Banking Company Notes

  • Bank: Derived from 'bancus' or 'banque' (bench) or German 'back' (joint stock fund).
  • Banking Regulation Act, 1949 (formerly Indian Banking Companies Act, 1949).
  • Banking: Accepting deposits for lending/investment, repayable on demand.
  • Banking Company: Transacts banking business in India.
  • Restrictions on name usage: Only banking companies can use 'bank', 'banker', or 'banking' in their name.
  • Nationalization: 14 major commercial banks nationalized in 1969; 6 more in 1980.
Functions of a Modern Bank
  • Accepting Deposits:
    • Fixed Deposits: Repayable after a period (1 month to 7+ years); high interest rates; loanable.
    • Current Deposits: On-demand deposits; generally no interest.
    • Savings Bank Deposit: Limited withdrawals; lower interest than fixed deposits.
  • Giving Loans:
    • Cash Credit: Borrowing up to a limit against securities; interest on amount withdrawn.
    • Overdraft: Overdrawing from current account; temporary; interest on actual amount used.
    • Loans: Lump-sum advance; repaid completely or partially.
    • Discounting of Bill of Exchange: Loan via discounting; short term; on securities.
  • Agency Functions:
    • Payments, collections, security purchases/sales, fund transfers, financial management.
  • Issue of Notes: Historically, but now by Reserve Bank of India.
  • Other Useful Services:
    • Safe custody, letters of credit, B/E acceptance, credit information, business statistics, underwriting.
  • Purchase and Sale of Foreign Exchange.
  • Financing of Internal and Foreign Trade.
Accounting Records
  • Slip System: Accounting via slips (pay-in-slips).
  • Key Books: General/Sectional Cash Book, Customers’ Receipts Book, Counter Payments Book, Cash Balance Book, Bills Payable/Discounting Register, Transfer Journal, General/Current/Savings/Fixed Deposits/Investment/Loan Ledgers, Safe Deposits Vault Register, Bill Register, Securities Register.
  • Slip system also called Unit Media of Posting.
Financial Statements
  • Balance Sheet and Profit & Loss Account prepared annually as per Third Schedule of Banking Regulation Act.
  • Must be signed by manager/principal officer and at least three directors (or all directors if fewer).
  • Central Government can amend forms.
  • Audit: By qualified auditor; requires Reserve Bank approval for appointment/reappointment/removal
  • Submission: Three copies to Reserve Bank within three months.
  • Copies to Registrar: Within three months.
  • Display: Banking companies incorporated outside of India must display audited statements.
New Formats (1991 Amendment)
  • Revised formats for Balance Sheet and Profit & Loss Account.
  • Implemented for accounting year ending March 31, 1992, and onwards.
Key Balance Sheet Schedules
  • Schedule 1: Capital
    • Nationalized Banks: Fully owned by Central Government.
    • Foreign Banks: Start-up capital prescribed by RBI; deposit with RBI (§11(2))(\S 11(2)).
    • Other Banks: Authorized, Issued, Subscribed, Called-up Capital; Forfeited shares.
  • Schedule 2: Reserves & Surplus
    • Statutory, Capital, Share Premium, Revenue Reserves; Profit & Loss Account balance.
    • Investment Fluctuation Reserve Account for depreciation on investments.
  • Schedule 3: Deposits
    • Demand, Savings Bank, Term Deposits; from banks and others; branches in/outside India.
  • Schedule 4: Borrowings
    • In India (from RBI, other banks, institutions); outside India.
    • Secured borrowings disclosed separately.
  • Schedule 5: Other Liabilities & Provisions
    • Bills payable, inter-office adjustments (net), interest accrued, other (taxes, surplus provisions, unclaimed dividend).
    • Contingent Provisions against Standard Assets.
    • Subordinated debt (Tier II capital).
  • Schedule 6: Cash and Balances with Reserve Bank of India
    • Cash in hand (including foreign currency), balances with RBI.
  • Schedule 7: Balances with Banks & Money at Call & Short Notice
    • In India (with banks/institutions), outside India.
  • Schedule 8: Investments
    • In India (Govt. securities, shares, debentures), outside India.
    • Gross value, provisions for depreciation, and net value disclosed.
  • Schedule 9: Advances
    • Bills purchased/discounted, cash credits, term loans; secured/unsecured; in/outside India (priority, public, banks, others).
  • Schedule 10: Fixed Assets
    • Premises, furniture, fixtures; at cost, with additions, deductions, depreciation.
  • Schedule 11: Other Assets
    • Inter-office adjustments (net), interest accrued, tax paid in advance, stationery, non-banking assets.
  • Schedule 12: Contingent Liabilities
    • Claims against bank, liability for partly paid investments/forward exchange contracts, guarantees, acceptances.
Profit & Loss Account Schedules
  • Schedule 13: Interest Earned
    • Interest/discount on advances/bills, income on investments, interest on inter-bank funds, others.
  • Schedule 14: Other Income
    • Commission, exchange, brokerage; profit on sale/revaluation of investments/assets; miscellaneous income.
  • Schedule 15: Interest Expended
    • Interest on deposits, RBI/inter-bank borrowings, others.
  • Schedule 16: Operating Expenses
    • Payments to/provisions for employees, rent/taxes/lighting, printing/stationery, advertisement, depreciation, director/auditor fees, postage, repairs, insurance, other expenditures.
RBI Guidelines
  • Detailed instructions for each schedule.
  • Clarifications on capital, reserves, deposits, borrowings, assets, liabilities, and income/expenses.
Specialised Accounts
  • Double entry system is adopted in a bank.
  • For accounting, Slip System is very popular in banks.
  • At the end of each financial year, banking companies must prepare a Balance Sheet and Profit and Loss Account as on the last working day of the year, in the form set out in the Third Schedule