Accounting for Banking Companies

Accounting for Banking Companies

The Banking Regulation Act, 1949; governs all the Banking Companies in India.

The Banking Regulation Act, 1949 Defines Banking as – “Banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;

The Banking Regulation Act, 1949 Defines Banking Company as - "Banking Company" means any company which transacts the business of banking in India.

Usually a Banking Company in India is required to maintain a lot of Books such as –

Cash Book, General Ledger, Etc.

To maintain such books it also has to maintain Subsidiary Books such as –

Receiving Cashiers Counter Cash Book; Paying Cashiers Counter Cash Book; Current/ Savings/ Fixed Deposits Accounts Ledger; Investment Ledger; Loan Ledger; Etc.

In addition to the above stated books it also needs to maintain few Registers such as –

Bills for Collection Register; Demand Draft Register; Share Security Register; Safe Custody Register; Etc.

However, in this chapter we are not going to discuss about any of such books or registers – We would be focusing only in the preparation of the Final Accounts of the Banking Companies; which would include – Profit & Loss A/c and Balance Sheet.

The Profit & Loss A/c and the Balance Sheet of the banking company needs to be prepared in a specified format as prescribed by the Reserve Bank of India.

In the final accounts of a banking company we first present the Balance Sheet and then the Profit & Loss A/c. Hence Balance Sheet is represented in Form A and the Profit & Loss A/c is represented in Form B.

Form A
Balance Sheet of ABC Bank as on 31st March, 2018 (000's omitted)
	Schedule	As on 31/3/18	As on 31/3/17
		Current Year	Previous Year
Capital and Liabilities
Capital	1
Reserves & Surplus	2
Deposits	3
Borrowings	4
Other Liab. & Provisions	5
Total
Assets
Cash &  Balances with RBI	6
Balances with Banks and Money at call and Short Notice	7
Investments	8
Advances	9
Fixed Assets	10
Other Assets	11
Total

Schedules

Schedule 1 – Capital

The particulars of capital are to be shown separately as - 

Authorized Capital

Issued Capital

Subscribed Capital

Paid up Capital.

Schedule 2 – Reserves and Surplus

                                                      Current      Previous

                                                       Year             Year

I.             Statutory Reserves

II.          Capital Reserves

III.       Securities Premium

IV.       Revenue & Other Reserves

V.          Balance in Profit & Loss A/c                ______    ______

Total                                               ______    ______

Schedule 3 – Deposits

I.          Demand Deposits

II.       Savings Bank Deposits

III.    Term Deposits                                        _______   _______

Total                                                   _______   _______

Schedule 4 – Borrowings

I.          Borrowings in India

i.        R.B.I.

ii.      Other Banks

iii.    Other Institutions and

II.       Borrowings Outside India                      _______   _______

Total                                                   _______   _______

Schedule 5 – Other Liabilities and Provisions

I.          Bills Payable

II.       Inter-office Adjustments

III.    Interest accrued

IV.    Others (including provisions)                 _______   _______

Total                                                   _______   _______

Note:- Others include net provisions for Income Tax, Contingency Funds, Transfer to Government, Proposed Dividends, Unclaimed Dividends, Outstanding Expenses, etc.

Schedule 6 – Cash and Balances with RBI

I.          Cash in Hand (Including Foreign Currency Notes)

II.       Balances with RBI                                    ______    ______

Total                                                 ______    ______

Schedule 7 – Balances with Banks and Money at Call and Short Notice

I.          In India

i.           Balances with Banks

ii.         Money at Call & Short Notice

II.       Outside India                                          ________  ________

Total                                                _______   ________

Schedule 8 – Investments

I.          Investments in India

i.           Government Securities

ii.         Other Approved Securities

iii.       Shares

iv.       Debentures & Bonds

v.         Others (like Gold)

II.       Investments Outside India                     _________    _______

Total                                              _________    _______  

Schedule 9 – Advances

A.    i. Bills Purchased and Discounted

ii. Cash Credits, Overdrafts and Loans

    repayable on demand.

iii. Term Loans                                   ________     ________

Total                                              ________     ________

B.     i. Secured by Tangible Assets

ii. Covered by Bank/Government

    Guarantees

iii. Unsecured                                                 _______     _______

Total                                              _______    _______ 

C.     I. Advances in India

i.     Priority Sector

ii.   Public Sector

iii. Banks

iv. Others

II. Advances outside India                ________   ________

Total                                             _______    ________

Note: The totals of A, B & C should be same as they are same loans divided under different heads.

Schedule 10 – Fixed Assets

I.       Premises

II.    Other Fixed Assets                                    ________   ________

Total                                                           ________   ________

Note: Any Additions or Deductions during the year along with total deprecation to date needs to be shown.

Schedule 11 – Other Assets

i.        Inter office adjustments (Net)

ii.      Interest Accrued

iii.    Advance Tax Paid

iv.    Stationery & Stamps (Stock)

v.      Non-banking Assets required in satisfaction of Claims

vi.    Others                                                        ________     ________

Total                                                           ________     ________

Schedule 12 – Contingent Liabilities

i.        Claims against Bank not acknowledged as debts

ii.      Liability for partly paid investments

iii.    Liability on account of outstanding, forward exchange transactions

iv.    Guarantees given

v.      Acceptances, endorsements and other obligations

vi.    Other Contingent liabilities                       _______      ________

Total                                                           _______      ________

Form B
Profit & Loss A/c for the year ended 31st March, 2018 (000's omitted)
	Schedule	As on 31/3/18	As on 31/3/18
		Current Year	Previous Year
I. Income
Interest Earned	13
Other Income	14
Total
II. Expenditure
Interest Expended	15
Operating Expenses	16
Provisions & Contingencies
Total
III. Profit/Loss
Net Profit/Loss for the year
Net Profit/Loss brought forward
Total
IV. Appropriations
Transfer to Statutory Reserve*
Transfer to Other Reserves
Transfer to Proposed Dividend
Balance Carried to Balance Sheet
Total

* Transfer to statutory Reserve is to be made at 25% of Current Year Profits

Schedule 13 – Interest Earned

I.             Interest/discount on advances/bills

II.          Income on Investments

III.       Interest on balances with RBI and others

IV.       Others                                                        ________   _______

Total                                                           ________   _______

Schedule 14 – Other Income

I.          Commission, exchange and brokerage

II.       Profit on sale of Investments

III.    Profit on revaluation of investments

IV.    Profit on sale of land, building & other assets

V.       Profit on exchange transactions

VI.    Income earned by way of dividends etc

       from subsidiaries and joint venture.

VII. Misc. Income                                              _______    _______

Total                                                           _______    ________

Note: In above items in place of Profit if there is Loss it has to be deducted.

Schedule 15 – Interest Expended

I.          Interest on deposits

II.       Interest on RBI/Inter bank Borrowings

III.    Others                                                        ________    _______

Total                                                           ________    _______

Schedule 16 – Operating Expenses

I.             Payments to and provisions for employees

II.          Rates, Taxes and Lighting

III.       Printing & Stationery

IV.       Advertisement & Publicity

V.          Depreciation

VI.       Director’s fees, allowances and expenses

VII.    Auditors Fees

VIII. Law Charges

IX.       Postage, Telegram, Telephone, Etc.

X.          Repairs and Maintenance

XI.       Insurance

XII.    Other Expenditure                                _________    _________

Total                                                           _________   _________

Notes: There is not specific schedule for Provisions and Contingencies. All provisions for bad and doubtful debts, provisions for taxation, transfers to contingencies etc. are to be shown at the net value in Profit and Loss A/c.

Classifying an Asset as Non-Performing Asset (NPA)

Any Loan which is overdue for more than a period exceeding 90 days will be considered as NPA as per the Guidelines issued by RBI.

In case of cash credit and overdraft if the outstanding balance is continuously more than the amount sanctioned or the amount of interest paid is less than the amount of interest charged then it is considered as NPA.

Income Recognition:

In case of Performing Assets the income in form of Interest is recognized on the Accrual (Due) basis, however in case of Non-Performing Assets the income in form of Interest is recognized on Receipt basis.

Illustration 1 The following are the details of Overdraft facility sanctioned to Mr. X as on 31^st March, 2018.

Sanctioned Limit                                   ₹2,50,000

Amount Drawn                                      ₹2,25,000

Amount outstanding continuously     ₹2,10,000

Total Interest debited for the year      ₹   27,500

Total Interest paid during the year     ₹   22,000

Determine the performing status of the above account as on 31^st March, 2018.

Illustration 2 The following are the details of the interest on loans and advances in respect of Performing and Non-Performing assets of XYZ Bank. Find the Income to be recognized for the year ended 31^st March, 2018.

Particulars		Performing Assets		Non-Performing Assets
		Interest Earned	Interest Received	Interest Earned	Interest Received
i	Term Loan	1212	988	521	99
ii	Cash Credit and Overdraft	785	765	831	222
iii	Bills Discounted	622	535	498	111

Classification of Advances

 Standard Assets: Theses are performing assets and pose no problem to the banks.

A provision of 0.4% is to be made on these assets

Sub-Standard Assets: Those assets which are classified as NPA for less than 12 months are called as Sub-Standard Assets

A provision of 15% is to be made on Secured Sub-Standard Assets &

A provision of 25% is to be made on Unsecured Sub-Standard Assets.

Doubtful Assets:

Those assets which are classified as NPA for more than 12 months are called as Doubtful Assets

A provision of 100% is to be made on Unsecured Doubtful Assets,

On Secured Doubtful Assets the provision to be made depends on the period of Asset –

Doubtful upto 1 year                          - 25%

Doubtful for 1 to 3 years                    - 40%

Doubtful for more than 3 years          -100%

Loss Assets:

These are the assets which are identified as bad but not written off from the books.

A provision of 100% is to be made on Loss Assets.

Important Note: If any advance is covered by Export Credit Guarantee Corporation (ECGC) or by Deposit Insurance & Credit Guarantee Corporation (DICGC) then, in such case from the total Advance (after deducting value of security) the % of Guarantee (ECGC/DICGC Cover) is to be deducted to arrive at the amount of Unsecured portion.

Table Showing Rate of Provision required on various types of Assets

	Type of Asset	Rate
1	Standard Assets	0.40%
2	Substandard Assets
	i.  Secured Portion	15%
	ii. Unsecured Portion	25%
3	Doubtful Assets
	i. Unsecured Portion	100%
	ii. Secured Portion
	a) Doubtful upto 1 year	25%
	b) Doubtful for 1 to 3 years	40%
	c) Doubtful for more than 3 years	100%
4	Loss Assets	100%

Illustration 3: From the following details calculate the amount of provision to be created in the books of ABC Bank.

Standard Assets                                  ₹ 45000

Sub-standard Assets(60% Secured)   ₹ 30000

Doubtful - upto 1 year                        ₹  7500

Doubtful - upto 3 year                        ₹  4000

Doubtful – more than 3 year               ₹  2500

Loss Asset                                           ₹  4500

Advance Outstanding                                                  XXX

Less: Value of Security held                                       XXX

                                                                                        XXX

Less: ECGC/DICGC Cover                                        XXX

Unsecured Portion                                                      XXX

The provision is to be created on such amount of unsecured portion and on total secured portion.