Final Accounts of Banking Companies | PAPER III – ACCOUNTING & FINANCIAL MANAGEMENT FOR BANKERS | MODULE B: FINANCIAL STATEMENTS AND CORE BANKING SYSTEMS

Final Accounts of Banking Companies

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Definition and Functions of a Bank

A bank is a financial institution licensed to receive deposits and make loans. Banks also offer financial services such as wealth management, currency exchange, and safe deposit boxes.

Functions of a Bank:

• Accepting deposits
• Providing loans and advances
• Facilitating payments and settlements
• Foreign exchange operations
• Investment and financial advisory

Requirements of Banking Companies as to Accounts and Audit

As per the Banking Regulation Act, 1949, banks are required to maintain proper books of accounts and get them audited annually. Key requirements include:

• Maintenance of books in accordance with accounting standards
• Audit by qualified auditors
• Submission of audit reports to RBI

Significant Features of Accounting Systems of Banks

• Accrual basis and double-entry system
• High volume and complexity of transactions
• Use of Core Banking Solutions (CBS)

Principal Books of Account

• General Ledger
• Subsidiary Ledgers (e.g., Loan Register, Deposit Register)
• Cash Book
• Day Book

Preparation and Presentation of Financial Statements of Banks

Bank financials include the Balance Sheet and the Profit and Loss Account, prepared as per Form A and B of the Third Schedule of the Banking Regulation Act.

Accounting Treatment of Specific Items

• Provision for NPAs: Based on RBI guidelines
• Rebate on Bills Discounted: Treated as unearned income
• Inter-branch transactions: Eliminated during consolidation

Mathematical Illustration

Example: Calculating Provision for NPAs:

  Standard Assets = ₹10,00,000 → Provision @0.40% = ₹4,000
  Substandard Assets = ₹5,00,000 → Provision @15% = ₹75,000
  Doubtful (up to 1 year) = ₹3,00,000 → Provision @25% = ₹75,000
  Total Provision = ₹4,000 + ₹75,000 + ₹75,000 = ₹1,54,000
  

Preparation of Profit and Loss Account

The P&L account is prepared in Form B and includes:

• Interest Earned
• Other Income
• Interest Expended
• Operating Expenses
• Provisions and Contingencies

Comments on Profit and Loss Account Items

• Net Interest Margin (NIM): Key profitability indicator
• Operating Profit: Excludes provisions
• Net Profit: After tax and provisions

Important Items of Balance Sheet

• Capital and Reserves
• Deposits and Borrowings
• Investments
• Advances
• Other Assets and Liabilities

Disclosure Requirements of Banks to be Added as Notes to Accounts

These include accounting policies, contingent liabilities, segmental reporting, and exposure to sectors/borrowers.

Disclosures Prescribed by RBI Under Basel-III

Disclosures include capital adequacy, risk-weighted assets, liquidity ratios (LCR, NSFR), and credit risk mitigation.

Banks Listed on a Stock Exchange

These banks must follow SEBI Listing Obligations and Disclosure Requirements (LODR) in addition to RBI norms.

Implementation of Indian Accounting Standards (Ind AS)

Ind AS aims to enhance comparability and transparency. Key impacts:

• Expected Credit Loss (ECL) model for provisioning
• Fair value accounting for financial instruments
• Increased disclosures

Multiple Choice Questions (MCQs)

1. Which Act governs the preparation of final accounts of banks?
   a) Companies Act
   b) Banking Regulation Act
   c) SEBI Act
   d) RBI Act
   Answer: b) Banking Regulation Act
2. Which schedule contains the forms for financial statements of banks?
   a) Second
   b) Third
   c) Fifth
   d) Sixth
   Answer: b) Third
3. What is the provision percentage for substandard assets?
   a) 0.25%
   b) 15%
   c) 25%
   d) 40%
   Answer: b) 15%
4. Rebate on bills discounted is treated as:
   a) Asset
   b) Liability
   c) Income
   d) Unearned income
   Answer: d) Unearned income
5. What is NIM in banking?
   a) Net Internal Margin
   b) Net Interest Margin
   c) Net Income Margin
   d) None
   Answer: b) Net Interest Margin
6. Ind AS uses which model for provisioning?
   a) Incurred Loss
   b) Realized Loss
   c) Expected Credit Loss
   d) Cash Flow Loss
   Answer: c) Expected Credit Loss
7. Under Basel-III, LCR stands for:
   a) Loan-Capital Ratio
   b) Liquidity Coverage Ratio
   c) Leverage Control Ratio
   d) Loan Cost Ratio
   Answer: b) Liquidity Coverage Ratio
8. Principal book in bank accounting is:
   a) Sales Register
   b) Day Book
   c) General Ledger
   d) Journal
   Answer: c) General Ledger
9. Which item is shown under liabilities in a bank’s balance sheet?
   a) Advances
   b) Investments
   c) Deposits
   d) Fixed Assets
   Answer: c) Deposits
10. Banks listed on stock exchanges must comply with:
    a) RBI Act
    b) Companies Act only
    c) SEBI LODR and RBI guidelines
    d) FEMA only
    Answer: c) SEBI LODR and RBI guidelines