Final Accounts of Banking Companies

M.Com - Part II - Sem 3

• More sums in document file
Sec. 12 - Capital Structure

• The subscribed capital of the company is not less than one-half of the
authorised capital,
• The paid-up capital is not less than one-half of the subscribed capital
• If the capital is increased, it complies with the conditions prescribed
in this clause within period not exceeding two years as the Reserve
Bank may allow;
Section 13 - Restriction on commission,
brokerage, discount, etc., on sale of shares.
• no banking company shall pay out directly or indirectly by way of

• commission,
• brokerage,
• discount or
• remuneration in any form in respect of any shares issued by it,

• An amount exceeding 2½% of the paid-up value of the said shares.

Section 17 - Statutory Reserves
• Every banking company shall, out of the balance of profit of each
year (as disclosed in the profit and loss account prepared under
section 29)
• And before any dividend is declared,
• Transfer to the reserve fund a sum equivalent to not less than 20% of
such profit.
Different Types of Deposits
Different Types of Advances
• Term Loan
• Cash Credit (permanent arrangement)
• Overdraft (Temporary nature)
• Discounting of Bills (Usually short period)
Other Facilities - Collection of Bills

Drawer

Credit the same to customer's A/C Hand over

Commission
Will be
Banker charged to
customers
Collect the proceeds
Present it on due date

Drawee
Other Facilities - Acceptances , Endorsements
etc.
• Accepts or endorses bills on behalf of its customers
• The bank undertakes liability towards the party which agrees to
receive such bills
• Bank has correcsponding claims against the customer on whose
behalf it has accepted or endorsed the bill
• It is disclosed as contingent item.
Other fcilities - Demand Draft / Banker's cheque
M.T / T.T.
• Demand draft drawn on local bank is called as Banker's cheque

• In Mail Transfer (M.T.) or Telegraphic Transfer (T.T.) bank does not

issue any document (like D.D.)
Other Facilities - Traveller's Cheques
• Customer has to deposit full money in advance at the issuing bank
• It can be encashed at any other authorised centre or can be used as
mode of payment.
Other Facilities - Letter of Credit
• Letter from a banker to his agent / correspondent
• Either at home / abroad
• Requesting him to advance to the person named in the letter
• a certain sum of money
Books of Aounts - Principal Books

• General Ledger
• Profit & Loss ledger
Books of Accounts - Subsidiary Books
• Personal ledgers (Deposits and Loans)
• Bill Registers
• Subsidiary Registers - (D.D., T.T., M.T. - issued / received)
• Memoranda Books (Departmental)
Rebate on Bills Discounted

• Rebate on Bills Discounted is also known as

• Discount Received in Advance, or,
• Unexpired Discount or,
• Discount Received but not earned.

• Its treatment is same as we do in the case of Interest Received in

Advance.
Rebate on Bills Discounted

• If it is given only in the Trial Balance:

— the same will be shown as a liability and will appear in the liability
side of the Balance Sheet.

• If it is given in adjustment:
— In that case, the same is deducted from the Income from Interest
and Discount in Profit and Loss Account and
On the liability side of the Balance Sheet.
Rebate on Bills Discounted

• In respect of the following transactions of the Prosperity Bank Ltd.,

you are required to indicate the necessary journal entries as well as
their treatment in the Profit and Loss Account and Balance Sheet in
respect of the year ended 31.12.1992:
• (a) The following bills were discounted at 5%:
Inter Office Adjustments
• Unadjusted transactions between head office of bank and its
branches.
• It may have either debit balance or credit balance
• It is grouped under 'Branch Adjustment'
• Debit balance is shown on ''Asset side” under ''Other Assets''
• Crdit balance is shown on “iabilities side” under “Other Liabilities”
Bad Debts and Provision for doubtful Debts
• The amount of provision for doubtful debts is merged with ''Provision
and Contingencies” while debiting it to profit and loss account.
• In balance sheet advances amount should be shown net - after
ducting provision for doubtful debts.
What is a Non-Performing Asset (NPA)?
How assets are classified?
• NPA indicates the amount of loan that was not returned by the
customer.
• An asset becomes non-performing when it ceases to generate income
for the bank.
• A loan whose interest and / or installment of principal have remained
‘overdue due’ for a period of 90 days is considered as NPA.
• Overdue is a situation where the loan is not paid by the due date fixed
by the bank.
How assets are classified?
Assets of a bank are classified in terms of its repayment status.
• Standard assets,
• Non-Performing Assets,
• Substandard assets,
• Doubtful assets and
• Loss assets are the classifications of asset quality.
Standard asset
• Standard Asset is one which does not disclose any problems, and
• which does not carry more than normal risk attached to the business.
• Such an asset should not be an NPA.
• The provision on Standard Assets should not be reckoned for arriving
at net NPAs and
• The provision should not be netted from gross advances
• It should be shown separately as 'contingent provisions against
Standard Assets' under ' Other Liabilities and Provisions Others' in
Schedule 5 of the balance sheet.
Standard asset
Direct advance to Micro and Small Enterprises (MSEs) 0.25%

Advance to Commercial Real Estate (CRE) 100% 1%

Housing Loan extended at teaser rates & restructured 2%

advances

All other advances 0.40%

Substandard asset
• A sub­standard asset would be one, which has remained NPA for a
period less than or equal to 12 months.

Sub -Standard ( secured exposure - without 15% of o/s

allowance for ECGC cover & securities)
Sub -Standard ( unsecured exposure - without 25% of o/s
allowance for ECGC cover & securities)
In respect of Infrastructure Lending where certain 20%
safeguards such as escrow accounts are available,
Doubtful asset
• An asset would be classified as doubtful if it has remained in the sub­
standard category for a period of more than 12 months.
Doubtful asset

Doubtful Assets (unsecured portion of outstanding) 100%

Doubtful Assets (secured portion of outstanding)

- (up to 1 yr in doubtful category) 25%

- (more than 1 yr &up to 3 yr in doubtful category) 40%

- (more than 3 yr in doubtful category) 100%

Loss asset
A loss asset is one where loss has been identified by
• the bank or
• internal or external auditors or
• the RBI inspection
• but the amount has not been written off wholly.
• Provisioning is 100%
Formula for alculating NPA Provision
A. Amount Outstanding -----------

B. (-) Realisable value of security (if any) ------------

C. (-) ECGC / DICGC Cover(% Limited to ) _______

D. Unsecured Portion (A-B-C) -----------
E. Provision required for unsecured portion of doubtful asset 100 % -----------

F. Provision required for secured portion of doubtful asset (25% or ------------

40% or 100%)

G. Total Provisioning (E + F) ----------