Unit
– 4: Financial Reporting By Banks, Insurance Companies and NBFCs
MEANING
OF A BANKING COMPANY
A
banking company is defined as a company which transacts the business of banking
in India. Section 5 (b) of The Banking Regulation Act, 1949 defines the term
banking as “accepting for the purpose of lending or investment of deposits of
money from the public, repayable on demand or otherwise and withdraw able by
cheque, draft, order or otherwise.
Section
– 7 of this Act makes it essential for every company carrying on the business
of banking in India to use as part of its name at least one of the words – bank,
banker, banking or banking company. Section 49A of the Act prohibits any
institution other than banking companies to accept deposit money from public
withdraw able by cheque. The essence of banking business is the function of
accepting deposits from public with the facility of withdrawal of money by
cheque. In other words, the combination of the functions of acceptance of
public deposits and withdrawal of the money by cheque by any institution cannot
be performed without the approval of Reserve Bank.
Features of Banking: The following are
the basic characteristics to capture the essential features of Banking:
a) Dealing in Money: The banks accept
deposits from the public and advance the same as loans to the needy people. The
deposits may be of different types – current, fixed, savings, etc. accounts.
The deposits are accepted on various terms and conditions.
b) Deposits must be withdraw able: The
deposits (other than fixed deposits) made by the public can be withdraw able by
cheques, draft or otherwise, i.e., the bank issue and pay cheques. The deposits
are usually withdraw able on demand.
c) Dealing with credit: The banks are the
institutions that can create credit i.e., creation of additional money for
lending. Thus, “creation of credit” is the unique feature of banking.
d) Commercial in nature: Since all the
banking functions are carried on with the aim of making profit, it is regarded
as a commercial institution.
e) Nature of agent: Besides the basic
function of accepting deposits and lending money as loans, bank possesses the
character of an agent because of its various agency services.
DISCLOSURE OF ACCOUNTS AND BALANCE SHEETS OF BANKS (RBI
Guidelines)
There
are various types of users of the financial statements of banks who need
information about the financial position and performance of the banks. The
financial statements are required to provide the information about the
financial position and performance of the bank in making economic decisions by
the users. The important information sought by these users are, about bank’s
Liquidity and solvency and the risks related to the assets and liabilities
recognized on its balance sheet and to its off balance sheet items. This useful
information can be provided by way of ‘Notes’ to the financial statements, hence
notes become an integral part of the financial statements of banks. The users
can make use of these notes and supplementary information to arrive at a
meaningful decision. Some of the specific disclosure requirements in Bank’s
financial statement are given below:
a)
Presentation: Summary of Significant
Accounting Policies’ and ‘Notes to Accounts’ may be shown under Schedule 17 and
Schedule 18 respectively, to maintain uniformity.
b)
Minimum Disclosures: While complying
with the requirements of Minimum disclosures, banks should ensure to furnish
all the required information in ‘Notes to Accounts’. In addition to the minimum
disclosures, banks are also encouraged to make more comprehensive disclosures
to assist in understanding of the financial position and performance of the
bank.
c)
Summary of Significant Accounting
Policies: Banks should disclose the accounting policies regarding key areas
of operations at one place (under Schedule 17) along with Notes to Accounts in
their financial statements. The list includes – Basis of Accounting,
Transactions involving Foreign Exchange, Investments – Classification,
Valuation etc, Advances and Provisions thereon, Fixed Assets and Depreciation,
Revenue Recognition, Employee Benefits, Provision for Taxation, Net Profit,
etc.
d)
Disclosure Requirements: In order to
encourage market discipline, Reserve Bank has over the years developed a set of
disclosure requirements which allow the market participants to assess key
pieces of information on capital adequacy, risk exposures, risk assessment
processes and key business parameters which provide a consistent and
understandable disclosure framework that enhances comparability. Banks are also
required to comply with the Accounting Standard 1 (AS 1) on Disclosure of
Accounting Policies issued by the Institute of Chartered Accountants of India
(ICAI). The enhanced disclosures have been achieved through revision of Balance
Sheet and Profit & Loss Account of banks and enlarging the scope of
disclosures to be made in “Notes to Accounts”.
e)
Additional/Supplementary Information:
In addition to the 16 detailed prescribed schedules to the balance sheet, banks
are required to furnish the following information in the “Notes to Accounts”:
Such furnished (information should cover the current year and the previous
year). “Notes to Accounts” may contain
the supplementary information such as:
1) Capital (Current & Previous Year) with
breakup including CRAR – Tier I/II capital (%), % of shareholding of GOI,
amount of subordinated debt raised as Tier II capital. Also it should show the
total amount of subordinated debt through borrowings from Head Office for
inclusion in Tier II capital etc.
2) Investments: Total amount should be
mentioned in crores, with the total amount of investments, showing the gross
value and net value of investments in India and Abroad. The details should also
cover the movement of provisions held towards depreciation on investments.
3) Derivatives: Forward Rate
Agreement/Interest Rates Swap: Important aspects of the disclosures would include
the details relating to:
Ø
The notional principal of swap agreements;
Ø
Losses which would be incurred if counterparties
failed to fulfill their obligations under the agreements;
Ø
Collateral required by the bank upon entering
into swap s;
Ø
Nature and terms of the swaps including
information on credit and market risk and the accounting policies adopted for
recording the swaps etc.
4) Exchange Traded Interest Rate Derivatives: As
regards Exchange Traded Interest Rate Derivatives, details would include the
notional principal amount undertaken:
Ø
During the year (instrument-wise),
Ø
Outstanding as on 31st March
(instrument-wise),
Ø
Outstanding and not “highly effective”
(instrument-wise),
Ø
Mark-to-market value of exchange traded interest
rate derivatives outstanding and not “highly effective” (instrument-wise).
f) Qualitative Disclosure: Banks should
discuss their risk management policies pertaining to derivatives with a
specific reference to the extent to which derivatives are used, the associated
risks and business purposes served. This also includes:
a)
The structure and organization for management of
risk in derivatives trading,
b)
The scope and nature of risk measurement, risk
reporting and risk monitoring systems,
c)
Policies for hedging and/or mitigating risk and
strategies and processes for monitoring the continuing effectiveness of hedges/mitigants,
and accounting policy for recording hedge and non-hedge transactions; recognition
of income, premiums and discounts; valuation of outstanding contracts;
provisioning, collateral and credit risk mitigation.
g) Quantitative Disclosures: Apart from
qualitative disclosures, banks should also included the quantitative
disclosures. The details are both Currency
Derivatives and Interest rate derivatives.
h) Asset Quality: Banks’ performances
are considered good based on the quality of assets held by banks. With the
changing scenario and due to number of risks associated with banks like Credit,
Market and Operational risks, banks are concentrating to ensure better quality
assets are held by them. Hence, the disclosure needs to cover various aspects
of asset quality consisting of:
Ø
Non-Performing
Assets, covering various details like Net NPAs, movement of NPAs
(Gross)/(Net) and relevant details provisioning to different types of NPAs
including Write off/write-back of excess provisions, etc., Details of
Non-Performing financial assets purchased, sold, are also required to be
furnished.
Ø
Particulars
of Accounts Restructured: The details under different types of assets such
as (i) Standard advances (ii) Sub-standard advances restructured (iii) Doubtful
advances restructured (iv) TOTAL with details number of borrowers, amount
outstanding, sacrifice.
Ø
Banks disclose the total amount outstanding in
all the accounts/facilities of borrowers whose accounts have been restructured
along with the restructured part or facility. This means even if only one of
the facilities/accounts of a borrower has been restructured, the bank should
also disclose the entire outstanding amount pertaining to all the
facilities/accounts of that particular borrower.
Ø
Details of financial assets sold to
Securitization/Reconstruction Company for Assets Reconstruction.
Ø
Provisions
on Standard Assets: Provisions towards Standard Assets need not be netted
from gross advances but shown separately as ‘Provisions against Standard
Assets’, under ‘Other Liabilities and Provisions – Others’ in Schedule No. 5 of
the balance sheet.
Ø
Other
Details: Business Ratios: (i) Interest Income as a percentage to Working
Funds (ii) Non-interest income as a percentage to Working Funds (iii) Operating
Profit as a percentage to Working Funds (iv) Return on Assets (v) Business
(Deposits plus advances) per employee (vi) Profit per employee.
i) Assets Liability Management: As part
of Assets Liability Management, the maturity pattern of certain items of assets
and liabilities such as deposits, advances, investments, borrowings, foreign
current assets, and foreign currency liabilities. Banks are required to
disclose the information based on the maturity patterns covering daily, monthly
and yearly basis.
j) Exposures
Break up Exposures: Banks should also
furnish details of exposures to certain sectors like Real Estate Sector.
Exposure to Capital Market: Capital
Market exposure details should be disclosed for the current and previous year
in crores. The details would include direct investment in equity shares,
convertible bonds, convertible debentures and units of equity-oriented mutual
funds the corpus of which is not exclusively invested in corporate debt and
also loan raised against such securities. A bank must also disclose the risk
associated with such investments. The risks are to be categorized as Insignificant,
Low, Moderate, High, Very high, Restricted
and Off-credit.
Apart
from the above category of exposures, banks are required to disclose details
relating to Single Borrower Limit (SGL)/Group Borrower Limit (GBL) exceeded by
the bank, and Unsecured Advances are to be furnished. Miscellaneous items would
include Amount of Provisions made for Income Tax during the year, and
Disclosure of Penalties imposed by RBI, etc.
AUDIT AND INSPECTION OF BANKING COMPANY
Audit: The balance sheet and the profit
and loss account of a banking company have to be audited as stipulated under
Section 30 of the Banking Regulation Act. Every banking company’s account needs
to be verified and certified by the Statutory Auditors as per the provisions of
legal frame work. The powers, functions and duties of the auditors and other
terms and conditions as applicable to auditors under the provisions of the
Companies Act are applicable to auditors of the banking companies as well. The
audit of banking companies books of accounts calls for additional details and
certificates to be provided by the auditors.
Apart
from the balance sheet audit, Reserve Bank of India is empowered by the
provisions of the Banking Regulation Act to conduct/order a special audit of
the accounts of any banking company. The special audit may be conducted or
ordered to be conducted, in the opinion of the Reserve Bank of India that the
special audit is necessary;
a)
In the public interest and/or
b)
In the interest of the banking company and/or
c)
In the interest of the depositors.
The
Reserve Bank of India’s directions can order the bank to appoint the same
auditor or another auditor to conduct the special audit. The special audit
report should be submitted to the Reserve Bank of India with a copy to the
banking company. The cost of the audit is to be borne by the banking company.
Financial Reporting Requirements of Insurance Companies
in India
To
protect the interests of policyholders and to increase transparency and
credibility of insurance companies there is a need to have an effective
regulatory system for financial reporting of insurance companies. Reporting
requirements of insurance companies are different from that of other companies,
because of the concept of policyholders and shareholders’ fund, segment
reporting in respect of all the funds maintained by the company, complexity of
insurance contracts and insurance itself is an intangible product.
Earlier
the accounts of insurance companies were governed by Insurance Act 1938, but
passing of Insurance Regulatory Development Authority Act (IRDA Act) in 1999
opened a new chapter for disclosure norms of insurance companies. In the year
2002, the IRDA came up with regulations for the preparation of the financial
statements of insurance companies. According to the Insurance (Amendment) Act,
2002, the first, second and third schedules prescribed for balance sheet,
profit and loss account and revenue account respectively as given in Insurance
Act, 1938 have been omitted. Now revenue account, profit and loss account and
balance sheet are to be prepared as per the formats prescribed by IRDA.
However, the statutes governing financial reporting practices of insurance
companies in India are: Insurance Act 1938, IRDA Act, 1999 (including IRDA
Regulations), Companies Act and Institute of Chartered Accountants of India
(ICAI).
IRDA Act 1999 (Including IRDA Regulations)
Insurance
Regulatory Development Authority (IRDA) has prescribed various regulations from
time to time. Preparation of Financial Statements and Auditor’s Report of
Insurance Companies Regulations, 2002 are one of them. These regulations are
related to the financial reporting practices of insurance companies. These
regulations are important constituents of the Indian regulatory regime.
According to the regulations made by the authority in consultation with the
Insurance Advisory Committee, accounts of insurance companies are prepared
according to the prescribed formats given by the authority. Details are given
as under:
a)
Preparation of Financial Statements:
After the commencement of Insurance Regulatory Development Authority,
Regulations, 2002, all the life insurance companies shall comply with the
requirements of Schedule A and general insurance companies with Schedule B of
these regulations while preparing their financial statements. The auditor’s
report on the financial statements of all insurance companies shall be in
conformity with the requirements of Schedule C. IRDA given the list of items to
be disclosed in the financial statements of insurance companies under Part II
of Schedule A (for life insurance companies) and Schedule B (for general
insurance companies) of the (Preparation of Financial Statements and auditor’s
report of Insurance Companies) Regulations, 2002. According to these
regulations, following disclosure will form part of financial statements of insurance
companies:
1.
Every insurance company will disclose all
significant accounting policies and accounting standards followed by them in
the manner required under Accounting Standard I issued by the Institute of
Chartered Accountants of India. (ICAI).
2.
All companies will separately disclose if there
is any departure from the accounting policies with reasons for such departure.
3.
Disclosure of investments made in accordance
with statutory requirements separately together with its amount, nature,
security and any special rights in and outside India.
4.
Disclosure of performing and non-performing
investments separately.
5.
Disclosure of assets to the extent required to
be deposited under local laws for otherwise encumbered in or outside India.
6.
All the companies are required to show
sector-wise percentage of their business.
7.
To include a summary of financial statements for
the last five years in their annual report to be prepared as prescribed by the
IRDA.
8.
Disclose the basis of allocation of investments
and income thereon between policyholders’ account and shareholders’ account.
9.
To disclose accounting ratios as prescribed by
the Insurance Regulatory and Development Authority.
10.
Disclosure of following items is made by way of
notes to balance sheet:
Ø
Contingent Liabilities.
Ø
Actuarial assumptions for valuation of
liabilities for life policies in force.
Ø
Encumbrance’s to assets of the company in and
outside India.
Ø
Commitments made and outstanding for loans,
investments and fixed assets.
Ø
Basis of amortization of debt securities.
Ø
Claims settled and remaining unpaid for a period
of more than six months as on the balance sheet date.
Ø
Value of contracts in relation to investments,
for purchases where deliveries are pending and sales where payments are
overdue.
Ø
Operating expenses relating to insurance
business and basis of allocation of expenditure to various segments of
business.
Ø
Computation of managerial remuneration.
Ø
Historical costs of those investments valued on
fair value basis.
Ø
Basis of revaluation of investment property.
b) Management Report: According to the
IRDA Regulations 2002, all the insurance companies are required to attach a
management report to their financial statements. The contents of the management
report are given under PART IV (Schedule A and Schedule B) of these regulations
and reproduced below:
1.
Confirmation regarding the continued validity of
the registration granted by the IRDA.
2.
Certification that all the dues payable to the
statutory authorities has been duly paid.
3.
Confirmation to the effect that the shareholding
patterns and the transfer of shares during the year are in accordance with the
statutory or regulatory requirements.
4.
Declaration that the management has not directly
or indirectly invested outside India the funds of the policyholders.
5.
Confirmation regarding required solvency
margins.
6.
Certification to the effect that no part of the
life insurance fund has been directly or indirectly applied in contravention of
the provisions of the Insurance Act, 1938 (4 of 1938) relating to the
application and investment of the life insurance funds.
7.
Disclosure with regard to the overall risk
exposure and strategy adopted to mitigate the same.
8.
Operations in other countries, if any, with a
separate statement giving the management’s estimate of country risk and
exposure risk and the hedging strategy adopted.
9.
Ageing of claims indicating the trends in
average claim settlement time during the preceding five years.
10.
Certification to the effect as to how the values,
as shown in the balance sheet, of the investments and stocks and shares have
been arrived at, and how the market value thereof has been ascertained for the
purpose of comparison with the values so shown.
11.
Review of assets quality and performance of
investment in terms of portfolio, i.e. separately in terms of real estate, loans,
investments. Etc.
12.
A schedule payments, which have been made to
individuals, firms, companies and organizations in which directors of the
insurance company are interested.
13.
A responsibility statement indicating therein
that:
a)
In the preparation of financial statements, the
applicable amounting standards, principles and policies have been followed
along with proper explanations relating to material departures, if any;
b)
The management has adopted accounting policies
and applied them consistently and made judgements and estimates that are
reasonable and prudent so as to give a true and fair view of the state of
affairs of the company at the end of the financial year and of the operating
profit or loss and of the profit or loss of the company for the year;
c)
The management has taken proper and sufficient
care for the maintenance of adequate accounting records in accordance with the
applicable provisions of the Insurance Act, 1938 and Companies Act 1956 for
safeguarding the assets of the company and for preventing and detecting fraud
and other irregularities;
d)
The management has prepared the financial
statements on a going concern basis;
e)
The management has ensured that an internal
audit system commensurate with the size and nature of the business exists and
is operating effectively.
Non-Banking
Financial Company
A Non-Banking
Financial Company (NBFC) is a company engaged in the business of loans and
advances, acquisition of shares/stocks/bonds/debentures/securities issue by Government
or local authority or other marketable securities of a like nature, leasing,
hire purchase, insurance business, chit business but does not include any
institution whose principal business is that of agriculture activity,
industrial activity, purchase or sale of any goods (other than securities) or
providing any services and sale/purchase/construction of immovable property. A
non-banking institution which is a company and has principal business of
receiving deposits under any scheme or arrangement in one lump sum or in
instalments by way of contributions or in any other manner, is also a
non-banking financial company (Residuary non-banking company).
Section 451 (c)
of the RBI defines “financial institution”, A non-banking company carrying
business of financial institution will be an NBFC.
NBFCs lend and
make investments and hence their activities are akin to that of banks; however
there are a few differences as:
a) NBFC cannot
accept demand deposits;
b) NBFCs do not
form part of the payment and settlement system and cannot issue cheques drawn
on itself.
c) Deposit
insurance facility of Deposit Insurance and Credit Guarantee Corporation is not
available to depositors of NBFCs, unlike in case of banks.
DISCLOSURES
IN FINANCIAL STATEMENTS (RBI – GUIDELINES)
a) NBFCs with
assets of Rs. 100 crore and above were required to make additional disclosures
in their balance sheet from the year ending March 31, 2009 relating to CRAR,
exposure to real estate sector (both direct and indirect), and maturity
patterns of assets and liabilities respectively. The above disclosures are now
applicable for NBFCs-ND-SI (as redefined) and for all NBFCs-D. However, other
NBFCs already disclosing the above are encouraged to continue to do so, in line
with prudent practice.
b) All NBFCs-D
shall additionally disclose the following in their Annual Financial Statements,
with effect from March 31, 2015:
Ø
Registration/license/authorization obtained from
other financial sector regulators;
Ø
Ratings assigned by credit rating agencies and
migration of rating during the year;
Ø
Penalties, if any, levied by any regulator;
Ø
Information viz., area, country of operation and
joint venture partners with regard to Joint Ventures and Overseas Subsidiaries;
and
Ø
Asset liability profile, extent of financing of
parent company products, NPAs and movement of NPAs, details of all off-balance
sheet exposures, structured products issued by them as also
securitization/assignment transactions and other disclosures.
GENERAL INSTRUCTION FOR PREPARATION OF
BALANCE SHEET AND PROFIT AND LOSS ACCOUNT
a) A statement
of all significant accounting policies adopted in the preparation and
presentation of the balance sheet and the profit and loss account shall be
included in the company’s balance sheet.
b) The accounting policies adopted in
the preparation and presentation of financial statements shall be in conformity
with the applicable prudential norms relating to accounting matters (including
income recognition, asset classification and provisioning, and valuation of
investments) issued by the Reserve Bank of India.
c) Where any of
the accounting policies is not in conformity with the accounting standards and
guidance notes issued by the Institute of Chartered Accountants of India, and
the effect of departures from accounting standards/guidance notes is material,
the particulars of the departure shall be disclosed, together with the reasons
therefore and the financial effect thereof. Where such effect is not
ascertainable, the fact shall be disclosed.
d) An inappropriate treatment of an
item in balance sheet or profit and loss account cannot be rectified either by
disclosure of accounting policies used or by disclosure in notes to balance
sheet and profit and loss account.
e) Notes to the balance sheet and the
profit and loss account shall contain only the explanatory material pertaining
to the items in the balance sheet and the profit and loss account.
f) If the information required to be
given under any of the items for which a separate schedule has not been
prescribed herein cannot be conveniently included in the balance sheet or the
profit and loss account itself, as the case may be, it can be furnished in a
separate Schedule or Schedules to be annexed to and forming part of the balance
sheet or the profit and loss account. This is recommended where items are
numerous.
The Schedules
referred to above, accounting policies and explanatory notes shall form an
integral part of the balance sheet.
g) The figures in the balance sheet and
profit and loss account shall be rounded off to the nearest thousands.
h) An NBFC having non-financial
business shall also disclose all the additional information as required to be
disclosed under Schedule VI of the companies Act.
i)
For the purposes of these formats unless the context otherwise requires:
Ø
The expression ‘relatives’ shall have the same
meaning as is assigned thereto in the Reserve Bank of India Act, 1934;
Ø
The expression ‘substantial shareholding’ shall
mean the holding of 10% or more in the nominal value of the total subscribed
capital of the company;
Ø
The expression ‘substantial interest’ shall
mean:
1.
In a case where the concern is a company,
beneficial ownership of its shares (not being shares entitled to a fixed rate
of dividend whether with or without a further right to participate in profits)
exceeding 10% in nominal value of the subscribed capital of such company;
2.
In the case of any other concern, entitlement to
more than 10% of the profits of such concern;
3.
The expression ‘companies in the same group’
shall mean companies under the same management as defined below: Two companies
shall deemed to be under the same management, if:
(i)
The managing director or manager of the one
company is the managing director or manager of the other company; or
(ii)
A majority of the directors of the one company
constitute, or at any time within the six months immediately preceding
constituted, a majority of the directors of the other company; or
(iii)
Not less than one-third of the total voting
power with respect of any matter relating to each of the two companies is
exercised or controlled by the same individual or company; or
(iv) The
holding company is under the same management as the other company within the
meaning of clause (i) clause (ii) or clause (iii) or
(v)
One or more directors of the one company while
holding, whether by themselves or together with their relatives, the majority
of shares in that company also hold, whether by themselves or together with
their relatives, the majority of shares in the other company.
Ø
The expression ‘public deposits’ shall have the
same meaning as is assigned thereto under the Non-Banking Financial Companies
Acceptance of Public Deposits (Reserve Bank) Directions, 1998;
Ø
For determining whether the company and/or one
or more directors of the company have a substantial interest in a concern, the
interest of spouses and minor children of the directors of the company in such
concern shall also be reckoned.
Ø
Every non-banking financial company shall
prepare its balance sheet and profit and loss account as on March 31 every
year. Whenever a non-banking financial company intends to extend the date of its
balance sheet as per provisions of the Companies Act, it should take prior
approval of the Reserve Bank of India before approaching the Registrar of
Companies for this purpose. Every non-banking financial company shall finalize
its balance sheet within a period of 3 months from the date to which it
pertains”.
