finance project

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1. INTRODUCTION A banking company means and includes any company which carries on business or which transacts banking business in India. A banking businessis generally governed by the provisions of the Companies Act 1956 andspecifically by the Banking Regulation Act. The Banking regulation Actof 1949 came into force on 16thMarch 1949 as a result of long-felt need toregulate the banking business in India and protect the interest of number of depositors. The existence of well- organized, regulated and efficient banking systemis pre-requisite for economic growth. Banks are agencies responsible for mobilizing and channeling of funds in a country. The major institutionscarrying 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. 1

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Page 1: Finance Project

1. INTRODUCTION

A banking company means and includes any company which carries on business or which transacts banking business in India. A banking businessis generally governed by the provisions of the Companies Act 1956 andspecifically by the Banking Regulation Act. The Banking regulation Actof 1949 came into force on 16thMarch 1949 as a result of long-felt need toregulate the banking business in India and protect the interest of number of depositors.

The existence of well- organized, regulated and efficient banking systemis pre-requisite for economic growth. Banks are agencies responsible for mobilizing and channeling of funds in a country. The major institutionscarrying 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.

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2. DEFINITION AND FUNCTIONS OF A BANK

Banking has been defined by section 5 of the Banking Regulation Act andmeans:

(a)accepting deposits of money from public

(b)for the purpose of lending or investment and deposits are repayableon demand or otherwise by cheque, draft, and order or otherwise. Itshould be noted that company which is engaged in manufacturinggoods and for the purpose of financing business accepts depositsfrom the public should not be deemed to transact business of banking.

In addition to banking business, a bank is permitted under Section 6 of theBanking Regulation Act to engage in certain class of business which isincidental to the business of banking. Section 8 of the Banking RegulationAct prohibits a bank from buying and selling or dealing in goods except inconnection with realization of a security held by it or in connection withthe 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 itscustomers.

(d)Opening letters of credits.

(e)Issuing guarantees.

(f) Dealing in foreign exchange.

(g)Transferring money from one place to another through demanddraft, telegraphic transfers, traveler’s cheques, bills, etc.

(h)Merchant banking, i.e. acting as managers to public issues, etc.

However, any company which is engaged in the manufacturer of goods or carries on any trade and which accepts deposits of money from the publicmerely for the purpose of financing its business as manufacturer or trader shall not be deemed to transact the business of banking. It may bementioned that the Banking Regulation Act, 1949 is not applicable to a primary agricultural society, a co-operative land mortgage bank and

anyother co-operative society except in the manner and to the extent specifiedin Part V of the Act.

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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 ReserveBanks 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 bankingdepartment and issue department;

(f) Remittance of money between different branches of scheduled banksthrough 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 thesame;

(iv) effecting, insuring, guaranteeing, under-writing, participating inmanaging 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 anyright, title or interest in such property which may form the security for anyloans and advances;

(viii) underwriting and executing trusts;

(ix) establishing and supporting or aiding in the establishment and supportof institutions, funds, trusts etc.

(x) acquisition, construction, maintenance and alteration of any buildingand works necessary for the purpose of the banking company;

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(xi) selling, improving, managing, developing, exchanging, leasing,mortgaging, depositing of or turning into account or otherwise dealingwith 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 bynotification in the Official Gazette. No banking company shall engage in any form of business other thanthose 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 inconnection 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 sevenyears from the date of acquisition. However, in any particular case, theReserve Bank of India may extend such period of seven years if it issatisfied, 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 personshaving special knowledge or practical experience in one or more of thefollowing fields :

1. Accountancy;

2. Agriculture and rural economy;

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3. Banking;

4. Co-operation;

5. Economics;

6. Finance;

7. Law;

8. Small scale industry.

It is also required that not less than two directors should have specialknowledge or practical experience in respect of agriculture and ruraleconomy 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 thewhole-time employee of the banking company and can hold office for a period not exceeding five years. Other directors who are whole-timedirectors can hold office continuously for a period not exceeding eightyears.

Thus the cash book gives a bird's-eye view each day of all the work of the bank. Some banks still use, in addition to thecashbook, a modified formof the old-fashioned journal, but it is preferable to make the cash book theonly posting medium of thegeneral 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 aledger, 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 specialledger for individual accounts, with the control or key account carried inthe original led-ger, and to have the checks and deposits entered inasupplementary cash book , with only the totals entered in the general cash book. Similarly, it would be found necessary in time to open up adiscount register and aliability ledger to look after the increased number of loans.As the volume of business increases, the deposit ledger is capable of beingindefinitely subdivided, either alphabetically or numerically. Generally,the ordinary deposit ledger is divided alphabetically and thesavings 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 indefiniteexpansion 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 transactionsduring the past twenty years has made the use of loose-leaf ledgers andother books a practical necessity in modern accounting. In Canadian banks, particularly, the system has been in successful

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operation for manyyears. The principal objection urged against loose-leaf ledgers - thequestion of their validity in a court of law - appears to have died a naturaldeath. The courts rule so plainly and the logic is so clear, that it is theoriginal entry that counts and not the assembly of entries inthe ledger , thatit is now generally conceded that the loose-leaf ledger is just as acceptableas evidence in a court as a bound ledger. In fact, with the precautionsobserved by the banks in their use of loose-leaf books, the evidence might be considered even more competent. The following rules are generallyobserved:

1. The keys of all loose-leaf ledgers and transfer binders are kept in thecustody of themanager or of the accountant or other officer speciallyauthorized, by whom blank sheets are inserted as required, and the usedsheets 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 frontof the ledger, and, when opening the book again, must satisfy himself thathis last seal has not been tampered with.

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

4. A few blank sheets may be locked in the current ledger for emergencyuse, 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 evidentmethods of defrauding than by switching ledger leaves.

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 lossaccount 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 lossaccount 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 bookson 30thSeptember for internal purpose.

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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 anyauditor, 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 preparedunder Section 29 together with auditors’ report under Section 30 must besubmitted 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 prescribedthat accounts and auditors’ report shall be published in newspaper circulating in a place where a banking company has its principal office,within six months from the end of period to which they relate.

4. SIGNIFICANT FEATURES OF ACCOUNTING SYSTEMS OFBANKS

Banks, like most of the other large-sized institutions, follow the mercantilesystem of accounting. Thus, the system of recording classifying andsummarizing the transactions in bank is in substance no different from thatfollowed in other entities having similar volume of operations. However inthe case of banks the need for the ledger accounts, especially those of customers, being accurate and up to date is much stronger than most of other types of enterprises. A bank cannot afford to ignore its ledgers particularly those containing the accounts of its customers and has to enter into the ledgers every transaction as soon as it takes place. In the case of banks, relatively lesser emphasis is placed on books of prime entry such ascash books or journals. This is unlike most other types of enterpriseswhere books of prime entry are generally kept up to date while ledgers,including the general ledger and subsidiary books ledgers for debtors,creditors are written up afterwards. Banks follow the accounting procedure of ‘voucher posting’ under whichthe vouchers are straightway posted to the individual accounts in thesubsidiary ledgers. (Only in case of Personal Ledger) At the end of eachday, the debit and credit vouchers relating to a particular type of transactions (e.g. savings bank accounts, current accounts, demand loanscash credit account etc.) are entered on separate vouchers summery sheetsand the

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total thereof is posted to the respective control account in thegeneral ledger. The general ledger trial balance is prepared every day.

Types of Transactions

The transactions in banks are of two types, cash and non-cash. In the caseof letter, also called ‘transfer transactions’, one or both of accountconcerned may be of customers or internal accounts of bank. For example,if ‘A’ deposits a cheque drawn in his favor by ‘B’, who is also customer of the branch, the accounts of the two customers will be affected. On theother hand, if ‘A’ deposits a draft drawn on branch the ‘Draft Account, aninternal account of bank, will be debited’. Likewise, on payment of interest on deposit accounts, the ‘Interest Account’ at the branch will bedebited and various personal accounts will be credited.

Vouchers

Both the debit and credit operations on all accounts, either by customers or by the banks itself, are made by means of vouchers. There are two kind of vouchers, one, which evidences only debit to an account and which other,which contains both debit and credit in different accounts. For the sake of convenience, the latter kinds of vouchers may be called ‘compositevouchers’.

The debit vouchers are of many kinds, broadly following:

1.Cheques issued by customers.

2.Cheques/ Pay orders issued by banks.

3.Withdrawal of money by saving bank account holders.

4.Drafts issued by another branches of banks payable at branch.

5.Draft issued by another banks on branch, in terms of an approvedarrangement between the two banks.

6.Dividend / Interest warrants issued by bank’s customers and payable by branch in terms of an approved arrangement.

7.Traveler’s cheques issued by any branch of the bank which presented to the branch for payment.

8.Drafts / Pay orders issued by the branch itself which are cancelled atthe request of customer and amount is refunded to him.

9.Letters of authority signed by the customers, containing standinginstructions.

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10.Instruments like traveler’s cheques/gift cheques, etc.of other bankswhich are paid by branch in terms of an approved arrangement.

11.Debit vouchers prepared by the branch on its printed stationarywhich are authorized by a designated official of the bank and mayalso carry authority from the customers in some cases to debit hisaccount at the branch.12.In respect of realization of collection instrument sent to other branches of the bank, a debit advice (which may be known by different names in different banks) prepared by the other branchmay itself as a debit voucher.13.In case of remittance of funds by one branch to the other branch bymeans of telegraphic transferor mail transfer, the bank may treat theadvice of transfer itself as debit voucher or may prepare a separatedebit voucher.

The credit vouchers are also of many kinds, broadly the following:

1.Pay –in-slip filled by customers (depositors as well as borrowers)for deposit the amounts in their accounts. Generally, the pay-in-slips are in standard format adopted by the bank but there may becases of a special kind of pay-in-slips in respect of some customers pursuant a formal agreement between the bank and customer.

2.Applications for issue of demand drafts, mail transfer telegraphictransfer, banker’s cheques, pay orders, gifts cheques, traveler’scheques, and other similar instruments. Some of these applicationmay be made on behalf of the branch itself it has to make.

3.Credit vouchers prepared by the branch on its printed stationarywhich are authorized by an official of the bank. Normally thesesvouchers are signed on behalf of the branch only but there may besome instance where the customer concerned also signs on thevoucher as evidence that the transaction actually pertains to him.Examples are: deposits of locker charges (credit to an incomeaccount of the bank), deposits of money for purchase of non- judicial stamps requires for execution of document in favor of the bank, etc.

4.Challans for deposit into the account of Central/State Government,e.g. on account of Direct/Indirect taxes or under schemes like public provident fund, etc.

5.On payment of collection instruments from other branches of the bank, a credit advice (which may be known by different names indifferent banks) or copy of the collection schedule received fromthe other branch may itself be treated as a credit voucher.It may be stated here in case of debits or credits of similar nature to a largeno. of accounts in the same ledger or group of ledgers (e.g. debit onaccount of periodic interest, inspection charges, etc. or credit on account

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of periodic payment of interest to depositors), it is a common practiceamong the banks to prepare a consolidated voucher on their stationary andenclosed thereto a list containing details of accounts debited/credited andthe amount of debit/credit.As stated earlier apart from debit vouchers and credit vouchers, there isalso category of ‘composite vouchers’. These vouchers record the particulars of both debit and credit accounts. Most of the transactionscovered by composite vouchers pertain to the internal accounts to the bank, i.e. non-customers accounts. Examples are: bills received for collection, letters of credit issued by the branch, guarantee issued by the branch, etc. Such vouchers may also be prepared to rectify an error whiledebiting or crediting accounts. For example, in case of current account isdebited in general ledger instead of cash credit account by mistake, thecomposite vouchers will show debit to cash credit account withcorresponding credit to current account.All entries in personal ledgers and the summary sheets are checked by persons other than those who have made entries. Most clerical errors arethus detected immediately.A trial balance of personal ledgers is prepared periodically, usually everytwo weeks and agreed with general ledger control accounts. In banking parlance, this exercise is referred to as ‘balancing of books’.

Banker’s Books

According to Section 2 (3) of the Banker’s Books Evidence Act,‘Bankers Books’ include ledgers, day book, cash books, account booksand all other books used in ordinary business of a bank.

Generally the following books are maintained by the bank to keep up-to-date records of its customers.

Cash Book

All cash receipts and payments are recorded in the receiving cashier’s cash book and paying cashier’s cash respectively. After this on the basis of pay-in slips received by receiving cashier and cheques and withdrawal slipsreceived by paying cashier, these transactions are entered first in theaccounts of customers and after that Day Book are written. This is called‘ Slip System’ of posting.

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Ledger Book

General Ledger contains the total accounts of each ledger. Besides the GL,the following ledger books are maintained:

1.Current Accounts Ledger

2.FD Accounts Ledger

3.RD Accounts Ledger

4.Loan Ledger

5.Investment Ledger

6.Bills discounted and purchased Ledger

Other Books

1.Clearing Register

2.Securities Register

3.Draft Register

4.Bills for collection Register

5.Dishonored cheques Register

6.Safe deposit vault Register

7.Letter of credit Register

Teller's Records

The teller 's cash book or blotter consists of a skeleton ruling with no printed headings, these being written in daily by the teller according to his requirements. Were the headings printed it would require a specially printed book for each class of teller, and even then it might not be suitably spaced for local requirements.

A teller should arrange his entries, debit, and credit to conform with the general system of the office. Cheque should be sorted out and entered according to the divisions of the ledger , thus balancing with the various supplementaries. If the checks are very numerous, separate sheets, suitablyruled, can be used; these can be entered on an adding machine or

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by anassistant.A teller's book is, in reality, a skeleton cash book, and the entries should be so arranged that the books of the various departments should balancewith the combined entries of the tellers.All parcels of money received are acknowledged, and entered in a special book. If the advice comes in first it should be at once entered in this book,and the parcel inquired for if necessary. Money parcels dispatched are alsoentered in a book. Great care is necessary in handling money parcels. Bothsent and received parcels should be counted by two men in each other's presence and, in the case of the former, it is necessary to have the parcel inthe uninterrupted custody of two men from the time it is counted andsealed until it is delivered to the express company or post office.The relative advices and acknowledgments should be carefully watchedand any delay immediately inquired into.

Supplementary Cash Book

In this book are entered all the deposit slips, checks, and other vouchers pertaining to the ordinary deposit and savings bank ledgers. The ruling is simple, requiring no printed headings, and consists of columns for folio, names of customers and amount of vouchers - two sets of columns to a page. Two pages will easily contain a day's entries for a small branch, the first or left-hand column being used for deposits and the remaining three for checks, the latter being much more numerous. The savings deposits and checks, being comparatively few in number, are entered at the end of the day under their own headings at the foot of the ordinary checks and deposits respectively, though in some small branches they are entered in the general cash book .In offices where it is found necessary to split up the deposit ledger into two or more alphabetical divisions, a special "supplementary" is devoted to each division including the savings bank ledger. It is not necessary to open up an account in the general ledger for each division of the deposit ledgers.

If the savings ledger contains a large number of accounts, it will be found of great advantage to split it up into several sections or blocks of accounts, as this greatly facilitates the location of errors when balancing. A special form of supplementary cash book should be used with a money column for each block of accounts. In the case of a current account which has an unusual number of checks ata certain period of the month or year - for instance, payroll or dividend checks - it is permissible to detail a day's checks once, either in the supplementary cash book or ledger, and enter the total only with a reference in the other book. In the larger offices of some of the banks, where the volume of checks is unusually heavy, a loose-leaf form of supplementary cash book is used in connection with the adding machine, the names being typewritten in afterward. Where this form is adopted, care should be taken to see that the sheets are consecutively numbered and filed, and that each sheet is signed by the two checking officers.

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5. PRINCIPAL BOOKS OF ACCOUNT

The principal books of accounts, subsidiary books and statistical recordsgenerally maintained by banks are described in the following. It may,however, be emphasized that the exact nature of such books may differ from one book to another, depending upon the individual requirement of each bank.

General Ledger

The general Ledger contains the control accounts of all personal ledgers,the profit and loss account and different asset and liabilities accounts.There are certain additional accounts also (known as contra accounts)which are kept with the view to keeping control over transactions whichhave no direct effect on the asset and liabilities of bank and representagency business handled by bank on which it earns service charges, (or commission) e.g. Letters of credit opened, bills received or sent for collection, guarantees given, etc.

Types of General Ledger:

1. Old Style

Although bank book-keeping is supposed to be very simple, there are many ways of doing the same thing and therefore every bank may find something in the methods of some other bank, which would be worth its while to adopt. The general ledger most often found is the old-fashioned ledger, this ledger needs no explanation. It is sometimes ruled with two columns on each side, the inside columns being used to bring down the totals from day to day, instead of directly under the day's work. These additional columns prove a blessing, when an analysis of previous work is desired. The footings are usually made in a hurry and are often so large and heavy tha tit is hard to tell them from the actual debits and credits. It should be bornein mind that the general ledger is continually used to prepare statements of all kinds. Every item of unusual nature should be properly explained on the ledger. For example, the profit and loss account frequently contains debits representing loans, discounts, or overdrafts charged off. Money subsequently recovered from these losses is credited to this account. The record on each side should be so plain that any item may be traced back, in order to show both debit and credit without referring to tickets or journal of any kind. It is worth while to itemize the expense account in the same way unless a detailed expense account is kept separately. Do not debit expense with "Hargood & Co.'s bill, $122.30," but "Stationery,$122.30." A few years hence the bank may be dealing with another stationer.

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Three Column Ledger

Another form of ledger has the money columns together, making it much easier to strike the balance. The debit balances should be struck in red and the credit balances in black ink when using this form.

Boston Ledger

A ledger on the style of the Boston ledger , a thorough explanation of which will follow later, is used in many banks and found satisfactory. In this ledger the names of the accounts are written or printed down the middle or side of the page. The days are placed side by side, across the page. A small column may be left for remarks beside each of the debit and credit columns as noted in the figure. It is preferable to arrange the asset accounts in proper order on the upper part of the page and the liabilities on the lower part. When the postings have been made and the balances struck and proved, a complete daily statement will be made on the ledger it-self. The objection to this style of general ledger is that an analysis of any account is a very trying task because of the meager explanations of debits and credits. A large New York bank has adopted a form which does away with this objection. The front part of the ledger is a two column Boston. The back part of the ledger is ruled like the old style ledger . The postings are all made first in one section and then in the other. The bookkeeper takes off a trial balance of the old style section at frequent intervals and compares the balances in each account with the balances in his skeleton section. If this duplication of the ledger should seem useless, the desired results can be obtained by keeping a skeleton ledger and an analytical account for such accounts as "profit and loss," "expense," etc. The Bostonledger and the old style each have their advantages as a general ledger. A union of the two combines all the good points of both, and when bound in the same cover furnishes, with a very small amount of extra work, as comprehensive a volume as one could wish. Date Memoranda Debit Credit Balance

Balance Ledger

Assets

Monday,July12,2009

Tuesday,July13,2009

Memo Dr. Memo

Cr. Balances Memo Dr. Memo Cr. Balance

Boston Ledger

A very simple point overlooked by most general ledger keepers using a Boston ledger may prove valuable. When closing the books at the end of a fiscal period, enter a trial balance of the ledger in the statement book before any closing entries are made, and another after closing the earningand expense accounts into profit and loss. If a statement of earnings andcharges is desired, covering a period dating from before the closing of the books to a

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period after the closing, it may be very easily prepared bysimply deducting the balances in the accounts chargeable to profit and losson the first day of the period from the balances shown as of the closingdate, and adding to the differences obtained, the balances in the sameaccounts on the last day of the period. Proper addition must be made toeach side of the resulting statement for charges and credits made directlyto profit and loss account.

Profit and Loss Ledger

Some banks maintain a profit and loss account in the general ledger andmaintain separate books for each revenue and expense heads/sub-heads.Some banks maintain columnar books having separate columns for eachrevenue and expense heads/sub-heads. These books are prepared fromvouchers. The total of debits and credits of each day are posted on profitand loss account in general ledger from voucher summery sheets. In some banks, the revenue accounts too maintained in general ledger itself, whilein others, board revenue heads are kept in general ledger and their detailsare kept in subsidiary ledgers.For managerial purpose, the accounts in profit and loss ledgers are moredetailed than those shown in published profit and loss accounts of banks.For example, there are separate accounts for basic salary, dearnessallowance, and various others allowances, which are grouped together in published accounts. Similarly various accounts comparing generalcharges, interest paid, and interest received, etc. are maintained in the profit and loss ledgers.

Subsidiary Books

Personal ledgers

Each control account in the general ledger is supported by a subsidiary ledger (or more than one subsidiary ledger if the number of accounts is large). Thus in respect to control accounts relating to accounts relating to accounts of customers, subsidiary ledgers are maintained for:

a)Various types of deposits accounts (saving bank accounts,recurring account, current accounts, etc) which contains accounts of individuals customers. Each account holder is allotted a separatefolio in the ledger:

b)various types of loans and advances related accounts (cashcredit, term loans, demand loans, bills purchased and discounted,letters of credit, bank guarantees issued, etc.) wherein the liabilityof each customer is reflected. Generally there is no separate ledger for overdraft accounts which are granted in current account.However some branches maintain these accounts in separate ledgersdepending upon the number of regular borrowers under the facility.

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Separate registers are maintained to record the particulars of term deposits(including derivatives like call deposits, certificate of deposits, etc.) Banksgenerally do not allot separate folios to each customer. The register divided in to various sections, each section for particular period of deposits and/or the rate of interest payable on deposits. As mentionedearlier, postings to these ledgers are made directly from summary sheets.The voucher summary sheets prepared in the department which originatesthe transactions, by the persons other than who writes the legers they aresubsequently checked with the vouchers by persons generally unconnectedwith writing of ledgers/registers or the voucher summery sheets.

Current Deposit Ledger

The ordinary or current deposit ledger is a very active and important book in a bank, and one which calls for both accuracy and dispatch on the partof the clerk in charge, as errors can easily be made, involving the bank inserious loss. The deposit ledger is invariably a loose-leaf book and ruledas shown in Figure 22. This form is invariably used by all the banks. Theso-called Boston ledger has been tried several times, but was not found practicable in Canada, owing perhaps to the method of marking or accepting checks by a direct debit to the account. The accounts arearranged alphabetically, and are therefore self-indexing, but an index isusually kept on the tagged sheet dividing the alphabet.In small offices there is usually only one current ledger used, A-Z. Aswork increases and becomes too much for oneledger-keeper , a secondledger can be opened divided A-K and L-Z. For three ledgers the divisionsgenerally run A-G, H-O, and P-Z, and for four the divisions are A-C, D-K,L-R and S-Z.Asthe ledger is loose-leaf there is no accumulation of dead leaves, but thegeneral regulations regarding loose-leaf ledgers given in Section 3 of thischapter should be observed closely.

BANKSheetNo. AccountNo.NameAddressDate Particulars Debit Credit Dr.

OrCr.Balance Date Particulars Debit Credit Dr.

OrCr.Balance

Current Deposit Ledger

Bills Registers

Details of different types of bills are kept in separate registers which have suitable columns. For example, bill purchased inward bills for collection; outward bills for collection, etc. are entered serially on a daily basis in separate registers. In the case of bill purchased or

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discounted party-wisedetails are also kept in normal ledger form this is done to ensure thatsanctioned limits of parties are not exceeded.Entries in registers are made by reference to the original documents. Avoucher of the total amount of the transactions of each day is prepared inrespect of each register. This voucher is entered in the day book. When the bill is realized or returned its original entry in register is marked off. Adaily summery of such realization or returns is prepared in separateregisters whose totals are taken to vouchers which are posted in day book.In respect of bills for collection, contra vouchers reflecting both sides of transactions are the prepared at the time of the original entry is reversed onrealization.Outstanding entries are summarized at stipulated intervals and their totalsagreed with the balance of the respective control accounts in generalledger.

DEPARTMENTAL JOURNALS

Each department of the Bank maintains a journal to note the transfer entries passed by it. These journals are memoranda books only, as all theentries made there are also made in the Day Book through Voucher Summary Sheets. Their purpose is to maintain a record of all the transfer entries originated by each department. For example, the Loans andOverdraft Section will pass transfer entries for interest charged on variousaccounts every month, and as all these entries will be posted in the journalof that department, the office concerned can easily find out the accounts inrespect of which the interest entry has been passed. Since all vouchers passed during the day are entered into the Day Book only in a summaryform, it may not be possible to get this information from the Day Book without looking into the individual vouchers. Moreover, as the number of departments in a banks is quite large, the Day Book may not be accessibleat all times to all departments.

As has been mentioned earlier, two vouchers are generally made for eachtransaction by transfer entry, one for debit and the other for credit. Thevouchers are generally made by and entered into the journal of thedepartment which is affording credit to the other department. For example,if any amount is to be transferred from Current Account of a customer tohis Saving Bank Account, the voucher will be prepared by the CurrentAccounts Department and entered in the journal of that department

Other Registers/Records

There are different Registers/Records to record the detail particulars of various types of transactions. These Registers/Records do not from part

of the books of accounts but support the entries/balances in the variousaccounts some of the important Registers/Records relate to the following:

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(a)Drat issued (separated registers may be maintained for draftsissued by the branch on other branches of same bank and those on the branch of its correspondents in India or abroad). Depending upon thevalue of business, some branches may have separated registers onsome other basis also like weather the draft issued advised is preparedor not, registers exclusively for some high volume customers of the bank, the range, within which amount of draft falls, e.g. below Rs. 1lakh, Rs 1-10 lakh, Rs 10 -100 lakhs, etc.

(b)Drafts paid (separate registers may be maintained on thesame pattern as an in case of draft issued

)(c)Issue and payment of:

1.Telephonic transfers

2.Mail transfers

3.Bankers cheques/Pay orders/traveler’s cheques/Giftcheques

4.Letters of credit.5.Letters of guarantee

Entries in these registers are made from original documents which are alsosummarized on vouchers every day. These vouchers are posted in Day book.Outstanding entries are summarized at stipulated intervals and their totalsare agreed with respective control accounts in the ledger.There are frequent transactions amongst the branch of bank which aresettled through the mechanism of inter-office accounts. The examples of such transaction include payment/realization of bills/cheques, etc. sent for the collection by one branch to other e.g. for government related business.All such transfers of funds are canalized through nodal account (this hasdifferent names in different banks such as Head-office account, Inter-office account, and so on.). This is a circular account for the banks as wellas the auditors for two reasons: first many funds have been prepared on banks through this account and second, banks are now required to make provision for entries routed through this account which remainunreconciled beyond a time period specified by Reserve Bank of India.Banks maintain a Suspense Ledger to record various suspense accounts.As mentioned earlier a trial balance is prepared in banks every day.Sometimes due to clerical errors e.g. preparing the voucher summery sheet balance and the trial balance may not tally. In such situation the differenceis temporarily transferred to a suspense account (in case of short debit) or to sundry deposits account (in case of short credit).Similarly transaction of transitory nature e.g. travel advance to employees,Are also recorded in suspense account pending their adjustment relatedincome/expenses account. Some banks maintains separate ledger for suspense account and sundry deposit accounts. The amounts lying intheses accounts need regular

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monitoring to clear them.Suitable registers with back-up registers to record classification under numerous sub-heads are maintained for:

a)Establishment expenses

b)Interest and discount income

c)Incomes by way of commission

d)Interest expenditure

e)Provision for interest accrued but not due on deposits

f)Fixed Assetsg)Stationary consumed/in hand

h)Interest payable to and receivable from head office,in respect of advances and depositors respectively. A peculiar featureof accounting systems in banks is that the branches, nationally, haveno funds of their own. All deposits accepted at branch are deemed tohave been passed on bank’s head office and all loans made at branchare deemed to have been made out of funds received from the headoffice. The head office pays interest to branch for its deposits andcharges interest from the branch for its loans and advances. The ratesof such interest charged and paid by head office are decided by thehead office during the course of the year and are an important factor in calculating profit and loss of branch. The mechanism may beknown by different names in different banks. All calculation in thisregard is done at the branches only and suitable entries are passed,generally at year end. These entries however get offset in the processof consolidation of accounts and have no effect on financial statementof the bank as a whole.

i)Instruments received from customers for payment/collection by branch. Clearing of locally payableinstruments is an important function of banks. Some banks maintainsseparate registers to maintain details of various types of instrumentslodged by customers where as some other banks use a common book to record all kind of instruments lodged by customers.Separate Registers are maintained to record summaries the transactionsrelating to a particular head of account like Current Account, Saving Bank Account, Cash Credit, Term loans. Such books may be called ‘LogBooks’, ‘Day Book’, etc. The totals of these books are carried over toCash book.Some other registers may be: Stop Payment Register, Locker AccessRegister, Demat Register, Drawing Power Register used for monitoring of CC Accounts etc.

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OTHER MEMORANDA BOOKS

Besides the books mentioned above, various departments of the bank haveto maintain a number of memoranda books to facilitate their work. Someof the important books are described below:-Cash Department

(a) Receiving Cashiers’ cash book

(b) Paying Cashiers’ cash book

(c) Main cash book

(d) Cash Balance book The main Cash Book is maintained by persons other than the cashiers.Each cashier keeps a separate cash book. When cash is received, it isaccompanied by pay-in-slip or other similar document. The cashier makesthe entry in this book This book contains arecordof all the vouchers and entries representingthe transactions of each day. Theoretically, the particulars of every item inthe cash book should be entered in detail, but owing to the wide extensionof banking facilities and the constantly increasing volume of checks andother entries, it has been found necessary to use supplementary books for recording particulars of any class of items whose volume is sufficient towarrant a separate book - only the day's totals are carried into the generalcashbook. The majority of entries, especially in a large office, aretherefore in the form of totals, and very few detailed entries have to bemade; but all entries, when made, should be definite as to source andsufficiently self-explanatory to be understood by any one at any time - tenyears after, if necessary.In the larger offices, the officers in charge of the different departmentsafter balancing their books hand to the cash-book clerk the totals in theform of a signed memorandum, and even in the smaller offices it isadvisable to have the clerks entering up the various supplementary books,give a similar memorandum of their totals. This limits the responsibilityand adds to the efficiency of the staff.Debit and credit entries for cash book, other than the totals referred toabove, are represented by vouchers giving the necessary particulars,signed by themanager , accountant or other authorized officer, and itshould be an imperative rule that any slip, which does not containsufficient particulars or which lacks the necessary signature, should berefused by the cash-book clerk and referred back to the teller for completion. In order to facilitate the sorting and checking of thesevouchers, distinctive colored paper or printing should be used; for instance, yellow, debit slips and white, credit slips.It should constantly be borne in mind that as the cash book and itssupplementary books are recognized in a court of law as the books of original entry, faulty or meager particulars might cause serious trouble.Verbal explanation, even if available, would not be admitted. Examine

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a bank cash book of twenty or thirty years ago: there could be no better object lesson of what a cash book should be. Copper-plate writing andample particulars are characteristic.

Quick Payment System

- Banks introduce different systems so that their customers may receive payment of cash etc. quickly. The most prevalentsystem is the teller system. Under this system tellers keep cash as well asledger cards and the specimen signature cards of each customer in respectof Current and Saving Bank Accounts. A teller is authorised to make payment up to a particular amount, say, Rs. 1,000. On receipt of thecheque, he checks it, passes it for payment, enters it in the ledger card andmakes the payment to customer. The teller also receives cash deposited inthese accounts.

Outward Clearing:

(a) A Clearing Cheques Received Book for entering cheques receivedfrom customers for clearing.

(b) Bank wise list of the above cheques, one copy of which is sent to theClearing House together with the cheques.A person checks the vouchers (foil of pay-in slips) and lists with theClearing Cheque Received Book. The vouchers are then sent toappropriate departments, where customers’ accounts are immediatelycredited. If any cheque is received back unpaid the entry is reversed. Normally, no drawings are allowed against clearing cheques deposited onthe same day but exceptions are often made by the manager in the case of established customers.

Inward Clearing

Cheques received are checked with the accompanying lists. They are thendistributed to different departments and the number of cheques given toeach department is noted in a Memo Book. When the cheques are passed and posted into ledgers, their number is independently agreed with theMemo Book. If any cheques are found unplayable, they are returned back to the Clearing House. The cheques themselves serve as vouchers. Book which is checked by the chief cashier. The pay-in-slip then goes to theMain Cash Book writer who makes an entry in his books. The cash book checker checks the entry with the slip and then the counter-foil of the slipis returned back to the customer and the foil is sent to the appropriatedepartment for entering into the ledger. The foil is used as a voucher. Cashis paid against a cheque or other document (e.g. traveller’s cheque,demand draft, pay order, after it has been duly passed and entered inthe appropriate account in the ledger. Cheques, demand drafts, pay orders,etc. are themselves used as vouchers.

Loans & Overdraft Departments

(a) Registers for shares and other securities held on behalf of eachcustomer.

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(b) Summary Books of Securities giving details of Government securities,shares of individual companies etc.

(c) Godown registers maintained by the godown-keeper of the bank.

(d) Price register giving the wholesale price of the commodities pledgedwith the bank.

(e) Overdraft Sanction registers.

(f) Drawing Power book.

(g) Delivery Order books.

(h) Storage books.

Deposits Department

(a) Account Opening & Closing registers.

(b) For Fixed Deposits, Rate registers giving analysis of depositsaccording to rates.

(c) Due Date Diary.

(d) Specimen signature book.

Establishment department

(a) Salary and allied registers, such as attendance register, leave register,overtime register, etc.

(b) Register of fixed assets, e.g., furniture and fixtures, motor cars,vehicles, etc.

(c) Stationery registers.

(d) Old records register.

General

(a) Signature book of bank’s officers.

(b) Private Telegraphic Code and Cyphers.

STATISTICAL BOOKS

Statistical records kept by different banks are in accordance with their individual needs. For example, there may be books for recording

(i) Average balance in loans and advances etc.

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(ii) Deposits received and amount paid out each month in the various departments,

(iii) Number of cheques paid,

(iv) Number of cheques, bills and other items collected. The above is not an exhaustive list of accounting records kept by a bank

6. PREPRATION AND PRESANTATION OF FINANCIALSTATEMENTS OF BANKS

A banking company is not required to prepare financial statements inaccordance with Schedule VI of the Companies Act, 1956.Form A of third schedule gives the format of a balance sheet and form Bgives the format of a profit and loss account. These formats have beenrevised w.e.f. 1stApril 1991 and the profit and loss account and balancesheet of banking company for the year ended 31stMarch 1992 andonwards have to be prepared in new form as discussed below.

7. FORMS OF BALANCE SHEET AND PROFIT AND LOSSACCOUNT

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 regardto :

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. Therevised 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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THIRD SCHEDULE: FORM A

Schedule 1 : Capital

I. Nationalized Banks

a) Capital (fully owned by central government) : The capital owned by theCentral Government as on the date of the balance sheet including thecontribution on from government, if any. For the participating in theWorld 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 Section11 of Banking Regulation Act 1949 should also be shown.

II. Others Banks (Indian)

Authorized, issued, subscribed, called up capital should be givenseparately. Calls-in-Arrears will be deducted from the called up capitalwhile the paid up value of forfeited shares should be added thus arriving atthe paid –up capital. Where necessary items which can be combinedshould 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 capitalcapitalization 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 includeany amount regarded as free for distribution through the profit andloss account. Surplus on revaluation should be treated as a capitalreserves. Surplus on translation of financial statements of foreign branch (which includes fixed assets also) is not a revaluationreserve.

III.Share premium:Premium on issue of shares capital may be shownseparately under this head.

IV. Revenue and other reserves:The expression ‘Reserve Revenue’ shallmean any reserve other than capital reserve. This item will includeall reserves other than those separately

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classified. The expression‘reserve’ shall not include any amount written –off or retained by providing for any known liability.

V. Balanceof profit:Includes balance of profit after appropriations. Incase of loss balance may be shown as deduction.

Schedule 3 : Deposits

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 creditaccounts, deposits payable at call, overdue deposits, inoperativecurrent accounts, matured time deposits, and cash certificates,certificates of deposits, etc. are to be included under this category.

Savings Banks Accounts:

Includes all savings banks depositsincluding inoperative savings bank accounts.

AIIITerm 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 andrecurring deposits, cash certificates, certificates of deposits, foreigncurrency non resident deposits accounts, annuity deposits, depositsmobilized 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 IndiaThe total of two A and B will agree with total Deposits of bank.

a) Interest payable on deposits which is accrued in but should not showunder others liability.

b) Matured time deposits and cash certificates, etc. should be treated asdemand deposits.

c) Deposits under special scheme should be included under term depositsif they are not payable on demand. When such deposits are maturedfor payment they should be shown under demand deposits.

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d) Deposits from banks will include deposits from the banking system inIndia, 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 bycommercial banks (including cooperative banks)

Other institutions and agencies:

Includes the borrowings/refinanceobtained by Industrial Development Bank of India, Export ImportBank of India, National Bank for Agriculture and RuralDevelopment of India and other institutions, agencies (includingliability against participation certificate, if any)

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 separatelyshown Includes secured borrowings/refinance in India and outsideIndia.

Notes:General:

a) The total of I and II will agree with the total of borrowing shown inthe balance sheet.

b) Inter –office transactions should not be shown as borrowings

.c) Funds raised by foreign branches by way of certificates of depositsnotes; bonds, etc. should be classified depending upondocumentation, as ‘deposits, borrowings’ etc.

d) Refinance obtained by banks from Reserve Bank of India andvarious institutions are being brought under the head borrowing,hence advances will be shown at the gross amount on the assetsside.

Schedule 5 : Other liabilities and provisions

IBills payable:the bank provides the facility remitting funds fromone place to another by means of bank drafts, telegraphic transfer,circular notes, pay orders etc. the person including to remit themoney with the bank and get a pay order or bank draft in exchangemoney deposited. Alternatively he may request the bank for makinga telegraphic

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transfer from his account to the account of the personto whom he want to remit the money. The paying bank reimbursed by the bank who issues such draft or institutions. The banks alsoissue travelers cheques and gift cheques for carrying or remittingmoney .If any such drafts, cheques, etc. remain uncashed on day of the preparation final accounts of final accounts, they are shownunder the heading ‘Bills Payable’ in the Balance Sheet.

II Inter Office (or Branch) Adjustment (Net):This item represents thedifference on account of incomplete recording of transactions between one branch and another branch or one branch and headoffice. 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 thatonly net portion is to be shown of inter office accounts, inland aswell foreign.

IIIInterest Accrued:It includes accrued but not due on deposits and borrowings

IVOthers (Including provisions) :It includes net provision for incometax and other taxes like interest tax (less advance payments, taxdeducted at source, etc.) surplus aggregate in provisions for baddebts provision account, surplus in aggregate in provisions for depreciation in securities contingency funds, which are notdisclosed are reserves but are actually in the nature of reserves,

proposed dividend/transfer to Government, other liabilities whichare not disclosed under any of many heads such as unclaimeddividend provisions and funds kept for specific purpose, unexpireddiscount, out standing charges, like rent conveyance, etc. certaintypes of deposits like staff security deposits, margin deposits, etc.where the repayment is not free, should also be included under thishead.

Notes:General:

a) For arriving at the net balance of inter-office adjustments allconnected inter-office accounts should be aggregated and the net balance only will be shown, representing mostly items in transit andunadjusted items.

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 debtscontingency 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 incase of banks having such branches.

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Schedule 7 : Balance with Other banks and Money at Call and shortnotice

I In India:

i) Balance with banks

a) In current accounts;

b) In order to deposit accounts: include all balance with banks inIndia (including co-operative banks). Balance in current accountsand 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 loansgiven by one bank to another for a short period Call loans arerepayable at any time the bankers recalls them while short noticeadvances are repayable within a short notice of (say) 24 hours.The maximum notice period is for two weeks. This includesdeposits repayable within fifteen days or less than fifteen daysnotice lent in the inter-bank call money market.

IIOutside 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 beincluded in inter-branch accounts. The amounts held in ‘CurrentAccounts’ and ‘Deposits Accounts’ should be shown separately.iii)

Money at Call and Short notice:

Includes deposits usually classifiedinforeign countries as money at call and short notice.

Schedule 8 : Investment

IInvestments in India:

i)Government securities:

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Includes Central and State Governmenttreasury bills. Theses securities should be shown at the book value.However, the difference the book value and market value should begiven in notes to balance sheet

ii)Other approved Securities:

Securities other than GovernmentSecurities which are according to Banking Regulation Act, 1949 aretreated as approved securities, should be including here.

iii)Shares:

Investments in shares of companies and corporations notincluded 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 beincluded 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.

IIInvestments out side India:

a)Government Securities (including local authorities):All foreignGovernment securities issued by local authorities may be classifiedunder this head.

b)Subsidiaries and/or Joint ventures abroad:All investment made inshare capital of subsidiaries floated outside India and/or jointventures abroad can be classifies under this head.c)

Others:

All other investments outside India may be shown under thishead.

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 creditedto the account of customer. The banks may

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discount the bills with or without security from the debtor in addition to one or more personsare already liable on the bill.ii)

Cash-credit, Overdrafts and Loans Repayable on Demand:Cash-credit:

A cash credit is an arrangement by which a bankersallows his customer to borrow money up to certain limit. Cash creditarrangements are usually made against the security of commoditieshypothecated or pledged with the bank. In case of a cash credit facility the borrower need not borrow at oncethe whole of the amount he is likely to require, but draw suchamounts as when required. He/she can put back any surplus amountwhich he may find with him for the time being. Interest oncash credit account has to be paid on the amount actually drawn atany 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 temporaryaccommodation. These arrangements is like cash credit isadvantageousfrom the customer’s point of view, as he/she is require to pay intereston the actual amount used by him/her.

Loans:

A loan is kind of advance made with or without security. Incase of loan the banks makes a credits his deposits account with the money advanced. Repaymentsmay be made in installments or or at the expiry of the certain period.The customer has to pay interest on the total advance whether hewithdraws 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 ayear. While term loans are given for a fixed term usually exceeding ayear. In classification under Section ‘A’ all outstanding-in India as well asoutside-less provisions made, will be made under three headsindicated above and both secured and unsecured advances will beincluded under these heads Term loans should be mentionedincluding overdue installments.

B i)Secured by Tangible Assets:

All advances or part advances which are secured by tangible assetsmay be shown here. The item will include advances in India andoutside India.

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ii)Covered by Bank/ Government Guarantee

Advances in India and Outside India, to extent they are covered bythe guarantees of Indian and foreign Governments and Indian andforeign Banks, DICGC, ECGC, Indian and foreign banks are to beincluded.i

ii)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 classifiedon 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’ suchadvances are excluded fro item ii i.e. advances to public sector.advances to Central and State Government Companies andCorporationwhich are according to statutes, to be treated as public sector companiesare to be included in the category ‘Public Sector’.All advances to the banking sector includes co-operative banks willcome under the head ‘Banks’. All the remaining advances will beincluded under the head ‘Others’ and typically this category willinclude non-priority advances to the private, joint and co-operativesectors.

Notes:General:

a) The gross amount of advance including refinance and rediscounts butexcluding provisions made to the satisfaction of auditors should beshown 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

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i) At cost as on 31stMarch 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 shownagainst ‘Premises’. In the case of premises and other fixed assets, the previous balance, addition thereto, and deductions there from duringthe 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 reductionor revaluation should show the revised figures for the period of fiveyears with the date and amount of revision made.

IIOther Fixed Assets (including furniture and fixtures)

i) At cost as on 31stMarch of the preceding year;\ii) Additions during the year;

iii) Deductions during

iv) Depreciation to the date.

Motor vehicles and all other fixed assets other than premises but includingfurniture 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 shownhere. For arriving at the net balance of inter-office accounts should be aggregated and the net balance, if in debit only should be shownrepresenting mostly items in transit and unadjusted items.

2) Interest Accrued:

Interest accrued but not on investments andadvances, and interest due but not collected on investments will bethe main components of this item As a bank normally debits the

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borrower’s account with interest due on advances. Only suchinterest as can be realized in the ordinary course should be shownunder this head.

3)Tax paid in advance/deducted at source:

The amount of taxdeducted at source securities on securities, advance tax paid, etc. theextent that these items are not set off against relative tax provisionsshould be shown under this head.

4)Stationary and Stamps:

Only exceptional items of expenditure onstationary 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 onrealistic basis and cost escalation should not be taken into accountas 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 beshown under this head

6)Others:

This will include items like claims which have not beenmet, for instance, clearing items debit items representing additionsto assets or reduction in liabilities which have not been adjusted for technical reasons, want of particulars, etc., advances given to thestaff by a bank as employer and not as a banker, etc. Items whichare in the nature of expense, which are pending adjustments, should be provided for and provision netted against this item so that onlythe 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:

Outstandingforwards exchange contracts may be include here.

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4)Guarantees given on behalf of constituents:

a) In Indiab) Outside India;Guarantees given on behalf of constituents in India and OutsideIndia may be shown separately.

5) Acceptance, Endorsement, Other obligations:

This item will includeletters 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 theaccounting year if some of these obligations remain undisbursed theyare to be shown as contingent liabilities under this head.

6)Other Items For Bank is Contingent Liable:

Arrears of cumulativedividends, bills rediscounted under underwriting contracts remainingto be executed on capital account and not provided for, etc. are to beinclude 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, itmaintains a book called ‘Bills for Collection Register’. On receipt of bill for 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 isascertained 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 beenreceived by the concerned bank on behalf of the concerned authority.They may be include in the category of Demand Deposits and shown inthe BalanceSheet accordingly.

Notes and instructions for compilationGeneral Instructions

1) The format of balance sheet and profit loss account cover all itemslikely to appear in these statements. In case bank doesn’t have any particular item to report, it may be omitted from formats.2) Corresponding comparative figures of the previous year are to bedisclosed as indicated in the formats. The words ‘current year’ and‘previous year’ used in the formats

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are only to indicate the order of presentation and may not appear in accounts.3) Figures should be rounded off to the nearest thousand rupees. Thus,a sum of Rs. 19,75,940.78 will appear in balance sheet as Rs. 19.76.

Form BThird Schedule

purchased and discounted (including those rediscounted), overdueinterest and also interest subsidy, if any relating to suchadvances/bills.2.Income on Investments: Includes all income derived from theinvestment portfolio by way of interest and dividend3.Interest on balances with Reserve Bank of India and other inter- bank 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 inthe above heads.

Schedule 14 B Other Incomes

1.Commission, Exchange and Brokerage: Includes all remunerationon services as a commission on collection, commission/exchangeon remittance and transfers, commission on letter of credits, lettingout lockers and guarantees, commission on Government business,commission on other permitted agency business includingconsultancy and other services, brokerage etc. on securities It doesnot 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 saleof 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 aloss, the amount should be shown as a deduction. The net profit/losson revaluation of assets may also be shown under this item

5.Profit on Exchange transactions:Less loss on exchangetransactions Includes profit/loss on dealing in foreign exchange, allincome earned by way of foreign exchange commission and chargeson foreign exchange transactions excluding interest which will beshown under interest. Only the net position should be shown. If thenet 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 anyitem under this head exceeds one percentage of the total income, particulars may be given in the notes.

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Schedule 15 C Interest Expenses

1. Interest on deposits:

Includes interest paid on all types of depositsfrom banks and other institutions.

2. Interest on RBI/Inter-Bank Borrowings:

Includes discounts/intereston all borrowings and refinance from the Reserve Bank of India andother 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 salarieswages, allowances, bonus, other staff benefits, like provident fund, pension, gratuity, leave fare concessions staff welfare medicalallowances to staff, etc.

2. Rent, taxes and Lighting:

Includes rent paid by the banks on buildings and municipal and other taxes paid excluding income taxand 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 stationaryused 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 printingcharges of publicity matter.

5.Depreciation on Banks Property:Includes

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depreciation on bank’sown property, motor cars and other vehicles, furniture, electricfittings, vaults, lifts, leasehold properties, non banking assets, etc.

6. Director’s fees, allowances and expenses:

Includes sitting fees andall other items of expenditure incurred on behalf of directors. Itincludes the daily allowances, hotel charges, conveyance charges,etc. which though in the nature of reimbursement of expensesincurred may include under this head. Similar expenses of localcommittee members may also be included in this head.

7. Auditors’ fees and expenses:

(including branch auditor’s fees andexpenses) Includes the fees paid to the statutory auditors and branchauditors 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 beenappointed by the bankers themselves for internal inspection and audits and other services, expenses incurred in that contextincluding 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 chargeslike stamps, telegram, telephones, teleprinters, etc.

10 Repairs and maintenance:

Includes repairs to bank’s 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.

12.Other expenditure:

All expenses other than those which are notincluded in any other heads like, licences fees, donation,subscription of papers, periodicals, entertainment expenses, travelexpenses, etc. may be included in this head. In case any particular item under this head exceeds one percent of the total income particulars may be given in the notes.

E Provisions and Contingencies

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Includes all the provisions made for bad debts and doubtful debts, provision for taxation, provisions for diminution in the value of investments, transfer to contingencies and other similar items.

8. ACCOUNTING TREATMENT OF SPESIFIC ITEMS

Accounting treatment of some specific items in the profit and loss accountand 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 chargedunder heading ‘Provision and Contingencies’ in the Profit and Lossaccount. In the Balance Sheet, the advances are shown after deducting both bad debts and provisions for bad debts. It may be noted the bankscollect from their branches information regarding bad debts and doubtfuldebts also. The schedule of Advances to be filled by the branches containsseparate column regarding doubtful debts in respect of ‘bills purchasedand discounted’, cash credits and overdrafts and unsecured loans.However while consolidating the Schedule of Advances at the head officelevel, for balance sheet purposes, the advances are shown net of any bador doubtful debts.

B. Provision for Taxation

The amount of provision for taxation has to be charged to the Profit andLoss account under heading ‘Provisions and Contingencies’ in the BalanceSheet, it will be shown under the heading ‘Other liabilities andProvisions’, on the liability side.

C. Rebate on b Bills Discounted

This refers to unexpired discount. A banking company charges discount inadvance for the full period of the bill of exchange or promissory notediscounted with it. The accounting entry made is as follows:Bills discounted and purchased a/c Dr.To Customers’ a/cTo Discount a/cCustomer’s account is credited with the net amount remaining after deducting the amount of discount. The amount credited to discountaccount represents the earning of the bank. However it may be possiblethat the bills discounted may mature after the close of financial year, Itwill be not be appropriate to take to the credit of the Profit and Lossaccount, that part of the discount charged, which relates to next year. Anaccounting entry is, therefore, passed for unearned discount in thefollowing 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 takento the Balance Sheet on ‘liabilities side’. However, if an adjustment has to be done after the preparation of the trial balance, in respect on billsdiscounted the amount of such rebate (i.e. unearned discount) will be

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deducted from the total discount in the profit and loss account and willalso appear as a liability in the balance sheet.

9.IMPORTANT ITEMS OF BALANCE SHEET

Let us consider some of the peculiar items of assets and liabilitiesappearing in the bank’s balance sheet.

Balance sheet: Assets Side

The various items of assets in the balance sheet are arranged according toliquidity order.

1. Money at Call and Short Notice

These are related to inter-bank transactions. Under this arrangementmoney borrowed one bank from other bank usually for one to fourteendays. Banks having surplus money advance such loans. Banks havingshort supply of money, contacts the banks having surplus funds or viceversa for this purpose. Alternatively, they may approach the primarydealers in the money market for deploying their surplus funds or makinggood the deficit. The rate of interest on which money is supplied fluctuatesevery day even within the day.

2. Advances

Under this head, the following items are covered:

1.Loans

2.Cash credit

3.Overdraft

Loans:A loan is advance of fixed amount given to customer for a specific period.

Cash credit:

A is an arrangement by which the bank agrees to lend moneyup to a fixed limit against pledge or hypothecation of some securities.Customers need not draw the whole at home.

Overdraft:

Under this arrangement, the customer is permitted to over draw the money from his current account up to a certain limit againstsome specific securities like L.I.C policy banks fixed deposits receiptsnational savings certificates, quoted shares.

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3. Bills Receivable being Bills for Collection as Per Contra

Customers deposit into bank the draft and the bills for collection andcredit to their accounts. The bank keeps the register for recording the billsfor collection. On collection, cash account is debited and customersaccount is credited. At end of the accounting year, when some bills are leftuncollected, following entry is passed:Bills received being bills for collection a/c…………Dr.To bills for collection being bills receivable accoun

It is contra item in the balance sheet. The first account denotes the amountreceivable and it is shown on assets side. The second one denotes theamount payable to the customer and is shown on the liabilities side of the balance sheet.

4. Acceptance Endorsement and other Obligations

They represent the liabilities which the bank has assumed on behalf of itscustomers, the bank may accommodate his customer in the followingways:

1.by opening letters of credit2.by accepting bills on behalf of the customer 3.by making endorsement on promissory notes prepared by thecustomer 4.by issuing letters of guarantee to make payments if the customersfail to payIn all these cases, the bank is liable to third parties. Hence, it is liability.While undertaking such liabilities the bank obtains customer guaranteefrom its customers which enables it to claim the amounts from itscustomers. Therefore, it is an asset. At the end of the accounting year, thefollowing entry is passed for recording unrecorded bills:Constituent’s Liability for Acceptance, Endorsement or other Obligations a/c ………………………..DR.To Acceptance, Endorsement or other Obligations.It is contra item in the balance sheet. The first accounts appears on assetsside while the other on liabilities side.

5. Non-Banking Assets

A bank cannot acquire certain assets but it can always lend against thesecurity of such assets. This means that some times, in case of failure on part of the loanee to repay the loans, the bank may have to take possessionof such assets. Profit or loss on disposal of such assets should be disclosedseparately in the profit and loss account.

6. Gold and Silver

Gold appears under ‘Investment’ and silver appears under ‘other assets

7. Lockers or Safe Deposits Vaults

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These are assets and are included are included under furniture

8. Branch Adjustment Account

There are many transactions that take place between the head office andthe branches and between one branch to another towards the end of financial year. When such transactions appear they are properly recordedin books of branch or head office when the transactions take place but inthe absence of any advice or completion of the transactions, they remainunrecorded in the books of other party. Because of these transactions thereis always balance left in branch account in the head office books. This balance is called ‘Branch adjustment account’. This appears on assets sideof the balance sheet if it has a debit balance and on liability side if it hascredit balance.

Balance Sheet: Liabilities side9. Share Capital

Under this head, authorised, subscribed and issued and paid up capital areshown separately. As in the case of any other limited company, calls inarrears are reduced from paid up capital and forfeited shares amount isadded to it.

10. Reserves Fund and Other Reserves

Every banking company incorporated in India shall before declaring adividend, transfer a sum equal to twenty per cent of net profit each year (as per profit and loss account) to reserve fund.

11. Deposits and Other Accounts

There are amounts lying in the credit of customers accounts. Fixeddeposits are for a fixed period whereas savings bank and current accounts balances are repayable on demand. Contingency accounts, include the provision for contingencies, provision for taxation, etc. These are mergedwith current accounts.

12. Bills for Collection and Acceptances and Endorsements areContra Item

A loan classified as doubtful has all the weaknesses inherent in thatclassified as sub-standard with the added characteristic that theweaknesses make collection or liquidation in full, on the basis of currentlyknown 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 amounthas not been written off, wholly or partly. In

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other words, such an asset isconsidered 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 andnot for the purpose of presentation of advances in the balance sheet. The balance sheet presentation of advances is governed by the Third Scheduleto the Banking Regulation Act, 1949, which requires classification of advances altogether differently.Taking into account the time lag between an accounts becoming doubtfulof recovery, its recognition as such, the realization of the security and theerosion over time in the value of security charged to the banks, it has beendecided 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 provisionshould 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 securityavailable to the bank should be determined on a realistic basis.DICGC/ECGC cover is also taken into account (this aspect is discussedlater in this chapter). In case the advance covered by CGTSI guarantee becomes non-performing, no provision need be made towards theguaranteed portion. The amount outstanding in excess of the guaranteed portion should be provided for as per the extant guidelines on provisioningfor non-performing advances.

(ii) Additionally, 20% - 100% of the secured portion should be providedfor, depending upon the period for which the advance has been consideredas a doubtful asset, as follows:Period for which the advance has been % of provision on secured portionConsidered as doubtful needs to be noted that such exemption from classification of advances as NPA is only for the purposes of assets classification and provisioningnorms 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 isactually realized. Also, in the case of state government guarantees, thisexemption is available only where the guarantees have not been invoked.The State Government guaranteed accounts which have been invokedupon becoming NPA are to be treated at par with other advances for purpose of asset classification, income recognition and provisioningnorms. Advances Under Rehabilitation PackagesWhere additional facilities are granted to a unit under rehabilitation packages approved by the Board for Industrial and FinancialReconstruction (BIFR) or by term-lending institutions or the bank (on itsown or under a consortium arrangement), provision should continue to bemade for the dues in respect of existing credit facilities. As regards theadditional facilities, provision need not to be made for a period of

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one year from the date of disbursement in respect of additional facilities sanctionedunder 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 inaccordance with a rehabilitation package/nursing programme drawn up bythe bank itself or under a consortium arrangement. After the period of oneyear, the bank in consultation with its auditors would take a view whether there is need for making provision in respect of the additional facilitiessanctioned.

Take-out Finance

In the case of take-out finance, if based on record of recovery, the accountis classified by their lending bank as NPA, it should make provision for loan losses as per the guidelines. The provision should be reversed whenthe account is taken over by the taking-over institution. On taking over theaccount, the taking-over institution should make provisions as per theguidelines. For this purpose, the account should be considered to have become NPA from the actual date of its becoming so, even though theaccount was not on the books of the taking-over institution on that date.

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