The following article will guide you about how to maintain accounts of the banking companies.
In 1913, when a good number of industrial houses failed, a demand for the regulation of banking business in our country was raised. A scheme for the regulation of banking companies was recommended by the Central Banking Enquiry Committee which was set-up in 1913. But some special provisions relating to banking companies were incorporated in the Indian Companies Act, 1913, not until 1936, although the said provisions were found to be inadequate to protect the interest of the depositors.
As a result, banking companies are governed by the Banking Regulation Act, 1949, which actually came into force on 16th March 1949. This Act, of course, has been amended several times. The Companies Act, 1956, however, is also applicable to banking companies since it is not inconsistent to the provision of the Banking Regulation Act.
(According to Sec. 5A, the provisions of Banking Regulation Act override any contrary provisions contained in the Memorandum and Articles of Association of a banking company or in any agreement made by it or in any resolution passed by it or by its Board of Directors.)
According to Sec. 5 of the Banking Regulation Act, 1949, a banking company means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise and withdrawn by Cheque, Draft, and Order or otherwise. In short, a banking company means and includes any company which carries on the business or which transacts the business of banking in India.
Therefore, any company which is engaged in trade or manufacture, which accepts deposits of money from the public for the purpose of financing its business only, shall not be deemed to carry on the business of banking.
No company can use as part of its name any of the words bank, banker or banking other than a banking company and, at the same time, no company can carry on business of banking in India unless and until it uses at least one of such words as part of its name.
Sec. 8 states that a banking company cannot deal directly or indirectly in buying or selling or banking of goods except of its legitimate banking business.
A banking company cannot also form a subsidiary company except for the purpose of undertaking and executing trusts, trustee or otherwise and providing of safe deposit vaults, or carry on business of banking exclusively outside India or such other purposes as are incidental to the business of banking if the Reserve Bank grants a written permission.
Licencing of Banking Companies:
According to Sec. 22, no company shall carry on banking business in India unless it holds a licence issued by the Reserve Bank of India.
If the following conditions art satisfied, the Reserve Bank of India may grant a licence:
(i) “That the company is or will be in a position to pay its present and future depositors in full as their claims accrue;
(ii) That the affairs of the company are not being or are not likely to be conducted in a manner detrimental to the interests of its present or future depositor;
(iii) That, in the case of a foreign banking company, the carrying on of a banking business by such company in India will be in the public interest, that the Government or law of the country of its origin does not discriminate against Indian banking companies carrying on business in that country, and that it complies with all the requirements of law applicable to it”.
Cancellation of Licence:
The Reserve Bank of India may cancel a licence if:
(i) The company ceases to carry on banking business in India;
(ii) The company at any time fails to comply with any of the conditions on which the licence was granted; or
(iii) At any time, any of the conditions, on the satisfaction of which the Reserve Bank of India granted the licence, has not been fulfilled.
Restrictions on Business:
Sec. 6 of the Act lays down that the following business may also be carried on by a banking company, in addition to the usual banking business:
(a) Acting as agents for any governments or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a managing agent of a company;
(b) Contracting for public and private loans and negotiating and issuing the same;
(c) Selecting, insuring, guaranteeing, underwriting, participating, in managing and carrying out of any issue, public or private, of state, municipal or other loans or of shares, stock, debentures or debenture stock of any company, corporation or association and of lending of money for the purpose of any such issue;
(d) Carrying on and transacting every kind of guarantee and indemnity business;
(e) Managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims;
(f) Acquiring or holding and generally dealing with any property, or title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security;
(g) Undertaking and executing trusts;
(h) Undertaking the administration of estates as executor, trustee or otherwise;
(i) Establishing and supporting associations, institutions, funds, trusts, and convenience for the benefit of employees, ex-employees, their dependants and the general public;
(j) Acquiring, constructing, maintaining and altering any building or works necessary for the purpose of the banking company;
(k) Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing-off or turning into account or otherwise dealing with all or any part of the property and rights of the company;
(l) Acquiring and undertaking the whole or any part of the business of any person or company when such business is of a nature enumerated or described in Sec. 6.
(m) Doing such other things as are necessary for the efficient conduct of the above-named business, such as acquisition, construction, alteration etc. of any building or works necessary or convenient for the purpose of the company; and
(n) Any other form of business which the Central Govt. may notify in the Official Gazette.
As such, other types of business are prohibited by a banking company.
Books Maintained by a Bank:
The methods of preparation and presentation of Profit and Loss Account and a Balance Sheet of a Bank are very important and significant which include certain peculiar terms to this type of organisation. For this purpose, a short description of different books, ledgers, registers and terms which are very important are discussed hereunder.
For recording different types of cash transactions two types of cash books are recorded, viz.:
(i) Rough Cash Book:
Rough Cash Book which deals with cash receipts and cash payments maintained by a receiving cashier and paying cashier, respectively. It records serial number, depositor’s name, amount received etc. in cash, whereas, in case of cash payment, serial number, payee’s name, amount paid, number of token etc. are recorded.
(ii) A Fair Cash Book:
A Fair Cash Book, on the other hand, is one when a separate- person, after receiving the above information from the paying and receiving cashier, records the transactions in a separate book. Naturally, the transaction of the fair cash book must tally with the sum total of the above two rough cash books.
The cash balance at the close of the day is written in the book which is duly signed by the cashier and the manager.
It records day-to-day transactions of the book relating to cash transfers, dealings etc. Besides the above, Received Waste Book, Sectional Cash Book etc. are also to be maintained.
Ledger and Register Sections:
Current Account Ledger:
It records the transactions of those customers who open current account. Generally, the bank does not pay interest on the balance of this account but a nominal charge is taken by the bank for rendering the services. If there are many current accounts, those are to be serially numbered.
Savings Bank Ledger:
It records the transactions of those customers who open savings account in a bank. The detailed description of the customer, viz., name, address, occupation, are recorded along with an account number. If there are many Savings Account ledgers, they are to be serially numbered.
Fixed Deposit Ledger:
It contains transactions of those customers who have deposited their money into the bank for a fixed period. Generally, at the top of the account, depositor’s name and address, rates of interest, period of deposit, the amount so deposited etc. are to be recorded.
It is actually the key ledger of the accounting system of a bank. It contains a total amount in respect of total Current Accounts, total Savings Bank Account, total Loans Account, total Bills Payable Account, total Expenses and total Revenue Accounts. Each ledger is kept under self-balancing system. A trial balance can easily be prepared which helps to prepare the final account as well.
Besides the above ledgers overdue fixed deposit ledger, fixed deposit interest ledger, loan ledger, investment ledger may also be prepared.
The register section includes: Bills for Collection Register, Securities Register, Document Register, Standing Order Register, Cheques Dishonoured Register, Drafts Issue Register, Drafts Payable Register, D.D. Register, Foreign Letters of Credit Register etc.
The Slip System of Ledger Posting:
It is a method of rapid posting in books maintained under Double Entry principle. Under this system, posting is done from slips and not from journals or cash books. Slips are loose leaves of journals and these are supplied either by the customers or by the bank staff. It becomes necessary for a bank to know the position of its individual customer’s account at any time and to see that the transactions are recorded as soon as they take place.
The same is not actually possible if transactions are recorded in bound books. So, original cheques and paying-in-slips are used as vouchers. Consequently, the cashier, for this purpose, credits cash account for receiving cheques and it passes on to the ledger-keeper concerned for debiting the customer’ accounts.
On the contrary, for paying-in-slips the cashier debits cash account and passes on the same to the ledger-keeper concerned, for crediting the customers’ accounts. In this way, the Double Entry posting is completed. The transactions which are not covered by original slips are posted by means of ‘dockets’ which is made out by the bank staff. These are used for posting purposes.
The advantages of this system are:
(i) It reduces the possibility of errors and frauds;
(ii) It saves a lot of time since it is prepared by the customers themselves;
(iii) It provides a good system of internal check etc.
The system is also not free from snags. It suffers from the risk of loss, misappropriation or destruction of slips since they are loose.
Principal Provisions of Banking Regulation Act:
Prohibition of Trading (Sec. 8):
According to Sec. 8 of the Banking Regulation Act, a banking Company cannot directly or indirectly deal in buying or selling or bartering of goods. But it may, however, buy, sell or barter the transactions relating to bills of exchange received for collection or negotiation.
Non-banking Assets (Sec. 9):
According to Sec. 9 “A banking company cannot hold any immovable property, howsoever acquired, except for its own use, for any period exceeding seven years from the date of acquisition thereof. The company is permitted, within the period of seven years, to deal or trade in any such property for facilitating its disposal”. Of course, the Reserve Bank of India may, in the interest of depositors, extend the period of seven years by any period not exceeding five years.
Management (Sec. 10):
Sec. 10(a) states that not less than 51% of the total number of members of the Board of Directors of a banking company shall consist of persons who have special knowledge or practical experience in one or more of tie following fields:
(b) Agriculture and Rural Economy;
(h) Small Scale Industry.
The Section also states that at least not less than two directors should have special knowledge or practical experience relating to agriculture and rural economy and cooperation. Sec. 10(b)(1) further states that every banking company shall have one of its directors as Chairman of its Board of Directors.
Minimum Capital and Reserves (Sec. 11):
Sec. 11 of the Banking Regulation Act, 1949, provides that no banking company shall commence or carry on business in India, unless it has minimum paid-up capital and reserve of such aggregate value as is noted below:
(a) Foreign Banking Companies:
In case of banking company incorporated outside India, its paid-up capital and reserve shall not be less than Rs. 15 lakhs and, if it has a place of business in Mumbai or Calcutta or in both, Rs. 20 lakhs. It must deposit and keep with the R.B.I, either in Cash or in unencumbered approved securities (i) the amount as required above, and (ii) after the expiry of each calendar year, an amount equal to 20% of its profits for the year in respect of its Indian business.
(b) Indian Banking Companies:
In case of an Indian banking company, the sum of its paid-up capital and reserves shall not be less than the amount stated below:
(i) If it has places of business in more than one State, Rs. 5 lakhs, and if any such place of business is in Mumbai or Calcutta or in both, Rs. 10 lakhs.
(ii) If it has all its places of business in one State, none of which is in Mumbai or Calcutta, Rs. 1 lakh in respect of its principal place of business plus Rs. 10,000 in respect of each of its other places of business in the same district in which it has its principal place of business plus Rs. 25,000 in respect of each place of business elsewhere in the State. No such banking company shall be required to have paid-up capital and reserves exceeding Rs. 5 lakhs and no such banking company which has only one place of business shall be required to have paid-up capital and reserves exceeding Rs. 50,000. In case of any such banking company which commences business for the first time after 16th September 1962, the amount of its paid-up capital shall not be less than Rs. 5 lakhs.
(iii) If it has all its places of business in one State, one or more of which are in Mumbai or Calcutta, Rs. 5 lakhs plus Rs. 25,000 in respect of each place of business outside Mumbai or Calcutta. No such banking company shall be required to have paid-up capital and reserve excluding Rs. 10 lakhs.
Capital Structure (Sec. 12):
According to Sec. 12, no banking company can carry on business in India, unless it satisfies the following conditions:
(a) Its subscribed capital is not less than half of its authorised capital, and its paid-up capital is not less than half of its subscribed capital.
(b) Its capital consists of ordinary shares only or ordinary or equity shares and such preference shares as may have been issued prior to 1st April 1944. This restriction does not apply to a banking company incorporated before 15th January 1937.
(c) The voting right of any shareholder shall not exceed 5% of the total voting right of all the shareholders of the company.
Payment of Commission, Brokerage etc. (Sec. 13):
According to Sec. 13, a banking company is not permitted to pay directly or indirectly by way of commission, brokerage, discount or remuneration on issues of its shares in excess of 2½% of the paid-up value of such shares.
Payment of Dividend:
According to Sec. 15, no banking company shall pay any dividend on its shares until all its capital expenses (including preliminary expenses, organisation expenses, share selling commission, brokerage, amount of losses incurred and other items of expenditure not represented by tangible assets) have been completely written-off.
But a Banking Company need not:
(a) Write-off depreciation in the value of its investments in approved securities in any case where such depreciation has not actually been capitalised or otherwise accounted for a loss;
(b) Write-off depreciation in the value of its investments in shares, debentures or bonds (other than approved securities) in any case where adequate provision for such depreciation has been made to the satisfaction of the auditor;
(c) Write-off bad debts in any case where adequate provision for such debts has been made to the satisfaction of the auditors of the banking company.
A floating charge on the undertaking or any property of a banking company can be created only if RBI certifies in writing that it is not detrimental to the interest of depositors — Sec. 14 A. Similarly, any charge created by a banking company on unpaid capital is invalid — Sec. 14.
Reserve Fund/Statutory Reserve (Sec. 17):
According to Sec. 17, every banking company incorporated in India shall, before declaring a dividend, transfer a sum equal to 20% of the net profits of each year (as disclosed by its Profit and Loss Account) to a reserve fund. The Central Government may, however, on the recommendation of RBI, exempt it from this requirement for a specified period.
The exemption is granted if its existing reserve fund together with Share Premium Account is not less than its paid-up capital. If it appropriates any sum from the reserve fund or the share premium account, it shall, within 21 days from the date of such appropriation, report the fact to the Reserve Bank, explaining the circumstances relating to such appropriation.
Cash Reserve (Sec. 18):
Under Sec. 18, every banking company (not being a Scheduled Bank) shall, if Indian, maintain in India, by way of a cash reserve in Cash, with itself or in current account with the Reserve Bank or the State Bank of India or any other bank notified by the Central Government in this behalf, a sum equal to at least 3% of its time and demand liabilities in India.
The Reserve Bank has the power to regulate the percentage also between 3% and 15% (in case of Scheduled Banks). Besides the above, they are to maintain a minimum of 25% of its total time and demand liabilities in cash, gold or unencumbered approved securities. But every banking company’s asset in India should not be less than 75% of its time and demand liabilities in India at the close of last Friday of every quarter.
Liquidity Norms (Sec. 24):
According to Sec. 24 of the Act, banking companies must maintain sufficient liquid assets in the normal course of business. The section states that every banking company has to maintain in cash, gold or unencumbered approved securities, an amount not less than 20% of its demand and time liabilities in India. This percentage may be changed by the RBI from time to time according to economic circumstances of the country. This is in addition to the average daily balance maintained by a bank.
Restrictions on Loans and Advances (Sec. 20):
After the Amendment of the Act, 1968, a bank cannot:
(i) Grant loans or advances on the security of its own shares, and
(ii) Grant or agree to grant a loan or advance to or on behalf of:
(a) Any of its directors;
(b) Any firm in which any of its directors is interested as partner, manager or guarantor;
(c) Any company of which any of its directors is a director, manager, employee or guarantor, or in which he holds substantial interest; or
(d) Any individual in respect of whom any of its directors is a partner or guarantor.
(ii)(c) Does not apply to subsidiaries of the banking company, registered under Sec. 25 of the Companies Act or a Government Company.
Accounts and Audit (Sees. 29 to 34A):
The above Sections of the Banking Regulation Act deal with the accounts and audit. Every banking company, incorporated in India, at the end of financial year expiring a period of 12 months as the Central Government may by notification in the Official Gazette specified, must prepare a Balance Sheet and a Profit and Loss Account as on the last working day of that year or according to the Third Schedule or as circumstances permit.
At the same time, every banking company, which is incorporated outside India, is required to prepare a Balance Sheet and also a Profit and Loss Account relating to its branch in India also. We know that Form A of the Third Schedule deals with form of Balance Sheet and Form B of the Third Schedule deals with form of Profit and Loss Account.
It is interesting to note that a new set of forms have been prescribed for Balance Sheet and Profit and Loss Account of the banking company and RBI has also issued guidelines to follow the new forms with effect from 31st March 1992.
According to Sec. 30 of the Banking Regulation Act, the Balance Sheet and Profit and Loss Account should be prepared according to Sec. 29 and the same must be audited by a qualified person known as auditor. It is needless to mention here that every banking company must take previous permission from RBI before appointing, re-appointing or removing any auditor. RBI also can order special audit for public interest of depositors.
Moreover, every banking company must have to furnish their copies of accounts and Balance Sheet prepared according to Sec. 29 along with the auditors’ report to the RBI and also the Registrar of Companies within three months from the end of the accounting period.
Revised Forms of Balance Sheet and Profit and Loss Account:
On 18.1.1991 the Government of India has issued a notification to make amendments to the Third Schedule to the said Act incorporating and considering the recommendations of Ghosh Committee (A. Ghosh, the then Deputy Governor, RBI) relating to the formats of Balance Sheet and Profit and Loss Account since, after nationalisation of commercial banks, the old formats were not found suitable.
As such, the suggestions were examined and a fresh notification was issued on 19.12.1991 expressing the Government’s intentions to introduce the revised formats. At last, the RBI issued a circular as on 6.2.1992 to the chief executives of all commercial banks to prepare and present their accounts under revised formats for the year ended 31st March 1992 and thereafter.
The revised formats are presented below:
Format A — for Balance Sheet
Format B — for Profit and Loss Account.
Notes and Instructions for Compilation:
1. Formats of Balance Sheet and Profit and Loss Account cover all items likely to appear in the statements, in case a bank does not have any particular item to report, it may be omitted from the formats.
2. Corresponding comparative figures for the previous year are to be disclosed as indicated in the format. The word “current year” and “previous year” used in the format are only to indicate the order of presentation and may appear in the accounts.
3. Figures should be rounded-off to the nearest thousand rupees.
4. Unless otherwise indicated, the banks in this statement will include banking companies, nationalised banks, State Bank of India, Associate Banks and all other institutions including cooperatives carrying on the business of banking whether or not incorporated or operating in India. Hindi version of the Balance Sheet will be part of the annual report.
Note containing guidelines of Reserve Bank of India for compilation of Financial Statements:
Given below are the compilation notes of the Reserve Bank of India for Balance Sheet and Profit and Loss Account as per the revised formats.
Disclosure of Accounting Policies:
The RBI issued a latest circular (No. DBOD. BP BC 91/C. 686/91, dt. 28.2.1991) to the chief executives of all scheduled commercial banks and a specimen form where accounting policies may be disclosed.
The specimen form is presented below:
Specimen Form of Accounting Policies:
I. Principal Accounting Policies:
The accompanying financial statements have been prepared on the historical cost basis and conform to the statutory provisions and practices prevailing in the country.
(2) Transactions involving Foreign Exchange:
(a) Monetary assets and liabilities have been translated at the exchange rate prevailing at the close of the year. Non-monetary assets have been carried in the books at the historical cost.
(b) Income and expenditure items in respect of the Indian branches have been translated at the exchange rates ruling on the date of the transaction and in respect of overseas branches at the exchange rates prevailing at the close of the year.
(c) Profit or loss on pending forward contracts has been accounted for.
(a) Investments in Government and other approved securities in India are valued at the lower of cost or market value.
(b) Investment in subsidiary companies and in some companies (i.e. companies in which at least 25% of the share capital) have been accounted for on the historical cost basis.
(c) All other investments are valued at the lower of cost or market value.
(a) Provisions for doubtful advances have been made to the satisfaction of the auditors:
(i) In respect of the identified advances, based on a periodical review of advances and after taking into account the portion of advance guaranteed by the Deposit Insurance and Credit Guarantee Corporation, the Export Credit and Guarantee Corporation and similar statutory bodies.
(ii) In respect of general advances as a percentage of total advances taking into account guidelines issued by the Government of India and the Reserve Bank of India.
(b) Provisions in respect Of doubtful advances have been deducted from advances to the extent necessary and the excess has been included under “Other Liabilities and Provisions”.
(c) Provisions have been made on a gross basis. Tax relief which will be available when the advance is written-off will be accounted for in the year of write-off.
(5) Fixed Assets:
(a) Premises and other fixed assets have been accounted for at their historical cost. Premises which have been revalued are accounted for at the values determined on the basis of such revaluation made by professional valuers. Profit arising on ^evaluations has been credited to Capital Reserve.
(b) Depreciation has been provided for on the straight line/diminishing balance method.
(c) In respect of revalued assets, depreciation is provided for on the revalued figure and an amount equal to the additional depreciation consequent on revaluation is transferred annually from the Capital Reserve to the General Reserve/Profit and Loss Account.
(6) Staff Benefits:
Provisions for gratuity/pension benefits to staff has been made on an accrual/cash basis. Separate funds for gratuity/pension have been created.
(7) Net Profit:
(a) The net profit disclosed in the Profit and Loss Account is after:
(i) Provisions for taxes on income in accordance with statutory requirements.
(ii) Provision for doubtful advances.
(iii) Adjustments to the value of “current investments” in Government and other approved securities in India valued at lower of cost or market value.
(iv) Transfers to contingency funds.
(v) Other usual or necessary provisions.
(b) Contingency funds have been grouped by the Balance Sheet under the head “Other Liabilities and Provisions”.
Interest on Doubtful Debts and its treatment:
When a loan is granted to a customer, interest is charged on such loans at the prescribed rate by the bank. Now the equation arises before us when the realisation of such loan is doubtful at the end of the year should interest on such Loans (i.e. Accrued Interest) be credited to Interest Account? But from the stand point of conservatism same should be transferred to Interest Suspense Account and, at the same time, when the interest is realised (either in part or whole) the same is credited.
For this purpose the following entries are required to be passed in the books of Bank:
The following illustration will help us to understand the principle clearly:
Rebate on Bills Discounted:
It is also known as Discount Received in Advance, or, Unexpired Discount or, Discount Received but not earned. Its treatment is same as we do in the case of Interest Received in Advance.
(i) If it is given only in the Trial Balance:
The same will be shown as a liability and will appear in the liability side of the Balance Sheet.
(ii) If it is given in adjustment:
In that case, the same is deducted from the Income from Interest and Discount in Profit and Loss Account and the same also will appear in the liability side of the Balance Sheet.
Method of Computation of Rebate on Bill Discounted:
For example, a customer discounts a bill of Rs. 30,000 for 3 months at 12% on 1st March 2000, it will be calculated as under:
Bank will earn discount @ 12% for 92 days i.e., = Rs. 30,000 x 12/100 x 92/365 = Rs. 907.
But this amount of discount is meant for March, April and May. As accounts are prepared on 31st March each year, discount received for 61 days (30 + 31) for April and May is not actually earned. Thus, discount of 61 days i.e., Rs. 601 is called Rebate on Bill Discounted. So, actual income is Rs. 306 (i.e. 907 – Rs. 601).