Bank Financial Statements

The financial health of any business organisation is reflected in the financial

statements it prepares at periodical intervals. The effect of the business transactions
that the enterprise conducted during a period are summarised and revealed in the
form of profit and loss account and balance sheet prepared at the end of that period.
A widely accepted concept in financial management is that “risk and return go
together”. Without willingness to assume the risks associated with its business no
enterprise can dream to secure return on its investment. How far the enterprise was
successful in undertaking judicial risks is shown as surplus in the profit and loss
account and as growth in the balance sheet.
The above statement made in general to all business enterprises applies with
greater intensity to banks. Banks deal in cash and claims, involving risk at a higher
level than other forms of business. The term “bankable risk” with reference to bank
lending was in vogue for a long term when “risk management in banks” started
gaining currency. Bank balance sheets have been subject to study and scrutiny by a
wider range of people including regulators, investors and economists.

F O R M AT O F B A N K B A L A N C E S H E E T

Banks in India are required to publish their final accounts, comprising of balance
sheet and profit and loss account as per the format given under the third schedule to
the Banking Regulation Act, 1949. The balance sheet is to be presented in an
abridged form containing 5 items of liabilities, 6 items of assets and 1 item relating to
contingent liabilities. Details of each of these major items are to be furnished in
respective schedules. Thus, the details of the balance sheet are furnished in
Schedules 1 to 12 attached to the final accounts. The profit and loss account
comprises 4 items with corresponding schedules. In addition Schedule 17 relating to
the Notes on Accounts and Schedule 18 relating to Significant Accounting Policies has
also been prescribed.
The format of a bank balance sheet is given below.
Balance Sheet of ………………. Bank
Schedu (Curre (Previo
le No. nt us
year) year)
Capital and Liabilities
Capital 1
Reserves and Surplus 2
Deposits 3
Borrowings 4
Other Liabilities and Provisions 5
Total
Assets
Cash and Balances with Reserve Bank of India 6
Balances with banks and money at call and short 7
notice 8
Investments .9
Advances 10
Fixed Assets 11
Other Assets
Total
Contingent Liabilities 12
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Bills for Collection

BANK LIABILITIES

Liabilities indicate the sources from which a bank was raised resources. It includes
the resources contributed by the owners and that from external sources. The
liabilities are classified under the following heads:
(a) Capital
(b) Reserves and Surplus
(c) Deposits
(d) Borrowings
(e) Other Liabilities and Provisions

CAPITAL
Capital represents the contribution by the owners of the bank. For the nationalised
banks capital will include the contribution from the Government, if any, for
participation in World Bank projects. For a banking company incorporated outside
India and having branches in India, capital will be the amount brought in by it as start
up capital as prescribed by Reserve Bank of India. In addition, the capital will include
the amount of deposit kept with Reserve Bank under Section 11(2) of the Banking
Regulation Act, 1949. According to this section, a bank incorporated outside India is
required to keep in deposit with Reserve Bank either in cash or in the form of
unencumbered approved securities or both.
Banks are required to show the authorised, issued, subscribed and called up
capital separately. Section 12 of the Act provides that the subscribed capital of a
banking company should not be less than one half of its authorised capital and the
paid-up capital should not be less than one half of its subscribed capital. The object is
to ensure that a banking company does not commence its business with
disproportionate authorised capital, which may create a wrong impression about the
financial strength of the bank.
To arrive at the paid up capital, which is the actual amount received as capital,
calls in arrears should be deducted from called up capital, and the paid up value of
the forfeited shares should be added. Banks are required to meet the minimum
capital requirements prescribed by Reserve Bank.

RESERVES AND SURPLUS

Reserve represents the amount set apart from profits or certain capital receipts or by
revaluation of assets. In a bank balance sheet, the heading reserves and surplus
comprises of (a) statutory reserves, (b) capital reserves, (c) share premium, (d)
revenue and other reserves, and (e) balance in profit and loss account.
Statutory reserve includes reserve created in terms of Section 17 of the Banking
Regulation Act. Under this Section, every banking company should transfer 20% of
profit before declaring any dividend every to a reserve called Statutory Reserve. If
the aggregate amount of reserve and share premium is not less than the paid up
capital, a bank may be exempted by the Central Government from this restriction.
Capital reserve includes reserves not regarded as free for distribution through
the profit and loss account. Surplus on revaluation of fixed assets will be a capital
reserve. If a bank had provided excessive depreciation on an investment, and wants
to set it right, the surplus will be included in the capital reserve.
Share premium is the premium on issue of share capital by the bank.
Revenue and other reserves include all reserves other than those separately
classified. Revenue reserve is defined as any reserve other than capital reserve. It
should be noted that the expression ‘reserve’ does not include any amount written
off or retained by way of providing for depreciation, renewals or diminution in the
value of assets or retained by way of providing for any known liability.
Bank Financial Statements 3

Balance in profit and loss account is the residual in the profit and loss account
after making all appropriations towards reserves and dividend.

DEPOSITS
Deposits constitute the largest item on the liabilities side of the balance sheet of a
bank. About 80% of the resources of a bank are in the form of deposits. Deposits
reflect the confidence the public have on the bank. Naturally, every bank is proud of
the growth of deposits achieved by it.
Fundamentally, there are only two types of deposits – demand deposits and time
deposits. Demand deposits are repayable at any time when demanded by the
customer. Time deposits can be withdrawn by the customers only after the expiry of
a specified period of time. Due to competition and increasing expectations of the
customers, banks offer different schemes under various catchy names. All such
special schemes of deposits are either time deposits, with facilities for premature
withdrawal under certain circumstances, or with additional services available as add-
ons.
For the balance sheet purposes, the deposits are to be shown under three
categories: (i) demand deposits, (ii) savings bank deposits, and (iii) term deposits.
Demand deposits include all deposits repayable on demand. Apart from current
accounts, this head includes credit balances in overdraft and cash credit accounts,
deposits payable at call, overdue deposits, inoperative current accounts and matured
term deposits, cash certificates and certificates of deposits. Demand deposits do not
carry interest.
Savings bank deposits are accounts opened by individuals and permitted non-
business organisations, mainly to accumulate their savings. The balances in savings
accounts are also repayable on demand, even though there may be certain
restrictions on withdrawals. Balances in savings bank accounts are considered to be
more stable and expected to stay with the bank for longer periods than current
accounts.
Term deposits are deposits repayable at the expiry of a specified period of time.
These include fixed deposits, cumulative and recurring deposits, cash certificates,
annuity deposits, deposits mobilised under various schemes, ordinary staff deposits,
foreign currency non-resident account etc. When such deposits have matured for
payment they should be shown under demand deposits.
Term deposits can be accepted for a maximum period of 15 days and for a
maximum of 10 years. The period may be longer than 10 years in case of deposits in
the name of a minor who will majority later than this period, and in case of deposits
made under court orders. The annualised rate of interest varies depending upon the
period of deposit. Banks have the discretion to fix their own rates. Special rates of
interest are paid for deposits of senior citizens and bulk deposits.
Both demand deposits and term deposits are shown separately as received from
(a) banks and (b ) others. Deposits from banks will include deposits from the banking
system in India, cooperative banks and foreign banks which mayor may not have a
office in India. Savings accounts cannot be opened by banks.
The total deposits are also shown in another way as deposits of branches in India
and deposits of branches outside India.

BORROWINGS
Borrowings are shown separately as borrowings in India and borrowing outside India.
Borrowings in India includes (a) borrowing from Reserve Bank of India as
refinance or otherwise, (b ) borrowing/refinance from other commercial banks,
including cooperative banks and (c) borrowing/refinance from financial institutions like
Exim Bank and NABARD. Interbank transactions are not shown as borrowings.
Borrowings include liabilities against participation certificates, if any.
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Borrowing outside India includes borrowings of Indian branches abroad as well as

borrowings of foreign branches. Funds raised by foreign branches by way of
certificates of deposits, notes, bonds etc. are classified, depending upon
documentation, as deposits, borrowings etc.
The secured portion of the borrowings in India and outside India are shown
separately, as information.

OTHER LIABILITIES AND PROVISIONS

This head includes bills payable, inter office adjustments, interest accrued and
others.
Bills payable represents the amount payable against instruments of remittance
issued by the bank and includes drafts, telegraphic transfers, pay slips, banker's
cheques and other miscellaneous items.
Inter office adjustment account represents the balances each branch maintains
in its account with the head office of the bank. Each branch may have debit balance
or credit balance in its account with the head office. If, at head office, the aggregate
of all such accounts shows net credit balance, it is shown under this head.
Interest accrued includes interest accrued but not due on deposits and
borrowings. Interest accrued and due is credited to the respective deposit/
borrowing.
Others include (n ) net provision for income tax and other taxes like interest tax
(less advance payment, tax deducted at source), (b ) surplus in provisions for bad
debts, (c) surplus in provision for depreciation, (d) contingency reserves which are not
disclosed as reserves, but are actually in the nature of reserves, (c) proposed
dividend/transfer to the government, (f) other liabilities which are not disclosed under
any other major head, (g) unexpired discount, outstanding charges like rent,
conveyance etc. Certain types of deposits like staff security deposits, margin deposits
etc, where repayment is not free are also included under this had.

B A N K A SS E T S

Assets depict the way in which the resources of a bank are deployed. Assets are
classified under the following broad heads in the balance sheet of a bank:
(a) Cash and balances with Reserve Bank of India
(b) Balances with banks and monev at call and short notice
(c) Investments
(d) Advances Fixed assets
(e) Other assets
Lines of Defence. The assets over which the banker distributes his funds are
classified in order of liquidity. Cash, being the most liquid of all, is called the first line
of defence in the sense it will be immediately available to meet the demands of
depositors. Similar classification is made of other assets also as show below:
(i) First line of defence - Cash (with the bank, with other banks and RBI).
(ii) Second line of defence - Money at call and short notice
(iii) Third line of defence - Investments in securities.
(iv) Fourth line of defence - BiHs purchased/discounted.
(v) Fifth line of defence - Loans and other advances.

CASH AND BALANCES WITH RESERVE BANK

Cash and balances with Reserve Bank of India are the most liquid of all the assets of
a bank.
Cash in hand is the accumulation of cash at all branches of the bank. Cash gets
accumulated at branches for various reasons. A minimum balance is maintained
Bank Financial Statements 5

deliberately by the bank to meet the demand for withdrawal of deposits, utilisation of
advances and counter payment of remittance instruments drawn on the 'branch. At
many branches cash gets accumulated over and above the needs of transactions due
to deposits made by customers towards deposits, repayment of advances or
purchase of bank instruments. They remain at the branch before the surplus could be
transferred to needy branches. Cash in hand includes foreign currency notes and
cash balances at foreign branches also.
Balances with Reserve of India may be in the form of current account or
other accounts. Mainly banks maintain balances in current account with Reserve
Bank of India to meet the CRR requirements and to facilitate the functioning of
clearing house.

BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE

Broadly these balances are classified as balances in India and balances outside India.
Balances with banks include balances held with other banks, including
cooperative banks. These are shown as current accounts and deposit accounts
separately. For balances abroad, balance with bank includes accounts held by foreign
branches with other banks and balances held by Indian branches of the bank outside
India. Current accounts and deposit accounts are shown separately. Balances held
with its own foreign branches by other branches of the bank are not shown under this
head. They are included in interbranch accounts.
Money at call and Short notice includes deposits repayable within 15 days or
less than 15 days' notice lent in the interbank call money market. For the foreign
branches, this item includes deposits usually classified in the country concerned as
money at call and short notice.

INVESTMENTS
Banks invest in securities to meet the statutory requirements and as a prudent
financial policy to earn stable returns. Investments can be made in India or abroad.
Domestic investments are classified into six categories.
1. Government securities include Central and State Government securities
and Government treasury bonds. Under Section 24 of the Banking Regulation Act,
banks are required to maintain in liquid assets an amount not less than 25% of its
demand and time liabilities. The actual percentage will be announced by the Reserve
Bank as the Statutory Liquidity Ratio (SLR) to be maintained by banks. Government
securities are SLR securities. A major portion of bank investments are in Government
securities for this reason. Also, in a period of excess liquidity, banks find these
investments yield better returns with low risk.
2. Approved securities include investments in securities other than
Government securities recognised as approved securities for SLR purposes. These
include securities issued by Government agencies, Government bodies like port trust
and municipalities, public sector undertakings etc.
3. Shares include investments in shares of companies and corporations other
than SLR securities.
4. Debentures and bonds issued by companies and corporates and are not
SLR securities.
5. Subsidiary and/or joint ventures include investments in a company where
more than 25% of the share capital of the company is held by the bank.
6. Other investments include investments in gold, commercial paper and other
investments in the nature of shares, bonds or debentures.

ADVANCES
Loans and advances form the major outlet of funds for a bank. They also form the
major source of income. [n the balance sheet advances in India as well as abroad are
shown classified on three different bases, viz., (a) type of advance, (b ) security
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coverage, and (c) sectoral details.

Type of advance. On the basis of nature of the facility, advances are classified
as:
(i) Bills purchased and discounted;
(ii) Cash credits, overdrafts and loans repayable on demand;
(iii) Term loans.
Under each category, the amounts include both secured and unsecured portions.
Amounts are shown for the net value after deducting the provisions made and
rediscounting availed. However, refinance availed is not deducted.
Security coverage. On the basis of collaterals available, the advances are
shown under the following heads:
(i) Secured by tangible assets, either the entire advance or part of the advance
secured by tangible assets.
(ii) Covered by bank/Government guarantees, to the extent the advances are
covered by the guarantees of Indian and foreign Governments, Indian and
foreign banks, and by credit guarantee agencies like ECGC and DICGC.
(iii) Unsecured, advances which are not covered by tangible assets or
bank/Government guarantee.
Sectoral disbursal. The major classification is advances in India and outside
India. Advances made in India are shown under the following subheads:
(i) Priority sector advances, falling under this classification as per Reserve Bank
instructions.
(ii) Public sector advances, including advances to Central and State
Governments and Government companies and corporations, which are
considered as public sector undertakings.
(iii) Advances to banks including cooperative banks.
(iv) Other advances, typically including non-priority sector advances granted to
private, joint and cooperative sectors.
Advances outside India are shown separately as (i) due from banks, (ii) due from
others in the form of (a ) bills purchased and discounted, (b) syndicated loans, and (c)
others.

FIXED ASSETS
The major fixed asset is premises. All other fixed assets, including furniture and
fixtures are clubbed under other fixed assets.
Prem isesinclude premises wholly or partly owned by the bank for the purpose of
business or residence. If value of premises has been revalued or written off on
reduction of capital, details of such revaluation or reduction are carried in balance
sheet for subsequent five years.
Other fixed assets
include motor vehicles, furniture and fixture and other fixed
assets.

OTHER ASSETS
Other assets include a number of items.
1. Inter-office adjustment. This represents the balances in the branch
accounts maintained at head office. The aggregated and net balance, if in debit is
shown here. These represent mostly items in transit and unadjusted items.
2. Interest accrued. Interest accrued but not due on investments and
advances and interest due but not collected on investments are the main
components of this item. As banks normally debit the borrowers account with interest
Bank Financial Statements 7

due on the balance sheet date, usually there may not be any amount of interest due
on advances.
3. Tax paid in advance/tax deducted at source. The amount of tax
deducted at source on securities, advance tax paid etc. to the extent these items are
not set off against relative tax provisions are shown against this item.
4. Stationery and Stamps. Exceptional items of expenditure on stationery like
bulk purchase of security paper, ledgers etc. which are treated as quasi asset to be
written off over a period are shown here.
5. Non-banking assets. Immovable properties/tangible assets acquired in
satisfaction of claims are shown under this head. The value should be on realistic
basis and cost of escalation is not taken into account as these items are for internal
use.
6. Others. This will include clearing items, advances to staff as employer and
lnot as banker, additions to assets which have not been adjusted due to technical
reasons etc. Accrued income other than interest are also included here.

CONTINGENT L IABILITIES
In order to increase their income and also to meet the specific requirements of their
customers for certain services, banks indulge in a number of 'off-balance sheet'
transactions. These include issuing guarantees on behalf of their customers, opening
of letters of credit, acceptance of bills on behalf of their customers, providing forward
exchange and other derivative instruments. All these off-balance sheet transactions
give rise to contingent liabilities. The bank may be required to pay under the contract
on the happening or non-happening of certain event, as contemplated in the
contracts.
Contingent liabilities of a bank are shown below its balance sheet. The details are
shown in Schedule 12 under the following heads:
(i) Claims against the bank not acknowledged as debts; (ii) Liability for partly
paid investments;
(ii) Liability on account of outstanding forward exchange contracts; (iv)
Guarantees given on behalf of constituents;
(iii) Acceptances, endorsements and other obligations;
(iv) Other items for which the bank is contingently liable which include arrears of
cumulative dividends, bills rediscounted, commitments under underwriting
contracts, estimated amount of contracts remaining to be executed on
capital account not provided for.
In addition bills and other items in the course of collection and not adjusted are
shown in summary form.

B A N K P R O F I T A N D LO SS A C C O U N T

Profit and loss account records the incomes and expenditures of a bank during a
given period. For a bank the income can be broadly classified into interest income
and non-interest income. Similarly expenditure can be classified into interest
expenditure and non-interest expenditure. The difference between the interest
income and interest expenditure is known as the ‘spread’, which is generally positive.
The difference between the non-interest income and non-interest expenditure is
known as the ‘burden’, which is generally negative. The bank makes profit if the
spread is greater than the burden, otherwise it incurs loss.
The format of profit and loss account of a bank is given in Fig. 2.
Profit and Loss Account for the year ending …..
Sched (Current (Previous
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ule year) year)

I Income
Interest earned 13
Other income 14
Total
II Expenditure
Interest expended 15
Operating expenses 16
Provisions and contingencies
Total
III Approximations
Net Profit/Loss (-) for the year
Profit/Loss (-) brought forward
Total
Transfer to statutory reserves
Transfer to other reserves
Transfer to Government/Proposed dividend
Balance carried over to balance sheet
Total

FIG. 2. FORMAT OF PROFIT AND LOSS ACCOUNT OF A BANK

INCOME
Income of a bank is broadly classified into interest income and other income.
Interest Earned
The major source of income for a bank is its interest income. The interest income is
earned under the following heads:
1. Interest/discount on advances/bills. Discount is the income earned on
bills purchased/discounted and interest is the income earned on other types of
advances. This head includes interest and discount on all types of loans and
advances like cash credit, demand loans, overdrafts, 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.
2. Interest on investments. This includes all income derived from the
investment portfolio by way of interest and dividend.
3. Interest on balances with banks. This includes interest on balances with
Reserve Bank of India and other banks, call loans, money market placements etc.
4. Others. This includes any other interest/discount income not included in the
above heads.
Other Income
Other than interest, the major head of income for a bank is commission and
brokerage. This and other heads of income for a bank are as follows:
1. Commission, Exchange and Brokerage. This head includes all
remuneration on services such as commission on collections, commission/ exchange
on remittances and transfers, commission on letters of credit and guarantees, letting
out of lockers, commission on government business, commission on other permitted
agency business including consultancy and other services, brokerage on securities
etc. This head excludes income from foreign exchange business.
2. Profit on sale of investments. This shows the net position of profit/loss on
sale of securities, furniture, land and buildings, motor vehicles, gold, silver etc.
3. Profit on revaluation of investments. This shows the profit on revaluation
of investments undertaken to show their market values. If the net position is a loss,
the amount should be shown as a deduction.
Bank Financial Statements 9

4. Profit on sale of fixed assets. This item shows the profit/loss on sale of
land, building and other assets. The net profit/loss on revaluation of assets may also
be shown under this item.
5. Profit on exchange transactions. This includes all income from foreign
exchange transactions in the form of profit/loss on dealing, commission and charges
on foreign exchange transactions excluding interest, and any other income earned by
way of foreign exchange.
6. Income from subsidiaries. This item includes income earned by way of
dividends etc. from subsidiaries/companies and/or joint ventures abroad/in India.
7. Miscellaneous income. This includes recoveries from constituents for
godown rents, income from bank’s properties, security charges, insurance etc., and
any other miscellaneous income.

EXPENDITURE
Expenditure is shown under three major heads: interest expended, operating
expenses and provisions.
Interest Expended
Interest expenditure fall under the following three heads:
1. Interest on deposits. Interest on deposits constitutes the single largest item
of expenditure for a bank. This item includes interest paid on all types of deposits
including deposits from banks and other institutions.
2. Interest on borrowings. This includes discount/interest paid on all
borrowings and refinance from Reserve Bank of India and other banks.
3. Interest on others. This item includes discount/interest on all borrowings/
refinance from financial institutions. All other payments like interest on participation
certificates, penal interest paid etc. are also be included here.
Operating Expenses
Operating expenses relate to establishment and other expenses.
1. Establishment expenses. This relates to payments to and provisions for
employees in the form of staff salaries/wages, allowances, bonus, other staff benefits
like provident fund, pension, gratuity, liveries to staff, leave fare concessions, staff
welfare, medical allowances to staff etc.
2. Rent, taxes and lighting. This includes rent paid by the bank on buildings,
vehicles and other municipal and other taxes (excluding income tax and interest tax)
electricity and other similar charges and levies.
3. Printing and stationery. This includes books and forms and stationery used
by the bank and other printing charges which are not incurred by way of publicity
expenditure.
4. Advertisement and publicity. This includes expenditure incurred by the
bank for advertisement and publicity purposes including printing charges for publicity
matter.
5. Depreciation. This includes depreciation on bank’s own property, motor cars
and other vehicles, furniture, electric fittings, vaults, lifts, leasehold properties, non-
banking assets etc.
6. Directors’ fee. This includes sitting fees and all other items of expenditure
incurred on behalf of the directors. The daily allowance, hotel charges, conveyance
charges are also included here. Similar expense incurred for local committee
members are also included here.
7. Auditors’ fees. This includes the fees paid to statutory auditors and branch
auditors for professional services rendered and all expenses for performing their
duties, even though they may be in the nature of reimbursement of expenses.
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Expenses of external auditors used for internal audit should be included under ‘other
expenditure’.
8. Law charges. All legal expenses and reimbursement of expenses incurred in
connection with legal services are included here.
9. Postages etc. This includes all postal charges like stamps, telegram,
telephone, teleprinter, courier charges etc.
10. Repairs and maintenance. This includes repairs to bank buildings and
their maintenance charges.
11. Insurance. This includes insurance charges on bank’s properties, insurance
premium paid to credit guarantee organisations, to the extent they are not recovered
from the concerned parties.
12. Other expenditure. All expenses other than those included in any of the
previous heads like licence fees, donations, subscriptions to papers, periodicals,
entertainment expenses, travel expenses are included in this head.
Provisions and Contingencies
Provisions and contingencies include all provisions made for bad and doubtful debts,
provisions for taxation, provisions for diminution in the value of investments,
transfers to contingencies and other similar items.