PROVISIONS OF BANKING REGULATION ACT 1949
The provisions of banking regulation act 1949 relating to accounts of banking companies are as follows:
BANKING COMPANY
Banking company is a company that deals in cash, money and credit. It accepts deposits and extends loans and advances to the needy persons.
ACCORDING TO BANKING REGULATION ACT, 1949
“Banking refers to the acceptance for the purpose of lending or investment of deposits of money from the public repayable of demand, order or otherwise and withdrawal by cheque, draft, order or otherwise.”
According to Section 6 of Banking Company Regulation Act, 1949, a banking company may deal in following forms of business:
- Borrowing and lending of money
- Drawing, making, accepting, endorsing, buying and selling of bills of exchange, hundies, promissory notes, debentures and other alike securities.
- Contracting for public and private loans
- Acting as an agent for government or local authority
- Undertaking and executing of trusts
- Acquisition, construction, maintenance and alteration of any building or works
- Carrying on and transacting every kind of guarantee and indemnity business.
PROVISIONS OF BANKING REGULATION ACT 1949
The Provisions of Banking Regulation Act 1949 are as follows:
FLOATING CHARGE
Section 14 A states that the banking company cannot create a floating charge on any company. It can be created only by getting the certificate from Reserve Bank of India otherwise the floating charge will be invalid.
RESTRICTIONS ON DIVIDENDS
Under Section 15, a banking company cannot pay dividends unless all of its capitalized expenses has been completely written off. Capitalised expenses are:
- Preliminary expenses
- Organization expenses
- Share ceiling commission
- Brokerage
But a banking company need not write off
- Depreciation in the value of its investments
- Devaluation of the shares or debentures
- Bad debts.
STATUTORY RESERVE
Section 17 of the Banking Companies Act, 1949 states that it is a legal obligation for the banking companies to create statutory reserve. The 25% of the profits earned by the bank is transferred to the statutory reserve. It is created before making any appropriation. It is show separately under the head ‘Reserves and Surplus’ in schedule 2.
CASH RESERVE
All scheduled banks have to maintain the reserve of 5% of the deposits with the Reserve Bank of India. This percentage can be raised upto 15% by Reserve Bank of India. All non-scheduled banks are also required to make this reserve upto 3% of the total deposits with Reserve Bank of India.
STATUTORY LIQUIDITY RESERVE
Under Section 24(2), every banking company has to maintain a reserve in the form of cash, gold or any approved securities. This reserve is created at 25%-40%. The statutory liquidity ratio is decided by the Reserve Bank of India and published in the official gazette.
PERFORMA OF PROFIT AND LOSS ACCOUNT
The profit and loss account is prepared as prescribed under the FORM B
| Schedule No. | Year ended 31.3…..(Current Year) | Year ended 31.3….. (previous year) | ||
| I | INCOME Interest earned Other Income Total | 13 14 | ||
| II | EXPENDITURE Interest expended Operating Expenses Provisions and Contingencies Total | 15 16 | ||
| III | PROFIT/ LOSS Net Profit/ Loss (-) for the year Profit/ Loss (-) brought forward Total | |||
| IV | APPROPRIATIONS Transfer to statutory reserves Transfer to other reserves Transfer to government/ proposed dividend Balance carried over to balance sheet Total |
GUIDELINES OF RBI REGARDING PROFIT AND LOSS ACCOUNT
INTEREST EARNED: Interest earned covers the elements like:
- Interest/ discount on advances/ bills.
- Income on investments
- Interest on balances with Reserve Bank of India and other Inter Bank Funds
The interest or discount on loans like credit, demand loans, overdraft, export loans, term loans and income derived from investments portfolio are compiled as income under interest earned.
OTHER INCOMES: Other incomes includes:
- Commission on collections, transfers, letters of credit etc. and brokerage on securities.
- Profit on sale of investments less loss on sale of investments.
- Profit on revaluation of assets less loss.
- Profit on sale of fixed assets less loss.
- Income earned b way of dividends and profits on exchange transactions less loss.
INTEREST EXPENDED: It includes the following expenses:
- Interest paid on all types of deposits from banks and other institutions.
- Interest paid on all borrowings from RBI.
- The payments like penal interest paid etc.
OPERATING EXPENSES: Operating expenses are the expenses related to the operating activities of the business. It includes the payment regarding:
- Salaries, wages, allowances, bonus, pension, gratuity, staff welfare allowance etc.
- Rent paid by the banks, municipal taxes, electricity charges etc.
- Stationery, advertisement expenses, depreciation on bank’s property.
- Fees of directors, audit fees, legal charges.
- Postage, telegrams, telephones, insurance, donations, license fees etc.
- The provisions regarding tax, doubtful debts, discount on debtors etc.
PERFORMA OF BALANCE SHEET
The Balance Sheet is prepared as prescribed by FORM A of third schedule of the Banking Regulation Act, 1949 :
| Schedule No. | As on 31.3…. (Current Year) | As on 31.3…. (Previous Year) | ||
| CAPITAL AND LIABILITIES Capital Reserves and Surplus Deposits Borrowings Other Liabilities and provisions Total | 1 2 3 4 5 | |||
| ASSETS Cash and bank balance with RBI Balances with banks and money at call and short notice Investments Advances Fixed Assets Other Assets Total | 6 7 8 9 10 11 | |||
| Contingent Liabilities Bills for Collections | 12 |
GUIDELINES BY RBI REGARDING BALANCE SHEET
CAPITAL: Capital is the amount invested in the Banking company and covers:
- Capital owned by Central Government
- Amount brought in by the banks by way of startup capital.
RESERVES AND SURPLUS: Reserves and surplus are the amount set aside out of the profits. The reserves created are:
- Statutory reserves (25% of the profits)
- Capital reserves which should not include the amount available for distribution through Profit and Loss Account.
- Securities Premium is premium on issue of share capital.
- Balance of profits after appropriation.
DEPOSITS: Deposits are the amount deposited in the banking company by the public and it covers:
- All demand deposits from banks and non-banking sectors repayable on demand.
- The saving bank deposits, fixed deposits, annuity deposits, recurring deposits etc.
BORROWINGS: Borrowings are the amount taken as loan and it covers:
- Borrowings obtained from Reserve Bank of India and commercial banks.
- Borrowings from IDBI, Export/ Import Bank of India, NABARD etc.
OTHER LIABILITIES AND PROVISIONS: It includes the following items:
- Telegraphic transfers, travelers’ cheques, pay-in-slips, banker’s cheques etc.
- Interest accrued but not due on deposits and borrowings.
CASH AND BALANCES WITH RBI: It covers the:
- Cash in hand including foreign currency notes.
- Balances with the RBI in current accounts and other accounts.
BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE: It includes or covers:
- Balances with the banks in current and other accounts.
- Money at call and short notice with banks and other financial institutions.
- Includes balances held by the foreign branches and Indian branches.
INVESTMENTS: All the amounts get invested in various securities are covered under this head. It covers
- Amount invested in state as well as central government securities.
- Investment in shares and debentures of companies
- Amount received in residual investments like gold, commercial papers etc.
ADVANCES: It covers:
- Bills purchased and discounted.
- Cash credits and overdrafts
- Term loans
- Advances secured by tangible assets
- Unsecured advances
- Advances secured by government guarantee
FIXED ASSETS: Fixed assets included both tangible and intangible assets. It covers:
- Assets purchased by the banking company.
- All the additions made during the year in the assets.
- The sale of asset is deducted from the respective asset.
- Land, building, motor vehicles etc.
OTHER ASSETS: It includes and covers:
- Interest accrued but not due on investments and advances.
- The amount of tax deducted at source on securities, advance tax paid etc.
- The non-banking assets i.e. immovable properties, tangible assets acquired in satisfaction of claims.
CONTINGENT LIABILITIES: It contains:
- The claims against the banks not acknowledged as debts.
- Liability for partly paid investments.
- Guarantee given on behalf of constituents in India or in abroad.
- Acceptances and endorsements i.e. letter of credit and bills accepted on behalf of the customers.
BILLS FOR COLLECTION: Bills are the other items in the course of collection and not adjusted will be shown against this item in the summary version only.