UNIT 1

FINAL ACCOUNTS OF BANKING COMPANIES

1.1. MEANING OF BANKING

Banks are vital to the prosperity and well-being of any society or country. Banks enable a society to create the platform for the satisfaction of wants of its people by managing and maintaining the flow of money to carry out transactions. The role of banks may be likened to the heart in a human being, circulating and managing money through the economy, thereby playing a crucial role for its good health.

Banks in India and their activities are regulated by the Banking Regulation Act, 1949.

Banking: Under Section 5(b) of the said Act “Banking” means,

1. Accepting deposits of money from public for the purpose of lending or investing
2. These deposits are repayable on demand or otherwise, and can be withdrawn by cheque, draft or otherwise.

Banking Company: Any bank which transacts this business as stated in section 5

(b) Of the act in India is called a banking company. However merely accepting public deposits by a company for financing its own business shall not make it a bank. It may be mentioned that the Banking Regulation Act, 1949 is not applicable to a primary agricultural society, a co-operative land mortgage bank and any other co- operative society.

Types of Banks

There are two main categories of Commercial Bank in India namely:-

• Scheduled Commercial Bank
• Scheduled Co-operative Bank

Scheduled Commercial Banks are again divided into five types and the Scheduled Co-operative Banks into two are as follows:

Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. After May 1997 there  are no non-scheduled commercial banks existing in India. However, there are small to tiny non-scheduled Urban Co-operative Banks.

The banks included in this schedule list should fulfill following two conditions:

1. The paid up capital and reserves in aggregate should not be less than Rs 5 lakhs.
2. Any activity of the bank will not adversely affect the interests of depositors.

The Reserve Bank includes a bank in this schedule if it fulfils certain other conditions too.

The RBI as the Central Bank is the ‘Bank of Last Resort’ i.e. when other commercial banks are in trouble RBI helps them out. The services provided by RBI to scheduled commercial banks include the following:

1. The purchase, sale, and re-discounting of certain bills of exchange, or promissory notes.
2. Purchase and sale of foreign exchange.
3. Purchase, sale and re-discounting of foreign bills of exchange.
4. Making of loans and advances to scheduled banks.
5. Maintenance of accounts of the scheduled bank in its banking department and issue department.
6. Remittance of money between different branches of scheduled banks through the offices, branches or agencies of Reserve Bank free of cost or at nominal rates.

Functions of a Commercial Bank

Some of the main functions of modern commercial banks are:

1. Receiving of money on deposit and providing facilities to constituents for payments by cheque.
2. Dealing in securities on its own account and on account of customers.
3. Lending of money by -

1. Making loans and advances,
2. Purchasing or discounting of bills.

4.      Transferring money from place to place by -

1. The issue of demand drafts, telegraphic transfers, traveler’s cheques, etc.,
2. Collection of bills.

5.      Issuing letters of credit.

6.      Safe custody of securities and valuables.

7.      Issuing guarantees.

8.      Acting as executors and trustees sometimes through subsidiary companies formed for that purpose.

9.      Buying, selling and dealing in foreign exchange.

10.  Acting as managers for issue of capital by companies and performing functions incidental thereto.

1.2. CAPITAL AND RESERVE

Requirement as to minimum paid-up capital and reserve (Section 11):

1. No banking company in existence on the commencement of this Act, shall, after the expiry of three years from such commencement or of such further period not exceeding one year as the Reserve Bank, having regard to the interests of the depositors of the company, may think fit in any particular case to allow, carry on business in India, and no other banking company shall after the commencement of this Act, commence or carry on business  in  India  unless it complies with such of  the requirements of this section as are applicable to it.
2. In the case of a banking company incorporated outside India-

1. The aggregate value of its paid-up capital and reserves shall not be less than fifteen lakhs of rupees and if it has a place or places of business in the city of Bombay or Calcutta or both, twenty lakhs of rupees; and
2. The banking company shall deposit and keep deposited with the Reserve Bank either in cash or in  the  form  of  unencumbered approved securities,  or partly in cash and partly in the form of such securities-

1. An amount which shall not be less than the minimum required by clause (a); and
2. As soon as may be after the expiration of each year, an amount calculated at twenty percent of its profit for that year in respect of all business transacted through its branches in India, as disclosed in the profit and loss account prepared with reference to that year under section 29

PROVIDED that any such banking company may at any time replace-

1. Any securities so deposited by cash or by any other unencumbered approved securities or partly by cash and partly by other such securities, so however, that the total amount deposited is not affected;
2. Any cash so deposited by unencumbered approved securities of an equal value.

3.      In the case of any banking company to which the provisions of sub-section (2)do not apply, the aggregate value of its paid-up capital and reserves shall not be less than-

1. If it has places of business in more than one State, five lakhs of rupees, and if any such place or places of business is or are situated in the city of Bombay  or Calcutta or both, ten lakhs of rupees;
2. If it has all its places of business in one State none of which is situated in the city of Bombay or Calcutta, one lakh of rupees in respect of its principal place of business, plus  ten thousand rupees in respect of each of its other places of business situated in the same district in which it has its principal place of business, plus twenty-five thousand rupees in respect of each place of business situated elsewhere in the State otherwise than in the same district.an aggregate value of fifty thousand rupees.

Iii.            if it has all its places of business in one State, one or more of which is or are situated in the city of Bombay or Calcutta, five lakhs of rupees, plus twenty- five thousand rupees in respect of each  place of business situated outside the city of Bombay or Calcutta, as the case may be.

4.      Any amount deposited and kept deposited with the Reserve Bank by any banking company incorporated [outside India] shall, in the event of the company ceasing for any reason to carry on banking business [in India], be an asset of the company on which the claims of all the creditors of the company  [in India]  shall be a first charge.

Regulation relating to authorized capital, subscribed capital and paid-up capital (Section 12): The subscribed capital of a banking company carrying on business in India shall not be less than one-half of the authorised capital and the paid-up capital shall not be less than one-half of the subscribed capital. The capital of the banking company consists of ordinary shares only; or of ordinary shares or equity shares and such preference shares which have been issued prior to the first day of July, 1944. The voting right of any single shareholder on a poll cannot exceed 10% of the total voting rights.

Restriction on commission, brokerage, discount, etc., on sale of shares: Under section 13 of the Banking Regulation Act, 1949, a banking company cannot pay out directly or indirectly commission, brokerage, discount, or remuneration in respect of any shares issued by it, an amount exceeding two and one-half per cent of the paid-up value of such shares.

1.3. RESERVE FUNDS (SECTION 17)

Every banking company incorporated in India is required to create a Reserve Fund and to transfer at least 20% of its profit to the reserve fund. The profit of the year as per the profit and loss account prepared under Section 29 is to be taken as base for the purpose of such transfer and transfer to reserve fund should be made before declaration of any dividend.

If any banking company makes any appropriation from the reserve fund or share premium account, it has to report to the Reserve Bank of India the reasons for such appropriation within 21 days.

1.4. CASH RESERVE (SECTION 18)

For smoothly meeting cash payment requirement, banks have to maintain certain minimum ready cash balances at all times. This is called as Cash Reserve Ratio (CRR)

Cash reserve can be maintained by way of either a cash reserve with itself or as balance in a current account with the Reserve Bank of India or by way of net balance in current accounts or in one or more of the aforesaid ways.

Every Scheduled Commercial Bank has to maintain cash reserve ratio (i.e. CRR) as per direction of the RBI issued under Section 42(IA) of the Reserve Bank of India Act, 1934.

The current Cash Reserve Ratio (CRR) is 4% of their Net Demand and Time Liabilities (NDTL) with effect from the fortnight beginning February 09. The Local Area Banks shall also maintain CRR at 4.00 per cent of its net demand and time liabilities from the fortnight beginning from February 09, 2013.

Demand and Time Liabilities

Demand Liabilities of a bank are liabilities which are payable on demand. These include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic Transfers (TTs), Mail Transfers (MTs), Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand. Money at Call and Short Notice from outside the Banking System should be shown against liability to others.

Time Liabilities of a bank are those which are payable otherwise than on demand. These include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit, if not payable on demand, deposits held as securities for advances which are not payable on demand and Gold deposits.

Other Demand and Time Liabilities (ODTL)

These include interest accrued on deposits, bills payable, unpaid dividends, suspense account balances representing amounts due to other banks or public, net credit balances in branch adjustment account, any amounts due to the banking system which are not in the nature of deposits or borrowing. Such liabilities may arise due to items like (i) collection of bills on behalf of other banks, (ii) interest due to other banks and so on. If a bank cannot segregate the liabilities to the banking system, from the total of ODTL, the entire ODTL may be shown against item II (c) 'Other Demand and Time Liabilities' of the return in Form 'A' and average CRR maintained on it by all SCBs.

Participation Certificates issued to other banks, the balances outstanding in the blocked account pertaining to segregated outstanding credit entries for more than 5 years in inter-branch adjustment account, the margin money on bills purchased/ discounted and gold borrowed by banks from abroad, also should be included in ODTL.

Cash collaterals received under collateralized derivative transactions should be included in the bank’s DTL/NDTL for the purpose of reserve requirements as these are in the nature of ‘outside liabilities’.

1.5. LIQUIDITY NORMS (SECTION 24)

Banking companies have to maintain sufficient liquid assets in the normal course of business called as Statutory Liquidity Ratio (SLR). This safeguards the interest of depositors and prevents banks from over-extending their resources, liquidity norms have been settled and given statutory recognition.

Every banking company has to maintain the SLR in the form of:

1. Cash
2. Gold
3. Unencumbered approved securities.

The above assets have to be held at the close of business on any day and shall be valued at a price not exceeding the current market price of the above assets.

The percentage of SLR is changed by the Reserve Bank of India from time to time considering the general economic conditions. This is in addition to the Cash Reserve Ratio balance which a scheduled bank is required to maintain under Section 42 of the Reserve Bank of India Act.

Maintenance of Statutory Liquidity Ratio (SLR)

In exercise of the powers conferred by sub-section (2A) of Section 24 read with Section 51 and Section 56 of the Banking Regulation Act, 1949 (10 of 1949, the Reserve Bank hereby specifies that:

1. 19.25 per cent from January 5, 2019
2. 19.00 per cent from April 13, 2019
3. 18.75 per cent from July 6, 2019
4. 18.50 per cent from October 12, 2019
5. 18.25 per cent from January 4, 2020
6. 18.00 per cent from April 11, 2020

Of their total net demand and time liabilities in India as on the last Friday of the second preceding fortnight, valued in accordance with the method of valuation specified by the Reserve Bank from time to time; and Such SLR assets shall be maintained by Scheduled Commercial Banks (Including Regional Rural Banks), Local Area Banks, Small Finance Banks and Payments Banks, as -

1. Cash; or
2. Gold as defined in Section 5(g) of the Banking Regulation Act, 1949 (10 of 1949) valued at a price not exceeding the current market price: or
3. Unencumbered investment in any of the following instruments [hereinafter referred to as Statutory Liquidity Ratio securities (arket price: or Payments Ban Dated securities of the Government of India issued from time to time under the Market Borrowing Programme and the Market Stabilization Scheme ; or Treasury Bills of the Government of India; or State Development Loans (SDLs) of the State Governments issued from time to time under the market borrowing programme:

d.     the deposit and unencumbered approved securities required, under sub- section (2) of section 11 of the Banking Regulation Act, 1949(10 of 1949), to be made with the Reserve Bank by a banking company incorporated outside India;

e.      any balance maintained by a scheduled bank with the Reserve Bank in excess of the balance required to be maintained by it under section 42 of the Reserve Bank of India Act,1934 (2 of 1934);

Following securities shall not be treated as encumbered for the purpose of maintenance of SLR assets, namely:-

1. Securities lodged with another institution for an advance or any other credit arrangement to the extent to which such securities have not been drawn against or availed of;
2. Securities offered as collateral to the Reserve Bank for availing liquidity assistance under Marginal Standing Facility (MSF), up to the permissible percentage of the total NDTL in India, carved out of the required SLR portfolio of the bank concerned; and
3. Securities offered as collateral to the Reserve Bank for availing liquidity assistance under Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR).

1.6. ACCOUNTS

At the end of each calendar year or at the expiration of twelve months ending on such date as the Central Government may specify in this regard, every banking company incorporated in India, in respect of business transacted by it, and every banking company incorporated outside India, in respect of business transacted by its branches in India, shall prepare with reference to that year or period, a Balance Sheet (Form A) and Profit and Loss Account (Form B) as on the last working day of that year or the period in the forms set out in the Third Schedule of Banking Regulation Act.

The Balance Sheet and the Profit and Loss Account must be signed by the manager or principal officer and by at least three directors or all directors if there are not more than three directors in case of a banking company incorporated in India. In case of a banking company incorporated outside India, the statement of accounts must be signed by the manager or agent of the principal office of the company in India. In addition to the above, the Reserve Bank of India has also issued Master Circular on Disclosures to be made in the Financial Statement of these Companies.

1.7. FORM OF BALANCE SHEET AND PROFIT & LOSS ACCOUNT

The Committee under the Chairmanship of Shri A. Ghosh, Deputy Governor, RBI, after due deliberation suggested suitable changes/amendments in the forms of balance sheet and profit and loss account of banks, having regard to:

1. Need for better disclosure
2. Expansion of banking operations both area-wise and sector-wise over the period
3. Need for improving the presentation of accounts etc.

The formats are given below as specified in Banking Regulation Act in Form A of Balance Sheet, Form B of Profit and Loss Account and eighteen other schedules of which the last two relates to Notes and Accounting Policies.

New Revised Formats

The Third Schedule (See Section 29)

Form ‘A’

Form of Balance Sheet

Balance Sheet of (here enter name of the Banking company)

Balance Sheet as on 31st March (Year)

Form ‘B’

Form of Profit & Loss Account for the year ended 31st March

Schedules forming a part of Balance Sheet

Schedules forming a part of Profit & Loss A/c

1.8. DISCLOSURE OF ACCOUNTING POLICIES

In order to bring the true financial position of banks to pointed focus and enable the users of financial statements to study and have a meaningful comparison of their positions, the banks should disclose the accounting policies regarding key areas of operation at one place along with notes on accounting in their financial statements. The RBI has taken several steps from time to time to enhance the transparency in the operations of banks by stipulating comprehensive disclosures in tune with international best practices. The RBI has prescribed the following additional disclosures in the ‘Notes to accounts’ in the banks’ balance sheets, from the year ending March, 2010:

1. Concentration of Deposits, Advanced, Exposures and NPAs;
2. Sector-wise NPAs;
3. Movement of NPAs;
4. Overseas assets, NPAs and revenue;
5. Off-balance sheet SPVs sponsored by banks.

1.9. INCOME RECOGNITION

Bulk of a banks’ income is from two sources:-

1. Interest earned on Loans & Advances extended to its customers.
2. Discount and commission earned handling Bills of Exchange and Non-Funded advances like Letter of Credit (LC), Letter of Guarantee (LG) etc.

Income recognition for interest earned is a function of classification of the Bank loans & advances (i.e. its Assets into Performing & Non-Performing Assets (NPA’s)). For Performing assets income is recognised as it is earned i.e. accrued. It is an essential condition for accrual of income that it should not be unreasonable to expect its ultimate collection. For Non-Performing assets interest income is not considered on accrual basis and it is recognised only when it is actually received. Basically an NPA is a bad and doubtful debt.

An asset becomes non-performing when the bank does not receive income from it for a certain period. In concept, any credit facility (assets) becomes non-performing “when it ceases to generate income for a bank.”

Income from non-performing assets can only be accounted for as and when it is actually received. The Accounting Standard 9 (AS 9) on ‘Revenue Recognition' issued by the Institute of Chartered Accountants of India (ICAI) requires that the revenue that arises from the use, by others, of enterprise resources yielding interest should be recognized only when there is no significant uncertainty as to its measurability or collectability.

1.10. IDENTIFICATION OF NPA

The Reserve Bank of India has issued detailed guidelines to banks regarding the classification of advances between performing and non-performing assets which are revised from time to time. The latest guidelines for identifying an NPA’s are:

1. Bills purchased and discounted become NPA if interest and / or instalment of principal remain overdue for a period exceeding 90 days.
2. Term Loans become NPA if their amount (interest or principal) remain overdue wholly or partly for a period exceeding 90 days.
3. A cash credit / overdraft account is treated as NPA if it becomes out of order. An account is deemed to be out of order if the outstanding balance remains continuously in excess of the sanctioned borrowing power or though the outstanding balance remains below the sanctioned borrowing power, there have been no credits in the account for a continuous period of more than 90 days prior to the Balance Sheet date or where the credits have not been enough to cover the interest debited during the same period. Therefore, an account is treated as 'out  of order' if any of the following conditions are satisfied:

1. The outstanding balance remains continuously in excess of the sanctioned limit/drawing power for a continuous period of 90 days prior to the Balance Sheet date
2. Though the outstanding balance is less than the sanctioned limit/drawing power –

1. There have been no credits for a continuous period of more than 90 days prior to the date of balance sheet; or
2. Credits during the aforesaid period are not enough to cover the interest debited during the same period.

c.      Further any amount due to the bank under any credit facility is ‘overdue’ if it   is not paid on the due date fixed by the bank.

4.      Agricultural Advances: Advances granted for agriculture purposes becomes NPA if interest and/or installment of principal remains overdue for two crop seasons in case of short duration crops and a loan granted for long duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for one crop season. Crops having crop season of more than one year i.e. upto the period of harvesting the crops raised will be termed as ‘long duration” crops and other crops will be treated as “short duration” crops.

5.      Securitisation transactions: Such transactions become NPA when the amount of liquidity facility remains overdue for more than 90 days.

6.      Derivative transactions: Such transactions become NPA when the overdue receivables representing positive mark to market value of a derivative contract remain unpaid for a period of 90 days from the specified due date for payment.

7.      Government    guaranteed    advances:    The     credit     facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. This exemption from classification of Government guaranteed advances as NPA is not for the purpose of recognition of income. The requirement of invocation of  guarantee  has been delinked for deciding the asset classification and provisioning requirements in respect of State Government guaranteed exposures. With effect from the year ending 31 March 2006 State Government guaranteed advances and investments in State Government guaranteed securities would attract asset classification and provisioning norms if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days.

8.      Advances to Staff: As in the case of project finance, in respect of housing loans or similar advances granted to staff members where interest is payable after recovery of principal, the overdue status (in respect of payment of interest) should be reckoned from the date when there is default in payment of interest or repayment of installment of principal on due date of payment.

9.      Take-out Finance: In the case of take-out finance arrangement, the lending bank should apply the prudential norms in the usual manner so long as the account remains on its banks.

10. Advances Guaranteed by EXIM Bank: In the case of advances covered under the guarantee-cum-refinance programme of EXIM Bank, to the extent payment has been received by the bank from the EXIM Bank, the advance may not be treated as NPA. The balance should, however, be treated as NPA (if the conditions for treating it as NPA are satisfied).

11. Consortium Advances: Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the  other  member  banks and  therefore,  be  treated  as NPA.  The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books.

12. Advances Secured Against Certain Instruments: Advances secured against term deposits, national savings certificates (NSCs) eligible for surrender, Indira Vikas Patras, Kisan Vikas Patras and life insurance policies have been exempted from the above guidelines. Thus, interest on such advances may be taken to income account on due dates provided adequate margin is available in the respective accounts. Advances against gold ornaments, government securities and all other securities are not covered by this exemption.

Interest Application

On an account turning NPA, banks should reverse the interest already charged and not collected by debiting Profit and Loss account, and stop further application of interest. However, banks may continue to record such accrued interest in a Memorandum account in their books. For the purpose of computing Gross Advances, interest recorded in the Memorandum account should not be taken into account.

In the account books of the bank, a customer’s loan account is debited with the amount lent to him and the interest accrued thereon is also entered in the debit side of his account. This procedure is followed when the financial position of the customer is good and he will be in a position to return the money on maturity date; the journal entry is :

Debit: Customer’s Loan Account

Credit: Interest Account

1.11.  CLASSIFICATION OF BANK ADVANCES ON BASIS OF PERFORMANCE

The Banks have to classify their advances into two broad groups:

1. Performing Assets

2. Non-Performing Assets

Performing assets are also called as Standard Assets. The Non-Performing Assets is again classified into three groups and they are

1. Sub-standard Assets
2. Doubtful assets &
3. Loss Assets

Performing Assets:

Standard Assets - Standard assets are those which do not disclose any problems and which does not carry more than normal risk attached to the business.

Non-Performing Assets (NPA):

1. Sub-standard Assets- A Sub-standard asset is one which has been classified as an NPA for a period not exceeding 12 months.

In such cases, the current net worth of the borrower/guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the bank in full. In other words, such an asset will have well-defined credit weaknesses that jeopardise the repayment of the debt and are characterised by the possibility that the bank would sustain some loss, if deficiencies are not corrected.

2.      Doubtful Assets- An asset would be classified as doubtful if it has remained in the substandard category for a period of at least 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable.

As per RBI guideline, loan upon becoming an NPA would first be classified as sub-standard for a period not exceeding 12 months and beyond that it would have to be classified as DOUBTFUL. The doubtful assets are further categorised into Doubtful-1, Doubtful-2 and Doubtful-3 on the basis of their ageing from the date of classification of NPA.

3.      Loss Assets- A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspectors but the amount has not been written off, wholly or partly. In other words, such an asset is considered uncollectible or if collected of such little value that its continuance as a bank asset is not warranted although there may be some salvage or recovery value.

It may be noted that the above classification is meant for the purpose of computing the amount of provision to be made in respect of advances and not for the purpose of presentation of advances in the balance sheet. The balance sheet presentation of advances is governed by the Third Schedule to the Banking Regulation Act, 1949, which requires classification of advances altogether differently.

1.12. PROVISIONS

Rates of Provisioning for Sub- standard, Doubtful and Loss Advances are as follows:

1.13. DISCOUNTING, COLLECTION & ACCEPTANCE

With reference to Bills, a banking company performs the following functions:

1. Discounting of bills

2. Collection of bills

3. Acceptances on behalf of customers

Discounting

A bank may straight away purchase a Bill (Discounting). In this case after reducing discount charges, the balance amount is credited to the account of the customer. The total of both is debited to ‘Bills purchased and discounted account’. This account is an Asset. For example, a person holds a bill of exchange duly accepted by his customer for retirement after 90 days. He may either wait for 90 days or have the same bill discounted with his banker who will credit the amount under a bill after deducting the discounting charges, to his account with the bank. On due date the bank will retire the bill with the customer and get his payment.

Rebate on Bills Discounted

Banks discount hundreds of bills every day and when someone gets a bill discounted, the bank credits the discount account with the fall amount of the discount, the bank will earn in respect of that bill. But in practice, it frequently happens that some of these bills will not mature by the close of the accounting year. The portion of the discount which relates to the period falling after the close of the accounting period is called 'rebate on bills discounted', or 'unearned discount'.

Example

A customer discounted a four month's bill from bank on 1st March and bank charged Rs 800 as discount. Accounts are closed on 31st March every Year. The date or maturity of the bill is 31st June. In this transaction the bank must have credited the discount account with Rs 800 on 1st March. But out of this, the discount for the months of April, May and June is not actually earned. Unearned discount for these three months @ Rs 200 per month amounts to Rs 600. This is the income which is related to the next accounting period and is called 'income received but not earned. It is also termed as 'rebate on bills discounted' or 'unexpired discount' or 'discount received in advance'.

Since discount on bill discounted is an income for the bank and is shown in the Profit & Loss Account under schedule 13, the amount of unexpired discount, if given in the adjustments, is deducted from schedule 13 and is also shown on the liabilities side of the balance sheet in the item 'other liabilities and provisions' in schedule 15. Following entry is made for the adjustment:

Discount A/c Dr.

To Rebate on Bills Discounted A/c

(For adjustment of unexpired discount)

Note: However, if the account of unexpired discount is given inside the trial balance, it is shown only in the balance sheet.

The Rebate A/c is shown on the liability side of the Balance Sheet as income received which has not accrued before the close of the year. Immediately on commencement of next financial year the Rebate A/c is closed by transfer to the credit of Discount A/c.

Collection of Bills

One of the services provided by banks to their customers is to collect the dues against Bills of Exchange from their customers on the due dates. Where the bills have been discounted the proceeds of such bills on due date are treated as incomes of the bank. On the other hand, if bills have not been discounted, the proceeds on the same on maturity are credited to the account of the customer. The particulars will be recorded in a separate book called Bills for Collection Register. Bills sent for collection have to be shown by way of Note as per Third Schedule.

Two Accounts have to be opened. They are mirror images of each other. They are:

(i)                 Bills for Collection (Asset)

(ii)               Bills for Collection (Liability)

Acceptance and Endorsement

A bank has more acceptable credit as compared to that of its customer, because of this, more often, the bank is called to accept or endorse a bill on behalf of its customers. The bank has to honour this acceptance on behalf of its client only in the event of a client failing to honour the bill on the due date.

As against this liability, the bank has a corresponding claim against the customer on whose behalf it has undertaken to be a party to the bill, either as an acceptor or as an endorser.

Such Acceptance (Liabilities) which are outstanding at the close of the year and the corresponding asset (security) is disclosed as Contingent liability. As a safeguard against the customer not being able to meet the demand of the bank in this respect, usually the bank requires the customer to deposit a security equivalent to the amount of the bill accepted on his behalf.

If the bill, at the end of its term, has to be retired by the bank and the amount cannot be collected from the customer on demand, the bank reimburses itself by disposing of the security deposited by the customer.

1.14. INTRODUCTION TO CORE BANKING SYSTEM

Core banking is normally defined as the business conducted by a banking institution with its retail and small business customers. Many banks treat the retail customers as their core banking customers and have a separate line of business to manage small business. Larger business is handled by the corporate banking division of the institution. Core banking basically is depositing and lending of money.

Now a days, most banks use core banking applications to support their operations where ‘CORE’ stands for “Centralized Online Real-time Environment”. This basically means that all the bank’s branches access applications from centralized data centres. It means that the deposits made are reflected immediately on the servers of bank and the customer can withdraw the deposited money from any of the branches of bank throughout the world. These applications now also have the capability to address the needs of corporate customers providing a comprehensive banking solution. Normal core banking functions will include deposit accounts, loans, mortgages and payments. Banks make these services available across multiple channels like ATMs, internet banking and branches.

Features of Core Banking

1. Customer relationship management features including a 360 degree customer view.

2. The ability to originate new products and customers.

3. Banking analytics including risk analysis, profitability analysis and provisions for capital reserve allocation and collateral management.

4. Banking finance including general ledger and reporting.

5. Banking channels such as teller systems, side counter applications, mobile banking and online banking solutions.

6. Best practice workflow process.

7. Content management facilities.

8. Governance and compliance capabilities such as internal controls management and auditing.

9. Security control and audit capabilities.

10. Core banking solutions to help maximize growth, increase productivity and mitigate risk.

Advantages of Core Banking

1. Limited Professional Manpower to be utilized more effectively.

2. Customer can have anywhere, more convenient and easier banking.

3. ATM, Interest Banking, Mobile Banking, Payment Gateways etc. are available.

4. More strong and economical way of management information system.

5. Reduction in branch manpower.

6. Additional manpower can be available for marketing, recovery and personalized banking.

7. Instant information available for decision support.

8. Quick and accurate implementation of policies.

9. Improved Recovery Process causing reduction on recovery costs, NPA provisions.

10. Innovative, redefined or improved processes i.e. Inter Branch Reconciliation causing reduction in manpower at Head Office.

11. Reduction in software maintenance at branch and Head office.

12. Centralized printing and backup resulting in reduction in capital and revenue expenditure on printing and backup devices and media at branches.

13. Electronic Transactions with other Financial Institutions.

14. Increased speed in working resulting in more business opportunities and reduction in penalties and legal expenses.