8.

84 ADVANCED ACCOUNTING

UNIT – 6: PREPARATION OF FINANCIAL

STATEMENTS OF BANKS

LEARNING OUTCOMES
 Learn how to prepare profit and loss account of a bank.
 Compute tax provision, transfer to statutory reserve, provisions
on non-performing assets, income recognition on NPA,
depreciation on current investments
 Learn how to prepare Balance-sheet

6.1 INTRODUCTION
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 Schedule -
1. Capital Schedule
2. Reserves & Surplus Schedule
3. Deposits Schedule
4. Borrowings Schedule
5. Other Liabilities and Provisions Schedule
6. Cash and balances with RBI Schedule
7. Balances with Banks and money at call and short notice.
8. Investments

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 BANKING COMPANIES 8.85

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. While preparing financial statements, banks
have to follow various guidelines / directions given by RBI/Government of India
governing the Financial Statements.
Forms for the preparation and presentation of financial statements of banking
companies have been given in Annexure I & II along with compliance guidelines of
RBI given in Annexure III at the end of this chapter. In this unit we shall straightaway
go to the problems relating to preparation of final accounts of banks.
Illustration 1
From the following information, prepare a Balance Sheet of ADT International Bank
as on 31st March, 20X1 giving the relevant schedules and also specify any four
Principal Accounting Polices: ` in lakhs
Dr. Cr.
Share Capital 198.00
19,80,000 Shares of ` 10 each

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 8.86 ADVANCED ACCOUNTING

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:

Bills for collection 18,10,000

Acceptances and endorsements 14,12,000
Claims against the Bank not acknowledged as debt 55,000
Depreciation- Premises 1,10,000
Depreciation - Furniture 78,000

50% of the Term Loans are secured by Government guarantees. 10% of cash credit
(including Debit balance in Current A/c) is unsecured. Assume that CRR is required to be
maintained at 4% of deposits. Transfer 25% of its profit to the reserve fund.

© The Institute of Chartered Accountants of India

 BANKING COMPANIES 8.87

Solution
Balance Sheet of ADT International Bank
As on 31st March, 20X1
(` in lacs)
Capital and Liabilities Schedule As on As on
31.3.20X1 31.3.20X0
Share Capital 1 1,98.00
Reserves and Surplus 2 7,93.00
Deposits 3 14,87.12
Borrowings 4 1,10.00
Other liabilities and provisions 5 0.10
25,88.22
Assets
Cash and balances with RBI 6 219.63
Balances with banks and money
at call and short notice 7 344.39
Investments 8 1,65.40
Advances 9 16,32.98
Fixed Assets 10 2,25.82
Other Assets 11 –
25,88.22
Contingent liabilities 12 14.67
Bills for collection 18.10

Schedule 1— Capital

Authorised Capital –
Issued, Subscribed and
Paid up Capital
19,80,000 Shares of ` 10 each 1,98.00

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 8.88 ADVANCED ACCOUNTING

Schedule 2— Reserves and Surplus

(1) Statutory Reserve-
Opening balance 2,31.00
Additions during the year 37.50
268.50
(2) Balance in Profit & Loss
Account (W.N. 1) 524.50
7,93.00
Schedule 3— Deposits
(i) Demand deposits from others 5,20.12
(ii) Saving bank deposits 4,50.00
(iii) Fixed Deposits 5,17.00
14,87.12

Schedule 4— Borrowings
Borrowing in India-
Other banks 1,10.00

Schedule 5— Other Liabilities and Provisions

Bills Payable 0.10

Schedule 6— Cash and balances with RBI

(i) Cash in hand 1,60.15
(ii) Balances with RBI
In current account (W.N. 2) 59.48
219.63

Schedule 7—Balances with banks and money at call and short notice
1. In India
(i) Balances with banks
(a) in current accounts (W.N. 3) 1,34.27
(ii) Money at call and short notice 2,10.12
344.39

© The Institute of Chartered Accountants of India

 BANKING COMPANIES 8.89

Schedule 8— Investments
(1) Investment in India in
(i) Government securities 1,10.17
(ii) Others—Gold 55.23
1,65.40

Schedule 9— Advances
A. (i) Cash credits, overdrafts (includes Dr Bal in Current A/c as 8,40.10
ODs)
(ii) Term Loans 7,92.88
16,32.98
B (i) Secured by tangible assets (balancing fig) 11,52.53
(ii) Secured by bank/government guarantees 3,96.44
(iii) Unsecured 84.01
16,32.98

Schedule 10— Fixed Assets

1. Premises
At cost 156.80
Depreciation to date# 1.10
155.70
2. Other Fixed Assets
Furniture at cost 70.90
Depreciation to date# 0.78
70.12
Total (1 + 2) 2,25.82
#It has been assumed that the balances of Premises and Furniture given in the question
are after charging depreciation.
Schedule 11— Other Assets
Nil

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 8.90 ADVANCED ACCOUNTING

Schedule 12— Contingent Liabilities

(` in lakhs)
(i) Claims against bank not acknowledged as debts 0.55
(ii) Acceptances, endorsements 14.12
14.67

Working Note:
(1) Balance in Profit & Loss Account: (` in lakhs)
Profit and Loss Account 4,12.00
Add : Net Profit before appropriation(Profit for the year) 1,50.00
5,62.00
Less : Transfer to statutory reserve
(25% of 150.00) (37.50)
524.50

(2) Transfer from Cash with other banks to Cash with RBI
Cash reserve required (14,87.12 x 4%) 59.48
Cash with RBI (37.88)
Transfer needed to maintain cash reserve 21.60
(3) Liquid Assets:

Cash on hand 1,60.15

Cash with other Banks 1,55.87
Money at call and short notice 2,10.12
Gold 55.23
Government securities 1,10.17
6,91.54
Excess liquidity [6,91.54 – (1487.12 x 23%)] or (6,91.54 – 342.04) 349.50

The excess liquidity enables the transfer as per (2) above.

After the transfer, Cash with other Banks = ` (in lakhs) (1,55.87 - 21.60) = ` (in lakhs)
134.27.

© The Institute of Chartered Accountants of India

 BANKING COMPANIES 8.91

Principal Accounting Policies:

(a) Foreign Exchange Transactions
(i) Monetary assets and liabilities have been translated at the exchange
rate prevailing at the close of year. Non-monetary assets have been
carried in the books at the historical cost.
(ii) Income and Expenditure items in respect of Indian branches have been
translated at the exchange rates on the date of transactions and in
respect of foreign branches at the exchange rates prevailing at the close
of the year.
(iii) Profit or Loss on foreign currency position including pending forward
exchange contracts have been accounted for at the exchange rates
prevailing at the close of the year.
(b) Investment: Permanent category investments are valued at cost. Valuation
of investment in current category depends on the nature of securities. While
valuation of government securities held as current investments have been made on
yield to maturity basis, the investments in shares of companies are valued on the
basis of book value.
(c) Advances: Advances due from sick nationalised units under nursing
programmes and in respect of various sticky, suit filed and decreed accounts have
been considered good on the basis of–
(i) Available estimate value of existing and prospective primary and collateral
securities including personal worth of the borrowers and guarantors.
(ii) The claim lodged/to be lodged under various credit guarantee schemes.
(iii) The claim lodged/to be lodged under various credit guarantee schemes.
(iv) Pending settlement of claims by Govt.
Provisions to the satisfaction of auditors have been made and deducted from
advances. Tax relief available when the advance is written off will be accounted for
in the year of write-off.
(d) Fixed Assets: The premises and other fixed assets except for foreign
branches are accounted for at their historical cost. Depreciation has been provided
on written down value method at the rates specified in the Income Tax Rules, 1962.

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 8.92 ADVANCED ACCOUNTING

Depreciation in respect of assets of foreign branches has been provided as per the
local laws.
Illustration 2
From the following information, prepare Profit and Loss A/c of Dimple Bank for the
year ended 31-3-20X3 :
`’000 Item `’000
20X1-X2 20X2-X3
14,27 Interest and Discount 20,45
1,14 Income from investment 1,12
1,55 Interest on Balances with RBI 1,77
7,22 Commission, Exchange and Brokerage 7,12
12 Profit on sale of investments 1,22
6,12 Interest on Deposits 8,22
1,27 Interest to RBI 1,47
7,27 Payment to and provision for employees 8,55
1,58 Rent, taxes and lighting 1,79
1,47 Printing and stationery 2,12
1,12 Advertisement and publicity 98
98 Depreciation 98
1,48 Director’s fees 2,12
1,10 Auditor’s fees 1,10
50 Law charges 1,52
48 Postage, telegrams and telephones 62
42 Insurance 52
57 Repair & maintenance 66

Also give necessary Schedules.

Other Information:
(i) The following items are already adjusted with Interest and Discount (Cr.):
Tax Provision (’000 `) 1,48
Provision for Doubtful Debts (’000 `) 92

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 BANKING COMPANIES 8.93

Loss on sale of investments (’000 `) 12

Rebate on Bills discounted (’000 `) 55
(ii) Appropriations:
25% of profit is transferred to Statutory Reserves
5% of profit is transferred to Revenue Reserve.
Solution
Dimple Bank
Profit and Loss Account for the year ended 31-3-20X3
(` 000’s)
Schedule Year ended Year ended
No. 31-3-20X3 31-3-20X2
I. Income
Interest Earned 13 25,86 16,96
Other Income 14 8,22 7,34
Total 34,08 24,30
II. Expenditure
Interest Expended 15 9,69 7,39
Operating Expenses 16 20,96 16,97
Provisions and Contingencies 2,40
Total 33,05 24,36
III. Profit/Loss
Net Profit/Loss (—) for the 1,03 (6)
year
Profit/Loss (—) brought (6)
forward
Total 97 (6)
IV. Appropriations
Transfer to Statutory Reserve 25.75
Transfer to Other Reserve 5.15
Balance carried over to 66.10
Balance Sheet
Total 97.00

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 8.94 ADVANCED ACCOUNTING

Schedule 13 - Interest Earned

(` 000’s)
Year ended Year ended
31-3-20X3 31-3-20X2
I. Interest/Discount 22,97 14,27
II. Income on Investments 1,12 1,14
III. Interest on Balances with RBI
and other inter-bank fund 1,77 1,55
IV. Others −
Total 25,86 16,96

Schedule 14 - Other Income

(` 000’s)
Year ended Year ended
31-3-20X3 31-3-20X2
I. Commission, Exchange and Brokerage 7,12 7,22
II. Profit on Sale of Investments 1,22 12
Less: Loss on sale of Investments (12) -
Total 8,22 7,34

Schedule 15 - Interest Expended

(` 000’s)
Year ended Year ended
31-3-20X3 31-3-20X2
I. Interest on Deposits 8,22 6,12
II. Interest on RBI/inter-bank borrowings 1,47 1,27
Total 9,69 7,39

© The Institute of Chartered Accountants of India

 BANKING COMPANIES 8.95

Schedule 16 - Operating Expenses

(` 000’s)
Year ended Year ended
31-3-20X3 31-3-20X2
I. Payments to and provision for employees 8,55 7,27
II. Rent, taxes and lighting 1,79 1,58
III. Printing and stationery 2,12 1,47
IV. Advertisement and Publicity 98 1,12
V. Depreciation on the Bank’s Property 98 98
VI. Director’s fees, allowances and expenses 2,12 1,48
VII. Auditor’s fees and expenses
(including branch auditors) 1,10 1,10
VIII. Law charges 1,52 50
IX. Postage, telegrams, telephones etc. 62 48
X. Repairs and maintenance 66 57
XI. Insurance 52 42
XII. Other Expenditure −
Total 20,96 16,97

Illustration 3
From the following information, prepare Profit and Loss A/c of KC Bank for the year
ended 31st March, 20X1:
Items `000
Interest on cash credit 18,20
Interest on overdraft 7,50
Interest on term loans 15,40
Income on investments 8,40
Interest on balance with RBI 1,50
Commission on remittances and transfer 75
Commission on letters of credit 1,18

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 8.96 ADVANCED ACCOUNTING

Commission on government business 82

Profit on sale of land and building 27
Loss on exchange transactions 52
Interest paid on deposit 27,20
Auditors’ fees and allowances 1,20
Directors’ fees and allowances 2,50
Advertisements 1,80
Salaries, allowances and bonus to employees 12,40
Payment to Provident Fund 2,80
Printing and stationery 1,40
Repairs and maintenance 50
Postage, telegrams, telephones 80
Other Information:
(i) Interest on NPA is as follows
Earned (` ’000) Collected (` ’000)
Cash credit 8,20 4,00
Overdraft 450 1,00
Term Loans 750 2,50
(ii) Classification of Non Performing Advances (’000 `)
Standard 30,00
Sub-standard 11,20
Doubtful assets not covered by security 2,00
Doubtful assets covered by security for one year 50
Loss Assets 2,00
(iii) Investments 27,50
Bank should not keep more than 25% of its investment as ‘held-for-maturity’ investment.
The market value of its rest 75% investment is ` 19,75,000 as on 31-3-20X1.

© The Institute of Chartered Accountants of India

 BANKING COMPANIES 8.97

Solution
KC Bank
Profit and Loss Account
For the year ended 31st March, 20X1

Particulars Schedule (` ’000’)

Year ended
31-3-20X1
I Income
Interest earned 13 38,30
Other income 14 2,50
40,80
II Expenditure
Interest expended 15 27,20
Operating expenses 16 23,40
Provisions and Contingencies 6,80
57,40
III Profit/Loss (16,60)
IV Appropriations Nil

Schedule 13 - Interest Earned

Year ended 31-3-20X1

(` ’000’)
I Interest/discount on advances/bills
Interest on cash credit `(18,20-420) 14,00
Interest on overdraft `(750-350) 4,00
Interest on term loans `(15,40-500) 10,40 28,40
II Income on investments 8,40
III Interest on Balance with RBI 1,50
38,30
Interest on NPA is recognised on cash basis, hence excess reduced.

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 8.98 ADVANCED ACCOUNTING

Schedule 14 - Other Income

Year ended
31-3-20X1
(` ’000’)
I Commission, Exchange and Brokerage
Commission on remittances and transfer 75
Commission on letter of credit 1,18
Commission on Government business 82 2,75
II Profit on sale of Land and Building 27
III Loss on Exchange Transactions (52)
2,50
Schedule 15 - Interest Expended

Year ended
31-3-20X1
I Interest on Deposits 27,20
Schedule 16 - Operating Expenses

Year Ended
31-3-20X1
I Payment and provision for employees
Salaries, allowances and bonus 12,40
Provident Fund Contribution 2,80 15,20
II Printing and Stationery 1,40
III Advertisement and publicity 1,80
IV Directors’ fees, allowances and expenses 2,50
V Auditors’ fees and expenses 1,20
VI Postage, telegrams, telephones etc. 80
VII Repairs and maintenance 50
23,40

© The Institute of Chartered Accountants of India

 BANKING COMPANIES 8.99

Working Note:

Provisions and contingencies (` ’000)

Provision for NPA:
Standard 3,000 × 0.40% 12
Sub-standard 1,120 × 15% ∗
1,68
Doubtful not covered by security 200 × 100% 2,00
Doubtful covered by security for one year 50 × 25% 12.5
Loss Assets 200 × 100% 2,00
592.5
Depreciation on current investments
Cost (75% of 27,50) 2,062.50
Less: Market value (1,975.00) 87.5
680.00

Note: 25% of the total investments are held to maturity. In the case of Held to
Maturity investments the valuation is done at cost and these are not marked to
market value generally. Hence, depreciation on investments has been calculated
only on other investments which can either be Held for Trading (HFT) or Available
for Sale (AFS)
Illustration 4
The following are the ledger balances (in Rupees thousands) extracted from the books
of Vaishnavi Bank as on March 31, 20X1:

Dr. Cr.
Share Capital 19,00,00
Current accounts control 9,70,00
Employee security deposits 74,20
Investments in Govt. of India Bonds 9,43,70
Gold Bullion 1,51,30
Silver 20,00

∗ It is assumed that sub-standard asset is fully secured.

© The Institute of Chartered Accountants of India

 8.100 ADVANCED ACCOUNTING

Constituent liabilities for

acceptances and endorsements 5,65,00 5,65,00
Borrowings from banks 7,72,30
Building 6,50,00
Furniture 50,00
Money at call and short notice 2,60,00
Commission & brokerage 2,53,00
Saving accounts 1,50,00
Fixed deposits 2,30,50
Balances with other banks 4,63,50
Other investments 5,56,30
Interest accrued on investments 2,46,20
Reserve Fund 14,00,00
P & L A/c 65,00
Bills for collection 4,35,00 4,35,00
Interest 6,20,00
Loans 18,10,00
Bills discounted 1,25,00
Interest 79,50
Discounts 4,20,00
Rents 6,00
Audit fees 50,00
Depreciation reserve (furniture) 2,00
Salaries 2,12,00
Rent, rates and taxes 1,20,00
Cash in hand and with Reserve Bank* 7,50,00
Miscellaneous income 39,00
Depreciation reserve (building) 8,00
Directors fees 10,00
Postage 12,50

© The Institute of Chartered Accountants of India

 BANKING COMPANIES 8.101

Loss on sale of investments 2,00,00

Branch adjustments 2,00,00
79,10,00 79,10,00

*Details of Cash in hand and with Reserve Bank:

Cash in hand (including foreign currency notes) 3,50,00

Balances with Reserve Bank of India:
(i) In Current Account 3,20,00
(ii) In Other Account 80,00

Other Information:
The bank’s Profit and Loss Account for the year ended and Balance Sheet as on 31st
March, 20X1 are required to be prepared in appropriate form. Further information (in
Rupees thousands) available is as follows —
(a) Rebate on bills discounted to be provided 40,00
(b) Depreciation for the year
Building 50,00
Furniture 5,00
(c) Included in the current accounts ledger are accounts overdrawn to the extent
of 25,00.
Transfer to Statutory Reserve 25% of the Net Profits for the current year.
Solution
Balance Sheet of Vaishnavi Bank
as on 31st March, 20X1
(`‘ 000)

Capital and Liabilities Schedule As on As on

31-3-20X1 31-3-20X0
Capital 1 19,00,00
Reserves & Surplus 2 20,24,00
Deposits 3 13,75,50
Borrowings 4 7,72,30

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 8.102 ADVANCED ACCOUNTING

Other liabilities and provisions 5 1,14,20

Total 61,86,00

(` ‘000)

Assets Schedule As on As on
31-3-20X1 31-3-20X0

Cash and balance with

Reserve Bank of India 6 7,50,00
Balances with bank and Money at call 7 7,23,50
and short notice
Investments 8 16,71,30
Advances 9 19,60,00
Fixed Assets 10 6,35,00
Other Assets 11 4,46,20
Total 61,86,00
Contingent liabilities 12 5,65,00
Bills for collection 4,35,00

Vaishnavi Bank
Profit and Loss Account for the year ended 31-3-20X1
(` ‘000)
I. Income
Interest & Discount 13 10,00,00
Other income 14 98,00
10,98,00
II. Expenditure
Interest Expended 15 79,50
Operating Expenses 16 4,59,50
Provisions and Contingencies -
5,39,00
III. Profits/Loss
Net profit for the year 5,59,00

© The Institute of Chartered Accountants of India

 BANKING COMPANIES 8.103

Profit b/f 65,00

6,24,00
IV. Appropriations
Transfer to Statutory Reserve 1,39,75
Balance carried over to Balance Sheet 4,84,25
6,24,00
Schedule 1 - Capital
(` ’000)

As on 31-3-20X1
I. For Other Banks
Authorised Capital
Shares of ` ... each −
Issued Capital
Shares of ` ... each −
Subscribed Capital
Shares of ` ... each −
Called up capital
Shares of ` ... each 19,00,00
19,00,00

Schedule 2 - Reserves & Surplus

As on 31-3-20X1
I. Statutory Reserves
Opening Balance 14,00,00
Additions during the year 1,39,75
15,39,75
II. Balance in Profit and Loss Account 4,84,25
Total 20,24,00

© The Institute of Chartered Accountants of India

 8.104 ADVANCED ACCOUNTING

Schedule 3 - Deposits
(` ’000)

As on 31-3-20X1
A. I. Demand Deposits 9,95,00
II. Saving Bank Deposits 1,50,00
III. Term Deposits 2,30,50
13,75,50

Current Accounts Control A/c shows a Credit Balance of ` 9,70,000/-. In the

additional information it is mentioned that in the above balance an OD of
` 25,000/- is included. Hence for presentation of the Balance Sheet the entries will
be as under:
Current Accounts 9,95,000 to be shown under deposits
ODs in Current Accounts To be shown as Advances along with cash credits
& Terms Loans
Schedule 4 - Borrowings

As on 31-3-20X1
I. Borrowings in India
(ii) Other banks 7,72,30
Total 7,72,30

Schedule 5 - Other liabilities and provisions

As on 31-3-20X1
I. Other liabilities including provisions:
Rebate on bills discounted 40,00
Employees Security Deposit 74,20
Total 1,14,20

Schedule 6 - Cash and Balances with Reserve Bank of India

As on 31-3-20X1
I. Cash in hand (including foreign currency notes) 3,50,00

© The Institute of Chartered Accountants of India

 BANKING COMPANIES 8.105

II. Balances with Reserve Bank of India:

(iii) In Current Account 3,20,00
(iv) In Other Account 80,00
Total 7,50,00

Schedule 7 - Balances with Banks & Money at Calls & Short Notice
As on 31-3-20X1
I. (i) In India Balances with banks
(a) in Current accounts
(b) in Other accounts 2,63,50
(ii) Money at call and short notice 2,00,00
(a) with banks 2,30,00
(b) with other institutions 30,00
Total (i + ii) 7,23,50
Schedule 8 - Investments

As on 31-3-20X1
I. Investments in India in
(i) Government securities 9,43,70
(ii) Shares (assumed) 5,56,30
(iii) Gold 1,51,30
(iv) Silver 20,00
Total 16,71,30

Schedule 9 - Advances
As on 31-3-20X1
A. (i) Bills purchased and discounted 1,25,00
(ii) Cash credits, overdrafts and loans repayable
on demand 18,35,00
19,60,00
B. (i) Secured by tangible assets 12,00,00
(ii) Secured by Bank/Govt. Securities 2,00,00

© The Institute of Chartered Accountants of India

 8.106 ADVANCED ACCOUNTING

(iii) Unsecured 5,60,00

19,60,00
C. I. Advances in India
(i) Priority sector 8,00,00
(ii) Public sector 1,00,00
(iii) Banks 20,00
(iv) Others 10,40,00
Total 19,60,00
(Details are assumed for explaining disclosures)
Schedule 10 - Fixed Assets

As on 31-3-20X1
I. Premises
At cost as on 31st March, 20X0 6,42,00
Depreciation to date (50,00) 5,92,00
II. Other fixed articles (including
Furniture and Fixture)
At cost as on 31st March, 20X0 48,00
Depreciation to date (5,00) 43,00
Total (I & II) 6,35,00

Schedule 11 - Other Assets

As on31-3-20X1
I. Inter-office adjustments (net) 2,00,00
II. Interest accrued 2,46,20
4,46,20
Schedule 12 - Contingent Liabilities

Year ended
31-3-20X1
I. Acceptances, endorsements
and other obligations 5,65,00
Total 5,65,00

© The Institute of Chartered Accountants of India

 BANKING COMPANIES 8.107

Schedule 13 - Interest Earned

Year ended
31-3-20X1
I. Interest/discount on
advances, bills (6,20,00 + 4,20,00 –40,00) 10,00,00
Total 10,00,00

Schedule 14 - Other Income

Year ended
31-3-20X1
I. Commission, Exchange and Brokerage 2,53,00
II. Profit on sale of investments
Less: Loss on sale on investments (2,00,00) 53,00
III. Miscellaneous Income
Rent and Other Receipts 45,00
Total 98,00
Schedule 15 - Interest Expended
Year ended
31-3-20X1
I. Interest on Deposits 79,50
Total 79,50
Schedule 16 - Operating Expenses
Year ended
31-3-20X1
I. Payments to and provisions
for employees 2,12,00
II. Rent, Taxes and Lighting 1,20,00
III. Depreciation on Bank’s property 55,00
IV. Director’s fees, allowances and expenses 10,00
V. Auditor’s fees and expenses 50,00
VI. Postage, Telegrams, Telephones etc. 12,50
Total 4,59,50

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 8.108 ADVANCED ACCOUNTING

SUMMARY
• Banks in India and their activities are regulated by the Banking Regulation
Act, 1949.
• The book-keeping system of a banking company is substantially different
from that of a trading or manufacturing enterprise. A bank maintains a large
number of accounts of various types for its customers.
• Every bank should maintain a minimum capital adequacy ratio based on
capital funds and risk assets.
• As per the prudential norms, all Indian scheduled commercial banks
(excluding regional rural banks) as well as foreign banks operating in India
are required to maintain capital adequacy ratio (or capital to Risk Weighted
Assets Ratio) which is specified by RBI from time to time.
• Capital is divided into two tiers according to the characteristics/qualities of
each qualifying instrument.
• Tier I capital consists mainly of share capital and disclosed reserves and it is
a bank’s highest quality capital because it is fully available to cover losses.
• Tier II capital on the other hand consists of certain reserves and certain types
of subordinated debt.
• With reference to Bills, a banking company performs the following functions:
Discounting of bills; Collection of bills; Acceptances on behalf of customers
• The banks have to classify their advances into four broad groups (i) standard
assets, (ii) sub-standard assets, (iii) doubtful assets and (iv) loss assets.
• Rates of Provisioning for Non-Performing Assets
Category of Advances Revised Rate (%)
Standard Advances
(a) direct advances to agricultural and SME 0.25
(b) advances to Commercial Real Estate (CRE) Sector 1.00
(c) all other loans and advances not included in (a) and (b) above 0.40
Sub-standard Advances
(a) Secured Exposures 15

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(b) Unsecured Exposures 25

(c) Unsecured Exposures in respect of Infrastructure loan
accounts where certain safeguards such as escrow
accounts are available. 20
• Doubtful Advances
(a) Unsecured Portion 100
(b) Secured Portion
For Doubtful upto 1 year 25
For Doubtful > 1 year and upto 3 years 40
For Doubtful > 3 years 100
Loss Advances 100
• The secured value of an asset is the realizable value of its security and not its
face value or book value.
• The provisions on standard assets should not be reckoned for arriving at net
NPAs.
• While preparing financial statements, banks have to follow various
guidelines/directions given by RBI/Government of India governing the
Financial Statements.
• The provisions towards Standard Assets need not be netted from gross advances
but shown separately as ‘Contingent Provisions against Standard Assets' under
'Other Liabilities and Provisions’ in Schedule 5 of the balance sheet.

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TEST YOUR KNOWLEDGE

MCQs
1. A banking company can pay dividend on its shares
(a) After writing off all its capitalized expenses including preliminary
expenses.
(b) After charging depreciation on its investments.
(c) After charging bad debts where adequate provisions has been made to
the satisfaction of the auditor.
(d) Before charging depreciation on its investments and writing off all its
capitalized expenses.
2. On 1.4.20X1 Bills for collection were ` 10,000. During 20X1-20X2 bills
received for collection amounted to ` 1,00,000, bills collected were ` 80,000
and bills dishonoured and returned were ` 5,000. What will be the amount
of bills for collection (assets) account as on 31.3.20X2?
(a) 25,000.
(b) 30,000.
(c) 35,000.
(d) None of the above.
3. Rebate on bill discounted is shown in the
(a) Assets side of the balance sheet.
(b) Liabilities side of the balance sheet.
(c) Income side of the income statement.
(d) Expense side of the income statement.
4. Bills for collection are shown
(a) On Assets side of the balance sheet.
(b) On liabilities side of the balance sheet.
(c) On the income side of the income statement.
(d) As note below the balance sheet.

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5. What percentage of provision is required on standard assets (other than

advances to agricultural, SME and Commercial Real Estate)?
(a) 10
(b) 40
(c) 0.40
(d) 0.25.
6. In case of direct advances to agricultural and SME, What percentage of
provision is required on standard assets?
(a) .25
(b) 40
(c) 0.40
(d) 25.
7. When income is to be recognized on cash basis by Safe Trust Bank, a
distinction should be made between
(a) Banking and Non-banking assets.
(b) Monetary and Non-banking assets.
(c) Current and Non-current assets.
(d) Performing and Non-performing assets.
8. For the year ended 31st March, 20X1 non-performing assets classified as sub-
standard in Centura Bank Ltd. will be classified as doubtful after
(a) 24 months.
(b) 18 months.
(c) 12 months.
(d) 180 days.
9. In case of advances to Commercial Real Estate (CRE) Sector, What percentage
of provision is required on standard assets?
(a) .25
(b) 1.00
(c) 0.40
(d) 25.

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10. The provisions on _________assets should not be reckoned for arriving at net
NPAs.
(a) Sub-standard.
(b) Standard.
(c) Doubtful.
(d) Loss.
11. For more than three years (unsecured) doubtful advances, provision will be
made for
(a) 10%
(b) 40%
(c) 100%
(d) 25%.
Theoretical Questions
Question 1
Write short notes on Slip system of posting and double voucher system.
Question 2
What are the restrictions imposed by the Banking Regulations Act, 1949 on
payment of dividend in case of banking companies?
Question 3
Write short note on Classification of investments by a banking company.
Question 4
Write short note on Non-Performing Assets.
Question 5
Write short note on Classification of advances in the case of a Banking Company.
Practical Problems
Question 1
From the following information find out the amount of provisions required to be
made in the Profit & Loss Account of a commercial bank for the year ended

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31st March, 20X1:

(i) Packing credit outstanding from Food Processors `60 lakhs against which the
bank holds securities worth ` 15 lakhs. 40% of the above advance is covered
by ECGC. The above advance has remained doubtful for more than 3 years.
(ii) Other advances:

Assets classification ` in lakhs

Standard 3,000
Sub-standard 2,200
Doubtful :
For one year 900
For two years 600
For three years 400
For more than 3 years 300
Loss assets 600

Question 2
From the following information find out the amount of provisions to be shown in
the Profit and Loss Account of a Commercial Bank:
Assets (` in lakhs)
Standard 4,000
Sub-standard 2,000
Doubtful upto one year 900
Doubtful upto three years 400
Doubtful more than three years 300
Loss Assets 500

Question 3
From the following information, compute the amount of provisions to be made in
the Profit and Loss Account of a Commercial bank:

Assets ` in lakhs
(i) Standard (Value of security `6,000 lakhs) 7,000
(ii) Sub-standard 3,000
(iii) Doubtful

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(a) Doubtful for less than one year 1,000

(Realisable value of security `500 lakhs)
(b) Doubtful for more than one year, but less than 3 years 500
(Realisable value of security `300 lakhs)
(c) Doubtful for more than 3 years (No security) 300
Question 4
Statement of interest on advances in respect of Performing assets and
Non-Performing Assets of Omega Bank is as follows:- (`in lakhs)

Performing Assets Non-Performing

Assets
Interest Interest Interest Interest
earned received earned received
Cash credits and overdrafts 1800 1060 450 70
Term Loan 480 320 300 40
Bills purchased and discounted 700 550 350 36

Find out the income to be recognized for the year ended 31st March, 20X1.
Question 5
State with reason whether the following cash credit accounts are NPA or not:

Case-1 Case-2
Sanctioned limit 60,00,000 45,00,000
Drawing power 56,00,000 42,00,000
Amount outstanding continuously 01-01-X1 48,00,000 30,00,000
to 31-03-X1
Total interest debited for the above period 3,84,000 2,40,000
Total credits for the above period Nil 3,20,000
Question 6
For a banking company, bills for collection was ` 21 lakhs as on 1st April, 20X1.
During 20X1-X2, bills received for collection amounted to ` 193.50 lakhs. Bills
collected were ` 141 lakhs. Bills dishonoured was ` 16.50 lakhs. Prepare Bills for
Collection (Assets) and Bills for Collection (Liabilities) Account.

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Question 7
ABC bank Ltd. has a balance of ` 40 crores in “Rebate on bills discounted” account
as on 31st March, 20X1. The Bank provides you the following information:
(i) During the financial year ending 31st March, 20X2 ABC Bank Ltd. discounted
bills of exchange of ` 5,000 crores charging interest @ 14% and the average
period of discount being 146 days.
(ii) Bills of exchange of ` 500 crores were due for realization from the
acceptors/customers after 31st March, 20X2. The average period of
outstanding after 31st March, 20X2 being 73 days. These bills of exchange of
` 500 crores were discounted charging interest@ 14% p.a.
You are requested to pass necessary Journal Entries in the books of ABC Bank Ltd.
for the above transactions.
Question 8
The following figures are extracted from the books of KLM Bank Ltd. as on 31-03-20X2:
`
Interest and discount received 38,00,160
Interest paid on deposits 22,95,360
Issued and subscribed capital 10,00,000
Salaries and allowances 2,50,000
Directors Fees and allowances 35,000
Rent and taxes paid 1,00,000
Postage and telegrams 65,340
Statutory reserve fund 8,00,000
Commission, exchange and brokerage 1,90,000
Rent received 72,000
Profit on sale of investment 2,25,800
Depreciation on assets 40,000
Statutory expenses 38,000
Preliminary expenses 30,000
Auditor's fee 12,000
The following further information is given:
(1) A customer to whom a sum of ` 10 lakhs was advanced has become insolvent
and it is expected only 55% can be recovered from his estate.

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(2) There was also other debts for which a provisions of ` 2,00,000 was found
necessary.
(3) Rebate on bill discounted on 31-03-20X1 was ` 15,000 and on 31-03-20X2
was ` 20,000.
(4) Income tax of ` 2,00,000 is to be provided.
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
31-03-20X2 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
31-03-20X1. Assume that the preliminary expenses had been fully written off during
the year.

ANSWERS/ HINTS
MCQs
1. (a), 2. (a), 3. (b), 4. (d), 5. (c), 6. (a),
7. (d), 8. (c), 9. (b), 10. (b), 11. (c)
Theoretical Questions
Answer 1
Slip system of posting: Under this system used in banking companies, entries in
the personal ledgers are made directly from vouchers instead of being posted from
the day book. Pay-in-slips (used by the customers at the time of making deposits)
and the cheques are used as slips which form the basis of most of the transactions
directly recorded in the accounts of customers. As the slips are mostly filled by the
customers themselves, this system saves a lot of time and labour of the bank staff.
The vouchers entered into different personal ledgers are summarised on summary
sheets every day, totals of which are posted to the different control accounts which
are maintained in the general ledger.
Double voucher system: In a bank, two vouchers are prepared for every
transaction not involving cash—one debit voucher and another credit voucher. This
system is called double voucher system. The vouchers are sent to different clerks
who make entries in books under their charge. This is designed to increase the
quality of internal check.

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Answer 2
Refer para 1.3 of unit 1.
Answer 3
Refer para 4.4 of unit 4.
Answer 4
Refer para 4.2 of unit 4.
Answer 5
Refer para 4.2 of unit 4.
Practical Problems
Answer 1
(i) Packing Credit
(` in lakhs)
Amount outstanding (packing credit) 60
Less: Realisable value of securities (15)
45
Less: ECGC cover (40%) (18)
Balance being unsecured portion of packing credits 27
Required provision :
Provision for unsecured portion (100%) 27.0
Provision for secured portion (100%) 15.0
42.0
(ii) Other advances:
(` in lakhs)
Assets Amount % of provision Provision

Standard 3,000 0.40 12

Sub-standard 2,200 15 330
Doubtful :
For one year 900 25 225
For two years 600 40 240
For three years 400 40 160

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For more than three years 300 100 300

Loss 600 100 600
Required provision 1,867
Note: Sub-standard and Doubtful advances have been assumed as fully
secured. However, in case it is assumed that no security cover is available for
these advances, provision will be made for @ 25% for sub-standard and 100%
for doubtful advances.
Answer 2
Computation of provision in the Profit & Loss Account of the Commercial Bank:

Assets Amount % of Provision

(` in lakhs) Provision (` in lakhs)
Standard 4,000 0.40 16
Sub-standard* 2,000 15 300
Doubtful upto one year* 900 25 225
Doubtful upto three years* 400 40 160
Doubtful more than three years* 300 100 300
Loss 500 100 500
1,501

* Sub-standard and doubtful assets are assumed as fully secured.

Answer 3
Statement showing Provisions on various performing and non-performing
assets

Amount % of Provision
` in lakhs provision ` in lakhs
Standard 7,000 0.40 28
Sub-standard 3,000 15 450
Doubtful (less than one year)
On secured portion 500 25 125
On unsecured portion 500 100 500
Doubtful (more than one year but less
than three years)
On secured portion 300 40 120

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On unsecured portion 200 100 200

Doubtful Unsecured (more than three 300 100
years) 300
Total provision 1,723

Answer 4
Interest on performing assets should be recognised on accrual basis, but interest
on NPA should be recognised on cash basis.
` in lakhs
Interest on cash credits and overdraft (1800+70)= 1,870
Interest on Term Loan (480+40) = 520
Income from bills purchased and discounted (700+36) = 736
3,126
Answer 5

Case 1 Case 2
` `
Sanctioned limit 60,00,000 45,00,000
Drawing power 56,00,000 42,00,000
Amount outstanding continuously from 48,00,000 30,00,000
1.01.20X1 to 31.03.20X1
Total interest debited 3,84,000 2,40,000
Total credits - 320,000
Is credit in the account is sufficient to cover the No Yes
interest debited during the period
NPA NOT NPA
Answer 6
Bills for Collection (Assets) Account

` in lacs ` in lacs
To Balance b/d 21 By Bills for collection 141
To Bills for collection 193.5 By Bills dishonoured 16.5
By Balance c/d 57
214.5 214.5

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Bills for Collection (Liabilities) Account

` in lacs ` in lacs
To Bills for collection 141 By Balance b/d 21
To Bills dishonoured 16.5 By Bills for collection 193.5
To Balance c/d 57
214.5 214.5
Answer 7
In the books of ABC Bank Ltd.
Journal Entries
` in crores
Particulars Debit Credit
Rebate on bills discounted A/c Dr. 40
To Discount on bills A/c 40
(Being the transfer of opening balance in ‘Rebate on bills
discounted A/c’ to ‘Discount on bills A/c’)
Bills purchased and discounted A/c Dr. 5,000
To Discount on bills A/c 280
To Clients A/c 4,720
(Being the discounting of bills of exchange during the year)
Discount on bills A/c Dr. 14
To Rebate on bills discounted A/c 14
(Being the unexpired portion of discount in respect of the
discounted bills of exchange carried forward)
Discount on bills A/c Dr. 306
To Profit and Loss A/c 306
(Being the amount of income for the year from discounting
of bills of exchange transferred to Profit and loss A/c)
Working Notes:
1. Discount received on the bills discounted during the year
` 5,000 crores x 14/100 x 146/365 = ` 280 crores
2. Calculation of rebate on bill discounted
` 500 crores x 14/100 x 73/365 = `14 crores

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3. Income from bills discounted transferred to Profit and Loss A/c would be
calculated by preparing Discount on bills A/c.
Discount on bills A/c ` in crores
Date Particulars Amount Date Particulars Amount
31.3.20X2 To Rebate on 14 1.4.20X1 By Rebate on bills 40
bills discounted discounted b/d
” To Profit and Loss 20X1-x2 By Bills purchased
A/c(Bal. Fig.) 306 and discounted 280
320 320
Answer 8
KLM Bank Limited
Profit and Loss Account for the year ended 31st March, 20X2

Schedule Year ended

31.03.20X2
`
I. Income:
Interest earned 13 37,95,160
Other income 14 4,87,800
Total 42,82,960
II. Expenditure
Interest expended 15 22,95,360
Operating expenses 16 5,70,340
Provisions and contingencies
(4,50,000+2,00,000+2,00,000) 8,50,000
Total 37,15,700
III. Profits/Losses
Net profit for the year 5,67,260
Profit brought forward Nil
5,67,260
IV. Appropriations
Transfer to statutory reserve (25% of 5,67,260) 1,41,815
Proposed dividend 50,000
Balance carried over to balance sheet 3,75,445
5,67,260

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Profit & Loss Account balance of ` 3,75,445 will appear under the head ‘Reserves and
Surplus’ in Schedule 2 of the Balance Sheet.
Year ended 31.3.20X2 (`)
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 37,95,160
37,95,160
Schedule 14 – Other Income
I. Commission, exchange and brokerage 1,90,000
II. Profit on sale of investment 2,25,800
III. Rent received 72,000
4,87,800
Schedule 15 – Interest Expended
I. Interests paid on deposits 22,95,360
22,95,360
Schedule 16 – Operating Expenses
I. Payment to and provisions for employees (salaries & allowances) 2,50,000
II. Rent, taxes paid 1,00,000
III. Depreciation on assets 40,000
IV. Director’s fee, allowances and expenses 35,000
V. Auditor’s fee 12,000
VI. Statutory (law) expenses 38,000
VII. Postage and telegrams 65,340
VIII. Preliminary expenses 30,000
5,70,340
Working Note:
`
Interest and discount received 38,00,160
Add: Rebate on bills discounted on 31.3. 20X1 15,000
Less: Rebate on bills discounted on 31.3. 20X2 (20,000)
37,95,160

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Annexure I
Schedules forming part of Balance Sheet
Schedule 1 - Capital
As on 31.3... As on 31.3...
(Current year) (Previous year)
I. For Nationalised Banks
Capital (Fully owned by
Central Government)
II. For Banks Incorporated outside India
Capital
(i) (The amount brought in by banks by way of
start-up capital as prescribed by RBI should
be shown under this head)
(ii) Amount of deposit kept with the RBI under
Section 11(2) of the Banking Regulation Act, 1949
Total
III. For other Banks
Authorised Capital
( ___Shares of ` ____ each)
Issued Capital
( ___Shares of ` ____each)
Subscribed Capital
( ____Shares of ` ___ each)
Called-up Capital
( ____Shares of ` ___ each)
Less: Calls unpaid
Add: Forfeited shares
Total

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Schedule 2 - Reserves and Surplus

As on 31.3.... As on 31.3....
(Current year) (Previous year)
I. Statutory Reserves
Opening Balance
Additions during the year
Deductions during the year
II. Capital Reserves
Opening Balance
Additions during the year
Deductions during the year
III. Share Premium
Opening Balance
Additions during the year
Deductions during the year
IV. Revenue and other Reserves
Opening Balance
Additions during the year
Deductions during the year
V. Balance in Profit and loss Account
Total: (I, II, III, IV and V)

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Schedule 3 - Deposits
As on 31.3... As on 31.3...
(Current year) (Previous year)
A. I. Demand Deposits
(i) From banks
(ii) From others
II. Savings Bank Deposits
III. Term Deposits
(i) From Banks
(ii) From others

Total: (I, II and III)

B. (i) Deposits of branches in India
(ii) Deposits of branches outside India
Total
Schedule 4 - Borrowings
As on 31.3.... As on 31.3....
(Current year) (Previous year)
I. Borrowings in India
(i) Reserve Bank of India
(ii) Other banks
(iii) Other institutions and agencies
II. Borrowings outside India
Total: (I and II)
Secured borrowings included in I & II above - `
Schedule 5 - Other Liabilities and Provisions
As on 31.3.... As on 31.3....
(Current year) (Previous year)
I. Bills payable
II. Inter-office adjustments (net)

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III. Interest accrued

IV. Others (including provisions)
Total
Schedule 6 - Cash and Balances with Reserve Bank of India
As on 31.3.... As on 31.3....
(Current year) (Previous year)
I. Cash in hand (including foreign currency notes)
II. Balances with Reserve Bank of India
(i) In Current Account
(ii) In Other Accounts
Total: (I & II)
Schedule 7 - Balances with Banks & Money at Call & Short Notice
As on 31.3.... As on 31.3....
(Current year) (Previous year)
I. In India
(i) Balances with banks
(a) in Current Accounts
(b) in Other Deposit Accounts
(ii) Money at call and short notice
(a) with banks
(b) with other institutions
Total: (i & ii)
II. Outside India
(i) In Current Accounts
(ii) In other Deposits Accounts
(iii) Money at call and short notice
Total
Grand Total (I & II):

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Schedule 8 - Investments
As on 31.3.... As on 31.3....
(Current year) (Previous year)
I. Investments in India in
(i) Government securities
(ii) Other approved securities
(iii) Shares
(iv) Debentures and Bonds
(v) Subsidiaries and/or joint ventures
(vi) Others (to be specified)
Total
II. Investments outside India in
(i) Government securities
(Including local authorities)
(ii) Subsidiaries and/or joint ventures abroad
(iii) Other investments (to be specified)
Total
Grand Total: (I & II)
Schedule 9 - Advances
As on 31.3.... As on 31.3....
(Current year) (Previous year)
A. (i) Bills purchased and discounted
(ii) Cash credits, overdrafts
and loans repayable on demand
(iii) Term loans
Total
B. (i) Secured by tangible assets
(ii) Covered by Bank/Government Guarantees
(iii) Unsecured
Total

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C. I. Advances in India
(i) Priority Sectors
(ii) Public Sector
(iii) Banks
(iv) Others
Total
II. Advances outside India
(i) Due from banks
(ii) Due from others
(a) Bills purchased and discounted
(b) Syndicated loans
(c) Others
Total

Grand Total: (C. I & II)

Schedule 10 - Fixed Assets
As on 31.3.... As on 31.3....
(Current year) (Previous year)
I. Premises
At cost as on 31st March of the preceding year
Additions during the year
Deductions during the year
Depreciation to date
II. Other Fixed Assets (including Furniture and Fixtures)
At cost as on 31st March of the preceding year
Additions during the year
Deductions during the year
Depreciation to date
Total: (I & II)

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Schedule 11 - Other Assets

As on 31.3.... As on 31.3....
(Current year) (Previous year)
I. Inter-office adjustments (net)
II. Interest accrued
III. Tax paid in advance/tax deducted at source
IV. Stationery and stamps
V. Non-banking assets acquired in satisfaction of claims
VI. Others*
Total
*In case there is any unadjusted balance of loss the same may be shown under this
item with appropriate foot-note.
Schedule 12 - Contingent Liabilities
As on 31.3.... As on 31.3....
(Current year) (Previous year)
I. Claims against the bank not acknowledged
as debts
II. Liability for partially paid investments
III. Liability on account of outstanding forward
exchange contracts
IV. Guarantees given on behalf of constituents
(a) In India
(b) Outside India
V. Acceptances, endorsements and other
obligations
VI. Other items for which the bank is contingently
liable
Total

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Annexure II
Schedules forming part of Profit and Loss Account
Schedule 13 - Interest Earned
Year ended Year ended
31.3.... 31.3....
(Current year) (Previous year)
I. Interest/discount on advances/bills
II. Income on investments
III. Interest on balances with Reserve Bank of
India and other inter-bank funds
IV. Others
Total
Schedule 14 - Other Income
Year ended Year ended
31.3.... 31.3....
(Current year) (Previous year)
I. Commission, exchange and brokerage
II. Profit on sale of investments
Less: Loss on sale of investments
III. Profit on revaluation of investments
Less: Loss on revaluation of investments
IV. Profit on sale of land, building and other assets
Less: Loss on sale of land, building and other
assets
V. Profit on exchange transactions
Less: Loss on exchange transactions
VI. Income earned by way of dividends etc.
from subsidiaries/companies and/or joint
ventures abroad/in India
VII. Miscellaneous Income
Total
Note: Under items II to V loss figures may be shown in brackets.

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Schedule 15 - Interest Expended

Year ended Year ended
31.3.... 31.3....
(Current year) (Previous year)
I. Interest on deposits
II. Interest on Reserve Bank of India/inter-bank
borrowings
III. Others
Total
Schedule 16 - Operating Expenses
Year ended Year ended
31.3.... 31.3....
(Current year) (Previous year)
I. Payments to and provisions for employees
II. Rent, taxes and lighting
III. Printing and stationery
IV. Advertisement and publicity
V. Depreciation on Bank’s property
VI. Director’s fees, allowances and expenses
VII. Auditor’s fees and expenses (including
branch auditor’s fees and expenses)
VIII. Law Charges
IX. Postages, Telegrams, Telephones, etc.
X. Repair and maintenance
XI. Insurance
XII. Other expenditure
Total
In ‘Notes on Accounts’, the following disclosures should be made:

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 8.132 ADVANCED ACCOUNTING

Annexure III
Guidelines of Reserve Bank of India for Compliance of Financial Statements
Given below are the compliance notes of the Reserve Bank of India for balance
sheet and profitand loss account as per the revised formats.
Balance Sheet
Item Schedule Coverage Notes and instructions for
compilation
Capital 1 Nationalised Banks The capital owned by Central
(Fully Owned by Central Government as on the date of the
Government) Balance Sheet including contribution
from Government, if any, for
participating in World Bank Projects
should be shown.
Banking companies (i) The amount brought in by banks by
incorporated outside way of start-up capital as prescribed by
RBI should be shown under this head.
(ii) The amount of deposits kept with RBI,
under sub-section 2 of section 11 of the
Banking Regulation Act, 1949 should
also be shown.
Other Banks (Indian)
Authorised Capital Authorised, Issued, Subscribed, Called-
(....Shares or ` each) Issued up Capital should be given separately.
Capital (..Shares of Calls-in-arrears will be deducted from
`.....each) subscribed Called up capital while the paid-up value
Capital ( ......Shares of of forfeited shares should be added thus
`....each) Called up Capital arriving at the paid-up capital. Where
(...........Shares of `.......each. necessary, items which can be combined
Less: Calls unpaid........Add: should be shown under one head for
Forfeited shares.....Paid up instance ‘Issued and Subscribed Capital’.
to capital.........
Notes - General
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.

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Reserves 2 (I) Statutory Reserves Reserves created in terms of Section 17

and or any other section of Banking
Surplus Regulation Act must be separately
disclosed.
(II) Capital Reserves The expression ‘capital reserves’ shall
not include any amount regarded as free
for distribution through the profit and
loss account. Surplus on revaluation
should be treated as Capital Reserves.
Such reserves will have to be reflected
on the face of the balance sheet as
revaluation reserves. Surplus on
translation of the financial statements of
foreign branches (which includes fixed
assets also) is not a revaluation reserve.
(III) Share Premium Premium on issue of share capital may
be shown separately under this head.
(IV) Revenue and other The expression ‘Revenue Reserve’ shall
Reserves mean any reserve other than capital
reserve. This item created will include all
reserves other than those separately
classified. The expression Reserve shall
not include any amount retained by way
of providing renewals or diminution in
value of assets or retained by way of
providing for depreciation, renewals or
diminution in value of assets or retained
by way of providing for any known
liability.
Excess provision towards depreciation
on investments should be transferred to
‘Investment Fluctuations Reserve
Account’ which should be shown as a
separate item under the head ‘Revenue
and Other Reserves’. The amount held
in ‘Investment Fluctuation Reserve
Account’ could be utilized to meet the
depreciation requirement on investment
in securities in future. Extra provision
needed in the event of depreciation in
the value of the investment should be

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 8.134 ADVANCED ACCOUNTING

debited to the Profit and Loss Account

and if required, an equivalent amount
may be transferred from the ‘Investment
Fluctuation Reserve Account’ to the
Profit and Loss Account as a ‘below the
line’ item after determining the profit
for the year.
(V) Balance of Profit Includes balance of profit after
appropriations. In case of loss the
balance may be shown as a deduction.
Notes – General
Movements in various categories of
Reserves should be shown as indicated
in the schedule.
Deposits 3 A. (I) Demand Deposits
(i) from banks Includes all bank deposits repayable on
demand.
(ii) from others Includes all demand deposits of the
non-bank sectors. Credit balances in
over-drafts, cash credit accounts,
deposits payable at call, overdue
deposits, inoperative current accounts,
matured time deposits and cash
certificates, certificates of deposits, etc.
are to be included under this category.
(II) Saving Bank Includes all savings bank deposits
Deposits (including inoperative savings bank
account).
(III) Term Deposits
(i) from banks Includes all types of bank deposits
repayable after a specified term.
(ii) from others Includes all types of deposits of the non-
bank sector repayable after a specified
term. Fixed deposits, cumulative and
recurring deposits, cash certificates,
certificates of deposits, annuity
deposits, deposits mobilised under
various schemes, ordinary staff deposits,
foreign currency non-resident deposits

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 BANKING COMPANIES 8.135

accounts, etc. are to be included under

this category.
B. (i) Deposits of The total of these two items will agree
branches in India with the total deposits.
(ii) Deposits of
branches outside India
Notes – General
(a) Interest payable on deposits which
is accrued but not due should not be
included but shown under other
liabilities.
(b) Matured time deposits and cash
certificates, etc. should be treated as
demand deposits.
(c) Deposits under special schemes
should be included under term deposits
if they are not payable on demand.
When each deposits have matured for
payments they should be shown under
demand deposits.
(d) Deposits from banks will include
deposits from the banking system in India,
co-operative banks, foreign banks which
may or may not have a presence in India.
Borrowings 4 (I) Borrowings in India
(i) Reserve Bank of Includes borrowings/refinance obtained
India from Reserve Bank of India.
(ii) Other banks Includes borrowings/refinance obtained
from commercial banks (including
cooperative banks).
(iii) Other Includes borrowings/refinance obtained
institutions from Industrial Development Bank of
and agencies India.
Export-Import Bank of India, National
Bank for Agriculture and Rural
Development and other institutions,
agencies (including liability against
participation certificates, if any)
(II) Borrowings Includes borrowings of India branches

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outside India abroad as well as borrowings of foreign

branches.
Secured borrowings This item will be shown separately.
included above Includes secured borrowings/refinance
in India and outside India.
Notes – General
(i)The total of I & II will agree with the
total borrowings shown in the balance
sheet.
(ii) Inter-office transactions should not
be shown as borrowings.
(iii) Funds raised by foreign branches by
way of certificates of deposits, notes,
bonds, etc. should be classified
depending upon documentation, as
‘deposits’ ‘borrowings’, etc.
(iv) Refinance obtained by banks
from Reserve Bank of India and various
institutions are being brought under the
head ‘Borrowings’. Hence, advances will
be shown at the gross amount on the
assets side
Other 5 I. Bills payable Includes drafts, telegraphic transfers,
liabilities travellers’ cheques, mail transfers
and payable, pay slips, bankers cheques and
provisions other miscellaneous items.
II. Inter-office The inter-office adjustments balance, if
adjustment (net) in credit, should be shown under this
head. Only net position of inter-office
accounts, inland as well as foreign,
should be shown here. In working out
the net position, credit entries
outstanding for more than five years in
inter-branch accounts should be
segregated and transferred to a
separate Blocked Account. While
arriving at the net amount of inter-
branch transactions for inclusion under
Schedule 5 or 11 as the case may be, the
aggregate amount of Blocked Account

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 BANKING COMPANIES 8.137

should be excluded and only the

amount representing the remaining
credit entries should be netted against
debit entries.
III. Interest accrued Includes interest accrued but not due on
deposits and borrowings.
IV. Others (including (i) Includes the net provision for
provisions) income tax and other taxes like interest
tax (less advance payment tax deducted
at source etc.), surplus in aggregate in
provisions for bad debts provision
account, surplus in aggregate in
provisions for depreciation in securities,
contingency funds which are not
disclosed as a reserve but are actually in
the nature of reserves, proposed
dividend/ transfer to Government, other
liabilities which are not disclosed under
any of the major heads such as
unclaimed dividend, provisions and
fund kept for specific purposes,
unexpired discount, outstanding
charges like rent, conveyance etc.
Certain types of deposits like staff
security deposits, margin deposits, etc.
where the repayment is not free, should
also be included under this head.
(ii) Provisions towards standard assets
should be shown separately as
‘Contingent Provisions against Standard
Assets’ under this ahead.
(iii) Amount of subordinated debt raised
as Tier II capital should be shown in
Schedule 5 as well as by way of
explanatory notes/remarks in the
balance sheet. The Blocked Account
arising from transfer of credit entries in
inter-branch accounts outstanding for
more than five years should be shown
under this head. Any adjustment from
the Blocked Account should be

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 8.138 ADVANCED ACCOUNTING

permitted only with the authorization of

two officials one of whom should be
from outside the branch concerned,
preferably from the Controlling/Head
Office if the amount exceeds Rupees
one lakh.
Notes – General
(i) For arriving at the net balance of
inter-office adjustments all connected
inter-office accounts should be aggre-
gated and the net balance only will be
shown, representing mostly items in
transit and unadjusted items.
(ii) The interest accruing on all deposits,
whether the payment is due or not,
should be treated as a liability.
(iii) It is proposed to show only pure
deposits under this head ‘deposits’ and
hence all surplus provisions for bad and
doubtful debts, contingency funds,
secret reserves, etc. which are not netted
off against the relative assets, should be
brought under the head ‘Others
(including provisions)’.
(iv) The amount of subordinated debt
raised against Tier II capital should be
indicated.
Cash and 6 I. Cash in hand Includes cash in hand including foreign
Balances (including foreign currency notes and also of foreign
with the currency notes) branches in case of banks having such
Reserve II. Balances with branches.
Bank of Reserve Bank of
India India
(i) in Current
Account
(ii) in other Accounts
Balances 7 I. In India Includes all balances with banks in India
with banks (i) Balances with banks (including co-operative banks). Balances
and money (a) in current in current accounts and deposit
at call and accounts should be shown separately.

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 BANKING COMPANIES 8.139

short accounts
notices (b) in other
Deposit
accounts
(ii) Money at call and Includes deposits repayable within 15
short notice days or less than 15 days’ notice lent in
(a) with banks the inter-bank call money market.
(b) with other
institutions
II. Outside India Includes balances held by foreign
(i) Current branches and balances held by Indian
accounts branches of the banks outside India.
(ii) Deposits Balances held with foreign branches by
accounts other branches of the bank should not
be shown under this head but should be
included in inter-branch accounts. The
amounts held in ‘current accounts’ and
‘deposit accounts’ should be shown
separately.
(iii) Money at call Includes deposits usually classified in
and short foreign countries as money at call and
notice short notice.
Investment 8 I. Investments in Includes Central and State Government
s India securities and Government treasury
(i) Government bills. These securities should be shown
securities at the book value. However, the
difference between the book value and
market value should be given in the
notes to the balance sheet.
(ii) Other approved Securities other than Government
securities securities, which according to the
Banking Regulation Act, 1949 are
treated as approved securities ∗, should
be included here.
(iii) Shares Investments in debentures and bonds of
companies and corporations not

∗ “Approved Securities” mean the securities issued by the Central Govt. or such securities
as prescribed by RBI from time to time.

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 8.140 ADVANCED ACCOUNTING

included in item (ii) should be included

here.
(iv) Debentures Investments in debentures and bonds of
and Bonds and corporations not included in item
(ii) should be included here.
(v) Investments in Investments in subsidiaries/joint
subsidiaries/joint ventures (including RRBs) should be
ventures included here.
(vi) Others Includes residual investments, if any, like
gold, commercial paper and other
instruments in the nature of shares/
debentures/ bonds.
II. Investments
outside India
(i) Government All foreign Government securities
securities including securities issued by local
(including local authorities may be classified under this
authorities) head.
(ii)Subsidiary and/ or All investments made in the share
joint ventures capital of subsidiaries floated outside
abroad India and/or joint ventures abroad
should be classified under this head.
(iii) Others All other investments outside India may
be shown under this head.
Notes-General
Indicate the gross value of investments
in India and outside India, the aggregate
of provisions for depreciation separately
on investments in India and outside
India, and the net value of investments
in India and outside India, the total of
which will be carried to balance sheet.
The gross value of investments and
provisions need not, however, be shown
against each of the categories specified
in the Schedule. The break-up of net
value of investments in India and
outside India (gross value of
investments less provision) under each

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 BANKING COMPANIES 8.141

of the specified category need only be

shown.
Advances 9 A. (i) Bills purchased and In classification under section ‘A’. All out
discounted standings in India as well as outside less
(ii) Cash credits, over- provisions made, will be classified under
drafts and loans three heads as indicated and both
repayable on secured and unsecured advances will be
demand included under these heads.
(iii) Term loans Including overdue installments.
B. (i) Secured by tangible All advances or part of advances which
assets are secured by tangible assets may be
(includes advances shown here. The item will include
against book debts) advances in India and outside India.
(ii)Covered by Bank/ Advances in India and outside India to
Government the extent they are covered by
Guarantee guarantees of Indian and foreign
governments and Indian and foreign
banks and DICGC & ECGC are to be
included.
(iii) Unsecured All advances not classified under (i) and
(ii) will be included here.
Total of ‘A’ should tally with the total of
‘B’.
C. I. Advances in India Advances should be broadly classified
(i) Priority sectors into ‘Advances in India, and ‘Advances
(ii) Public sector outside India’.
(iii) Banks Advances in India will be further
(iv) Others classified on the sectoral basis as
II. Advances outside indicated. Advances on sectors which
India for the time being are classified as
priority sectors according to the
(i) Due from banks
instructions of the Reserve Bank are to
(ii) Due from
be classified under the head ‘Priority
others
sector’. Such advances should be
excluded from item (ii) i.e., advances to
public sector.
(a) Bills purchased and Advances to Central and State
discounted Governments and other Government
(b) Syndicate loans undertaking including Government
companies and corporations which are,

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 8.142 ADVANCED ACCOUNTING

(c) Others according to the statutes, to be treated

as public sector companies are to be
included in the category “Public Sector”.
All advances to the banking sector
including co-operative banks will come
under the head ‘Banks’. All the
remaining advances will be included
under the head ‘Others’ and typically
this category will include non-priority
advances to the private, joint and co-
operative sectors.
Notes – General
(i) The gross amount of advances
including refinance but excluding
rediscounts provisions made to the
satisfaction of auditors should be shown
as advances.
(ii) Term loans will be loans not
repayable on demand.
(iii) Consortium advances would be
shown net of share from other
participating banks/ institutions.
Fixed 10 I. Premises Premises wholly or partly owned by the
Assets (i) At cost as on 31st banking company for the purpose of
March of the business including residential premises
preceding year should be shown (against ‘Premises’. In
(ii) Additions during the the case of premises and other fixed
year assets, the previous balance, additions
thereto and deductions there from during
(iii) Deductions during
the year as also the total depreciation
the year
written off should be shown. Where sums
(iv) Depreciation to date
have been written off on reduction of
capital or revaluation of assets, every
balance sheet after the first balance sheet
subsequent to the reduction or
revaluation should show the revised
figures for a period of five years with the
date and amount of the revision made.
Motor vehicles and other fixed assets
II. Other Fixed Assets other than premises but including
(including furniture and

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 BANKING COMPANIES 8.143

fixtures) furniture and fixtures should be shown

under this head.
(i) At cost on 31st
March of the preceding
year
(ii) Additions during the
year
(iii) Deductions during
the year
(iv) Depreciation to date
Other 11 I. Inter-office The inter-office adjustments balance, if
Assets adjustments (net) in debit, should be shown under this
head. Only net position of inter-office
accounts, inland as well as foreign,
should be shown here. For arriving at
the net balances of inter-office
adjustment accounts, all connected
inter-office accounts should be
aggregated and the net balance, if in
debit, only should be shown
representing mostly items in transit and
unadjusted items.
In working out the net position, credit
entries outstanding for more than five
years in inter-branch accounts should
be segregated and transferred to a
separate Blocked Account. While
arriving at the net amount of inter-
branch transactions for inclusion under
Schedule 5 or 11, as the case may be, the
aggregate amount of Blocked Account
should be excluded and only the
amount representing the remaining
credit entries should be netted against
debit entries.

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 8.144 ADVANCED ACCOUNTING

II. 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. As banks normally debit the
borrowers’ accounts with interest due
on the balance sheet date, usually there
may not be any amount of interest due
on advances. Only such interest as can
be realised on the ordinary course
should be shown under this head.

III. Tax paid in The amount of tax deducted at source

advance/tax deducted at on securities, advance tax paid etc. to
source the extent that these items are not set
off against relative tax provisions
should be shown against this item.
IV. Stationery and Only exceptional items of expenditure
stamps on stationery like bulk 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. The value
should be on a realistic basis and cost
escalation should not be taken into
account, as these items are for internal
use.
V. Non-banking assets Immovable properties/tangible assets
acquired in satisfaction acquired in satisfaction of claims are to
of claims. be shown under this head.
VI. Others This will include items like claims which
have not been met, for instance,
clearing items, debit items
representing addition to asset or
reduction in liabilities which have not
been adjusted for technical reasons,
want of particulars, etc., non-interest
bearing loans and advances given to
staff by a bank as employer and not as
a banker, etc. Items which are in the
nature of expenses which are pending

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 BANKING COMPANIES 8.145

adjustments should be provided for

and the provision netted against this
item so that only realizable value is
shown under this head. Accrued
income other than interest may also be
included here.
Outstanding in credit card operations
should be shown as part of “advances”
(Schedule instead of clubbing these
under “Other Assets”
Contingent 12 I. Claims against the
Liabilities bank not acknowledged
as debts
II. Liability for partly Liability on partly paid shares,
paid investments debentures, etc. will be included under
this head.
III. Liability on account Outstanding forward exchange
of outstanding forward contracts may be included here.
exchange contracts
IV. Guarantees given on Guarantees given for constituents in
behalf of constituents India and outside India may be shown
(i) In India separately.
(ii) Outside India
V. Acceptances This item will include letters of credit
endorsements and and bills accepted by the bank on
other obligations behalf of customers.
VI. Other items for which Arrears of cumulative dividends, bills
the Bank is contingently rediscounted, commitments under
liable under-writing contracts, estimated
amounts of contracts remaining to be
executed on capital account and not
provided for, etc. are to be included here.
Bills for Bills and other items in the course of
Collection collection and not adjusted will be shown
against this item in the summary version
only. No separate schedule is proposed.

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 8.146 ADVANCED ACCOUNTING

Profit and Loss Account

Interest 13 I. Interest/discount on Includes interest and discount on
earned advances/bills all types of loans and advances like
cash credit, demand loans,
overdraft, export loans, term loans,
domestic and foreign bills
purchased and discounted
(including those rediscounted),
overdue, interest and also interest
subsidy, if any, relating to such
advances/bills.
II. Income on Includes all income derived from
Investments the investment portfolio by way of
interest and dividend
III. Interest on balances Includes interest on balances with
with Reserve Bank of Reserve Bank and other banks, call
India and other loans, money market placements,
Interbank funds etc.
IV. Others Includes any other
interest/discount income not
included in above heads.
Other Income 14 I. Commission, exchange Includes all remuneration on services
and brokerage such as commission on collections,
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.
II. Profit on sale of Includes profit/loss on sale of
investments Less Loss securities, furniture land and
on sale of investments buildings, motor of vehicle, gold,
silver etc. Only the net position
should be shown. If the net
position is a loss, the amount
should be shown as deduction.

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 BANKING COMPANIES 8.147

III. Profit on revaluation of The net profit/loss on revaluation

investments Less: Loss of assets may also be shown under
on revaluation of this item.
investments
IV. Profit on sale of land,
building and other assets
Less : Loss on sale of land,
buildings and other
assets
V. Profit on exchange Includes profit/loss on dealing in
transactions Less : Loss foreign exchange all income
on exchange earned by way of foreign exchange
transactions commission and charges on
VI. Income earned by way of foreign exchange, transactions
dividends etc. from excluding interest which will be
subsidiaries, companies shown under interest. Only the net
and/or joint ventures position should be shown. If the
abroad/in India net position is a loss, it is to be
shown as a deduction.
VII. Miscellaneous income Includes recoveries from
constituents for the godown rents,
income from bank’s properties,
security charges, insurance etc. and
any other miscellaneous income. In
case any item under this head
exceeds one percentage of the
total income, particulars may be
given in the notes.
Interest 15 I. Interest on deposits Includes interest paid on all types
Expended of deposits including deposits from
banks and others institutions.
II. Interest on Reserve Includes discount/interest on all
Bank of India/inter- borrowings and refinance from
bank borrowings Reserve Bank of India and other
banks.
III. Others Includes discount/interest on all
borrowings/refinance from
financial institutions. All other
payments like interest on
participation certificates, penal

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 8.148 ADVANCED ACCOUNTING

interest paid, etc. may also be

included here.
Operating 16 I. Payments to and Includes staff salaries / wages,
expenses Provisions for allowances, bonus, other staff
employees benefits like provident fund,
pension, gratuity liveries to staff,
leave fare concessions, staff
welfare, medical allowance to staff
etc.
II. Rent, taxes and Includes rent paid by the banks on
lighting building and other municipal and
other taxes paid (excluding income
tax and interest tax) electricity and
other similar charges and levies.
House rent allowance and other
similar payments to staff should
appear under the head ‘Payments
to and provisions for employees’.
III. Printing and Includes books and forms and
Stationery stationery used by the bank and
other printing charges which are
not incurred by way of publicity
expenditure.
IV. Advertisement and Includes expenditure incurred by the
publicity bank for advertisement and publicity
purposes including printing charges
of publicity matter.
V. Depreciation on Includes depreciation on bank’s own
Bank’s property property: motor cars and other
vehicles, furniture, electric fittings,
vaults, lifts, leasehold properties, non-
banking assets, etc.
VI. Directors’ fees, Includes sitting fees and all other items
allowances and expenses of expenditure incurred on behalf of
directors. The daily allowances, hotel
charges, conveyance charges, etc.
which though in the nature of
reimbursement of expenses incurred
may be included under this head.
Similar expenses of local Committee

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members may also be included under

this head.
VII. Auditors’ fees and Includes fees paid to the statutory
expenses (including branch auditors and branch auditors for
auditors’ fees and professional services rendered
expenses) and all expenses for performing
their duties, even though they may
be in the nature of reimbursement
of expenses. If external auditors
have been appointed by banks
themselves for internal inspections
and audits and other services the
expenses incurred in that context
including fees may not be included
under this head but shown under
‘other expenditure’.
VIII. Law charges All legal expenses and
reimbursement of expenses
incurred in connection with legal
services are to be included here.
IX. Postage, telegrams, Includes all postal charges like
telephones, etc. stamps, tele-gram, telephones,
tele-printer etc.
X. Repairs and Includes repairs to banks’ property,
maintenance their maintenance charges, etc.
XI. Insurance Includes insurance charges on
bank’s property, insurance
premium paid to Deposit
Insurance & Credit Guarantee
Corporation, etc. to the extent they
are not recovered from the
concerned parties.
XII. Other expenditure All expenses other than those not
included in any of the other heads
like, licence fees, donations,
subscriptions to papers, periodicals,
entertainment expenses, travel
expenses, etc. may be included
under this head. In case any
particular item under this head

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 8.150 ADVANCED ACCOUNTING

exceeds one percentage of the total

income particulars may be given in
the notes.
Provisions Includes all provisions made for
and bad and doubtful debts, provisions
contingencies for taxation, provisions for
diminution in the value of
investments, transfers to
contingencies and other similar
items.
Treatment of While preparing the Balance Sheet
accumulated and Profit and Loss Account
losses accumulated losses should be
brought forward under Item III or
Form “B” before appropriation of
the balance profit made.

Annexure IV
Risk Weights for Calculation of Capital charge for Credit Risk
The following table shows the weights to be assigned to the value of different
assets and off-balance sheet items:
I. Domestic Operations
A. Funded Risk Assets

Sr. Item of asset or liability Risk

No. Weight
%
I Balances
1. Cash, balances with RBI 0
2. i. Balances in current account with other banks 20
ii. Claims on Bank 20
II Investments (Applicable to securities held in HTM)
1. Investments in Government Securities. 0
2. Investments in other approved securities guaranteed by
0
Central/State Government.

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 BANKING COMPANIES 8.151

Note:

If the repayment of principal I interest in respect of State

Government Guaranteed securities included in item 2, 4
and 6 has remained in default, for a period of more than
90 days banks should assign 100% risk weight. However
the banks need to assign 100% risk weight only on those
State Government guaranteed securities issued by the
defaulting entities and not on all the securities issued or
guaranteed by that State Government.

3. Investments in other securities where payment of interest 0

and repayment of principal are guaranteed by Central
Govt. (This will include investments in Indira/Kisan Vikas
Patra (IVP/KVP) and investments in Bonds and Debentures
where payment of interest and principal is guaranteed by
Central Govt.)
4. Investments in other securities where payment of interest
and repayment of principal are guaranteed by State 0
Governments.
5. Investments in other approved securities where payment
of interest and repayment of principal are not guaranteed 20
by Central/State Govt.
6. Investments in Government guaranteed securities of 20
Government Undertakings which do not form part of the
approved market borrowing programme.
7. Claims on commercial banks. 20
Note:
The exposure of Indian branches of foreign banks,
guaranteed/counter-guaranteed by overseas Head Offices
or the bank's branch in other country, would amount to a
claim on the parent foreign bank and the risk weight of
such exposure would depend upon the rating (assigned
by the international rating agencies) of the overseas
parent of the Indian branch.
8. Investments in bonds issued by other banks 20
9. Investments in securities which are guaranteed by banks 20

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 8.152 ADVANCED ACCOUNTING

as to payment of interest and repayment of principal.

10. Investments in subordinated debt instruments and bonds
issued by other banks or Public Financial Institutions for 100
their Tier II capital.
11. Deposits placed with SIDBI/NABARD in lieu of shortfall in
100
lending to priority sector.
12. Investment in Mortgage Backed Securities (MBS) of
residential assets of Housing Finance Companies (HFCs)
50
which are recognised and supervised by National Housing
Bank
13 Investment in Mortgage Backed Securities (MBS) which
50
are backed by housing loan qualifying for 50% risk weight.
14. Investment in securitised paper pertaining to an
50
infrastructure facility.
15 Investments in debentures/ bonds/ security receipts/ Pass 100
Through Certificates issued by Securitisation Company /
SPVs/ Reconstruction Company and held by banks as
investment
16. All other investments including investments in securities
100
issued by PFls.
Note: Equity investments in subsidiaries, intangible assets
and losses deducted from Tier I capital should be assigned
zero weight
17 Direct investment in equity shares, convertible bonds,
125
debentures and units of equity oriented mutual funds
18 Investment in Mortgaged Backed Securities and other
150
securitized exposures to Commercial Real Estate
19 Investments in Venture Capital Funds 150
20 Investments in Securities issued by SPVs (in respect of
securitisation of standard assets) underwritten and
100
devolved on originator banks during the stipulated period
of three months

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 BANKING COMPANIES 8.153

21 Investments in Securities issued by SPVs in respect of

securitisation of standard asset underwritten and
100
devolved on bank as third party service provider during
the stipulated period of three months
22 NPA Investment purchased from other banks 100
23 Investments in instruments issued by NBFC-ND-SI 100
III Loans & Advances including bills purchased and
discounted and other credit facilities
1. Loans guaranteed by Govt. of India 0
Note:
The amount outstanding in the account styled as "Amount
receivable from Government of India under Agricultural
debt Waiver Scheme 2008" shall be treated as a claim on
the Government of India and would attract zero risk
weight for the purpose of capital adequacy norms.
However, the amount outstanding in the accounts covered
by the
Debt Relief Scheme shall be treated as a claim on the
borrowers and risk weighted as per the extant norms.
2. Loans guaranteed by State Govts. 0
Note: If the loans guaranteed by State Govts. have
remained in default for a period of more than 90 days a
risk weight of 100 percent should be assigned.
3. Loans granted to public sector undertakings of Govt. of
100
India
4. Loans granted to public sector undertakings of State Govt. 100
5. (i) For the purpose of credit exposure, bills
purchased/discounted /negotiated under LC (where
payment to the beneficiary is not under reserve) is treated 20
as an exposure on the LC issuing bank and assigned risk
weight as is normally applicable to inter-bank exposures.
(ii) Bills negotiated under LCs ‘under reserve’, bills
purchased/discounted/negotiated without LCs, will be
reckoned as exposure on the borrower constituent.

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 8.154 ADVANCED ACCOUNTING

Accordingly, the exposure will attract a risk weight

appropriate to the borrower. 00
(i) Govt.
(ii) Banks 20
(iii) Others 100
6. Others including PFls 100
7. Leased Assets 100
8. SSI Advances Guaranteed by Credit Guarantee Fund Trust
0
for Small Industries (CGTSI) up to the guaranteed portion.
Note: Banks may assign zero risk weight for the
guaranteed portion.
The balance outstanding in excess of the guaranteed
portion would attract a risk-weight as appropriate to the
counter-party.
9. Insurance cover under Business Credit Shield, the product
50
of New India Assurance Company Ltd.
Note: The risk weight of 50% should be limited to the
amount guaranteed and not the entire outstanding
balance in the accounts.
In other words, the outstanding in excess of the amount
guaranteed, will carry 100% risk weight.
10. Advances against term deposits, Life policies, NSCs, IVPs
0
and KVPs where adequate margin is available.
11. Loans and Advances granted to staff of banks which are
fully covered by superannuation benefits and mortgage of 20
flat/house.
12. Housing loans above `30 lakh sanctioned to individuals
against the mortgage of residential housing properties 75
having LTV ratio equal to or less than 75%
Note: If restructured 100
13. Housing loans upto `30 lakhs sanctioned to individuals
against the mortgage of residential housing properties 50
having LTV ratio equal to or less than 75%.

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 BANKING COMPANIES 8.155

Note: If restructured 75
14. Housing loans of ` 75 lakhs and above sanctioned to
125
individuals (irrespective of LTV ratio)
15. Consumer credit including personal loans and
125
credit cards
16. Educational Loans 100
17. Loans up to `.1 lakh against gold and silver
50
ornaments
18. Takeout Finance
(i) Unconditional takeover (in the books of lending
20
institution)
(a) Where full credit risk is assumed by the taking
over institution
(b) Where only partial credit risk is assumed by
taking over institution
(i) the amount to be taken over 20
(ii) the amount not to be taken over 100
(ii) Conditional take-over (in the books of lending and
100
Taking over institution)
19 Advances against shares to individuals for investment in
equity shares (including IPOs/ESOPs), bonds and 125
debentures, units of equity oriented mutual funds, etc.
20 Secured and unsecured advances to stock brokers 125
21 Fund based exposures commercial real estate* 100
22 Funded liquidity facility for securitisation of standard asset
100
transactions
23 NPA purchased from other banks 100
24 Loans & Advances NBFC-NO-SI (other than Asset Finance
100
Companies (AFCs)) &
25 All unrated claims on corporate, long term as well as short
100
term, regardless of the amount of the claim

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 8.156 ADVANCED ACCOUNTING

IV Other Assets
1. Premises, furniture and fixtures 100
2. Income tax deducted at source (net of provision) 0
Advance tax paid (net of provision) 0
Interest due on Government securities 0
Accrued interest on CRR balances and claims on RBI on
account of Government transactions (net of claims of
0
Government/RBI on banks on account of such
transactions)
All other assets # 100

# (i) The exposures to CCPs on account of derivatives trading and securities

financing transactions (e.g. CBLOs, Repos) outstanding against them, will be
assigned zero exposure value for counterparty credit risk, as it is presumed that the
CCPs' exposures to their counterparties are fully collateralised on a daily basis,
thereby providing protection for the CCP's credit risk exposures;
(ii) The deposits / collaterals kept by banks with the CCPs will attract risk weights
appropriate to the nature of the CCP. In the case of CClL, the risk weight will be 20
per cent and for other CCPs, it will be according to the ratings assigned to these
entities as per the New Capital Adequacy Framework.
& As regards claims on AFCs, there is no change in the risk weights, which would
continue to be governed by the credit rating of the AFC, except the claims that
attract a risk weight of 150 per cent under the New Capital Adequacy Framework,
which shall be reduced to a level of 100 per cent.
* It is possible for an exposure to get classified simultaneously into more than one
category, as different classifications are driven by different considerations. In such
cases, the exposure would be reckoned for regulatory / prudential exposure limit,
if any, fixed by RBI or by the bank itself, for all the categories to which the exposure
is assigned. For the purpose of capital adequacy, the largest of the risk weights
applicable among all the categories would be applicable for the exposure.
Securitisation exposures not meeting the requirements prescribed in the
securitisation guidelines dated May 7, 2012 will be risk weighted at the rates
prescribed therein.

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 BANKING COMPANIES 8.157

**The LTV ratio should not exceed the prescribed ceiling in all fresh cases of
sanction. In case the LTV ratio is currently above the ceiling prescribed for any
reasons, efforts should be made to bring it within limits.
@: Commercial Real Estate – Residential Housing (CRE-RH) would consist of loans
to builders/developers for residential housing projects (except for captive
consumption) under CRE segment. Such projects should ordinarily not include non-
residential commercial real estate. However, integrated housing projects comprising
of some commercial space (e.g. shopping complex, school, etc.) can also be classified
under CRE-RH, provided that the commercial area in the residential housing projects
does not exceed 10% of the total Floor Space Index (FSI) of the project. In case the FSI
of the commercial area in the predominantly residential housing complex exceeds the
ceiling of 10%, the project loans should be classified as CRE and not CRE-RH. Banks’
exposure to third dwelling unit onwards to an individual will also be treated as CRE
exposures.
Off-Balance Sheet Items
The credit risk exposure attached to off-Balance Sheet items has to be first
calculated by multiplying the face value of each of the off-Balance Sheet items by
'credit conversion factor' as indicated in the table below. This will then have to be
again multiplied by the weights attributable to the relevant counter-party as
specified above.

Sl. Instruments Credit

No. conversion
factor
1. Direct credit substitutes e.g. general guarantees of 100
indebtedness*
(i) Guarantees for credit facilities
(ii) Guarantees in lieu of repayment of financial securities;
(iii) Guarantees in lieu of margin requirements of exchanges;
(iv) Guarantees for mobilisation advance, advance money
before the commencement of a project and for money to be
received in various stages of project implementation;

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 8.158 ADVANCED ACCOUNTING

(v) Guarantees towards revenue dues, taxes, duties, levies etc.

in favour of Tax/ Customs / Port / Excise Authorities and for
disputed liabilities for litigation pending at courts;
(vi) Credit Enhancements;
(vii) Liquidity facilities for securitisation transactions;
(viii) Acceptances (including endorsements with the character of
acceptance);
(ix) Deferred payment guarantees.
2. Certain transaction-related contingent items (performance 50
Guarantees) ∗
(i) Bid bonds;
(ii) Performance bonds and export performance guarantees;
(iii) Guarantees in lieu of security deposits / earnest money
deposits (EMD) for participating in tenders;
(iv) Retention money guarantees;
(v) Warranties, indemnities and standby letters of credit related
to particular transaction.
3. Short-term self-liquidating trade-related contingencies 20
(such as documentary credits collateralized by the
underlying shipments).
4. Sale and repurchase agreement and asset sales with 100
recourse the credit risk remains with the bank., where
5. Forward asset purchases, forward deposits and partly paid 100
shares and securities, which represent commitments with
certain drawdown.
6. Note issuance facilities and revolving underwriting facilities. 50
7. Other commitments (e.g., formal standby facilities and credit 50
lines) with an original maturity of over one year.
8. Similar commitments with an original maturity upto one 0
year, or which can be unconditionally cancelled at any time.

∗
An indicate list of financial and performance guarantees given under circular no. DBOD. No.
BP. BC.89.21.04.009 dated April 2, 2013.

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 BANKING COMPANIES 8.159

9. Aggregate outstanding foreign exchange contracts of

original maturity -
• less than one year 2
• for each additional year or part thereof 3
10. Take-out Finance in the books of taking-over institution
(i) Unconditional take out finance 100
(ii) Conditional take out finance 50
Note: As the counter-party exposure will determine the risk
weight, it will be 100 percent in respect of all borrowers or
zero percent if covered by Government guarantee.
11. Non-Funded exposures to commercial real estate 150
12. Guarantees issued on behalf of stock brokers and market 125
makers
13. Commitment to provide liquidity facility for secuitisation of 100
standard asset transactions
14. Second loss credit enhancement for securitisation of 100
standard asset transactions provided by third party
15. Non-funded exposure to NBFC-ND-SI 125

NOTE: In regard to off-balance sheet items, the following transactions with non-bank
counterparties will be treated as claims on banks and carry a risk-weight of 20%
Guarantees issued by banks against the counter guarantees of other banks.
Rediscounting of documentary bills accepted by banks. Bills discounted by banks
which have been accepted by another bank will be treated as a funded claim on a bank.
In all the above cases banks should be fully satisfied that the risk exposure is in fact on
the other bank.
Risk weights for Open positions

Sr. No. Item Risk weight (%)

1. Foreign exchange open position. 100
2. Open position in gold 100
Note: The risk weighted position both in respect of foreign
exchange and gold open position limits should be added
to the other risk weighted assets for calculation of CRAR

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 8.160 ADVANCED ACCOUNTING

I.D. Risk weights for Forward Rate Agreement (FRA) / interest Rate Swap (IRS)
For reckoning the minimum capital ratio, the computation of risk weighted assets
on account of FRAs/IRS should be done as per the two steps procedure set out
below:
Step 1
The notional principal amount of each instrument is to be multiplied by the
conversion factor given below:

Original Maturity Conversion Factor

Less than one year 0.5 per cent
One year and less than two years 1.0 per cent
For each additional year 1.0 per cent
Step 2
The adjusted value thus obtained shall be multiplied by the risk weightage allotted
to the relevant counter-party as specified below:

Counter party Risk weight

Banks 20 percent
Central & State Govt. 0 percent
All others 100 percent

II. Overseas operations (applicable only to Indian banks having branches

abroad)
A. Funded Risk Assets
Sr. Item of asset or liability Risk
No. Weight %
(i) Cash 0
(ii) Balances with Monetary Authority 0
(iii) Investments in Government securities 0
(iv) Balances in current account with other banks 20
(v) All other claims on banks including but not limited to funds
loaned in money markets, deposit placements, investments in
CDs/FRNs. Etc. 20
(vi) Investment in non-bank sectors 100

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 BANKING COMPANIES 8.161

(vii) Loans and advances, bills purchased and discounted and other
credit facilities
(a) Claims guaranteed by Government of India. 0
(b) Claims guaranteed by State Governments 0
(c) Claims on public sector undertakings of Government of
100
India.
(d) Claims on public sector undertakings of State Governments 100
(e) Others 100
(viii) All other banking and infrastructural assets 100
B. Non-funded risk assets

Sr. Instruments Credit

No. Conversion
Factor (%)
(i) Direct credit substitutes, e.g. general guarantees of
100
indebtedness
(including standby letters of credit serving as financial
guarantees for loans and securities) and acceptances
(including endorsements with the character of acceptances)
(ii) Certain transaction-related contingent items (e.g.
performance bonds, bid bonds, warranties and standby 50
letters of credit related to particular transactions)
(iii) Short-term self-liquidating trade related contingencies-
such as documentary credits collateralised by the underlying 20
shipments
(iv) Sale and repurchase agreement and asset sales with
100
recourse, where the credit risk remains with the bank.
(v) Forward asset purchases, forward deposits and partly paid
shares and securities, which represent commitments with 100
certain draw down
(vi) Note issuance facilities and revolving underwriting facilities 50
(vii) Other commitments (e.g. formal standby facilities and credit
50
lines) with an original maturity of over one year.
(viii) Similar commitments with an original maturity up to one
0
year, or which can be unconditionally cancelled at any time.

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 8.162 ADVANCED ACCOUNTING

MSE Advances Guaranteed by Credit Guarantee Fund Trust for Micro and
Small Enterprises (CGTMSE) - Risk weights and Provisioning norms
Risk-weight Example I
CGTMSE Cover: 75% of the amount outstanding or 75% of the unsecured amount or
`18.75 lakh, whichever is less
Realisable value of Security : `1.50 lakh
(a) Balance outstanding : `10.00 lakh
(b) Realisable value of security : ` 1.50 lakh
(c) Unsecured amount (a) - (b) : `8.50 lakh
(d) Guaranteed portion (75% of (c) : `6.38 lakh
(e) Uncovered portion (8.50 lakh - 6.38 lakh) : `2.12 lakh
Risk-weight on (b) and (e) Linked to the counter party
Risk-weight on (d) - Zero
Example II
CGTMSE cover: 75% of the amount outstanding or 75% of the unsecured amount or
` 18.75 lakh whichever is less
Realisable value of Security : ` 10.00 lakh.
(a) Balance outstanding : ` 40.00 lakh
(b) Realisable value of security : ` 10.00 lakh
(c) Unsecured amount (a) - (b) : ` 30.00 lakh
(d) Guaranteed portion (max.) : ` 18.75 lakh
(e) Uncovered portion (` 30 lakh-18.75 lakh) : ` 11.25 lakh
Risk-weight (b) and (e) Linked to the counter party
Risk-weight on (d) - Zero

© The Institute of Chartered Accountants of India