A Study of Accounting of Banking Companies
This study paper has been specifically prepared for looking into the accounting aspect of banking form of business. So, for the purpose of the paper, a bank is not merely a financial services provider, it is rather to be taken as some entity being run to carry out some business activity and thus to earn some profit.
In the Indian context, business of banking is largely governed by Banking Regulation Act, 1949 and some other statutes like Reserve bank of India Act, Companies Act, etc. These statutes also provide for accounting aspects of a banking company so an attempt to cover all such provisions to some possible extent has also been made.
:INTRODUCTION:
A developed banking system plays a crucial role in any economy. The banks play the role of financial intermediaries between the ultimate lenders and ultimate borrowers. Since banks mainly play with public money, there is a very strong need of managing their affairs well. The term ‘bank’ is derived from the Latin word ‘banca’ originally referred to as a bench or table on which the moneylenders, the forerunners of financial institutions, used to carry on their business.
In India, the genesis of banking institutions is found in the Culcutta Agency Houses, the trading firms, which undertook banking operations for its constituents. Prominent among these were Messrs Alexander & Co. and Messrs Fergusson & Co. and the bank of Hindustan which was merely an appendage of Messrs Alexander & Co., was the earliest bank started under European Direction in India.
Further, in 1809, the first Presidency Bank i.e. the bank of Bengal was started followed by bank of Bombay in 1840 and Bank of Madras in 1843. These presidency banks were amalgamated into the Imperial bank of India on 27th January, 1921 by the Imperial bank of India Act, 1920. Subsequently in 1955, the Imperial bank of India was converted into State bank of India by the State bank of India Act, 1955.
Banking institutions include commercial banks, savings and loan associations, savings banks, and credit unions. The major differences between these types of banks involve how they are owned and how they manage their assets and liabilities. Assets of banks are typically cash, loans, securities (bonds, but not stocks), and property in which the bank has invested. Liabilities are primarily the deposits received from the bank’s customers. They are known as liabilities because they are still owned by, and can be withdrawn by, the depositors of the Financial institution.
Until the early 1980s, the assets and liabilities of banks were tightly regulated. As a result, clear distinctions existed between the activities and types of services offered by these different types of banks. Although subsequent deregulation in the 1990s blurred these distinctions, differences do remain.
The differences result from a combination of history and politics. For example, depending upon the type of "bank" it may be regulated and supervised by different federal and/or state agencies. While each of the "banks" may seem similar, they enjoy different rights, have different powers and obligations, and may have different tax obligations. For example, "savings and loans" are required to invest more of their assets in mortgages than "banks." Pure "trust companies" manage and administer trust funds of individuals and pension plans, but do not take "deposits." "Credit unions" have some unique tax advantages. Some entities have powers to sell other products, such as insurance; directly or through subsidiaries; some do not. Some have to place significant "reserves" on deposit with the Government; others do not.
The Banking Regulation Act, 1949.
The Banking Companies Act, 1949 was passed to fulfill the long persistent need for consolidated law relating to banking companies. From March 1, 1966 it came to be known as banking Regulation Act, 1949.
â– Meaning of ‘Banking’ and ‘Banking Company’:
According to section 5(b) of the banking Regulation Act, 1949 banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. Further, the section defines the banking company as any company which transects the business of banking in India undertaking any of the functions mentioned in section 6 of the act.
Thus banking means to accept the public money for the purpose of lending or investment. This being the primary function of banking, in the modern age the scope of functions of banks has been very much wide and newer roles are being played by the banks these days.
â– Functions of Banking Company:
According to Section 6 of the banking Regulation Act, 1949 the banking company may carry on any of the following business. It may be noted that below mentioned points are not the exact words of section 6. The section has been interpreted so as to discuss the functions precisely. A. Borrowing or raising of the money for the purpose of lending or advancing of with or without security. B. dealing in bills of exchange, hundies, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants and other securities whether transferable or negotiable or not. C. Granting and issuing of letters of credit, travelers’ cheques and circular notes. D. Dealing in bullions and foreign exchanges
E. Acting as agent of any government or local authority or any other person. F. contracting for public and private loans and negotiations for the same. G. various tasks relating to carrying out an IPO.
H. Guarantee and indemnity business.
I. dealing in properties forming part of the security towards loan J. undertaking and execution of trust.
K. doing all other things that are incidental or conducive to the promotion or advancement of the company. L. Generally, the banking companies are not allowed to enter into any other business except those provided under section 6 but the latest change is that the banks have been allowed to enter into insurance business also.
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â– Types of banks:
Though the banks can be classified in many ways, from accounting point of view, following are the important types of banks that we need to understand.
1. Commercial bank and Central bank:
Banks that mainly deal with industrial and commercial finance along with normal public lending and borrowing functions are called commercial banks. They are generally put to control by the higher authority due to their being highly general and public in nature. A central bank is the apex institution charged with the responsibilities like governing the commercial banks and issuing currency notes. The Indian Central bank is the Reserve Bank of India.
2. Domestic and Foreign bank:
This depends upon the registration of the bank as a company. The banks incorporated under Companies Act, 1956 or any other statutes specifically passed for that sake in India are domestic banks for India like IDBI Bank Limited is not a registered company under Companies Act, 1956 but has been created by the Industrial Development bank of India Act. On the contrary, any banking company having registered outside India is a foreign bank like HSBC.
3. Private or Public banks:
Depending upon the nature of the ownership a bank is termed as private or public bank. Public Banks are also called as nationalized bank where entire capital is owned by the central/state government. The banks having private entrepreneurs as owners are called as private banks.
4. Scheduled and Unscheduled bank:
The banks which are included in the 2nd schedule of the Reserve Bank of India Act, 1934 are called scheduled banks and others are unscheduled banks.
â– Prohibition of Trading:
According to section 8, a banking co. is not allowed to deal directly or indirectly in buying or selling of goods except in case of bills of exchange received through collection or negotiation.
â– Licensing Requirements:
No banking company can carry on banking business in India except it holds a license issued by the Reserve Bank of India. Such permission is also needed to open a new place of banking business.
â– Disposal of Immovable Properties:
A banking company must dispose off any immovable assets howsoever acquired except those as required for its own use within seven years of acquisition.
: Accounting Requirements :
â– Books of Accounts:
According to section 2(3) of Bankers’ Books Evidence Act, the books of accounts of a banking company may include following bankers’ books: A. Cash Book: All cash receipts and payments are recorded in receiving cashier’s cash book and paying cashier’s cash book respectively. After this, on the basis of pay-in slips received by the receiving cashier and cheques and withdrawal slips with payment cashier, these transactions are entered first in the accounts of customers and after that Day Book is written. This is called SLIP SYSTEM OF POSTING. It helps in timely posting of transaction to keep the customers’ accounts updated.
B. Ledger Book: To serve the purpose of the internal check, all the ledgers are kept on the basis of SELF BALANCING SYSTEM OF LEDGER KEEPING. General Ledger contains the total accounts of each ledger. The total of balances of individual accounts taken from particular ledger, are compared periodically with total ledger. Besides General Ledger, following ledgers are maintained: 1. Current Account Ledger.
2. Saving Bank Account Ledger.
3. Fixed Deposits Account Ledger.
4. Recurring Deposits Account Ledger.
5. Loan Ledger.
6. Bills Discounted and Purchased Ledger.
C. Other Books:
Apart from above books which are necessary for maintenance of records on double entry system, it is necessary for a banking company to maintain following register.
1. Clearing Register.
2. Security Register.
3. Standing Order Register.
4. Draft Register.
5. Bills for collection Register.
6. Safe Deposit Vaults Register.
7. Dishonoured Cheques Register.
â– Other Disclosures that should form a part of notes on accounts: A. Capital adequacy ratio.
B. Percentage of shareholding of Government of India (in case of nationalized banks) C. Percentage of net NPA to net advances.
D. Amount of provision made towards NPA, Depreciation in the value of investments and income tax during the year. E. Amount of subordinate debts raised as tier-II capital.
F. The gross value of investments in India and outside India. G. Interest income as percentage to working capital funds.
H. Non- Interest income as percentage to working capital funds. I. Operating profit as percentage to working capital funds.
J. Return on Assets.
K. Business (deposits + advances) per employee.
L. Profit per Employee.
â– Some peculiar points involved in preparation of final accounts of banking companies: In the following paragraphs, some out of blue points which one has to come across while undertaking final accounts of banking companies have been briefed:
A. Collection of Bills of Customers:
Bills or Bills of Exchanges are negotiable instruments representing claim of the drawer on the acceptor payable on some maturity date. One of the peculiar functions of the banks is to collect such bills of the customers on behalf of them and discounting them by remitting money to the customers before maturity date against some nominal discount.
A separate record is kept for such bills in subsidiary books called Bills for Collection. Normal practice is to make the accounting entry only when such bills are collected from the acceptor by debiting the cash account and crediting the respective customer’s account. Bills pending for collection at the end of the year are shown as footnotes to the balance sheet.
Another way, is to prepare “Bills for Collection (assets) a/c” and “Bills for Collection (liabilities) a/c” at the very time of receiving of the bills. In such a situation, the trial balance sheet will have two bills for collection accounts on Dr. and Cr. Sides. However in Balance Sheet, they are cancelled out and bills for collection appears as footnote only. Let us take a practical example for better understanding.
END NOTE:
In all, most of the accounting procedures for banking companies are regulated by the statutes like Banking Regulation Act, 1949, Reserve Bank of India Act, 1934 and bankers’ Book Evidence Act etc. This study paper basically aimed at outlining the form and contents of the financial statements to be prepared by a banking company. And I hope that the reader will find himself in some informed state of mind after reading the study paper. BIBLIOGRAPHY:
Following reference readings were highly value-additives to this study paper: 1. Banking Regulation Act, 1949 – Bare Act.
2. Reserve bank of India Act, 1934 – bare Act.
3. Bankers’ Book Evidence Act, 1891 – Bare Act.
4. TANNAN’S Banking law and Practise edition 2005.
5. Advanced Accounting II by Deepak Sehgal & Ashok Sehgal.
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