Commercial and Co-operative Banks

CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS COMMERCIAL BANKING Commercial banking refers to the sector of the banking industry that deals directly with individuals, businesses, and other institutions to provide various financial services. These banks offer service...

CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS COMMERCIAL BANKING Commercial banking refers to the sector of the banking industry that deals directly with individuals, businesses, and other institutions to provide various financial services. These banks offer services such as accepting deposits, providing loans, and managing basic investment products. Their main goal is to facilitate day-to-day financial transactions and support the economic activities of their clients. Commercial banks operate on a broad scale, from local branches serving individual customers to large multinational institutions serving corporate clients. They generate revenue primarily through the interest rate spread—earning interest on loans and paying interest on deposits. Additionally, they might charge fees for services such as account maintenance, overdrafts, and transaction processing. The stability and regulation of commercial banks are crucial for the broader economy, as they play a significant role in monetary policy implementation and financial stability. Regulatory frameworks often require these banks to maintain certain capital ratios and adhere to various safety and soundness regulations to protect depositors and ensure the integrity of the financial system. FUNCTIONS OF COMMERCIAL BANKS 1. Accepting Deposits Commercial banks in India offer a variety of deposit products tailored to different needs:  Savings Accounts: These are basic accounts where individuals can deposit and withdraw money while earning a modest interest rate. Savings accounts are highly liquid, meaning funds can be accessed easily. Banks offer different types of savings accounts, such as regular savings accounts, high-interest savings accounts, and accounts with special features like online banking.  Current Accounts: Designed for frequent transactions, these accounts are used primarily by businesses and professionals. They do not typically offer interest on the deposited amount but allow unlimited deposits and withdrawals. They often come with features like overdraft facilities, which can be useful for managing cash flow.  Fixed Deposits (FDs): These accounts involve depositing a lump sum amount with the bank for a fixed tenure, ranging from a few months to several years. FDs offer higher interest rates compared to savings accounts. The interest rate is predetermined, and early withdrawal usually incurs a penalty, though some banks offer flexible FD options with partial withdrawal facilities.  Recurring Deposits (RDs): RDs are savings plans where individuals deposit a fixed amount every month for a specific period. The deposited amount and the interest earned are paid out at the end of the tenure. RDs are popular for disciplined savings and offer a fixed interest rate, making them suitable for those looking to build a corpus over time.  NRI Accounts: Non-Resident Indian (NRI) accounts are tailored for Indians residing abroad. NRE accounts allow NRIs to repatriate funds freely and are exempt from tax in India. NRO accounts, on the other hand, are for managing income earned in India and are subject to tax. Both account types cater to different needs regarding currency and repatriation. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 1 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 2. Providing Loans and Advances Commercial banks provide a range of loan products to meet diverse financial needs:  Personal Loans: These are unsecured loans that can be used for various purposes, such as medical expenses, travel, or personal emergencies. Approval is based on the borrower’s credit history, income, and repayment capacity. Interest rates are typically higher due to the lack of collateral.  Home Loans: Secured by the property being purchased or constructed, home loans help individuals acquire residential properties. The loan amount depends on the property's value and the borrower's financial profile. The repayment period is usually long-term, ranging from 10 to 30 years, and can be in the form of equated monthly installments (EMIs).  Car Loans: These are secured loans where the vehicle being purchased serves as collateral. They help individuals finance the purchase of new or used cars. The loan tenure is generally shorter compared to home loans, typically ranging from 1 to 7 years.  Business Loans: Designed for entrepreneurs and companies, these loans can be used for various business needs, including expansion, working capital, or equipment purchase. They may be secured by assets or unsecured, depending on the borrower’s creditworthiness and the bank’s policies.  Education Loans: These loans cover the cost of higher education, including tuition fees, books, and living expenses. They often come with a moratorium period, allowing borrowers to begin repayment after completing their education. The interest rates may be subsidized, and repayment terms are generally flexible.  Gold Loans: Offered against gold ornaments or coins, these loans provide quick access to funds. The gold serves as collateral, and the loan amount is determined based on the gold’s value. These loans are typically short-term and offer relatively higher interest rates.  Agricultural Loans: These loans support farmers and agricultural activities, such as crop cultivation, equipment purchase, and land improvement. They often come with favorable terms, including lower interest rates and longer repayment periods, to support the agricultural sector. 3. Credit Creation Credit creation is a fundamental function of commercial banks, facilitated through their lending activities. When banks provide loans, they effectively increase the money supply in the economy. This process works as follows:  Deposit Multiplier Effect: When a bank lends out a portion of its deposits, it creates new deposits in the borrower’s account. This new deposit can then be used by the borrower, leading to further deposits and loans, thus expanding the money supply.  Economic Impact: By providing credit, banks enable consumers and businesses to spend and invest, driving economic growth. This credit expansion can lead to increased demand for goods and services, job creation, and overall economic development. 4. Payment and Settlement Systems Commercial banks facilitate efficient and secure financial transactions through various payment and settlement systems:  Electronic Fund Transfers (EFT): These include services like NEFT, RTGS, and IMPS. NEFT is used for transferring funds in batches at scheduled intervals, RTGS allows for real-time and high-value transactions, and IMPS provides instant, round-the-clock money transfers. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 2 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS  Cheque Clearing: Banks process and clear cheques through the clearing house system, ensuring that funds are transferred between accounts. The process involves verification of the check details, clearing through the clearing house, and settlement of funds.  Bill Payments: Banks offer services for paying utility bills, taxes, and other regular payments. Customers can schedule payments or make one-time payments through online banking, mobile apps, or bank branches.  Debit and Credit Cards: Debit cards allow direct access to funds in a checking or savings account for purchases, while credit cards offer a line of credit up to a specified limit. Credit cards come with various features, such as reward points, cash back, and installment payment options. 5. Wealth Management and Financial Advisory Banks provide comprehensive financial services to help customers manage and grow their wealth:  Investment Advisory: Banks offer personalized investment advice based on clients’ financial goals, risk tolerance, and investment horizon. Advisors help clients select appropriate investment products, such as stocks, bonds, mutual funds, and ETFs.  Portfolio Management: This service involves managing a client’s investment portfolio to achieve specific financial objectives. Banks may offer discretionary or non-discretionary portfolio management services, where the former allows the bank to make investment decisions on behalf of the client.  Insurance and Pension Plans: Banks offer various insurance products, including life, health, and general insurance, to provide protection against unforeseen events. Pension plans are designed to help individuals save for retirement, offering regular income after retirement. 6. Foreign Exchange Services Commercial banks facilitate international financial transactions and currency exchange:  Currency Exchange: Banks provide services for buying and selling foreign currencies, catering to both individuals traveling abroad and businesses involved in international trade.  Remittances: Banks offer domestic and international remittance services, allowing individuals to transfer money to family members or business associates in other countries. They use networks and partners to ensure secure and timely transfers.  Trade Finance: Banks support international trade by providing financial products such as letters of credit, which guarantee payment to exporters, and trade credit, which helps businesses manage trade-related financing needs. 7. Safeguarding Valuables Banks offer safe deposit lockers for the secure storage of valuable items:  Jewellery and Documents: Safe deposit lockers provide a secure and controlled environment for storing items such as jewellery, important documents, and heirlooms. Access to lockers is typically restricted to authorized individuals, ensuring the safety of the contents. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 3 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 8. Investment Banking Services Some commercial banks offer investment banking services to assist with capital raising and corporate transactions:  Underwriting Services: Banks help companies raise capital by underwriting and issuing securities, such as shares and bonds. They assume the risk of purchasing and selling these securities to the public.  Advisory Services: Banks provide expertise on mergers, acquisitions, and corporate restructuring, offering strategic advice and assistance throughout the transaction process. 9. Financial Inclusion Banks contribute to financial inclusion by providing banking services to underserved populations:  Pradhan Mantri Jan Dhan Yojana (PMJDY): This initiative aims to bring more people into the formal banking system by offering zero-balance accounts with features like overdraft facilities and insurance coverage.  Microfinance: Banks provide microloans and financial services to low-income individuals and small businesses, promoting economic activity and improving access to financial resources in underserved areas. 10. Regulatory Compliance and Reporting Commercial banks must comply with regulations set by the Reserve Bank of India (RBI):  Capital Adequacy Requirements: Banks are required to maintain a minimum capital-to-risk-weighted assets ratio to ensure they can absorb losses and maintain stability. This helps protect depositors and the financial system.  Lending Norms: Banks must follow guidelines on lending practices, including interest rate caps, borrower credit assessment, and priority sector lending requirements. These norms ensure responsible lending and promote equitable access to credit.  Transparency: Banks are required to provide accurate financial reports and disclosures, including balance sheets, income statements, and risk assessments. This transparency helps regulators, investors, and customers make informed decisions. Narasimham Committee Report Banks are considered the backbone of any economy. In the late 1980s, Indian economy was going through a series of economic crises, including the Balance of Payment crisis. From near depletion in foreign reserves in mid-1991 to becoming the 3rd largest economy in the world in 2011, India has come a long a way. One of the major contributions in that journey has come from banks. India has both public and private sector banks. As India liberalised its economy in 1991, it was felt that banks were not performing efficiently. During the economic crises, it was recognised that banks have a crucial role to play in the economy and, hence, the banking sector had to be more competitive and effective. For that, Ministry of Finance under then finance minister Dr Manmohan Singh set up Narasimham Committee to analyse India’s banking sector and recommend reforms. The Committee was set up under the chairmanship of Maidavolu Narasimham. He was the 13th governor of the Reserve Bank of India (RBI) from 2 May 1977 to 30 November 1977. There was another Committee, this time under P Chidambaram as the finance minister, headed by Narasimham, which was formed in 1998. The first Committee was set up in 1991 and is referred to as the Narasimham Committee- I, and the 1998 Committee is known as the Narasimham Committee – II. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 4 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS Narasimham I Report (1991) Title: "Report of the Committee on the Financial System" Chair: M. Narasimham Objective: To review and recommend reforms to enhance the efficiency, stability, and competitiveness of the Indian banking system. Key Recommendations 1. Banking Sector Reforms o Capital Adequacy: The report recommended that Indian banks should adhere to the Basel I standards for capital adequacy. Banks were advised to maintain a minimum capital-to-risk-weighted assets ratio of 8% to ensure they could absorb potential losses and protect depositors. o Asset Classification and Provisioning: The committee suggested implementing stricter norms for classifying assets and provisioning for non-performing assets (NPAs). Banks were required to classify loans based on their performance (e.g., standard, sub-standard, doubtful, and loss) and make adequate provisions for potential losses. o Deregulation of Interest Rates: To enhance competition and efficiency, the report proposed deregulating interest rates on deposits and loans. This would allow banks to set rates based on market conditions rather than government controls. o Restructuring Public Sector Banks: The committee recommended reducing government ownership in public sector banks below 50% to improve their performance. It suggested restructuring these banks to increase efficiency and encourage private sector participation. o Financial Discipline: Emphasis was placed on improving financial discipline within banks by introducing better management practices and accountability measures. 2. Regulatory and Supervisory Reforms o Enhanced Role of RBI: The committee stressed the need for the RBI to play a more active role in regulating and supervising the banking sector. It recommended enhancing the RBI’s powers to oversee banks’ operations and financial health more effectively. o Autonomy and Accountability: It advocated for granting more autonomy to banks while ensuring accountability through better governance practices and transparent reporting. o Credit Control Mechanisms: The report suggested moving from direct credit controls (e.g., credit ceilings) to indirect methods (e.g., policy rates, open market operations) to manage credit and liquidity in the economy. 3. Development of Financial Markets o Capital Markets: Recommendations included improving the infrastructure of capital markets to enhance transparency, efficiency, and investor protection. This involved strengthening market regulations and promoting the development of primary and secondary markets. o Debt Markets: The report advocated for the creation of a robust corporate bond market and enhancing the liquidity of debt instruments to provide companies with alternative sources of funding. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 5 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 4. Corporate Governance and Management o Professional Management: Emphasis was placed on adopting professional management practices in banks, including better training and skill development for bank managers. o Board Structure: Recommendations included improving the composition of bank boards by including more independent directors to enhance governance and oversight. Narasimham II Report (1998) Title: "Report of the Committee on the Financial System" (also known as Narasimham II) Chair: M. Narasimham Objective: To build on the earlier recommendations and address broader issues within the financial sector, focusing on comprehensive reforms to improve stability and efficiency. Key Recommendations 1. Banking Sector Reforms o Strengthening Banking Sector Reforms: The report built upon the earlier recommendations by reinforcing the need for implementing capital adequacy norms and addressing NPAs. It recommended a phased approach to reform, including enhancing the role of technology in banking operations. o Further Privatization and Restructuring: It proposed further steps to reduce government ownership in public sector banks and encouraged consolidation through mergers and acquisitions to improve efficiency and competitiveness. o Reforms in Cooperative Banks: The report highlighted the need for reforms in cooperative banks, which had been underperforming. It suggested measures to enhance their regulation and management. 2. Development of Financial Markets o Capital Market Reforms: The committee recommended additional measures to develop the capital markets, including improving the legal and regulatory framework and enhancing market infrastructure. o Debt Market Development: Emphasis was placed on developing a vibrant corporate bond market and creating a framework for efficient trading and settlement of debt instruments. o Money Market and Foreign Exchange Market: Recommendations included strengthening the money market and foreign exchange market to enhance liquidity and improve market functioning. 3. Regulation of Non-Banking Financial Companies (NBFCs) o Stricter Regulation and Supervision: The report proposed comprehensive regulation and supervision of NBFCs to ensure their stability and protect investors. This included enhancing disclosure norms and strengthening the regulatory framework for NBFCs. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 6 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 4. Corporate Governance o Enhancing Governance Standards: The report emphasized the need for improving corporate governance standards across financial institutions. This included enhancing transparency, accountability, and the role of independent directors in financial institutions. 5. Financial Sector Legislation o New Legislation: The committee recommended the enactment of new legislation and the revision of existing laws to support a modern and efficient financial sector. This included establishing a Financial Sector Legislative Reforms Commission to review and update financial sector laws. Impact and Implementation The recommendations from both reports had a profound impact on the Indian financial system:  Capital Adequacy and NPA Management: The implementation of Basel I norms and stricter asset classification improved the financial health of banks and helped manage NPAs more effectively.  Interest Rate Deregulation: The deregulation of interest rates enhanced competition and allowed banks to set rates based on market conditions.  Public Sector Bank Restructuring: The reduction in government ownership and restructuring of public sector banks led to increased efficiency and the entry of private sector banks.  Development of Financial Markets: The reforms contributed to the growth and development of capital and debt markets, enhancing investment opportunities and market infrastructure.  Regulation of NBFCs: Stricter regulation and supervision of NBFCs helped stabilize the sector and protect investors.  Corporate Governance: Improved governance standards and practices in financial institutions increased transparency and accountability. The Narasimham Committee reports played a crucial role in shaping the modern Indian financial system, setting the stage for continued reforms and development in the sector. NATIONALISATION OF BANKS In 1955, India nationalized Imperial Bank of India with extensive banking facilities on a large scale, especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State governments all over the country On 19 July 1969, a major process of nationalization was carried out and 14 major commercial banks in India were nationalized. The second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with six more banks. This step brought 80% of the banking segment in India under Government ownership. After independence, the Government of India (GOI) adopted planned economic development for the country. Nationalisation was in accordance with the national policy of adopting the socialistic pattern of society. Nationalization came at the end of a troubled decade. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 7 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS During the first wave of nationalisation (1969), India suffered many economic as well as political shocks:  There were two wars (with China in 1962 and Pakistan in 1965) that put immense pressure on public finances.  Two successive years of drought had not only led to food shortages but also compromised national security because of the dependence on American food shipments (PL 480 program).  Subsequently, a three-year plan holiday affected aggregate demand as public investment was reduced.  The decade of 1960-70s was the lost decade for India as the economic growth barely outpaced population growth and average incomes stagnated.  Industry’s share in credit disbursed by commercial banks almost doubled between 1951 and 1968, from 34% to 68% whereas agriculture received less than 2% of total credit  Agriculture needed a capital infusion, with the initiation of the Green Revolution in India that aimed to make the country self-sufficient in food security Benefits of Nationalisation of 1969  After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.  Banking under government ownership gave the public implicit faith and immense confidence about the sustainability of the banks.  Banks were no longer confined to only metropolitan or cosmopolitan in India. In fact, the Indian banking system has reached even to the remote corners of the country.  This is one of the main reasons for India’s growth process, particularly in the Green revolution.  Purpose of nationalization is to promote rapid growth in agriculture, small industries and export, to encourage new entrepreneurs and to develop all backward areas.  Public deposits in the bank have increased so much that leaving it completely to the private sector might pose a challenge. Banks, by advancing loans to the speculators and non-priority sector, have created havoc in the economy. Balance of payment crisis 1991 started an era of liberalization, privatization and globalisation. However, the political control of bank lending continued even after the 1991 reforms which today had culminated into the bad loan or Non- Performing Assets crisis that has slowed down India's growth trajectory. Was nationalisation the right move? 1. NPA crisis since 2012 is at least partly explained by the credit bubble that grew under political patronage that emerged out of government's control over Banks. Nationalization of banks led to an interest rate structure that was incredibly complex. 2. Banking is a highly competitive enterprise which works on profits, nationalization of banks has led to lesser competition between the public sector and private sectors banks. This has created a bureaucratic attitude in the functioning of the banking system. Lack of responsibility and initiative, red-tapism, inordinate delays are common features of nationalized banks. 3. Although liberal credit policy is necessary for providing financial support to the weaker sections of the rural community, such a policy may prove harmful for the stability of the banking system. 4. Due to lack of performance audit of banks, policy-making failed to ensure that the finance from the public institutions are, in fact, going to productive uses in the large public interest. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 8 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS List of Banks Nationalised in 1969: 1. Central Bank of India 2. Bank of India 3. Bank of Baroda 4. Indian Bank 5. Canara Bank 6. Punjab National Bank 7. Syndicate Bank 8. Union Bank of India 9. Indian Overseas Bank 10. Dena Bank 11. UCO Bank 12. Corporation Bank 13. Allahabad Bank 14. Oriental Bank of Commerce Further Developments In 1980, a second round of nationalization took place under Prime Minister Indira Gandhi, which brought six more banks into public ownership: 1. New Bank of India 2. Vijaya Bank 3. Bank of Maharashtra 4. United Bank of India 5. East Punjab Bank 6. South Indian Bank CO-OPERATIVE BANKING IN INDIA Cooperative banks in India play a significant role in the country's financial sector, particularly in serving the rural and agricultural communities. Established with the primary aim of providing affordable credit and financial services to members of cooperatives, these banks operate on a cooperative model, which emphasizes mutual assistance and shared benefits among members. Historical Background and Evolution The cooperative banking movement in India dates back to the late 19th century, with the passage of the Cooperative Credit Societies Act of 1904, which laid the foundation for cooperative banking institutions. The primary objective of these early cooperatives was to offer credit to farmers and rural communities, who had limited access to institutional credit. Over the years, the cooperative banking sector has evolved, with several legislative and institutional reforms aimed at strengthening and expanding its reach. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 9 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS Structure and Types Cooperative banks in India are organized in a tiered structure, consisting of three main levels: 1. Primary Agricultural Credit Societies (PACS): These are the grassroots level cooperative banks that operate in rural areas. PACS provide short-term credit to farmers for agricultural activities and other rural needs. They are the first point of contact for many rural borrowers seeking credit. 2. Central Cooperative Banks (CCBs): At the intermediate level, CCBs function as the central institution for a group of PACS within a district. They provide financial and managerial support to PACS and offer medium- term and long-term credit to agricultural and rural sectors. CCBs also serve as a link between PACS and the State Cooperative Banks (SCBs). 3. State Cooperative Banks (SCBs): Operating at the state level, SCBs are the apex cooperative banks responsible for coordinating and supporting the activities of CCBs and PACS within the state. They provide refinancing to CCBs and ensure the overall financial stability of the cooperative banking system within the state. Regulatory Framework Cooperative banks in India are regulated by both central and state authorities. The Reserve Bank of India (RBI) oversees the regulation and supervision of cooperative banks, including setting policies related to their operations and financial stability. The RBI’s involvement ensures that cooperative banks adhere to standards concerning capital adequacy, asset quality, and risk management. In addition to the RBI, the National Bank for Agriculture and Rural Development (NABARD) plays a crucial role in the cooperative banking sector. NABARD provides financial support, training, and technical assistance to cooperative banks, with a focus on enhancing their capacity to serve the agricultural sector. Functions and Services Cooperative banks provide a range of financial services to their members, including:  Credit Services: They offer short-term, medium-term, and long-term loans for agricultural activities, rural development, and personal needs. This includes crop loans, dairy loans, and loans for other rural enterprises.  Deposits: Cooperative banks accept deposits from their members in the form of savings accounts, fixed deposits, and recurring deposits. These deposits are used to fund their lending activities and support their financial stability.  Financial Inclusion: By targeting underserved and economically weaker sections of society, cooperative banks play a vital role in promoting financial inclusion. They provide banking services to people in remote and rural areas, where mainstream banks might not have a presence. Challenges and Issues Despite their important role, cooperative banks face several challenges:  Management and Governance Issues: The effectiveness of cooperative banks can be undermined by weak management practices, political interference, and lack of professional expertise. These issues can impact their operational efficiency and financial health.  Financial Health: Many cooperative banks struggle with poor asset quality and high levels of non-performing assets (NPAs). This affects their ability to lend and maintain financial stability. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 10 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS INTRODUCTION TO BANKING FINAL ACCOUNTS While preparing financial statements, banks have to follow various guidelines / directions given by RBI/Government of India governing the Financial Statements. Profit and Loss Account and Balance Sheet are prepared as on 31st March every year by all the Banks. They contain 18 schedules as under. Schedules forming part of Form A – Balance Sheet: 1. Capital 2. Reserves and Surplus 3. Deposits 4. Borrowings 5. Other Liabilities and Provisions 6. Cash and Balances with RBI 7. Balances with Banks and Money at Call & Short Notice 8. Investments 9. Advances 10. Fixed Assets 11. Other Assets 12. Contingent Liabilities / Bills for Collection Schedules forming part of Form B – Profit and Loss Account: 13. Interest Earned 14. Other Income 15. Interest Expended 16. Operating Expenses 17. Schedules forming part of Annual Report 18. Significant Accounting Policies 19. Notes forming part of accounts The Assets side of the Balance Sheet has been arranged in such a manner that liquid assets such as Cash, Balances with Banks and Investments are shown in that order. This enables the investor to quickly identify how much the Bank is liquid enough to meet its commitment towards its customers. This arrangement of Assets is from liquid to fixed assets in contrast to corporate balance sheets where the arrangement is from fixed to liquid. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 11 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS GUIDELINES OF RESERVE BANK FOR COMPLIANCE OF FINANCIAL STATEMENTS Given below are the compliance notes of the Reserve Bank of India for balance sheet and profit and loss account as per the revised formats. BALANCE SHEET Item Schedule Coverage Notes and Instructions for Compilation Capital 1 Nationalized Banks The capital owned by Central Government as on the date of the (Fully Owned by Balance Sheet including contribution from Government, if any, Central for participating in World Bank Projects should be shown. Government) Banking Companies The amount brought in by banks by way of start-up capital as Incorporated prescribed by RBI should be shown under this head. Outside Other Banks Authorised, Issued, Subscribed, Called-up Capital should be (Indian) given separately. Calls-in-arrears will be deducted from Called up capital while the paid-up value of forfeited shares should be added thus arriving at the paid-up capital. Where necessary, items which can be combined should be shown under one head for instance ‘Issued and Subscribed Capital’. The changes in the above items, if any, during the year, say, fresh contribution made by Government, fresh issue of capital, capitalisation of reserves, etc. may be explained in the notes. Reserves and 2 Statutory Reserves Reserves created in terms of Section 17 or any other section of Surplus Banking Regulation Act must be separately disclosed. Section 17 (1) mandates every banking company incorporated in India to create a reserve fund and transfer 20% of profit of each year to the reserve fund. Capital Reserves Amounts included in capital reserves is not freely available for distribution. Surplus on revaluation should be treated as Capital Reserves. Share Premium Premium on issue of share capital may be shown separately under this head. Revenue and Other The expression ‘Revenue Reserve’ shall mean any reserve other Reserves than capital reserve. This item created will include all reserves other than those separately classified. Balance of Profit Includes balance of profit after appropriations. In case of loss the balance may be shown as a deduction. Deposits 3 Current Deposits Includes deposits in current accounts opened with the bank. Savings Deposits Includes deposits in savings accounts opened with the bank. Term Deposits Includes all types of deposits repayable after a specified term. Fixed deposits, cumulative and recurring deposits and other term deposits. Matured time deposits should be treated as demand deposits. Further, deposits of branches in India and deposits of branches outside India has to be shown separately. The total of these two items will agree with total deposits. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 12 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS Borrowings 4 From RBI Includes borrowings or re-finance obtained from the RBI Other Banks Includes borrowings/refinance obtained from commercial banks (including cooperative banks). Other Institutions Includes borrowings/refinance obtained from IDBI, EXIM, and Agencies NABARD and other institutions. Borrowings Outside Includes borrowings of Indian branches from abroad as well as India borrowings by foreign branches. Other 5 Bills Payable Liabilities and Provisions Inter-Office Includes branch adjustments. If Branch Adjustment Account Transactions has a credit balance, it will be reflected here. Interest Accrued Includes interest accrued but not due on deposits and borrowings. For example – Suppose interest on fixed deposits is payable on 30th June and 31st December every year. A bank will treat interest payable on FD as accrued interest on 31st March. This will be for a period of 3 months (1st January to 31st March). Others (Including Includes provision for income tax, proposed dividend, Provisions) unclaimed dividend, unexpired discount, outstanding charges like rent etc. Cash and 6 Cash in Hand Includes cash in hand including foreign currency notes and also Balances with of foreign branches in case of banks having such branches. It RBI also includes balances of commercial banks with Reserve Bank of India. Balances with 7 Includes all balances with banks in India, including co- Banks and operative banks. Also includes money at call and money at Money at Call short notice with banks and other institutions. and Short Notice Money at call is outright money. Under call money market, funds are transacted on overnight basis, i.e., duration of one day. Money at short notice is market for minimum 2 days and up-to 14 days. Banks borrow for a variety of reasons such as to maintain their Cash Reserve Ratio, to meet heavy withdrawals etc. Investments 8 Investments in India 1) Government Includes Central and State Government securities and Securities Government treasury bills. These securities should be shown at the book value. However, the difference between the book value and market value should be given in the notes to the balance sheet. 2) Other Securities other than Government securities, which according Approved to the Banking Regulation Act, 1949 are treated as approved Securities securities∗, should be included here. 3) Shares 4) Debentures Investments in debentures and bonds of companies and & Bonds corporations not included in item 2 should be included here. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 13 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 5) Subsidiaries Investment in subsidiaries, joint ventures (including in and Joint Regional Rural Banks) should be included here. Ventures 6) Others Includes residual investments, if any, like gold, commercial paper and other instruments. Commercial Paper (CP) is an unsecured promissory note for a short- term, i.e., up-to 1 year. CP is negotiable, having fixed maturities. CPs are issued by well rated companies to satisfy their short-term deficits. Investment outside All investments in foreign government securities, in shares of India subsidiaries floated outside India, joint ventures out of India etc should be classified under this head. Advances 9 Bills Purchased and Discounted Cash Credits, Overdrafts and Loans Repayable on Demand Term Loans Outstanding in credit card operations should be shown as advances. Fixed Assets 10 Premises  Premises wholly or partly owned by the banking company for the purpose of business including residential premises should be shown (against ‘Premises’)  In the case of premises and other fixed assets, the previous balance, additions thereto and deductions there from during the year as also the total depreciation written off should be shown. Other Fixed Assets  Motor vehicles and other fixed assets other than premises but including furniture and fixtures should be shown under this head. Other Assets 11 Inter Office The inter-office adjustments balance, if in debit, should be Adjustment shown under this head. Interest Accrued Interest accrued but not due on investments and advances and interest due but not collected on investments will be the main components of this item. Tax Paid in Advance The amount of tax deducted at source on securities, advance tax & Tax Deducted at paid etc. are included here. Source Stationery and Only exceptional items of expenditure on stationery like bulk Stamps purchase of securities paper, loose leaf or other ledgers, etc. which are shown as quasi-asset to be written off over a period of time should be shown here. Minor stationery items are debited to Profit and Loss Account. Non-banking Assets Immovable properties/tangible assets acquired in satisfaction Acquired in of claims are to be shown under this head. Satisfaction of Claims Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 14 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS Others This will include items like claims which have not been met. This includes: a. Clearing items b. Non-interest-bearing loan given to staff by bank as employer and not as a bank Accrued income other than interest may also be included here. Contingent 12 1. Claims Against Banks Not acknowledged as Debt Liabilities 2. Liability for Partly Paid Investments 3. Guarantees Given in India or Outside India 4. Acceptances, Endorsements and Obligations – This will include letters of credit and bills accepted by bank on behalf of customers. 5. Other items for which bank is contingently liable – arrears of cumulative dividend, bills re-discounted, commitments of underwriting contracts etc. are included here. 6. Bills for collection will be shown under this head. PROFIT AND LOSS ACCOUNT Interest 13 Interest, Discount Includes interest and discount on all types of loans and Earned on Advances or Bills advances like cash credit, demand loans, overdraft, export loans, term loans, domestic and foreign bills purchased and discounted (including those rediscounted) etc. Income on Includes interest income on investments. Investments Interest on balances Includes interest on balances with Reserve Bank and other with RBI and other banks inter-bank funds Others Includes any other interest or discount incomes not included in above heads Other Income 14 Commission, Includes all remuneration on services such as Exchange and  commission on collections, Brokerage  commission/exchange on remittances and transfers,  commission on letter of credit and guarantees,  commission on Government business  commission on other permitted agency business including consultancy and other services, broke-rage, etc. on securities. It does not include foreign exchange income. Profit on Sale of Includes profit/loss on sale of securities, furniture; land and Investment less Loss buildings, motor of vehicle, gold, silver etc. Only the net on Sale of position should be shown. If the net position is a loss, the Investment amount should be shown as deduction. Profit on Exchange Includes profit/loss on dealing in foreign exchange all income Transactions less earned by way of foreign exchange commission and charges on Loss on Exchange foreign exchange, transactions excluding interest which will be Transactions shown under interest. Only the net position should be shown. If the net position is a loss, it is to be shown as a deduction. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 15 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS Income earned by way of dividend etc Interest 15 Interest on Deposits Includes interest paid on all types of deposits including Expended deposits from banks and financial institutions Interest on RBI Includes discount/interest on all borrowings and refinance borrowings and from Reserve Bank of India and other banks. inter-bank borrowings Others Includes discount, interest on all borrowings and refinance from other financial institutions Operating 16 This includes: Expenses 1. Employee payments and provisions for employees 2. Rent, taxes and lighting 3. Printing and stationery 4. Advertisement and publicity 5. Depreciation on bank’s property 6. Directors’ fees, allowances and expenses 7. Auditor’s fees 8. Law charges 9. Postage and telegram 10. Repairs and maintenance 11. Insurance 12. Other expenses like licence fees, donations, subscriptions to papers, periodicals, entertainment expenses, travel expenses, etc. may be included under this head Provisions Includes all provisions made for bad and doubtful debts, and provisions for taxation, provisions for diminution in the value Contingencies of investments, transfers to contingencies and other similar items. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 16 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS PRACTICAL PROBLEMS 1. From the following information, prepare a Balance Sheet of City Finance Bank Ltd as on 31.03.2021 giving the relevant schedules: Particulars Debit (Rs. In Credit (Rs. Lakhs) In Lakhs) Share Capital (19,80,000 shares of Rs. 10 each) 198.00 Statutory Reserve 231.00 Net Profit Before Appropriation 150.00 Profit and Loss Account 412.00 Fixed Deposit Account 517.00 Savings Deposit Account 450.00 Current Accounts 28.00 520.12 Bills Payable 0.10 Cash Credits 812.10 Borrowings from Other Banks 110.00 Cash in Hand 160.15 Cash with RBI 37.88 Cash with Other Banks 155.87 Money at Call 210.12 Gold 55.23 Government Securities 110.17 Premises 155.70 Furniture 70.12 Term Loan 792.88 2,588.22 2,588.22 Additional Information: 1. Bills for Collection – Rs. 18,10,000. Acceptances and Endorsements – Rs. 14,12,000. Claims Against Banks not acknowledged as debt – Rs. 55,000. 2. Depreciation on Premises is Rs. 110,000 whereas Depreciation on Furniture is 78,000. Balances of Premises and Furniture given in the question are after charging depreciation 3. 50% of term loans are secured by Government guarantees. 4. 10% of cash credit including debit balance in current accounts is unsecured. 5. Assume that CRR is required to be maintained at 4% of deposits. 6. Transfer 25% of profits to reserve fund. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 17 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 2. From the following, prepare Profit and Loss Account of Sunrise Finance Bank for the year ended 31.03.2021 Particulars 2019-20 2020-21 (Rs. In ‘000) (Rs. In ‘000) Interest and Discount 14,27 20,45 Income from Investment 1,14 1,12 Interest on Balances with RBI 1,55 1,77 Commission, Exchanges and Brokerage 7,22 7,12 Profit on Sale of Investment 12 1,22 Interest on Deposits 6,12 8,22 Interest to RBI 1,27 1,47 Payment to and Provision for Employees 7,27 8,55 Rent, Taxes & Lighting 1,58 1,79 Printing and Stationery 1,47 2,12 Advertisement and Publicity 1,12 98 Depreciation 98 98 Director’s Fees 1,48 2,12 Auditor’s Fees 1,10 1,10 Law Charges 50 1,52 Postage, Telegram and Telephones 48 62 Insurance 42 52 Repairs and Maintenance 57 66 Additional Information: (i) The following items are already adjusted with interest and discount: 1. Tax Provision (‘000 Rs.) 1,48 2. Provision for Doubtful Debts (‘000 Rs.) 92 3. Loss on Sale of Investment (‘000 Rs.) 12 4. Rebate on Bills Discounted (‘000 Rs.) 55 (ii) Appropriations:  25% of profit is transferred to Statutory Reserves  5% of profit is transferred to Revenue Reserve. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 18 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 3. The following figures are extracted from the books of KLM Bank, as on 31.03.2021 Particulars Debit (Rs.) Credit (Rs.) Interest and discount received 38,00,160 Interest paid on deposits 22,95,360 Issued and subscribed capital 10,00,000 Salaries and allowances 250,000 Directors Fees and allowances 35,000 Rent and taxes paid 100,000 Postage and Telegram 65,340 Statutory Reserve Fund 800,000 Commission, Exchange and Brokerage 190,000 Rent Received 72,000 Profit on Sale of Investment 225,800 Depreciation on Assets 40,000 Statutory Expenses 38,000 Preliminary Expenses 30,000 Auditor’s Fees 12,000 NEFT Fees Collected from Customers 14,000 ATM Maintenance 5,500 The following further information is given: (1) A customer to whom a sum of Rs. 10 lakhs was advanced has become insolvent and it is expected only 55% can be recovered from his estate. (2) There were also other debts for which a provision of Rs. 2,00,000 was found necessary. (3) Rebate on bill discounted on 31-03-2021 was Rs. 15,000 and on 31-03-2022 was Rs. 20,000. (4) Income tax of Rs. 2,00,000 is to be provided. (5) The directors desire to declare 5% dividend and transfer 25% of its profit to the reserve fund Prepare the Profit and Loss account of KLM Bank Ltd. for the year ended 31-03-2021 and also show, how the Profit and Loss account will appear in the Balance Sheet if the Profit and Loss account opening balance was NIL as on 31-03-2021. Assume that the preliminary expenses had been fully written off during the year. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 19 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 4. The following is the Trial Balance extracted from the records of Janata Bank Ltd as on 31.03.2021. PARTICULARS DR. (RS.) CR. (RS.) Share Capital 16,00,000 Cash in Hand 185,400 Investments 777,480 Gold 10,83,040 Interest Accrued 98,480 Security Deposit 60,000 Saving Account 29,680 Current Ledger Account 388,000 Fixed Deposit 92,200 Share Premium 360,000 Reserve Fund 560,000 Silver Bullion 8,000 Building 280,000 Borrowing from Banks 308,920 Money at Call and Short Notice 104,000 Advances 800,000 Profit and Loss as on 01.04.2020 26,000 Bills Discounted and Purchased 50,000 Interest 31,800 288,000 Commission and Brokerage 101,200 Discount 168,000 Audit Fees 24,000 Salaries 88,800 Upkeep of ATM Machines 1,000 Rent 7,200 M.D. Remuneration 48,000 Sundry Income 10,800 Deposit with Banks 420,000 Branch Adjustment 80,000 Provident Fund 80,000 40,80,000 40,80,000 Additional Information: 1. Provide Rs. 80,000 for Income Tax. 2. Provide Rebate on Bills Discount Rs. 20,000. 3. Create Reserve for Bad Debts Rs. 30,000. 4. Allow 5% Depreciation on Building. 5. Acceptance on behalf of customer’s amount to Rs. 300,000. Prepare Profit and Loss Account for the year ended 31.03.2021 and Balance Sheet as on that date with necessary workings in the prescribed schedules. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 20 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 5. The following Trail Balance pertains to Vidya Bank Ltd as on 31.03.2021: PARTICULARS DR. (RS.) CR. (RS.) Capital 500,000 Reserve Fund 250,000 Loans, Cash Credit and Overdraft 285,000 Premises 61,000 Indian Government Securities 400,000 Current Deposits 100,000 Fixed Deposits 125,000 Savings Bank Deposit 50,000 Salaries 28,000 General Expenses 27,400 Rent and Taxes 2,300 Director’s Fees 1,800 Profit and Loss Account on 01.04.2020 16,000 Interest and Discount 128,000 Stock of Stationery 8,500 Bills Purchased and Discounted 46,000 Interim Dividend Paid 17,000 Recurring Deposits 31,000 Investment in Shares 50,000 Cash in Hand and with RBI 193,000 Money at Call and Short Notice 80,000 12,00,000 12,00,000 Additional Information: 1. Provision for Bad and Doubtful Debts is required to be made at Rs. 5,000. 2. Interest accrued on Investments is Rs. 8,000. 3. Unexpired Discount amounted to Rs. 380. 4. Interim Dividend is declared at 4%. 5. Market Value of Indian Government Securities is Rs. 390,000. 6. Rs. 10,000 is added to the premises during the year. Depreciation is on opening balance at 5%. You are required to prepare Profit and Loss Account for the year ended 31.03.2021 and the Balance Sheet as on that date with necessary working in the prescribed schedules. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 21 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 6. The Trial Balance of Jana Bank as on 31.03.2021: PARTICULARS DR. (RS.) CR. (RS.) Equity Share Capital of Rs. 100 each 800,000 General Expenses 48,000 Current Accounts 40,40,000 Interest Paid 46,000 Reserve Fund 200,000 Fixed Deposit 25,60,000 Saving Bank Account 400,000 Cash in Hand 70,000 Interest Received 320,000 Loans, Cash Credit and Overdraft 41,20,000 Depreciation on Premises 54,000 Premises 862,000 Silver 64,000 Bad Debts 16,000 Cash with RBI 400,000 Cash with other banks 206,000 Gold 78,000 Money at Call and Short Notice 200,000 Profit and Loss Account as on 01.04.2020 240,000 Discount 60,000 Commission 10,000 Dividend 60,000 Investment in Shares 18,80,000 Bills Discounted and Purchased 526,000 Recurring Deposits 40,000 Government Bonds 40,000 86,70,000 86,70,000 Additional Information: 1. Rebate on Bills Discounted amounted to Rs. 24,000. 2. Interest accrued on Investment was Rs. 20,000. 3. Provide Rs. 40,000 for taxation. 4. Provision for bad and doubtful debts amount to Rs. 20,000. 5. Bills for collection amount to Rs. 160,000 You are required to prepare Profit and Loss Account for the year ended 31.03.2021 and Balance Sheet as on that date from the information given above. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 22 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 7. The following is the Trial Balance of IDBI Bank Ltd as on 31.03.2021 Particulars Debit (Rs.) Credit (Rs.) Subscribed Capital – 50,000 Equity Shares of Rs. 10 500,000 Reserve Fund 250,000 Loans, Cash Credit and Overdraft 285,000 Premises 50,000 Indian Government Securities 400,000 Current Deposits 100,000 Fixed Deposits 125,000 Saving Bank Deposits 150,000 Salaries 28,000 General Expenses 27,400 Rent, Rates and Taxes 2,300 Director’s Fees 1,800 Profit and Loss Account on 01.04.2020 16,000 Interest and Discount 128,000 Stock of Stationery 8,500 Bills Purchased and Discounted 46,000 Interim Dividend Paid 17,000 Recurring Deposits 20,000 Shares 150,000 Cash in Hand and with RBI 193,000 Money at Call and Short Notice 80,000 12,89,000 12,89,000 Additional Information:  Provision for bad and doubtful debts is required to be made at Rs. 5,000.  Interest accrued on investments was Rs. 8,000.  Unexpired Discount (Rebate on Bills Discounted) amounted to Rs. 380.  Interim dividend declared was at 4% actual.  Endorsements were made on behalf of the customers amounting to Rs. 115,000.  Authorized capital was Rs. 80,000 Equity Shares of Rs. 10 each.  Rs. 10,000 was added to the premises during the year. Depreciation at the rate of 15% on the opening balance is required.  Market value of Indian Government Securities was Rs. 390,000. Prepare Profit and Loss account for the year ending 31.03.2021 and Balance Sheet as on that date in the Prescribed Form. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 23 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 8. The below given Trial Balance pertains to Cosmo Bank Ltd: Particulars Amount (Rs.) Particulars Amount (Rs.) Share Capital 400,000 Statutory Reserve 320,000 Deposits 12,50,000 Provident Fund 135,000 Borrowings from Banks 255,000 Unclaimed Dividend 4,000 Commission and Exchange 37,500 Profit on Sale of Non-Banking Assets 1,200 Other Expenditure 2,450 Profit and Loss A/c (01.04.2010) 112,300 Premises (-) Depreciation 150,000 Money at Call 215,000 Furniture (-) Depreciation 65,000 Depreciation on Bank Assets 11,000 Non-Banking Assets 20,000 Cash in Hand 450,000 Cash at Bank 250,000 Investments 200,000 Loans, Cash Credit and Overdraft 12,65,000 Interest on Deposits (Dr.) 200,000 Audit Fees 4,500 Salaries and Allowances to Staff 40,500 Directors’ Fees 4,000 Postage and Telegram 1,350 Printing and Stationery 3,700 Interest and Discount (Cr.) 367,500 1. Provide Rs. 10,000 for Bad and Doubtful Debts. 2. Bills for Collection amount to Rs. 105,000. 3. Provide Rs. 1,500 as Rebate on Bills Discounted. 4. Provide Rs. 10,500 for Taxation. 5. Postage Stamps of Rs. 160 and Stationery of Rs. 700 were in hand on 31.03.2011. Prepare Profit and Loss Account and Balance Sheet. 9. From the following Trial Balance of a bank, prepare Profit and Loss Account and a Balance Sheet as on 31.03.2021. Particulars Debit (Rs.) Particulars Credit (Rs.) Loan, Cash Credit and Overdraft 244,125 56,250 Equity Shares of Rs. 10 each 562,500 Premises 86,250 Reserve Fund 281,250 Indian Govt. Securities 450,000 Current Deposits 112,500 Salaries 31,500 Fixed Deposits 140,625 General Expenses 30,375 Saving Bank Deposits 86,250 Rent and Taxes 3,375 Profit and Loss Account (01.04.2020) 20,250 Director’s Fees 2,250 Interest and Discount Received 140,625 Stock of Stationery 9,000 Bills Purchased and Discounted 51,750 Interim Dividend Paid 19,125 Shares of Company 56,250 Cash in Hand and with RBI 213,750 Money at Call and Short Notice 90,000 Interest Paid 56,250 13,44,000 13,44,000 Additional Information: a. Provide rebate on bills discounted Rs. 1,125. b. Provide Rs. 3,375 for doubtful debts. c. Authorized Capital was 120,000 Equity Shares of Rs. 10 each. d. Provide Rs. 9,000 for Taxation. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 24 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 10. From Trial Balance of Canara Bank Ltd as on 31.03.2021 prepare P&L A/c and Balance Sheet: Particulars Debit (Rs.) Credit (Rs.) Equity Share Capital of Rs. 100 each, Rs. 50 paid up 400,000 Profit and Loss Account 01.04.2020 160,000 Current Deposit Account 13,64,000 Fixed Deposit Account 15,60,000 Saving Bank Account 10,26,000 Director’s Fees 18,000 Audit Fees 4,000 Furniture (Cost – Rs. 400,000) 348,000 Interest and Discount 840,000 Commission and Exchange 400,000 Reserve Fund 140,000 Printing & Stationery 16,000 Rent and Taxes 34,000 Salary 280,000 Building (Cost – Rs. 12,00,000) 900,000 Legal Charges 6,000 Cash in Hand 64,000 Cash at Bank 13,00,000 Cash with RBI 14,00,000 Investment at Cost 480,000 Loans, Cash Credit and Overdraft 12,00,000 Bills Discounted and Purchased 560,000 Interest Paid 600,000 Borrowing from Banks 800,000 Branch Adjustment Account 520,000 72,10,000 72,10,000 Following additional information is available: a. The Bank has accepted on behalf of the customers bills worth Rs. 600,000 against securities of Rs. 760,000 lodged with the bank. b. Rebate on Bills Discounted Rs. 22,000. c. Depreciation on cost on Building at 10% and Furniture at 5%. d. Provide Rs. 6,000 for bad and doubtful debts. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 25 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 11. The following figures are extracted from the books of New Bank Ltd as on 31.03.2021. Particulars Amount (Rs.) Interest and discount received 48,11,200 Interest paid on deposits 22,95,920 Salaries and allowances 840,510 Director’s fees and allowances 45,000 Issued and subscribed capital 16,00,000 Commission, exchange and brokerage 145,000 Postage and telegram 60,000 Statutory Reserve Fund 800,000 Interest on cash credit 265,000 Profit on sale of investment 115,800 Depreciation on bank’s property 40,000 Interest on overdraft 120,000 Rent received 65,000 Legal expenses 21,000 Auditors’ Fees 5,000 Statutory expense 38,000 The following information is also given: 1. A customer to whom a sum of Rs. 5 lakh was advanced has become insolvent and it is expected that only 50% can be recovered from his estate. Apart from this, bank anticipates further provision of Rs. 237,000 for bad debts. 2. Provide Rs. 650,000 for income tax. 3. The directors desire to declare 10% dividend. 4. 25% of profit is to be transferred to reserve fund. 5. Rebate on bills discounted on 31.03.2020 was Rs. 20,000 and on 31.03.2021 was Rs. 15,000. Prepare Profit and Loss Account as per format given in Banking Regulation Act. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 26 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 12. From the following balances of Ashoka Bank Ltd as on 31.03.2002, prepare Balance Sheet as on 31 st March, 2002 and a Profit and Loss Account for that year ended. Particulars Debit (Rs.) Credit (Rs.) Share Capital (Rs. 100 each Share) 10,00,000 Profit and Loss A/c on 01.04.2001 81,500 Current Deposit A/c 21,44,000 Fixed Deposit A/c 23,43,000 Savings Bank A/c 11,07,000 Director’s Fees 9,300 Audit Fees 8,800 Furniture 85,900 Interest and Discount 704,000 Interest paid on borrowings 400,400 Commission and Exchange 203,000 Investments 18,40,000 Branch Adjustment A/c 204,000 Postage and Telegrams 4,100 Printing and Stationery 2,800 Premises 17,03,000 Salaries 67,000 Law Charges 5,300 Provident Fund Contribution 11,200 Cash in Hand 207,000 Bills Purchased and Discounted 61,000 Unexpired Insurance 2,700 Statutory Reserve 72,000 Contingency Reserve 7,000 Loans, Cash Credits and Overdrafts 30,49,000 76,61,500 76,61,500 The following additional information is provided: a. The authorized share capital consists of 20,000 ordinary shares of Rs. 100 each, fully subscribed but only 50% of it has been called up. b. The bank has accepted bills worth Rs. 300,000 on behalf of the customers against the securities of Rs. 400,000 lodged with the bank. c. Provide depreciation on premises Rs. 90,000 and on Furniture Rs. 8,000. d. Provide Rs. 28,500 for doubtful debts. e. Rebate on Bills Discounted amounted to Rs. 7,100. f. Provide Rs. 10,000 for Taxation. g. Directors declared dividend at the rate of 2.50%. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 27 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS NON-PERFORMING ASSETS - INCOME RECOGNITION: Bulk of a banks’ income is from two sources : - 1. Interest earned on Loans & Advances extended to its customers. 2. Discount and commission earned handling Bills of Exchange and Non-Funded advances like Letter of Credit (LC), Letter of Guarantee (LG) etc. Income recognition for interest earned is a function of classification of the Bank loans & advances (i.e. classification into performing and non-performing assets). For Performing assets income is recognised as it is earned i.e. accrued. It is an essential condition for accrual of income that it should not be unreasonable to expect its ultimate collection. For Non- Performing assets interest income is not considered on accrual basis and it is recognised only when it is actually received. Basically, an NPA is a bad and doubtful debt. On Performing Upon accrual Asset Income Recognition for Interest On Non- Performing Upon Receipt Asset An asset becomes non-performing when the bank does not receive income from it for a certain period. In concept, any credit facility (assets) becomes non-performing “when it ceases to generate income for a bank.” Security or net worth of a borrower or guarantor will not be considered while qualifying a loan account as NPA. If any of the credit facilities granted to a borrower becomes non-performing, all the facilities granted to the borrower will have to be treated as NPA without any regard to performing status of other facilities. Income from non-performing assets can only be accounted for as and when it is actually received. The Accounting Standard 9 (AS 9) on ‘Revenue Recognition' issued by the Institute of Chartered Accountants of India (ICAI) requires that the revenue that arises as interest should be recognized only when there is no significant uncertainty as to its measurability or collectability. Illustration 1 Given below are the interests on advances of a commercial bank (Rs in lakhs) Performing Assets Non-Performing Assets Interest Earned Interest Received Interest Earned Interest Received Term Loans 120 80 75 5 Cash Credits 750 620 150 12 Bills Purchased & Discounted 150 150 100 20 Find out income to be recognized for the year ended 31.03.2021. Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 28 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS Illustration 2 Find out the income to be recognized in the case of SS Bank for the year ended 31st March, 2021: Performing Assets Non-Performing Assets Interest Earned Interest Received Interest Earned Interest Received Term Loans 240 160 150 10 Cash Credits 1500 1240 300 24 IDENTIFICATION OF NPA The Reserve Bank of India has issued detailed guidelines to banks regarding the classification of advances between performing and non-performing assets which are revised from time to time. The latest guidelines for identifying an NPA’s are: 1. Bills purchased and discounted become NPA if interest and / or instalment of principal remain overdue for a period exceeding 90 days. 2. Term Loans: become NPA if their amount (interest or principal) remains overdue wholly or partly for a period exceeding 90 days. 3. A cash credit / overdraft account is treated as NPA if it becomes out of order. An account is deemed to be out of order if a) the outstanding balance remains continuously in excess of the sanctioned borrowing power; or b) though the outstanding balance remains below the sanctioned borrowing power, there have been no credits in the account for a continuous period of more than 90 days prior to the Balance Sheet date; or c) where the credits have not been enough to cover the interest debited during the same period. Therefore, an account is treated as 'out of order' if any of these conditions are satisfied/ Example of Out of Order: Sanctioned Limit Rs. 60,00,000 Drawing Power Rs. 55,00,000 Amount outstanding continuously from 01.01.2021 to 31.03.2021 Rs. 47,00,000 Total interest debited Rs. 342,000 Total credits Rs. 125,000 Since the credit in the account is not sufficient to cover the interest debited during the period account will be said as NPA. 4. Agricultural Advances: Advances granted for agriculture purposes becomes NPA if interest and/or instalment of principal remains overdue for two crop seasons in case of short duration crops and a loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season. Agriculture Advances Short Duration Crops Long Duration Crops NPA if interest / principal NPA if interest / principal remains instalment overdue for 2 crop overdue for 1 crop season seasons Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 29 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 5. Securitisation transactions: Such transactions become NPA when the amount of liquidity facility remains overdue for more than 90 days. In securitization transactions, assets like loans or receivables are bundled together and sold to investors as securities. These assets generate cash flows, which are then used to repay the investors. A liquidity facility is a type of support mechanism in these transactions, often provided by a financial institution, to ensure that there are sufficient funds available to make timely payments to investors, even if the underlying assets are temporarily underperforming. This facility might be drawn upon if the cash flow from the securitized assets is insufficient to meet payment obligations. An asset or transaction becomes classified as a Non-Performing Asset (NPA) when it fails to generate expected income. Specifically, in the context of securitization, if the amount borrowed or utilized from the liquidity facility remains unpaid for more than 90 days, it signals that the transaction is under distress. The prolonged overdue suggests that the underlying assets are not generating sufficient cash flows to cover the debt, leading to the classification of the securitization transaction as an NPA. This NPA classification can have significant implications for the financial institution, including the need for additional provisioning, which reflects a higher risk and potential loss on the balance sheet. Process of Securitization: Security Borrower Originator (Banks, Financial Institutions) Financial Assistance Secured Asset Transfer Cash Cash Asset Reconstruction Companies Qualified Buyer Security Receipts Compiled By – Prof. Onkar Pathak (CS, M. Com, NET) 30 CHAPTER 4 COMMERCIAL AND CO-OPERATIVE BANKS 6. Government Guaranteed Advances: 1. Central Government Guaranteed Credit Facilities: o When a loan or credit facility is backed by a guarantee from the Central Government, it has a special treatment in terms of NPA classification. o Normally, if a loan is overdue for more than 90 days, it is classified as a Non-Performing Asset (NPA). However, in the case of Central Government-backed loans, this rule does not immediately apply. o These loans are only classified as NPAs if the Central Government refuses to honor its guarantee when the guarantee is invoked by the lender. This means that even if the loan is overdue, it won't be considered an NPA as long as the government guarantee is still valid and the government has not rejected the claim. o Important Note: This exemption from NPA classification is specific to the loan’s status but does not apply to income recognition. This means that even if the loan is not classified as an NPA due to the government guarantee, the bank cannot recognize income on overdue amounts. 2. State Government Guaranteed Credit Facilities: o The rules for State Government guarantees are different. Since March 31, 2006, loans or investments backed by State Government guarantees must follow standard NPA classification and provisioning rules. o If any payment (whether interest, principal, or any other amount due) remains overdue for more than 90 days, the loan must be classified as an NPA. o This classification applies regardless of whether the State Government's guarantee has been invoked or not. The guarantee does not prevent the loan from being classified as an NPA, and the bank must make appropriate provisions for potential losses. In summary, while Central Government-guaranteed loans have a special exemption from being classified as NPAs unless the guarantee is repudiated, State Government-guaranteed loans do not have this exemption and must follow standard NPA classification rules if overdue. 7. Take-Out Finance: In the case of take-out finance arrangement, the lending bank should apply the prudential norms in the usual manner so long as the account remains on its banks. Take-out finance is a product emerging in the context of the funding of long-term infrastructure projects. Under this arrangement, the institution/bank financing