1.

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.

2. DEFINITION AND FUNCTIONS OF A BANK

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, travelers 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 co-operative 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 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)

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 of 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;

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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.

3. REQUIRMENTS OF BANKING COMPANIES AS TO ACCOUNTS

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 dishonored 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-to- date 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 thebank. Some banks still use, in addition to the cash book, a modified formof 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 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.

Loose-Leaf Accounting

The vast increase in the number and volume of commercial transactions during the past twenty years has made the use of loose-leaf ledgers and other books a practical necessity in modern accounting. In Canadian banks, particularly, the system has been in successful operation for many years. The principal objection urged against
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loose-leaf ledgers the question of their validity in a court of law - appears to have died a natural death. The courts rule so plainly and the logic is so clear, that it is the original entry that counts and not the assembly of entries in the ledger, that it is now generally conceded that the loose-leaf ledger is just as acceptable as evidence in a court as a bound ledger. In fact, with the precautions observed by the banks in their use of loose-leaf books, the evidence might be considered even more competent. The following rules are generally observed:

1. The keys of all loose-leaf ledgers and transfer binders are kept in the custody of the manager or of the accountant or other officer specially authorized, by whom blank sheets are inserted as required, and the used sheets removed and filed in the transfer binder.

2. After removing the sheets, the officer who has custody of the key must place a paper seal bearing his signature in the sealing device on the front of the ledger, and, when opening the book again, must satisfy himself that his last seal has not been tampered with.

3. A separate sheet must be used for each account, and each sheet must be signed in the upper right-hand corner by the manager or accountant when the first entry is made. The officer who signs the sheet must see that the account is properly indexed.

4. A few blank sheets may be locked in the current ledger for emergency use, but all others must be kept under lock in the custody of the officer who holds the key of the ledger. Bound books have not prevented manipulation and fraud, and the above precautions combined with the comprehensive checking system of a bank should practically eliminate the danger of fraudulent substitution of pages. If a man is determined to be dishonest there are easier and less evident methods of defrauding than by switching ledger leaves.

4. 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 31st 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.

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 relates.
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5. FORMS OF BALANCE SHEET

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

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.

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THE THIRD SCHEDULE (See Section 29) Form A FORM OF BALANCE SHEET Balance Sheet of .. Balance Sheet as on 31st March..

(000s omitted)

PARTICULARS

Sc h. No.

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

Capital and liabilities Capital Reserves & Surplus Deposits Borrowings Other Liabilities and Provisions Total Assets Cash and balances with RBI Balances with banks and money at call and short notice Investments Advances Fixed Assets Other Assets Total Contingent liabilities Bills for collection

1 2 3 4 5

7 8 9 10 11 12

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FORM OF SCHEDULES
SCHEDULE 1 - CAPITAL

PARTICULARS
For Nationalised Banks Capital (Fully owned by Central Government) For Banks Incorporated Outside India Capital (The amount brought in by banks by way of start-up capital as prescribed by RBI should be shown under this head) Amount of deposit kept with the RBI under Section 11(2) of Banking Regulation Act, 1949 Total For Other Banks Authorised Capital ........... shares of Rs ........... each Issued Capital ........... shares of Rs .......... each Subscribed Capital .......... shares ofRs ........... each Cafled-up Capital ........... shares of Rs ....... .. each Less: Calls unpaid Add: Forfeited shares

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

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Schedule.2 Reserves and Surplus

PARTICULARS
I. Statutory Reserves

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

Opening Balance Additions during the year Deductions during the year

II. Capital Reserves Opening Balance Additions during the year Deductions during the year

III. Shares Premium Opening Balance Additions during the year Deductions during the year

IV. Revenue and other Reserves Opening Balance Additions during the year Deductions during the year

V. Balance in Profit and Loss Account Total (I + II + III + IV + V)

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SCHEDULE 3 DEPOSITS

PARTICULARS
I. Demand Deposits (i) From banks (ii) From otners II. Savings Bank Deposits III. Term Deposits (i) From banks (ii) From others Total (I + II + III) (i) Deposits of branches in India (ii) Deposits of branches outside India Total

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

SCHEDULE 4 - BORROWINGS

PARTICULARS

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

I. Borrowings in India (i) Reserve Bank of India (ii) Other Banks (iii) Other Institution and agencies II. Borrowings Outside India Total (I + II ) Secured borrowings included in I and II above. Rs..

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SCHEDULE 5 - OTHER LIABILITIES AND PROVISIONS

PARTICULARS
Bills Payable Inter -Office adjustments(net) Interest accrued Others(Including Provisions)

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

Total SCHEDULE 6 - CASH AND BALANCES WITH RESERVE BANK OF INDIA

PARTICULARS
Cash in hand (including foreign currency notes) Balances with RBI (i) in Current Account (ii) in Other Accounts Total (I + II)

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

SCHEDULE 7 - BALANCES WITH BANKS & MONEY AT CALL & SHORT NOTICE

PARTICULARS
I. In India (i) Balances with banks (a) In Current Accounts (b) In Other Deposit Accounts (ii) Money at call and short notice (a) With banks (b) With other institutions

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

Total

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As on 31.3. (Current Year)

As on 31.3. (Previous Year)

II. Outside India (i) in Current Accounts (ii) in Other Deposit Accounts (iii) Money at call and short notice Total Grand Total (I + II) SCHEDULE 8 INVESTMENTS

PARTICULARS
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 Investments outside India in (i) Government securities (including local authorities)
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As on 31.3. (Current Year)

As on 31.3. (Previous Year)

(ii) Subsidiaries and/or joint ventures abroad (iii) Other investments (to be specified) Total Grand Total (I + II)
SCHEDULE 9 - ADVANCES

PARTICULARS

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

(i) Bills purchased and discounted (ii) Cash credits, overdrafts and loans repayable on demand (iii) Term loans Total (i) Secured by tangible assets (ii) Covered by Bank/Government guarantees (iii) Unsecured Total I. Advances in India (i) Priority Sectors (ii) Public Sector (iii) Banks (iv) Others Total II. Advances outside India (i) Due from banks (ii) Due from others (a) Bills purchased and discounted (b) Syndicated loans (c) Others Total

Grand Total (I + II)

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SCHEDULE 10 - FIXED ASSETS

PARTICULARS
Premises At cost as on 31st March of the preceding year Additions during the year Deductions during the year Depreciation to date Other Fixed Assets (including furniture and fixtures) At cost as on 31st March of the preceding year Additions during the year Deductions during the year Depreciation to date Total (I + II)

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

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SCHEDULE 11 - OTHER ASSETS

PARTICULARS
I. Inter-office adjustments (net) II. Interest accrued III. Tax paid in advance / tax deducted at source IV. Stationery and stamps V. Non-banking assets acquired in satisfaction of claims VI. Others

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

Total

SCHEDULE 12 - CONTINGENT LIABILITIES

PARTICULARS
I. Claims against the bank not acknowledged as debts. II. Liability for partly paid investments III. Liability on account of outstanding forward exchange contracts IV. Guarantees given on behalf of constitutents (a) In India (b) Outside India V. Acceptances, endorsements and, other obligations VI. Other items for which the bank is contingently liable Total

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

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Schedule 1 : Capital I. Nationalized Banks a) Capital (fully owned by central government) : The capital owned by thevCentral Government as on the date of the balance sheet including the contribution on from government, if any. For the participating in the World Bank projects should be shown. b) Banking companies incorporated outside India: i) The amount brought in by banks by way of start-up capital as prescribed by RBI should shown under this head. ii) The amount deposit kept with RBI, under the subsection 2 of Section 11 of Banking Regulation Act 1949 should also be shown. II. Others Banks (Indian) Authorized, issued, subscribed, called up capital should be given separately. Calls-in-Arrears will be deducted from the called up capital while the paid up value of forfeited shares should be added thus arriving at the paid up capital. Where necessary items which can be combined should be shown under on head for instance Issued and subscribed Capital Notes General: The changes in above items, if any, during the year say, fresh contribution made by the government, fresh issue of capital capitalization of reserves etc. may be explained the notes. Schedule 2 : Reserves and surplus I. Statutory reserves: Reserves created in terms of Section 17, or other Section of Banking Regulation Act must be separately disclosed. II. Capital Reserves: The expression Capital Reserves shall not include any amount regarded as free for distribution through the profit and loss account. Surplus on revaluation should be treated as a capital reserves. Surplus on translation of financial statements of foreign branch (which includes fixed assets also) is not a revaluation reserve. III. Share premium: Premium on issue of shares capital may be shown separately under this head. IV. Revenue and other reserves: The expression Reserve Revenue shall mean any reserve other than capital reserve. This item will include all reserves other than those separately classified. The expression reserve shall not include any amount written off or retained by providing for any known liability. V. Balance of profit: Includes balance of profit after appropriations. In case of loss balance may be shown as deduction. Schedule 3 : Deposits
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AI Demand deposits: i) From banks ii) From others: includes all bank deposits, repayable on demand, of non-bank sectors. Credit balance in overdraft, cash credit accounts, deposits payable at call, overdue deposits, inoperative current accounts, matured time deposits, and cash certificates, certificates of deposits, etc. are to be included under this category. AII Savings Banks Accounts: Includes all savings banks deposits including inoperative savings bank accounts. AIII Term Deposits: i) From banks: Includes all type of bank deposits repayable after specified term ii) From others: Includes all types of deposits of non banks sector repayable after specified term. Fixed deposit, cumulative and recurring deposits, cash certificates, certificates of deposits, foreign currency non resident deposits accounts, annuity deposits, deposits mobilized under various schemes, ordinary staff deposits, etc. are to be included under this category. BI Deposits of branches in India. II Deposits of branches outside India The total of two A and B will agree with total Deposits of bank. Notes: General: a) Interest payable on deposits which is accrued in but should not show under others liability. b) Matured time deposits and cash certificates, etc. should be treated as demand deposits. c) Deposits under special scheme should be included under term deposits if they are not payable on demand. When such deposits are matured for payment they should be shown under demand deposits. d) Deposits from banks will include deposits from the banking system in India, co-operative banks, foreign banks, which may or may not have presence in India. Schedule 4 : Borrowings I Borrowings in India: Reserve bank of India: Includes the borrowings/refinance obtained by Reserve Bank of India. Other banks: Includes the borrowings/refinance obtained by commercial banks (including cooperative banks) Other institutions and agencies: Includes the borrowings/refinance obtained by Industrial Development Bank of India, Export Import Bank of India, National Bank for Agriculture and Rural Development of India and other institutions, agencies (including liability against participation certificate, if any)
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II Borrowings out side India: It includes the borrowing of Indian branches abroad as well as borrowing from foreign branches. Secured borrowings included above. This item will be separately shown Includes secured borrowings/refinance in India and outside India. Notes: General: a) The total of I and II will agree with the total of borrowing shown in the balance sheet. b) Inter office transactions should not be shown as borrowings. c) Funds raised by foreign branches by way of certificates of deposits notes; bonds, etc. should be classified depending upon documentation, as deposits, borrowings etc. d) Refinance obtained by banks from Reserve Bank of India and various institutions are being brought under the head borrowing, hence advances will be shown at the gross amount on the assets side. Schedule 5 : Other liabilities and provisions I Bills payable: the bank provides the facility remitting funds from one place to another by means of bank drafts, telegraphic transfer, circular notes, pay orders etc. the person including to remit the money with the bank and get a pay order or bank draft in exchange money deposited. Alternatively he may request the bank for making a telegraphic transfer from his account to the account of the person to whom he want to remit the money. The paying bank reimbursed by the bank who issues such draft or institutions. The banks also issue travelers cheques and gift cheques for carrying or remitting money .If any such drafts, cheques, etc. remain uncashed on day of the preparation final accounts of final accounts, they are shown under the heading Bills Payable in the Balance Sheet. II Inter Office (or Branch) Adjustment (Net): This item represents the difference on account of incomplete recording of transactions between one branch and another branch or one branch and head office. It may have a debit or a credit balance. In case of credit balance; it should be shown under this head It may be noted that only net portion is to be shown of inter office accounts, inland as well foreign. III Interest Accrued: It includes accrued but not due on deposits and borrowings IV Others (Including provisions) : It includes net provision for income tax and other taxes like interest tax (less advance payments, tax deducted at source, etc.) surplus aggregate in provisions for bad debts provision account, surplus in aggregate in provisions for depreciation in securities contingency funds, which are not disclosed are reserves but are actually in the nature of reserves, proposed dividend/transfer to Government, other liabilities which are not disclosed under any of many heads such as unclaimed dividend provisions and funds kept for specific purpose, unexpired discount, out standing charges, like rent conveyance, etc. certain types of deposits like staff security deposits, margin deposits, etc. where the repayment is not free, should also be included under this head. Notes: General: a) For arriving at the net balance of inter-office adjustments all connected inter-office accounts should be aggregated and the net balance only will be shown, representing mostly items in transit and unadjusted items.
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b) The interest accruing all deposits, whether the payment is due or not, should be treated as a liability. c) It is proposed to show only pure deposits under this head Deposits and hence all surplus provisions for bad and doubtful debts contingency funds, secret reserves, etc. which are not netted off against the relative assets, should be brought under the head Others (including provisions). Schedule 6 : Cash and Balance with Reserve Bank of India I Cash in hand (including foreign currency notes); II Balance with RBI: a) in current account; b) in other accounts. Includes cash in hand foreign currency notes and also foreign branches in case of banks having such branches. Schedule 7 : Balance with Other banks and Money at Call and short notice I In India: i) Balance with banks a) In current accounts; b) In order to deposit accounts: include all balance with banks in India (including co-operative banks). Balance in current accounts and deposit accounts should be shown separately. ii) Money at Call and Short notice a) With banks b) With other institutions. This item mainly represents the loans given by one bank to another for a short period Call loans are repayable at any time the bankers recalls them while short notice advances are repayable within a short notice of (say) 24 hours. The maximum notice period is for two weeks. This includes deposits repayable within fifteen days or less than fifteen days notice lent in the inter-bank call money market. II Outside India: i) Currents accounts and ii) Deposits accounts: Includes balance held by Indian branches of the banks outside India. Balance held with the foreign branch by other branches of bank should not shown under this head but should be included in interbranch accounts. The amounts held in Current Accounts and Deposits Accounts should be shown separately.

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iii) Money at Call and Short notice: Includes deposits usually classified in foreign countries as money at call and short notice. Schedule 8 : Investment I Investments in India: i) Government securities: Includes Central and State Government treasury bills. Theses securities should be shown at the book value. However, the difference the book value and market value should be given in notes to balance sheet ii) Other approved Securities: Securities other than Government Securities which are according to Banking Regulation Act, 1949 are treated as approved securities, should be including here. iii) Shares: Investments in shares of companies and corporations not included in the b above should be included here. iv) Debentures and bonds: investment in debentures and bonds of companies and corporations not included in the b above should be included here. v) Investment in Subsidiaries/Joint ventures: Investment in Subsidiaries/ joint ventures (including RRBs) should be included here. vi) Others: Includes residual investment, if any, like gold, commercial papers, and other instruments in nature of shares/debentures/bonds. II Investments out side India a) Government Securities (including local authorities): All foreign Government securities issued by local authorities may be classified under this head. b) Subsidiaries and/or Joint ventures abroad: All investment made in share capital of subsidiaries floated outside India and/or joint ventures abroad can be classifies under this head. c) Others: All other investments outside India may be shown under this head. Schedule 9 : Advances A i) Bills Discounted and Purchased: The banks also give advances to their customers by discounting their bills. Net amount after deducting the amount of discount is credited to the account of customer. The banks may discount the bills with or without security from the debtor in addition to one or more persons are already liable on the bill. ii) Cash-credit, Overdrafts and Loans Repayable on Demand:

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Cash-credit: A cash credit is an arrangement by which a bankers allows his customer to borrow money up to certain limit. Cash credit arrangements are usually made against the security of commodities hypothecated or pledged with the bank. In case of a cash credit facility the borrower need not borrow at once the whole of the amount he is likely to require, but draw such amounts as when required. He/she can put back any surplus amount which he may find with him for the time being. Interest on cash credit account has to be paid on the amount actually drawn at any time and not on the full amount of the credit allowed. Overdrafts: The customer may be allowed to overdraw his/her current account with or without security if he/she requires temporary accommodation. These arrangements is like cash credit is Advantageous from the customers point of view, as he/she is require to pay interest on the actual amount used by him/her. Loans: A loan is kind of advance made with or without security. In case of loan the banks makes a lump sum payment to the borrower or credits his deposits account with the money advanced. Repayments may be made in installments or or at the expiry of the certain period. The customer has to pay interest on the total advance whether he withdraws the money from his account (credited with the loan) or not. A loan once repaid full or in part cannot be drawn again by the borrower unless the banker sanctions as fresh loan. Term loans: A loan may be in form of demand loan Demand loan is payable on demand It is usually for a short period not exceeding a year. While term loans are given for a fixed term usually exceeding a year. In classification under Section A all outstanding-in India as well as outside-less provisions made, will be made under three heads indicated above and both secured and unsecured advances will be included under these heads Term loans should be mentioned including overdue installments. B i) Secured by Tangible Assets: All advances or part advances which are secured by tangible assets may be shown here. The item will include advances in India and outside India. ii) Covered by Bank/ Government Guarantee Advances in India and Outside India, to extent they are covered by the guarantees of Indian and foreign Governments and Indian and foreign Banks, DICGC, ECGC, Indian and foreign banks are to be included. iii) Unsecured: All advances not classified under i) and ii) will be included here. Total of A should tally with total B. C i) Advances in India (Priority Sectors, Public Sector; Banks and Others) Advances should be broadly classified into Advance in India and Advances outside India. Advance in India can be further classified on sectoral basis as indicated. Advances to sectors, which for the time being are classified as priority sectors, according to the instructions of Reserve Bank are classified under the head Priority Sectors such advances are excluded fro item ii i.e. advances to public sector. advances to Central and State Government Companies and Corporation which are according to statutes, to be treated as public sector companies are to be included in the category Public Sector. All advances to the banking sector includes cooperative banks will come under the head Banks. All the remaining advances will be included under the head Others and typically this category will include non-priority advances to the private, joint and co-operative sectors.
26

Notes: General: a) The gross amount of advance including refinance and rediscounts but excluding provisions made to the satisfaction of auditors should be shown as advances. b) Term loans will be loans not repayable on demand c) Consortium advances would be shown net of share from other participating banks/institutions. Schedule 10 : Fixed Assets I Premises i) At cost as on 31st March of the preceding year;\ ii) Additions during the year; iii) Deductions during the year; iv) Depreciation to the date. Premises wholly or partly owned by the banking company for the propose of business including residential premises should be shown against Premises. In the case of premises and other fixed assets, the previous balance, addition thereto, and deductions there from during the year as also the total depreciations written off, should be shown. Where sums have been written off on reduction of capital or revaluation of assets, every balance sheet subsequent to the reduction or revaluation should show the revised figures for the period of five years with the date and amount of revision made. II Other Fixed Assets (including furniture and fixtures) i) At cost as on 31st March of the preceding year;\ ii) Additions during the year; iii) Deductions during the year; iv) Depreciation to the date. Motor vehicles and all other fixed assets other than premises but including furniture and fixtures should be shown under this head. Schedule 11 : Other Assets They include following: 1) Inter-office Adjustment (Net): The inter office adjustment balance, if in debit, should be shown under this head. Only net positions of Inter-office accounts, includes as well as a foreign should be shown here. For arriving at the net balance of inter-office accounts should be aggregated and the net balance, if in debit only should be shown representing mostly items in transit and unadjusted items.
27

2) Interest Accrued: Interest accrued but not on investments and advances, and interest due but not collected on investments will be the main components of this item As a bank normally debits the borrowers account with interest due on advances. Only such interest as can be realized in the ordinary course should be shown under this head. 3) Tax paid in advance/deducted at source: The amount of tax deducted at source securities on securities, advance tax paid, etc. the extent that these items are not set off against relative tax provisions should be shown under this head. 4) Stationary and Stamps: Only exceptional items of expenditure on stationary like bulk purchase of security paper, loose leaf or other ledger, etc., which are shown as quasi assets are to be written off over a period of time should be shown here. The value should be on realistic basis and cost escalation should not be taken into account as these items for internal use. 5) Non banking assets acquired in satisfaction of claims: Immovable properties/tangible assets acquired in satisfaction of claims are to be shown under this head. 6) Others: This will include items like claims which have not been met, for instance, clearing items debit items representing additions to assets or reduction in liabilities which have not been adjusted for technical reasons, want of particulars, etc., advances given to the staff by a bank as employer and not as a banker, etc. Items which are in the nature of expense, which are pending adjustments, should be provided for and provision netted against this item so that only the realizable value is shown under this head. Accrued income other than the interest may also be included here. Schedule 12 : Contingent liabilities 1) Claims against bank not acknowledge as debt 2) Liability of partly paid installments: Liabilities on partly paid shares, debentures, etc. will be included in this head. 3) Liquidity on account of outstanding forward contracts: Outstanding forwards exchange contracts may be include here. 4) Guarantees given on behalf of constituents: a) In India b) Outside India; Guarantees given on behalf of constituents in India and Outside India may be shown separately. 5) Acceptance, Endorsement, Other obligations: This item will include letters of credit and bills accepted by the bank on behalf of customers. In such cases the bank takes upon itself the responsibility for payment. In order to keep a paper record of such liability, the bank maintains customer acceptances, endorsement and guarantee register. All obligations undertaken by the bank as a result of guarantees, endorsement, acceptance, etc. are recorded here. At the end of the accounting year if some of these obligations remain undisbursed they are to be shown as contingent liabilities under this head.
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6) Other Items For Bank is Contingent Liable: Arrears of cumulative dividends, bills rediscounted under underwriting contracts remaining to be executed on capital account and not provided for, etc. are to be include here. Bills for collection A banking company receives a large number of bills of exchange for collection purpose. So in order to keep a systematic record of such bills, it maintains a book called Bills for Collection Register. On receipt of billfor collection, an entry is made in this register. On collection of exchange, besides making a note of this fact in the bills for collection register, following accounting is also passed by the banker: Cash account (with the amount of bill collected) Dr. To Customers Account. (with the amount of bill collected less commission charges) To Commission Account. At the end of accounting period the amount of bills yet to be collected is ascertained from the bills for collection register. the total amount of such bill is shown here. Compulsory deposits In case certain persons are required to make compulsory deposits with a bank as per income tax, excise rules, etc. these deposits have been received by the concerned bank on behalf of the concerned authority. They may be include in the category of Demand Deposits and shown in the Balance Sheet accordingly.

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6.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 I. Income Interest earned Other Income Total II.Expenditure Interest Expended Operating Expenses Provision and contingencies Total III. Profit /Loss Net Profit/(Loss) for the year Profit/(Loss) brought forward Total Transfer to statutory reserve Transfer to other reserve Proposed Dividend Balance carried forward to Balance sheet Total

Sc h. No.

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

13 14 15 16

SCHEDULE 13 INTEREST EARNED

PARTICULARS
I. Interest discount on advances I bills II. Income on investments III. Interest on balances with Reserve Bank of India and other inter-bank funds IV. Others Total

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

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SCHEDULE 14 - OTHER INCOME

PARTICULARS
I. Commission, exchange and brokerage II. Profit on sale of investments Less: Loss on sale of investments III. Profit on revaluation of investments Less: Loss on revaluation of investments IV. Profit on sale of land, buildings and other assets Less: Loss on sale of land, buildings and other assets V. Profit on exchange transactions Less: Loss on exchange transactions VI. Income earned by way of dividends etc., from subsidiaries / companies and/or joint ventures abroad / in India VII Miscellaneous Income Total

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

SCHEDULE 15 - INTEREST EXPENDED

PARTICULARS
I. Interest on deposits II. Interest on Reserve Bank of India I inter-bank borrowings III. Others Total
31

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

SCHEDULE 16 - OPERATING EXPENSES

PARTICULARS
I. Payments to and provisions for employees II. Rent, taxes and lighting III. Printing and stationery IV. Advertisement and publicity V. Depreciation on banks property VI. Directors fees, allowances and expenses VII. Auditors fees and expenses (including branch auditors fees and expenses) VIII. Law charges IX. Postages, telegrams, telephones, etc. X. Repairs and maintenance XI Insurance Total

As on 31.3. (Current Year)

As on 31.3. (Previous Year)

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Schedule 13 A Interest Earned 1. interest/Discount on Advances/Bills: includes interest and discount on all types of loans and advances like cash-credit, demand loans, overdrafts, exports loans, term loans, domestic and foreign bills purchased and discounted (including those rediscounted), overdue interest and also interest subsidy, if any relating to such advances/bills. 2. Income on Investments: Includes all income derived from the investment portfolio by way of interest and dividend 3. Interest on balances with Reserve Bank of India and other interbank funds: Includes the interest on balances with Reserve Bank of India and other banks, call loans, money market placements, etc. 4. Others: Includes any other interest/discount income not included in the above heads. Schedule 14 B Other Incomes 1. Commission, Exchange and Brokerage: Includes all remuneration on services as a commission on collection, commission/exchange on remittance and transfers, commission on letter of credits, letting out lockers and guarantees, commission on Government business, commission on other permitted agency business including consultancy and other services, brokerage etc. on securities It does not include foreign exchange income. 2. Profit on sale of investment: Less loss on sale of investment 3. Profit on revaluation of investment: Less loss on revaluation of investment. 4. Profit on sale of land, building and other assets: Less loss on sale of land, building and other assets. Includes profit/loss on the sale of securities, furniture land and buildings, motor vehicle, gold, silver, etc. Only the net position should be shown. If the net position is a loss, the amount should be shown as a deduction. The net profit/loss on revaluation of assets may also be shown under this item 5. Profit on Exchange transactions: Less loss on exchange transactions Includes profit/loss on dealing in foreign exchange, all income earned by way of foreign exchange commission and charges on foreign exchange transactions excluding interest which will be shown under interest. Only the net position should be shown. If the net position is a loss, the amount should be shown as a deduction. 6. Income earned by way of dividends, etc. from subsidiaries, companies, joint ventures, abroad/in India. 7. Miscellaneous Income: Includes recoveries from constituents for godown rents, income from the banks properties, security charges, insurance, etc. and any other miscellaneous income. In case any item under this head exceeds one percentage of the total income, particulars may be given in the notes. Schedule 15 C Interest Expenses 1. Interest on deposits: Includes interest paid on all types of deposits from banks and other institutions.

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2. Interest on RBI/Inter-Bank Borrowings: Includes discounts/interest on all borrowings and refinance from the Reserve Bank of India and other banks. 3. Others: Includes discount/interest on all borrowings and refinance, penal interest paid, etc. may also be included here. Schedule 16 D Operating Expenses 1. Payments to and provisions for employees: Include staff salaries wages,allowances, bonus, other staff benefits, like provident fund, pension, gratuity, leave fare concessions staff welfare medical allowances to staff, etc. 2. Rent, taxes and Lighting: Includes rent paid by the banks on buildings and municipal and other taxes paid excluding income tax and interest tax, electricity and other similar charges and levies. House allowance and all similar payments to staff should appear under head Payments and provisions for employees. 3. Printing and Stationary: Includes books and forms and stationary used by bank and other printing which are not incurred by way of publicity expenditure. 4. Advertisement and Publicity: Includes expenditure incurred by the bank for advertisement and publicity purpose including printing charges of publicity matter. 5. Depreciation on Banks Property: Includes depreciation on banks own property, motor cars and other vehicles, furniture, electric fittings, vaults, lifts, leasehold properties, non banking assets, etc. 6. Directors fees, allowances and expenses: Includes sitting fees and all other items of expenditure incurred on behalf of directors. It includes the daily allowances, hotel charges, conveyance charges, etc. which though in the nature of reimbursement of expenses incurred may include under this head. Similar expenses of local committee members may also be included in this head. 7. Auditors fees and expenses: (including branch auditors fees and expenses) Includes the fees paid to the statutory auditors and branch auditors for professional services rendered and all expenses for performing their duties, even though they may be in the nature of reimbursement of expenses. If external auditors have been appointed by the bankers themselves for internal inspection and audits and other services, expenses incurred in that context including fees may not be included this head but shown under Other Expenses. 8. Law Charges: All legal expenses and reimbursement of expenses, incurred in connection with legal services are to be included here. 9. Postage, telegrams, telephones, etc: Includes all postage charges like stamps, telegram, telephones, teleprinters, etc. 10. Repairs and maintenance: Includes repairs to banks property, their maintenance charges, etc. 11. Insurance: Includes insurance charges premium paid to DICGC, etc. to the extent they are not recovered from the concerned parties.

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7. ACCOUNTING TREATMENT OF SPESIFIC ITEMS

Accounting treatment of some specific items in the profit and loss account and balance sheet are as per following. A. Bad Debts and Provisions for Doubtful Debts The amount of bad debts and provision for bad debts has to be charged under heading Provision and Contingencies in the Profit and Loss account. In the Balance Sheet, the advances are shown after deducting both bad debts and provisions for bad debts. It may be noted the banks collect from their branches information regarding bad debts and doubtful debts also. The schedule of Advances to be filled by the branches contains separate column regarding doubtful debts in respect of bills purchased and discounted, cash credits and overdrafts and unsecured loans. However while consolidating the Schedule of Advances at the head office level, for balance sheet purposes, the advances are shown net of any bad or doubtful debts. B. Provision for Taxation The amount of provision for taxation has to be charged to the Profit and Loss account under heading Provisions and Contingencies in the Balance Sheet, it will be shown under the heading Other liabilities and Provisions, on the liability side. C. Rebate on b Bills Discounted This refers to unexpired discount. A banking company charges discount in advance for the full period of the bill of exchange or promissory note discounted with it. The accounting entry made is as follows: Bills discounted and purchased a/c Dr. To Customers a/c To Discount a/c Customers account is credited with the net amount remaining after deducting the amount of discount. The amount credited to discount account represents the earning of the bank. However it may be possible that the bills discounted may mature after the close of financial year, It will be not be appropriate to take to the credit of the Profit and Loss account, that part of the discount charged, which relates to next year. An accounting entry is, therefore, passed for unearned discount in the following manner: Discount a/c Dr. To Rebate on Bills Discounted a/c (with the amount of unearned discount to the next period) Rebate on bills discounted, if already appears in the trial balance, is taken to the Balance Sheet on liabilities side. However, if an adjustment has to be done after the preparation of the trial balance, in respect on bills discounted the amount of such rebate (i.e. unearned discount) will be deducted from the total discount in the profit and loss account and will also appear as a liability in the balance sheet.
35

8.DISCLOSURE REQUIRMENTS OF BANKS TO BE ADDED AS NOTES TO ACCOUNTS ( in Schedule 17)

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 realization 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
36

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 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 % of provision on secured portion Considered as doubtful Up to 1 year
37

20%

More than 1 year and up to 3 years More than three years i. Outstanding stock of NPAs as on 31.03.2004 w.e.f. 31.03.2005 w.e.f. 31.03.2006 w.e.f. 31.03.2007

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 nonfund based). Security should not include guarantees, comfort letters etc (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

38

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 small-scale 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 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.
39

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 offset. 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.) Banking companies are required to make additional disclosure in the Schedule 17 on Notes on Accounts regarding movement of the provisions for NPA (excluding the provisions on standard assets) and depreciation on investments as per the following format: 2 Movement of provisions held towards NPA Particulars As on 31-3-200x As on 31-3- 200x (Current year) (Previous year) Opening Balance Add: Provisions made during the yr. Sub-total Less: Write off bad debts/ write Back of excess provisions Closing Balance 3 Movement of provisions held towards Depreciation on Investments Particulars As on 31-3-200x As on 31-3- 200x (Current year) (Previous year) Opening Balance Add: (a) Appropriation from Investment Fluctuation Reserves during the yr (b) Provisions made during the year
40

Less: (c) Transfer to Investment Fluctuation Reserves during the yr. (d) Provision made during the year Closing Balance 4. Asset Classification, Income Recognition and Provision Norms Assets classification-(a) A banks advances are divided between performing and nonperforming assets. An advance giving income on continuous basis is called a performing asset. A nonperforming 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 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 (d) Investment Classification 1. Investment by banks include as under: 2. Government Securities 3. Approved securities 4. Shares 5. Debenture and bonds 6. Subsidiaries/joint venture 7. 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.
41

8.CONCLUSION
A bank is a commercial institution, licensed to accept deposits and acts as a safe custodian of the spendable funds of its customers. Banks are concerned mainly with the functions of banking, i.e., receiving, collecting, transferring, buying, lending, investing, dealing, exchanging and servicing (safe deposit, custodianship, agency , trusteeship) money and claims to money both domestically and internationally. The principal activities of a bank are operating current accounts, receiving deposits, taking in and paying out notes and coins, and making loans. Banking activities undertaken by banks include personal banking (non-business customers), commercial Banking (small and medium-sized business customers) and corporate banking (large international and multinational corporations). 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 31st December earlier. In practice, banks also close books on 30th September for internal purpose .As per the provision of Section 6 of the Banking Regulation Act, 1949, a banking company may engage in any one or more of the following forms of business, in addition to the business of banking. These are:

The borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hoondees, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates,scrips and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, travelers cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes.
42

43