
3. Bills Receivable being Bills for Collection as Per Contra
Page32
Customers deposit into bank the draft and the bills for collection and credit to
their accounts. The bank keeps the register for recording the bills for
collection. On collection, cash account is debited and customers account is
credited. At end of the accounting year, when some bills are left uncollected,
following entry is passed:
Bills received being bills for collection a/c…………Dr.
To bills for collection being bills receivable account
It is contra item in the balance sheet. The first account denotes the amount
receivable and it is shown on assets side. The second one denotes the
amount payable to the customer and is shown on the liabilities side of the
balance sheet.
4. Acceptance Endorsement and other Obligations
They represent the liabilities which the bank has assumed on behalf of its
customers, the bank may accommodate his customer in the following ways:
1. by opening letters of credit
2. by accepting bills on behalf of the customer
3. by making endorsement on promissory notes prepared by the
customer
4. by issuing letters of guarantee to make payments if the customers fail
to pay
In all these cases, the bank is liable to third parties. Hence, it is liability. While
undertaking such liabilities the bank obtains customer guarantee from its
customers which enables it to claim the amounts from its customers.
Therefore, it is an asset. At the end of the accounting year, the following entry
is passed for recording unrecorded bills:
Constituent’s Liability for Acceptance, Endorsement or other
Obligations a/c ………………………..DR.
To Acceptance, Endorsement or other Obligations.
It is contra item in the balance sheet. The first accounts appears on assets
side while the other on liabilities side.
5. Non-Banking Assets
A bank cannot acquire certain assets but it can always lend against the
security of such assets. This means that some times, in case of failure on part
of the loanee to repay the loans, the bank may have to take possession of
such assets. Profit or loss on disposal of such assets should be disclosed
separately in the profit and loss account.
6. Gold and Silver
Page33
Gold appears under ‘Investment’ and silver appears under ‘other assets’
7. Lockers or Safe Deposits Vaults
These are assets and are included are included under furniture
8. Branch Adjustment Account
There are many transactions that take place between the head office and the
branches and between one branch to another towards the end of financial
year. When such transactions appear they are properly recorded in books of
branch or head office when the transactions take place but in the absence of
any advice or completion of the transactions, they remain unrecorded in the
books of other party. Because of these transactions there is always balance
left in branch account in the head office books. This balance is called ‘Branch
adjustment account’. This appears on assets side of the balance sheet if it
has a debit balance and on liability side if it has credit balance.
Balance Sheet: Liabilities side
9. Share Capital
Under this head, authorised, subscribed and issued and paid up capital are
shown separately. As in the case of any other limited company, calls in arrears
are reduced from paid up capital and forfeited shares amount is added to it.
10. Reserves Fund and Other Reserves
Every banking company incorporated in India shall before declaring a
dividend, transfer a sum equal to twenty per cent of net profit each year (as
per profit and loss account) to reserve fund.
11. Deposits and Other Accounts
There are amounts lying in the credit of customers accounts. Fixed deposits
are for a fixed period whereas savings bank and current accounts balances
are repayable on demand. Contingency accounts, include the provision for
contingencies, provision for taxation, etc. These are merged with current
accounts.
12. Bills for Collection and Acceptances and Endorsements are Contra
Items
10. DISCLOSURE REQUIRMENTS OF BANKS TO BE ADDED
AS NOTES TO ACCOUNTS ( in Schedule 17)
Page34
1. Non- performing Assets (NPA)
The banks have to classify their advances into four broad groups (i) standard
assets, (ii) sub-standard assets, (iii) doubtful assets and (iv) loss assets.
Broadly speaking, classification of assets into the above categories should be
done taking into account the degree of well defined credit weaknesses and
extent of dependence on collateral security for realisation of dues. Banks
should, therefore, keep the following definitions in mind while classifying the
assets.
Financial Statements of Banking Companies
(i) Standard Assets - Standard asset is one which does not disclose any
problems and which does not carry more than normal risk attached to the
business. Such an asset is not a NPA.
(ii) Sub-standard Assets - Sub-standard asset is one which has been
classified as NPA for a period not exceeding 12 months. In such cases, the
current net worth of the borrower/guarantor or the current market value of the
security charged is not enough to ensure recovery of the dues to the bank in
full. In other words, such an asset will have well-defined credit weaknesses
that jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the bank will sustain some loss, if deficiencies are not
corrected. In the case of term loans, those where installments of principal are
overdue for period exceeding one year should be treated as sub-standard. An
asset where the terms of the loan agreement regarding interest and principal
have been renegotiated or rescheduled after commencement of production,
should be classified as sub-standard and should remain in such category for
at least two years of satisfactory performance under the renegotiated or
rescheduled terms. In other words, the classification of an asset should not be
upgraded merely as a result of rescheduling, unless there is satisfactory
compliance of the above condition.
(iii) Doubtful Assets - A doubtful asset is one which has remained NPA for a
period exceeding 18 months. In the case of term loans, those where
instalments of principal have remained overdue for a period exceeding 18
months should be treated as doubtful. Here too, as in the case of substandard assets, rescheduling does not entitle a bank to upgrade the quality
of an advance automatically.
A loan classified as doubtful has all the weaknesses inherent in that classified
as sub-standard with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently known facts, conditions
and values, highly questionable and improbable.
(iv) Loss Assets - A loss asset is one where loss has been identified by the
bank or internal or external auditors or the RBI inspection but the amount has
not been written off, wholly or partly. In other words, such an asset is
considered uncollectible and of such little value that its continuance as a bank
asset is not warranted although there may be some salvage or recovery
value.
It may be noted that the above classification is meant for the purpose of
computing the amount of provision to be made in respect of advances and not
Page35
for the purpose of presentation of advances in the balance sheet. The balance
sheet presentation of advances is governed by the Third Schedule to the
Banking Regulation Act, 1949, which requires classification of advances
altogether differently.
Taking into account the time lag between an accounts becoming doubtful of
recovery, its recognition as such, the realization of the security and the
erosion over time in the value of security charged to the banks, it has been
decided that banks should make provision against sub-standard assets,
doubtful assets and loss assets on the following basis:
(a) Loss assets: The entire amount should be written off or full provision
should be made for the amount outstanding.
(b) Doubtful assets: (i) Full provision to the extent of the unsecured portion
should be made. In doing so, the realizable value of the security available to
the bank should be determined on a realistic basis. DICGC/ECGC cover is
also taken into account (this aspect is discussed later in this chapter). In case
the advance covered by CGTSI guarantee becomes non-performing, no
provision need be made towards the guaranteed portion. The amount
outstanding in excess of the guaranteed portion should be provided for as per
the extant guidelines on provisioning for non-performing advances.
(ii) Additionally, 20% - 100% of the secured portion should be provided for,
depending upon the period for which the advance has been considered as a
doubtful asset, as follows:
Period for which the advance has been
Considered as doubtful
Up to 1 year
More than 1 year and up to 3 years
More than three years
% of provision on secured portion
i. Outstanding stock of NPA’s as on 31.03.2004
w.e.f. 31.03.2005
w.e.f. 31.03.2006
w.e.f. 31.03.2007
20%
30%
50%
60%
75%
100%
ii. Advances classified as doubtful for more than three years on or after
01.04.2004
w.e.f. 31.03.2005
100%
(c) Sub-standard assets : A general provision of 10% on total outstanding
should be made without making any allowance for DICGC/ECGC cover and
securities available. An additional provision of 10% (i.e., total 20% of total
outstanding) is required to be made on ‘unsecured exposure’ ab initio sanction
of loan. Generally such a situation may arise in case of personal and
education loans etc. Unsecured exposure is defined as ‘an exposure where
the realizable value of security is not more than 10% of the outstanding
exposure (fund based and non-fund based). Security should not include
guarantees, comfort letters etc
Page36
(d) Standard assets : A general provision of a minimum of 0.40% of total
standard assets should be made. It has been clarified that the provision
should be made on global laon portfolio basis and not on domestic advances
alone.
Provision for Certain Specific Types of Advances
The guidelines also deal with provisioning for certain specific types of
advances as follows :
Advances Secured Against Term Deposits, National Savings Certificates,
Surrender Value of Life Policies, etc.
Advances secured against term deposits, NSCs eligible for surrender, Indira
Vikas Patras, Kisan Vikas Patras and life insurance policies are exempted
from provisioning requirements. Accordingly, the banks need not treat such
accounts as NPAs. It may be noted that advances against gold ornaments,
government securities, and all other kinds of securities are not exempted from
provisioning requirements.
Advances Guaranteed by Government of India and/or State Governments
According to the guidelines, credit facilities where government guarantees are
available, although overdue, should not be treated as NPA. However, it needs
to be noted that such exemption from classification of advances as NPA is
only for the purposes of assets classification and provisioning norms and not
for the purposes of recognition of income. In other words, if such a credit
facility meets the criteria for being classified as NPA, income in respect of the
facility should not be recognised until it is actually realized. Also, in the case of
state government guarantees, this exemption is available only where the
guarantees have not been invoked. The State Government guaranteed
accounts which have been invoked upon becoming NPA are to be treated at
par with other advances for purpose of asset classification, income
recognition and provisioning norms. Advances Under Rehabilitation Packages
Where additional facilities are granted to a unit under rehabilitation packages
approved by the Board for Industrial and Financial Reconstruction (BIFR) or
by term-lending institutions or the bank (on its own or under a consortium
arrangement), provision should continue to be made for the dues in respect of
existing credit facilities. As regards the additional facilities, provision need not
to be made for a period of one year from the date of disbursement in respect
of additional facilities sanctioned under rehabilitation packages approved by
BIFR/term-lending institutions. Similarly, no provision need be made for a
period of one year in respect of additional facilities granted to a sick smallscale industrial unit in accordance with a rehabilitation package/nursing
programme drawn up by the bank itself or under a consortium arrangement.
After the period of one year, the bank in consultation with its auditors would
take a view whether there is need for making provision in respect of the
additional facilities sanctioned.
Take-out Finance
In the case of take-out finance, if based on record of recovery, the account is
classified by their lending bank as NPA, it should make provision for loan
losses as per the guidelines. The provision should be reversed when the
Page37
account is taken over by the taking-over institution. On taking over the
account, the taking-over institution should make provisions as per the
guidelines. For this purpose, the account should be considered to have
become NPA from the actual date of its becoming so, even though the
account was not on the books of the taking-over institution on that date.
Provisioning in advances covered by the guarantees of DICGC/ECGC : In
the case of advances guaranteed by Export Credit Guarantee Corporation
(ECGC) or by Deposit Insurance and Credit Guarantee Corporation (DICGC),
provision is required to be made only for the balance in excess of the amount
guaranteed by these corporations. In case the bank also holds a security in
respect of an advance guaranteed by ECGC/DICGC, the realizable value of
the security should be deducted from the outstanding balance before the
ECGC/DICGC guarantee is off-set. The Reserve Bank of India has also
clarified that if the banks are following more stringent method of provisioning
in respect of advances guaranteed by ECGC/DICGC, such banks may
continue to do so.
The manner of determining the amount of provision in respect of
ECGC/DICGC guaranteed advances in accordance with the above guidelines
is illustrated below. (It may be noted that these illustrations are merely
intended to facilitate understanding of the RBI guidelines; they have not been
issued by the RBI.)
4. Asset Classification, Income Recognition and Provision
Norms
Assets classification
(a) A bank’s advances are divided between performing and non-performing
assets. An advance giving income on continuous basis is called a
performing asset. A non–performing asset, on other hand, is one
remains out of order for ninety days.
A term loan is treated as NPA, if the interest instalment remains
overdue for more than 180 days while a cash credit/overdraft account
treated as NPA, if the outstanding amount remains over and above
sanctioned limits/drawing power more than ninety days
The bill purchased/discounted is treated as NPA, if bill remains overdue
and unpaid for ninety days. In other case (i.e. where the outstanding
amount is less than drawing power) it is treated as NPA it there is no
credit is less than the debit to the account on account of interest,
interest during the ninety days preceding the date of the balance sheet.
(b) Incoming Recognition
The income from performing assets is recognised on accrual basis and
interest income from non-performing assets is recognised on cash
basis. In case interest on NPA is already recognised in the books of
Page38
accrual basis, the same should be adjusted by making provisions for
income recorded but not received on NPA.
(c)
Assets classification for provisioning requirement
The rules regarding classification and provisioning requirements are
listed below:
Category
Definitional
requirements
Provisioning
requirement
Standard
Assets
A performing
asset with
just normal
risk attached
0.40%
Sub-Standard
Assets
Which has
remained
NPA for a
period not
exceeding
eighteen
months
10% of total
outstanding
Doubtful
Assets
Which has
remained
NPA for a
period
exceeding
eighteen
months
Unsecured
portion
-100%
Secured
portion –
Debt doubtful
20% up to
one year 1 to
3 years 30%
more than 3
years 50%
Loss Assets
Which has been
identified by
internal and
external auditors,
RBI inspectors
100% of total
outstanding
(d) Investment Classification
1.
2.
3.
4.
5.
6.
7.
Investment by banks include as under:
Government Securities
Approved securities
Shares
Debenture and bonds
Subsidiaries/joint venture
Others (commercial paper, units of mutual funds, etc)
The first two, viz., Government securities and Approved securities are
generally used for meeting statutory liquidity ratio and are called SLR
securities. The remaining securities are known as non-SLR securities.
The banks were required to bifurcate their SLR securities into ‘current’ and
‘permanent’ categories. The minimum ratio prescribed most recently was 75;
25 for current and permanent investments. The current SLR securities and
entire non-SLR securities were to be written down to market value. This leads
Page39
to depreciation being shown in account. The permanent securities were
carried at cost.
As per new guidelines, both SLR and Non SLR securities are to be divided in
three categories viz.,
1. Held to maturity
2. Available for sale
3. Held for trading
Category 1 is like old permanent category 2 and 3 are like current category.
The investment under ‘Held to maturity’ should not exceed 25% of banks total
investment. The banks have the freedom to decide on extent of holding under
‘available for sale’ and held for trading category.
The securities acquired by banks to the intension to hold them up to maturity
are classified as under Hold to the maturity. The security, acquired by banks
with intention of trading, by taking advantage of short term price/interest rate
movement, is classified under ‘held for trading’. The remaining securities are
classified under the category ‘available for sale’. The securities held for
trading are to be sold within ninety days. The profit and loss on securities
‘held to maturity’ is to be transferred to Profit and Loss account. The profit is
subsequently transferred to Capital Reserves Account. The securities ‘held to
maturity need not to be marked to market. The remaining two categories are
marked to market.
List of Disclosure Items
• Capital adequacy ratio
• Capital adequacy ratio-tier T capital
• Capital adequacy ratio-tier II capital
• Percentage of shareholding of the Government of India
in nationalized banks
• Amount of subordinated debt raised as tier II capital
• Gross value of investments, etc.
• Provisions made towards depreciation in the value of investments
• Movement of provisions held towards depreciation on investments
• Repo transactions
• Non-SLR investment portfolio
• Forward rate agreement/interest rate swap
• Exchange traded interest rate derivatives
• Disclosures on risk exposure m derivatives
• Percentage of net NPAs to net advances
• Movement in NPAs
• Amount of provisions made towards NPAs
• Movement of provisions made towards NPAs
• Details of Loan assets subjected to restructuring
• Restructuring under CDR
• Details of financial assets sold to a SC/RC for asset reconstruction
• Provision on standard assets
Page40
• Interest income as a percentage to working funds
• Non-interest Income as a percentage to working funds
• Operating profit as a percentage to working funds
• Return on assets
• Business (deposits plus advances) per employee
Profit per employee
• Maturity pattern of loans and advances
• Maturity pattern of investment securities
• Maturity pattern of deposits
• Maturity pattern of borrowings
- • Foreign currency assets and liabilities
• Exposure to real estate sector
• Exposure to capital market: investment in equity shares, etc.
• Bank financing for margin trading
• Exposure to country risk
• Details of single borrower/group borrower limit exceeded by the bank
• Provision made towards income tax during the year
• Disclosure of penalties imposed by RBI
• Consolidated financial statements —AS 21
• Segment reporting —AS 17
• Related party disclosure — AS 18
• Other disclosures as required under the relevant accounting standards
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www.wikipedia.com
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