Chapter - 7

Balance-Sheet and Profit and Loss Account,

Appropriation of Profits and Declaration of Dividend

7.1

Formats of Balance sheet and Profit and Loss accounts

The banks have to prepare the balance sheet and profit and loss account for the accounting year ending
31st March (Section 29 of the Banking Regulation Act, 1949) in the format set out in the third schedule to
the Banking Regulation Act, 1949. The formats and the guidelines in regard to coverage of various items of
liabilities and assets and income and expenditure have been furnished in Volume II of the Manual. (Item No.
6)

7.2

Submission of balance sheet, etc. to the RBI

In terms of the provisions of Section 31 of the Banking Regulation Act, 1949, three copies of the Annual
accounts and balance sheets together with Auditor's report are required to be furnished to the Reserve
Bank of India before 30th June of the respective year. In case the banks are not able to comply with the
requirements, they should apply to the Reserve Bank for extension of time for submission thereof, as per
the provisions of the Act.

7.3

Publication of balance sheet, etc.

In terms of the provisions of Section 31 of the Banking Regulation Act, 1949, banks have to publish their
balance sheet and profit and loss account together with Auditor's report in a newspaper in circulation at the
place where the banking company has its Principal office. In order to effect economy in publicity
expenditure, it would be enough if banks publish their balance sheets, etc. in full together with Auditor's
report in one newspaper only. However, abridged version of balance sheets and profit and loss accounts
may be published, if considered necessary, in other newspapers and journals for the sake of wider publicity.
The publication should be separately in Hindi and English daily. The expenditure incurred for publication
would be outside the purview of the publicity expenditure. The banks should however, ensure that maximum
economy is effected on printing and publishing the bank's annual accounts.

7.4

Transfer to Reserve Fund

In terms of the provisions of Section 17 of the Banking Regulation Act, 1949, banks are required to transfer
to the Reserve Fund a sum equivalent to not less than 20 per cent of the profits. The banks are however,
advised to transfer to Reserve Fund at least 25 per cent of the disclosed profits (before making
adjustments/provisions for bonus to staff.).

7.5

Provision for retirement benefits to staff

Banks should estimate their liabilities towards retirement benefits to staff on acturial basis and make full
provision therefor. If no provision had been made or adequate provision was not available, necessary
provisions should be built up over a period of time by allocations from the yearly profits.

7.6

Provision for foreign exchange losses

Banks which are authorised dealers should keep in view the possible fluctuations in exchange rates and
consider the question of creating an exchange fluctuation fund to take care of losses that may arise, taking
into account the volume of such business.

7.7

Development Fund

It may be prudent to transfer to Development Reserve Fund one to two per cent of net profit to take care of
development expenditure in regard to investment in immovable properties, furniture and fixtures and
expenses towards opening of branches, etc.
7.8

Profit on sale of fixed assets

The profit on sale of fixed assets like land, premises, etc. is a capital profit. Such a fortuitous profit should be
retained as capital reserves and should not be used for payment of dividend.

7.9

Treatment of excess provision for depreciation in investment

In terms of earlier instructions, the excess provision towards depreciation on investments should be
transferred to Capital Reserve Account by way of appropriation in the Profit and Loss Account. The excess
provision towards depreciation on investments should henceforth be appropriated to Investment Fluctuation
Reserve Account instead of Capital Reserve Account and should be shown as a separate item in Schedule
2 Reserves and Surpluses under the head Revenue and other Reserves and will be eligible for
inclusion in Tier II capital. The existing amount of excess provision towards depreciation on investments
held under Capital Reserve Account should stand transferred to Investment Fluctuation Reserve Account
as on March 31, 1999. The amount held in Investment Fluctuation Reserve Account could be utilised to
meet, in future, the depreciation requirement on investment in securities. The amount to be transferred to
Investment Fluctuation Reserve Account shall be determined net of taxes, if any, and net of transfer to
statutory reserve as applicable to such excess provision.

7.10

Valuation of investments and booking of income

i) While finalising the balance sheet, the banks should adopt the method indicated in the Annexure-I for
valuing the investments.
ii) If there is any appreciation in the value of securities on account of the method of valuation indicated in
the Annexure-I, it should not be booked as income.
iii) The banks which have adopted a more prudent method of valuation of securities than the one indicated
in the Annexure-I may continue the practice hitherto followed by them.
iv) The banks may book income on accrual basis on securities of corporate bodies/public sector
undertakings in respect of which the payment of interest and repayment of principal have been guaranteed
by the Central or State Government.
v) The banks may book income from dividend on shares of corporate bodies on accrual basis provided
dividend on the shares has been declared by the corporate body in its Annual General Meeting and the
owner's right to receive payment is established.

7.11

Declaration of dividend by public and private sector banks

i) The banks both, public and private sector need not seek RBI's prior approval for declaration of dividend
provided the following requirements are fulfilled:a)

The bank has complied with the provisions of Section 15 of B. R. Act, 1949.

b) The proposed dividend is to be paid out of the current year's profits and is not at a rate higher
than 25% for the year.
c) The bank has complied with the extant regulations/guidelines in regard to transfer of profits to
statutory reserves and setting up of required provisions.

d) The bank is in compliance with the prudential regulation relating to capital adequacy at level
applicable to it in the relevant year and is also in observance of prudential norms on income
recognition, asset classification and loan loss provisioning.
ii) The Reserve Bank's prior approval for declaration of dividend would, however, need to be taken by the
banks in the following cases :
a)

for payment of interim dividend ;

b)

where the proposed total dividend will amount to a rate higher than 25% for the year;

c)

where any of the other conditions mentioned in para (i) above are not satisfied.

iii) Where a bank had declared dividend without Reserve Bank's approval, in terms of para (i) above, it
should, on a postfacto basis, send to the Central Office of the Department of Banking Operations and
Development, as well as to its Regional Office under whose jurisdiction the bank falls, a statement
furnishing financial data as in the proforma furnished in Annexure II, within 10 days from the date of the
relevant Annual General Meeting of the bank/declaration of dividend.

7.12

Analysis of Balance Sheets

Banks should undertake focussed scrutiny of the balance sheets in a prescribed format
given in Vol. II of the Manual (Item No. 6A) to identify/analyse key measures of returns and
risks, assumed by them and to demonstrate the relationship of returns and risks. The format is
broadly divided into two parts - Part I - identifies inputs and Part II - indicates the various ratios,
amounts, etc. which require detailed interpretation. The inputs and outputs are broadly classified
on CAMEL basis. The analysis of the balance sheets should be undertaken by the banks
immediately on finalisation of the annual accounts, as per the suggested framework and submit a
memorandum to their Board of Directors. A copy of the note put up to the Board together with
analysis (in floppies) should be submitted to the Reserve Bank of India, Dept. of Banking
Supervision, Central Office, OSMOS Division, Mumbai on a regular basis.

---------------------------------------------------------Annexure - I
[Paragraph No. 7.10(i)]

Investment Category

Method to be adopted by banks

1.
Permanent Investments

i) Any gain on sale of securities in this category should be first taken to

the profit and loss account and thereafter it could be appropriated to
the "capital reserve" account.
ii) `Permanent' investments should be valued at cost and in case the
cost price is higher than the face value, the premium should be
amortized over the remaining period of maturity of the security. On the
other hand, where the cost price is less than the face value, the

difference should be ignored and should not be amortized or taken to

income account since the amount represents unrealised gain.
2.
Current Investments

Valuation of Government Securities in the `current' category should be

done as per market quotations on the date of balance sheet i.e. 31st
March, wherever available. Where market quotations are not available,
valuation of the Government Securities should be made on yield to
maturity rate advised to the banks each year by the RBI.

Shares

i) Wherever Stock Exchange quotations are available, the shares

should be valued accordingly.

3.

ii) In the case of shares for which current quotations are not available
or where the shares are not quoted on the Stock Exchanges the same
should be taken at Book Value (without considering revaluation
reserves, if any) which is to be ascertained from the latest balance
sheet. In case latest balance sheet is not available, the shares are to
be taken at Re. 1 per company.
iii) In the case of public sector companies, shares of PSUs should be
valued at the break-up value as per the balance sheet as at 31st
March of the previous year (i.e. In the case of bank balance sheet as
at 31st March, 1997, the PSUs' balance sheet should be as at 31st
March, 1996). In case the previous years balance sheet of the PSU is
not available, the break-up value as per the balance sheet of one year
earlier should be worked out and the break-up value should be
reduced or discounted by 20 per cent. If the balance sheet of one year
earlier is also not available, the shares of the concerned PSU should
be valued at Re.1 per company.
4.
Debentures

1) Wherever Stock Exchange quotations are available, the debentures

should be valued accordingly.
2) Wherever current quotations are not available or where the
debentures are not quoted on the Stock Exchanges the same should
be valued as follows :
a) At carrying cost (i.e. book value), if interest is serviced regularly.
b) Where interest is not serviced regularly and as such, is in arrears,
the depreciation should be made on the same lines as advances
classified as sub-standard, doubtful and loss.

5.
Mutual Fund Units

Investment in Mutual Fund Units is to be valued based on latest NAV

declared by the Mutual Fund in respect of each particular scheme.
However, if market rates are available as per Stock Exchange
quotations, market rates should be adopted.

6.
Investments in subsidiaries and
sponsored institutions

Security is to be valued at carrying cost (i.e. book value) on a

consistent basis.

Treasury Bills
(All maturities)

Valuation may be based at carrying cost (i.e. book value)

Commercial Paper

Commercial Paper to be valued at carrying cost (i.e. book value).

7.

8.

9.

General Issues
i) Rounding off e.g. to nearest 000s)

May be done at banks' discretion on a consistent basis.

ii) Investment Categories

For the purpose of balance sheet, investments are to be classified into

the following categories:
a) Government Securities (inclusive of T Bills, Zero coupon bonds)
b) Other approved securities
c) Shares
d) Debentures and bonds.
e) Subsidiaries and Joint Ventures (sponsored institutions)
f) Other (CP, Mutual Fund Units, etc.)

iii) Aggregation

10
.
Recapitalisation Bonds

Securities under each category shall be valued scripwise as indicated

above and depreciation/ appreciation shall be aggregated categorywise. Net appreciation should be ignored. Net depreciation, if any,
shall be provided for. Net depreciation required to be provided in any
one category should not be reduced on account of net appreciation in
any other category.
The recapitalisation bonds will not form part of `permanent' or `current'
investments. It will not be necessary to provide for depreciation on the
recapitalisation bonds received by the nationalised banks from
Government. In case, however, banks acquire recapitalisation bonds
of other banks for investment purposes, the depreciation, if any, will
have to be provided for.

11.
Zero Coupon Bonds

The value of Zero Coupon Bonds issued vide Notification No. F.4
(5)W&M/93 dated 7 January 1994 by Government of India for the
purpose of determining "cost" may be reckoned after taking into
account the accrued discount pro rata. After this adjustment of the

"cost", banks can use the standard valuation procedures.

12
.
Capital Indexed Bonds

Capital Indexed Bonds issued by Government of India vide its

Notification No. 4(13)W&M/96 dated 19 December 1997, the "cost"
may be reckoned by using the index ratio calculated by taking the WPI
with a three months' lag as shown in an illustrative example given in
the Appendix.

---------------------------------------------------------Appendix
Illustration

Calculation of `cost' of the 5 year Capital Indexed Bonds, 2002 as on March 31, 1998.
The bonds were issued in December 1997 at par. The Wholesale Price Index (WPI) for August 1997 was taken as the
Base WPI. Similarly the Reference WPI for payment of the redemption value in December 2002 is taken as the WPI
for August 2002. Thus, a clear 3 months' lag is followed for indexation of capital. The same principle can be applied
for arriving at `cost' for the purpose of valuation of Capital Indexed bonds. If the valuation of the bond is to be done in
March 1998, the index ratio can be calculated by taking the WPI for November 1997 as the Reference WPI. While
thus for every quarter ending March of a year, the numerator will take WPI of November of the previous year, for
other quarters ending in months viz. June, September and December, every year, the index ratio will take in the
numerator WPI for February, May and August of the respective years.
Assuming that the Monthly Average Index of Wholesale Prices (1981-82=100) for November 1997 is 329.90. The
Reference WPI is 329.90. The base WPI, i.e. the WPI for August 1997 is 326.00. The calculation of `cost' of Capital
Indexed Bonds is illustrated below :

Index Ratio for March

1998

WPI for November 1997

Base WPI
=
329.90
326

1.01196 or 1.01 (rounded to

two decimal places.)
=

Cost of the bonds for valuation as on 31.3.98

Rs. 100 x 1.01 =

Rs. 101.00

---------------------------------------------------------Annexure - II
[Paragraph No. 7.11(iii)]

(Proforma of Report on Capital Structure, Earnings, Provisions and

Appropriations in the Context of Dividend Declaration)
Reporting Bank :
(Financial based on audited accounts)
Part A :

Report on Capital Structure

(Rs. in lakhs)

As at end of

Current Year

1.

Paid up capital
(face value of
share ..................)
(No. of shares issued/
paid up .......................)

2.

Reserves and Surplus

(Schedule- I)
a) Statutory
Reserve Fund
b) Share Premium
amount
c) Other Capital
Reserves
(i)
(ii)
d) Revenue Reserves
(i)
(ii)
(iii)
e) Balance in P & L A/c.

3.

Capital adequacy ratio (%)

a) Tier I Capital to

Last Year

Risk assets (%)

b) Tier II Capital to
Risk assets (%)

---------------------------------------------------------Part B :

Report on Earnings, Provisions and Appropriations

(Rs. in lakhs)

As at end of

Current Year

Interest earned

Less

Interest expended
1.
Net interest income

Add

Other income (Sch.2)

Less

Operating expenses (Sch.3)

2.
Operational surplus

Less

Provisions & Contingencies

(Sch.4 & 4a)
3.
Profit before tax/(Loss)

Less

Provision for tax liability

4.
Net profit/(Loss)

Last Year

Add/Deduct

Profit/(Loss brought forward)

5.
Profit available for appropriations and transfers.
i) Transfer to Statutory Reserve
ii) Transfer to other Reserve
a)
b)
c)
6.
Disposable profit

Less

Proposed dividend
7.
Retained profit
8.
a) Earnings per share (EPS)
b) Dividend per share
c) Dividend rate (%)

---------------------------------------------------------Part C :

Schedules

(Date for both years to be furnished)

(Proforma referred to are those given in Schedule III to Banking Regulation Act, 1949).
Notes :
Schedule - 1.

As in the proforma of Annexure 2 to Balance Sheet

Schedule - 2.

As in the proforma of Annexure 2 to Profit & Loss account.

Schedule - 3.

As in the proforma of Annexure 4 to Profit & Loss account.

Schedule - 4.

Breakup of provisions and contingency accounts to be given.

Schedule - 4a.

For loan loss provision only

Give details as under :

i)

Balance at the beginning of the year

Add

ii)

Provisions made during the year

Less

iii)

Provisions utilised

Add

iv)

Debts written off recovered and credited back.

v)

Balance at the end of the year.