Professional Documents
Culture Documents
Bankers are familiar with Profit & Loss Account and Balance Sheet of Corporates as they day in
and day out read, analyze, disseminate information for processing the credit requirements of the
borrowers. They calculate various ratios including Current Ratio, Interest Coverage Ratio, Debt
Equity Ratio, Debt Service Coverage Ratio to assess whether the Bank will be assured of return
of its funds. They flip through hard bound books of Reports submitted by them in order to be
doubly sure that they are financing the right borrower with eligible financial limits.
But, we hardly come across any banker reading the financial statements of his own Bank.
While preparing financial statements, banks have to follow various guidelines / directions given
by RBI/Government of India governing the Financial Statements. It is important to go through
the Director’s Report, Management Discussion and Analysis Report, Corporate Governance
Certificate which normally precede the Financial Statements. All together all these are
incorporated in Annual Report of the Bank
1. Balance Sheet is prepared in conformity with Form A of the Third Schedule to the Banking
Regulation Act, 1949 and Profit and Loss Account in conformity with Form B ibid. They are
prepared in accordance with provisions of Section 29 of the Banking Regulation Act read with
Section 211 (10), (2), and 3 © of the Companies Act 1956.
2. They are always prepared as on 31st March of every year. Listed Banks are required to
publish Review financial results every quarter. But full fledged Profit and Loss Account and
Balance Sheet are prepared as on 31st March every year by all the Banks.
Some of these Schedules viz., 1,2,4,8,17 and 18 are not required to be prepared by Bank’s
branches. They are consolidated at Head office level. Schedule 1 to 5 form Liability Side of the
Banks Balance Sheet and Schedule 6 to 12 on the Asset side of the Balance Sheet. 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.
1. RBI mandated all banks to disclose the accounting policies regarding key areas of operation in
Schedule 17 alongwith Note to Accounts in their financial statements. They include basis of
Accounting, Transactions involving Foreign Exchange, Investments etc.
2. RBI has also directed Banks to make 53 disclosures to enable the market participants to assess
the key areas of performance of the Banks. In addition to 53 disclosures mandated by RBI,
Banks are also required to comply with the Accounting Standard 1 (AS 1) on Disclosure of
Accounting Policies issued by Institute of Chartered Accountants of India.
3. The performance of Bank is assessed through calculation of various ratios such as CRAR,
Gross NPA, Net NPA, NIM, Interest income as percentage to average working funds, Non
interest income as percentage to average working funds, Operating profit as percentage to
average working funds, Return on Assets, Business / Profit per employee, Provision Coverage
Ratio, etc. whereas a Company’s strength is assessed through Current Ratio, ISCR, DER, DSCR
etc.
4. Banks prepare two sets of financial statements (includes Balance Sheet and Profit and Loss
Account), one containing the performance of the Bank through its Banking operations, both
domestic and international and the other called consolidated Financial Statements containing the
performance of the Bank of its Banking operations and subsidiary units, joint ventures and
associates in accordance with AS 21, issued by ICAI on a line-by-line basis by adding together
the like items of assets, liabilities, income and expenditure of the Bank. Sometimes, a standalone
balance sheet may give a better picture of performance of the Bank than when consolidated
business of the subsidiaries, joint ventures and associates are combined, if they have less profit
making subsidiaries. Investor is interested in consolidated financial statements as it is the
position of the “Group”. Some banks having international branches may prepare financial
statements in dollar terms also to meet the requirements of their overseas centres.
5. They are prepared on the basis of “going concern approach” adhering to various accounting,
disclosures prescribed by agencies like ICAI (Accounting Standards – GAAP), RBI (Banking
Regulation Act, RBI Act), and Government of India. Banks are also required to prepare their
financial statements based on International Financial Reporting Standards wef. 1.4.2013.
SCHEDULE 6 – CASH AND BALANCES WITH RBI : Cash in Hand represents the cash held
by branches of the Bank. All Branches are required to maintain cash within retention limit
prescribed by the bank (normally 0.25% of deposits). Any amount beyond the limit should be
transferred to RBI accounts so that the balances in RBI accounts qualify for CRR (Cash Reserve
Ratio) calculations. Keeping excess cash is fraught with security issues, and the Bank will be
losing interest / other benefits on idle component of the Cash held at branches. Balances with
RBI qualify for CRR calculations. Excess amount over required CRR will qualify for SLR
(Statutory Liquidity Ratio). Branches should therefore maintain minimum cash with them.
SCHEDULE 9 – ADVANCES : There are three classifications under Advances, viz. first
classification into Bills purchased and discounted, Cash Credit, Overdrafts and Loans repayable
on demand (normally loans with repayment period less than 36 months) and Term Loans. This
classification will enable the investor to know the liquidity of funds for the Bank and also how
the interest streams are ensured. For example, if the balances under Cash Credit, Overdraft etc
are more than Term Loans, the Bank’s liquidity position is good where as more balances in Term
Loans show steady profit by way of interest earnings. Second classification is based on the
security available in the loan portfolio. The classification is i) secured by tangible assets, ii)
covered by Bank/Government Guarantee and iii) unsecured. Large amount of unsecured
advances and / or increase over last may indicate the Bank’s vulnerability for credit risk. Third
classification is, Advances under i) Priority Sector ii) Public Sector iii) Banks iv) Others. This
classification is required as all banks are required to lend 40 % of their Advances under Priority
Sector. As of now, capital requirement for Credit Risk is higher than Capital requirement for
Market Risk and Operational Risk. It is therefore necessary that while undertaking Credit Risk
availability and costs of additional Capital requirement need to be looked into. A realignment of
portfolios and/ or securing assets with collaterals will enable reduce risk weights. For example,
under Basel I frame work, all outstanding advances carry a risk weight of 100%, whereas under
Basel II frame work, the risk weights vary from 20 % to 150% depending upon corporate
borrowers external rating, unsecured portfolios and similar activities. Under Basel I frame work,
cash margins and deposits are eligible financial collaterals. For example, a borrower has been
financed Rs.100 lakhs and there is a deposit of Rs. 10 lakhs as cash collateral, for the purpose of
calculation of risk weights, the amount is Rs. 90 lakhs. Under Basel II frame work, not only cash
collaterals, bonds, gold, debt mutual funds etc. are also considered as collateral for calculation of
risk weights. Under Basel II frame work, risk weight for restructured advances is 125 % whereas
under Basel I, it is 100%. If branches are able to understand the concept of risk weights for credit
risk, they can ensure and properly account for all eligible securities as collaterals for calculation
of risk weights, thus reducing the higher requirement of Capital. Further, the advances shown
under this schedule are net of provisions. In other words, they only include performing portion of
advances.