Accounting and Management in Cooperative Banks CRR SLR

Accounting and Management in Co-operative Banks

CRR / SLR: Investments- regulations, types, Valuation Section 18: - Cash Reserve Ratio (CRR) Every co-operative bank shall maintain in India by way of Cash Reserve, a sum equivalent to at least 4% of total of it’s time & demand liabilities as on last Friday of Second preceding forth night & submit to RBI before 15 th day of every month a return showing the particulars. Section 24: - Statutory Liquidity Ratio (SLR) Every co-operative bank shall maintain in India by way of Assets, a sum equivalent to at least 21. 50% (Not exceeding 40%) of total of it’s time & demand liabilities as on last Friday of Second preceding forth night & submit to RBI before 20 th day of every month showing the particulars. 2

Statutory CRR requirements Incremental CRR Maintenance of CRR on daily basis Calculation of CRR Computation of NDTL for CRR Reporting requirements Penalty for Non submission/delayed submission of return Penal Interest for default in maintenance of CRR Cash Reserves for Non Scheduled UCB’s 3

Current prescription for SLR Calculation of SLR Manner of maintaining SLR Classification & Valuation of Securities Computation of NDTL for SLR Reporting Requirements Penal Provisions 4

Investments: SLR Investments - 21. 50% of NDTL Investment Policy General Guidelines: - Not to undertake Purchase/Sale transactions with broking firms on principal to principal basis. - Investment transactions subjected to concurrent audit. - No Sale unless they hold in their portfolio. - No transactions in G-Sec in physical form. - Fairly diversified Investment portfolio - NDS - OM negotiated dealing system 5

Empanelment of Brokers & Broker Limit: - Bank should prepare panel of brokers after verifying the credentials. - Broker limit is fixed at 5% of total transactions. Non SLR Investments - Limited to 10% of Banks Total Deposits Restrictions: Investment in perpetual debt instruments is not permitted. - Investment in commercial paper, debentures , bonds, units of debt mutual fund should not exceed 10% of Non SLR Investment. 6

- Investment in Deep discount - Zero coupon bonds are not permitted unless issuer built a sinking fund. - Fresh Investments in shares of AIFIL’s will not be permitted. - All Non SLR investments should be classified as HFT/AFS and mark to market. - All Non SLR investments will be subject to Single/Group counter party exposure limits. - Placement of deposits with other banks by UCB’s shall not exceed 20% of total deposit liabilities. - Within exposure limit deposit with any single bank should not exceed 5% of depositing banks total deposit liabilities. 7

Categorization of Investments: - UCB’s are required to classify under 3 categories: a) Held to Maturity (HTM) b) Available for Sale ( AFS) c) Held for Trading (HFT) - Bank should decide the category at the time of acquisition. - Investments included in HTM category should not exceed 25% of total investments. - Banks may shift investments to/from HTM category ones in a year. - Shifting of Investments from HFT to AFS is generally not allowed 8

Valuation of Investments: - Investments under HTM need not be marked to market and will be carried at acquisition cost but premium is to be amortized during the remaining period of maturity. - AFS category will be marked to market at the year end but book value would not undergo any change. - HFT category will be marked to market at monthly or more frequent intervals. (book value would not undergo any change) - Securities under AFS & HFT shall be valued scripwise but any net depreciation needs to be provided and appreciation should be ignored. 9

Investment Fluctuation Reserve: Bank should built up IFR out of realized gains on sale of investments and subject to available of Net Profit a minimum of 5% of Investment Portfolio. (This minimum 5% should be computed with reference to HFT & AFS) IFR would be eligible for inclusion in Tier II capital. Transfer from IFR to P&L account to meet depreciation requirement would be below the line. Banks with deposits more than 100 Crores are mandatory to create IFR and for smaller banks it is optional. IFR is a created out of appropriation but IDR is charge on profit. 10

Returns: Form I: Statement of Demand Time Liabilities Form II: Unsecured Loans and advances to companies in which any of its directors is interested as a Director or Managing Agent or Guarantor Form III: A Co-operative society or a bank desiring to have a license under Section 22 of the Act (Rule 6) shall apply to the principal office of the RBI in the form specified. 1) As a Primary Co-operative Bank, in Form III-A 2) As a Central Co-operative Bank, in Form III-B 3) As a State Co-operative Bank, in Form III-C 11

Form IV: In case of a co-operative society which at the commencement of the Banking Laws (Application to Cooperative Societies) Act 1965 Form V: Application for permission to open a new place if business or change the location of an existing place of business Form VI: A list relating to the officers of a co-operative bank shall be sent, within a period of one month from the close of every quarter along with revised Proforma I & II (Cir No. 43 Dated 09. 05. 2007) Form VIII: Unclaimed Deposits accounts in India which have not been operated upon for 10 years or more as on 31 st December Form IX: Statement showing Assets & Liabilities in India as at the close of business on the last Friday of the month 12

Due date & Date of submission of various Monthly Returns to RBI & Other Authorities SR. NO. TYPE OF RETURN DUE DATE 1 Form I (Demand & Time Liabilities) along with appendix I & II (Sec. 18 & 24(3) rule 5) 20 th of month subsequent 2 Form II : Unsecured Advances to Directors (Sec. 20(2) rule 5) Last Day of subsequent month 3 Form IX : Asset & Liabilities (Sec. 27(i) rule 9) as on last Friday of every month Last Day of subsequent month 4 Money Supply & Monetary aggregate as on last Friday of every month in Annexure I (Banks with deposits of Rs. 10 Crore & above) 10 th of month subsequent 13

Due date & Date of submission of various Quarterly Returns to RBI & Other Authorities SR. NO. TYPE OF RETURN Quarterly DUE DATE 1 Form VI (a, b, c) (Sec. 23, Rule 8) June: 31 st July Sept. : 31 st Oct. Dec. : 31 st Jan. Mar. : 30 th April 2 Advances granted to Director & their Relatives ----- do ----- 3 Loan against Shares & Debentures June: 15 th July (as of last reporting Friday of quarter) Sept. : 15 th Oct. Dec. : 15 th Jan. Mar. : 15 th April 4 Violation of Directives on maximum limit on Advances ----- do ----- 5 Review report Robbery/Dacoit/Frauds etc. ----- do ----- of 14

Due date & Date of submission of various Fortnightly & Half Yearly Returns to RBI & Other Authorities SR. NO. TYPE OF RETURN DUE DATE 1 Fortnightly (for scheduled UCB’s only) four copies of Form B (RBI Act 1934 Sec. 42) On Alternatives Friday and also as on last Friday of the Month Within 7 days from the reporting Friday / Last Friday of the Month 2 Half Yearly Return : 1)RBI survey of Advances against Sensitive Commodities Sep. : 15 th Oct. Mar. : 15 th April 2) DICGC Deposit Insurance Scheme Form DI-01 Payment of Premium Sep. : 30 th Nov. Mar. : 31 st May 15

Due date & Date of submission of various Annual Returns to RBI & Other Authorities SR. TYPE OF RETURN NO. DUE DATE A 1 RBI : Form No VIII - Deposit account not operated for 10 years & more (Sec. 26, Rule 9) 2 Speciman Signatures of Officials authorised to sign the Returns (Rule 5(i)) 31 st Jan. 3 Advances to Priority Sector - Annual Review Report of the Board as of 31 st March 30 th April 4 Assets & Liabilities - Special Return in Form IX as at 31 st March (Sec. 27(2) Rule 9) 15 th May 5 Statement of Share Holdings in other Co-op. Societies as on 31 st March (Sec. 19) 15 th May 31 st Jan. 16

Due date & Date of submission of various Annual Returns to RBI & Other Authorities SR. TYPE OF RETURN NO. DUE DATE 6 Copy of Annual Review of Fraud/Dacoity/Robbery by the Board 15 th May 7 Statement Showing Classification of Advances & Provisioning for NPA as of 31 st March along with Special Return in Form IX 20 th May 8 Certificate of Safe Custody of Speciman Signature as on 30 th June 31 st July 9 Three Copies of Balance Sheet, Profit and Loss account & Auditors Report for the year (Sec. 29 & 31) duly signed by CEO & at least Three Directors 30 th Sept. 10 Three Copies of News Paper in which Balance Sheet, Profit and Loss account together with Auditors Report for the year has been published (Sec. 29 & 31 Rule 10) 31 st Dec. 17

Due date & Date of submission of various Annual Returns to RBI & Other Authorities SR. TYPE OF RETURN NO. B DICGC : Form DI - 02 Distribution of Deposit Accounts according to size as on the last day of Sept. C Registrar of Co-op. Societies : Annual Return D Others : Copy of Annual Report for the year to the editor -in -chief, Co-op. bankers handbook Note : (i) Any delay in submitting the Returns will attract the penal provisions of Sec. 46(4) & 47 A of Banking Regulation Act 1949 (AACS) (ii) Copies of Returns in Form I, II, VI & IX are to be furnished to the DDR & State Co-op. bank of the State. DUE DATE 31 st Oct 30 th Oct. 31 st Dec. 18

Audit Classification of the Banks in Karnataka Government of Karnataka Department of Co. Operative Audit Classification of _____________ For the year 2014 -2015. The Audit Classification of the Bank is arrived at on the basis of the aggregate marks secured by it, as indicated below: 19

SR. Particulars NO. A B DEPOSIT MOBILISATION PERFORMANCE UNDER PRIORITY SECTOR/WEAKER SECTION ADVANCES i)Percentage of Priority Sector Advances to Total Advances at the end of the Year. ii)Percentage of Weaker Section Advances to Total Advances at the end of Year. Marks ( 05 Marks ) ( 15 Marks ) C RECOVERY PERFORMANCE i)Percentage of Over Dues to Loans and Advances Outstanding at the end of the Co-Operative Year ii)Performance of the Bank in Taking Effective Legal Action ( 25 Marks ) D RESERVES/PRIVISIONS TO COVER EROSION IN THE VALUE OF ASSETS ( 05 Marks ) 20

SR. Particulars NO. E F G MAINTENANCE OF CASH RESERVE/ LIQUID ASSETS i)Cash Reserve ii)Liquid Assets MANAGEMENT OF FUNDS H LOANS AND ADVANCES I)Documentation II)Security III)Follow-up WORKING RESULTS I OPERATIONAL EFFICIENCY Marks ( 10 Marks ) ( 05 Marks ) ( 10 Marks ) ( 08 Marks ) ( 12 Marks ) 21

SR. Particulars NO. J EFFICIENCY OF MANAGEMENT AUDIT CLASSIFICATION Marks ( 05 Marks ) 100 Marks Depending upon the aggregate marks Secured by the Bank on the basis of the above 10 norms Audit Classification may be made on the following basis. Marks Secured: Audit Classification: Date: For Chartered Accountants Place: 22

Loan documentation: Various loans Type Loans : Term Loan (Property, Business, Machinery etc. ) Working Capital Loan Housing Loan Project Loan Member Loan Vehicle Loan Gold Loan Consortium Finance 23

Loan Documents : Loan Application Form KYC Documents Financial Statements with IT Returns (Borrower & Guarantor) Collateral Security Papers Legal Opinion & Search Report Quotation & Valuation Report Stock Statement, Book Debt Statements CIBIL Report Confidential Report Project Report Documents for creating charge with ROC or Revenue Authorities 24

Stamp Duty & Registration Act THE KARNATAKA STAMP ACT, 1957 Act 34 of 1957. - Different rates on stamp duty are in force in the various areas of the State. As it is very desirable to have the same rates of stamp duty in all the areas in all areas of new State, Government have decided to undertake legislation to achieve this object. 25

Accounting Entries to be passed in respect of Accrued Interest on both the Performing and Nonperforming Advances I. Accrued Interest on Performing Advances: i) Accrued interest in respect of performing advances may be charged to borrowal accounts and taken to income account. Illustratively, if the accrued interest is Rs. 10, 000/- in respect of performing advances of a borrower 'X' (cash credit, overdraft, loan account, etc. ) the following entries can be passed in the Books of Account. (Dr) Borrower's account (CC, OD loan) Rs. 10, 000. 00 (Cr) Interest account Rs. 10, 000. 00 26

ii) In case the accrued interest of Rs. 10, 000/- in respect of the borrowal account is not actually realised and the account has become NPA as at the close of subsequent year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realised by passing the following entries : (Dr) P&La/c) Rs. 10, 000. 00 (Cr) Overdue Interest Reserve Account Rs. 10, 000. 00 27

iii) In case accrued interest is realised subsequently, the following entries may be passed: (Dr) Cash / Bank account Rs. 10, 000. 00 (Cr) Borrower's Account (CC, OD, Loan) Rs. 10, 000. 00 (Dr) Overdue Interest Reserve Account Rs. 10, 000. 00 (Cr) Interest account Rs. 10, 000. 00 28

II. Accrued Interest on Non-Performing Advances i) Accrued interest in respect of non-performing advances may be debited to 'Interest Receivable Account' and corresponding amount credited to 'Overdue Interest Reserve Account'. For example, if the interest accrued in respect of Cash Credit / OD / Loan etc. account of a borrower 'Y' is Rs. 20, 000/the accounting entries may be passed as under : (Dr) Interest Receivable Account Rs. 20, 000. 00 (Cr) Overdue Interest Reserve Account Rs. 20, 000. 00 29

ii) Subsequently, if interest is actually realised, the following accounting entries may be passed : (Dr) Cash / Bank Account Rs. 20, 000. 00 (Cr) Interest account Rs. 20, 000. 00 (Dr) Overdue Interest Reserve Account Rs. 20, 000. 00 (Cr) Interest Receivable Account Rs. 20, 000. 00 30

III. Accounting of Overdue Interest in Loan Ledgers & Balance Sheet i) With a view to facilitating the banks to work out the amount of interest receivable in respect of each nonperforming borrowal account, banks can consider opening a separate column in the individual ledger accounts of such borrowers and interest receivable shown therein. This would enable the banks to determine at a particular point of time, the amount of interest actually to be recovered from the borrowers. Total of the amounts shown under the separate columns in the loan ledgers would be interest receivable in respect of non-performing advances and it would get reflected as such on the 'assets' side of balance sheet with a corresponding item on the liabilities side of the balance sheet as 'Overdue Interest Reserve'. 31

ii) Similarly, a separate column should be provided in the loan ledger in respect of performing advances for showing accrued interest taken to income account on 31 March every year so that a watch can be kept on them. If the accrued interest is not realised and the account becomes NPA in the subsequent year, the amount has to be reversed or provided for. 32

Charging of Interest at monthly rests (i) Banks should charge interest at monthly rests in the context of adoption of 90 days norm for recognition of loan impairment w. e. f. from the year ended March 31, 2004 and consequential need for close monitoring of borrowers' accounts. However, the date of classification of an advance as NPA as stated in preceding paras, should not be changed on account of charging of interest at monthly basis. The existing practice of charging / compounding of interest on agricultural advances would be linked to crop seasons and the instructions regarding charging of interest on monthly rests shall not be applicable to agricultural advances. 33

Record of Recovery (i) The treatment of an asset as NPA should be based on the record of recovery. Banks should not treat an advance as NPA merely due to existence of some deficiencies which are of temporary in nature such as non-availability of adequate drawing power, balance outstanding exceeding the limit, non-submission of stock statements and the nonrenewal of the limits on the due date, etc. Where there is a threat of loss, or the recoverability of the advances is in doubt, the asset should be treated as NPA. A credit facility should be treated as NPA as per norms. However, where the accounts of the borrowers have been regularised by repayment of overdue amounts through genuine sources (not by sanction of additional facilities or transfer of funds between accounts), the accounts need not be treated as NPAs 34

Thank You! CA Sunil Nagaonkar, Kolhapur M: 9823124333 35