CA.

Nitin Goel

Educator: CA Inter Accounts

& Advanced Accounts

3 years experience with ITC Ltd.

> 7 Years teaching experience
All India Rankholder
(CPT-9, Inter- 7, Final-9)
Gold Medalist

Use Code: CANITIN

to get 10% Discount
 ACCOUNTS OF BANKING COMPANIES
TOPIC Introduction to Chapter, NPA & Income Recognition
Introduction
Banks in India and their activities are regulated by the Banking Regulation Act, 1949.
Under Section 5(b) of the said Act “Banking” means,
➢ Accepting deposits of money from public for the purpose of lending or investing
➢ These deposits are repayable on demand or otherwise, and can be withdrawn by cheque, draft or
otherwise.

Non-Performing Assets (NPA)

➢ An asset is classified as NPA if dues in the form of principal and interest are not paid by the borrower
for a period of 90 days.
➢ If any advance or credit facility granted by a bank to a borrower becomes NPA, then the bank will
have to treat all the advances/credit facilities granted to that borrower as NPA without having any
regard to the fact that there may still exist certain advances/credit facilities having performing status.
FACILITY WHEN TO BE TREATED AS NPA
Term Loan If interest and/or instalments of principal remains over due for a period of > 90 days.
Bills purchased If they remain overdue and unpaid for a period of > 90 days.
& discounted
Cash Credit If it remains out of order for a period of > 90 days. An account is treated an ‘out of
/Overdraft order’ if any of the following conditions is satisfied:
Account o the outstanding balance remains continuously in excess of the sanctioned
limit/drawing power.
o though outstanding balance is less than sanctioned limit/drawing power—
▪ there are no credits continuously for > 90 days as on the date of Balance sheet or
▪ credits during aforesaid periods are not enough to cover interest debited during
the same period
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Question 1 RTP Nov 2020 / RTP May 2021 (Similar) / ICAI Study Material
State with reason whether the following cash credit accounts are NPA or not:
Case 1 Case 2 Case 3 Case 4
Sanctioned limit 50,00,000 60,00,000 55,00,000 45,00,000
Drawing power 44,00,000 56,00,000 50,00,000 42,00,000
Amount outstanding continuously 40,00,000 48,00,000 56,00,000 30,00,000
01-01-21 to 31-03-21
Total interest debited for the period 3,20,000 3,84,000 4,48,000 2,40,000
Total credits for the above period 1,80,000 Nil 4,48,000 3,20,000

Income from the non-performing assets can only be accounted for as and when it is actually received.

Question 2 ICAI Study Material

Find out the income to be recognised by Bank for year ended 31st March, 2021 in respect of interest on
advances [₹ in Lakhs] as detailed below:.
Performing Assets Non Performing Assets
Interest Interest Interest Interest
earned received earned received
Cash credits and overdrafts 1800 1060 450 70
Term Loans 480 320 300 40
Bills purchased & discounted 700 550 350 36

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 Classification of Advances & Rates of Provisioning

Rates of Provisioning
Category of Advances Rate (%)
1. Standard Advances
(a) Direct advances to Agricultural and Small & Micro Enterprises (SME) 0.25
(b) Advances to Commercial Real Estate (CRE) Sector 1.00
(c) Advances to Commercial Real Estate – Residential Housing Sector (CRE - RH) 0.75
(d) all other loans and advances not included in (a) , (b) and (c) above 0.40
2. Sub- standard Advances
(a) Secured Exposures 15
(b) Unsecured Exposures 25
(c) Unsecured Exposures in respect of Infrastructure loan accounts where certain 20
safeguards such as escrow accounts are available.
3. Doubtful Advances
A. Unsecured Portion 100
B. Secured Portion
(a) For Doubtful upto 1 year 25
(b) For Doubtful > 1 year and upto 3 years 40
(c) For Doubtful > 3 years 100
4. Loss Advances 100

NOTES:
❖ The secured value of assets is the realizable value of its security and not its face value or book value.
❖ The value of security is to be considered on the balance sheet date
❖ If Question is silent whether the Sub-standard Advances or Doubtful Advances are secured or
unsecured, assume it to be secured by giving note.

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Question 3
Compute the amount of Provisions to be made in Profit and Loss Account of SG Bank for the year
ending 31st March, 2021.
Assets ₹ in lakhs
Standard (includes ₹ 1,000 lakhs to Commercial 10,000
Real Estate – Residential Housing Sector CRE-RH)
Sub-standard Secured 5,000
Sub-Standard Unsecured 2,000
(includes ₹ 500 lakhs for infrastructure loans
accounts where ESCROW accounts are available)
Doubtful Advance Secured
Upto 1 Year 1,000
1 Year and upto 3 Years 500
Above 3 Years 200
Doubtful Advance Unsecured 300
Loss Assets 500

Question 4 ICAI Study Material

From the following information, compute the amount of provisions to be made in the Profit and Loss
Account of bank:
Assets ₹ in Lakhs
Standard (Value of security ₹ 6,000 lakhs) 7,000
Sub Standard 3,000
Doubtful
(a) Doubtful for less than one year 1,000
(Realisable value of security ₹ 500 lakhs)
(b) Doubtful for more than one year, but less than 500
3 years (Realisable value of security ₹300 lakhs)
(c) Doubtful for more than 3 years (No security) 300

Provision in case of ECGC & DICGC

ECGC (Export Credit Guarantee Corporation)/ DICGC (Deposit
Insurance Credit Guarantee Corporation)

Outstanding Balance (A) xx

Less: Realizable Value of Security (B) (xx)
Unsecured Balance [C = A – B] xx
Less: ECGC/DICGC Cover (% of Unsecured Balance) (xx)
[D = C * %)
Net Unsecured Balance [ E = C – D] xx

Provision:
Secured Portion: Value (B) * Applicable Rate
Unsecured Portion: Value (E) * Applicable Rate

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Question 5 ICAI Study Material

Outstanding Balance ₹ 4 Lakhs

ECGC Cover 50%
Period for which the advance has More than 3 years remained
remained doubtful doubtful (as on March 31, 2021)
Value of security held ₹ 1.50 Lakhs
(realizable value only 80%)
You are required to calculate provisions as per applicable rates.

Question 6
A loan account remains out of order as on the date of Balance Sheet of a Bank. The account has been
classified as doubtful assets (up to 3 years). Detail of the account is:
Outstanding ₹ 7,24,000
ECGC Cover 30% of outstanding (Subject to
maximum of ₹ 1,50,000)
Value of security
As per valuation on the date of grant of loan 2,25,000
As per realizable value as on date of Balance Sheet 1,75,000
Compute the necessary provision to be made by bank as per applicable rate.

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 Rebate on Bill Discounted
It refers to the unearned discount on those bills that will mature after the date of closing of accounts or
that portion of the discount which relates to the period falling after the close of the year.

Unearned Interest: Bill Value x Discount rate x No. of days to Maturity from close of year
365

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Question 7
The following is an extract from the Trial Balance of Laxmi Bank as at 31st March 2020:
₹ ₹
Bills discounted 51,50,000
Rebate on bills discounted not yet due, April 1,2019 30,501
Discount received 1,45,500
An analysis of the bills discounted as shown above shows the following:
Date of Bills Amount Term Months Rate of Discount (%)
(i) Jan 13 7,50,000 4 12
(ii) Feb 17 6,00,000 3 10
(iii) Mar 6 4,00,000 4 11
(iv) Mar 16 2,00,000 2 10
Find out the amount of discount received to be credited to Profit and Loss Account and pass appropriate
journal entries for the same. For calculation, take 1 year = 365 days.

Question 8 ICAI Study Material

On 31st March, 2020, Uncertain Bank had a balance of ₹ 9 crores in “rebate on bills discounted”
account. During the year ended 31st March, 2021, Uncertain Bank discountedbills of exchange of ₹
4,000 crores charging interest at 18% per annum the average period of discount being for 73 days.
Of these, bills of exchange of ₹ 600 crores were due for realisation from the acceptors/customers
after 31st March, 2021, the average period outstanding after 31st March, 2021 being 36.5 days.
Uncertain Bank asks you to pass journal entries and show the ledger accounts pertaining to:
(i) discounting of bills of exchange and
(ii) rebate on bills discounted.

Bills for Collection

One of the services provided by banks to their customers is to collect the dues against Bills of Exchange
from their customers on the due dates. The particulars will be recorded in a separate book called Bills for
Collection Register. Bills sent for collection have to be shown by way of Note in Balance Sheet.
2 Accounts have to be opened which are mirror images of each other. They are:
(i) Bills for Collection (Asset) (ii) Bills for Collection (Liability)

Acceptances & Endorsements

A bank has a more acceptable credit as compared to that of its customers. On this account, it is often
called upon to accept or endorse bills on behalf of its customers.
A record of the particulars of the bills accepted as well as of the securities collected from the customers is
kept in the Bills Accepted Register.

Question 9
From the following facts drawn from the records of Honest Bank for the year ended 31st March, 2021,
prepare the accounts as mentioned below:
a) On 1st April, 2020 Bills for Collection were ₹28,00,000. During 2020-21, bills received for collection
were ₹2,58,00,000. Bills collected were ₹1,88,00,000. Bills dishonoured and returned were ₹22,00,000.
Prepare Bills for Collection (Assets) Account and Bills for Collection (Liability) Account.
b) On 1st April, 2020, Acceptance, Endorsement etc. not yet satisfied amounted to ₹58,00,000. During
the year, Acceptances, Endorsements, Guarantees etc. were ₹1,76,00,000. The Bank honoured
acceptances of ₹1,00,00,000 and a client paid ₹40,00,000 against guaranteed liabilities. The Bank paid
₹4,00,000 which clients failed to pay.
Prepare "Acceptances, Endorsements and Other Obligations Account" in the General Ledger.
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c) The following balances were taken from the Trial Balance as on 31.3.2021:
Dr. Cr.
Interest and Discounts 3,92,00,000
Rebate for bills discounted 80,000
Bills discounted and purchased 16,00,000
Proportionate discounts not yet earned for Bills to mature in 2021-22 were ₹56,000.
Prepare the following Accounts:
i. Rebate on Bills Account
ii. Interest and Discount Account

Solution

(i) Bills for Collection (Assets) A/c

Particulars Amount Particulars Amount
To Balance b/d 28,00,000 By Bills for collection (Liability) A/c 1,88,00,000
To Bills for collection (Liability) A/c 2,58,00,000 By Bills for collection (Liability) A/c 22,00,000
By Balance c/d 76,00,000
2,86,00,000 2,86,00,000

Bills for Collection (Liability) A/c

Particulars Amount Particulars Amount
To Bills for collection (Assets) A/c 1,88,00,000 By Balance b/d 28,00,000
To Bills for collection (Assets) A/c 22,00,000 By Bills for collection (Assets) A/c 2,58,00,000
To Balance c/d 76,00,000
2,86,00,000 2,86,00,000
(ii) In the General Ledger
Acceptances, Endorsement & other Obligation Account
Particulars Amount Particulars Amount
To Constituents’ Liability for 1,00,00,000 By Balance b/d 58,00,000
Acceptance, Endorsement, etc.
To Constituents’ Liability for 40,00,000 By Constituents’ Liability for 1,76,00,000
Acceptance, Endorsement, etc. Acceptance, Endorsement, etc.
To Constituents’ Liability for 4,00,000
Acceptance, Endorsement, etc.
(amount paid on failure of clients)
To Balance c/d 90,00,000
2,34,00,000 2,34,00,000

(iii)
Rebate on Bill Discounted A/c
Particulars Amount Particulars Amount
To Interest & Discount A/c 80,000 By Balance b/d 80,000
To Balance c/d 56,000 By Interest & Discount A/c 56,000
1,36,000 1,36,000

Interest and Discount A/c

Particulars Amount Particulars Amount
To Rebate on bill discounted A/c 56,000 By Rebate on bill discounted A/c 80,000
To P & L A/c (Bal. Fig.) 3,92,24,000 By Bills Purchased & discounted A/c 3,92,00,000
/ By Customer’s A/c
3,92,80,000 3,92,80,000
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 Final Accounts

FORM OF BALANCE SHEET

Balance sheet as on 31st March, _______________ (year)
Schedule As on 31.3... As on 31.3...
No. (Current year) (Previous year)
Capital & Liabilities
Capital 1
Reserves & Surplus 2
Deposits 3
Borrowings 4
Other Liabilities and Provisions 5
Total
Assets
Cash and balances with Reserves Bank of India 6
Balances with banks & money at call & short notice 7
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
Total
Contingent Liabilities 12
Bills for Collection

SCHEDULE 9 – ADVANCES
As on 31.3... As on 31.3...
(Current year) (Previous year)
A. (i) Bills purchased and discounted
(ii) Cash credits, overdrafts and loans repayable on demand
(iii) Terms loans
Total
B. (i) Secured by tangible assets
(ii) Covered by Bank/Government guarantees
(iii) Unsecured
Total
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 FORM OF PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31stMARCH
Schedule No. As on 31.3... As on 31.3...
(Current year) (Previous year)
I. Income
Interest earned 13
Other income 14
Total
II. Expenditure
Interest expended 15
Operating expenses 16
Provisions and contingencies
Total
III. Profit/Loss
Net profit/ Loss (−) for the year
Profit/Loss (−)brought forward
Total
IV. Appropriations
Transfer to statutory reserves
Transfer to other reserves
Declared dividend
Balance carried over to balance sheet
Total

SCHEDULE 13- INTEREST EARNED

As on 31.3... As on 31.3...
(Current year) (Previous year)
I. Interest/discount on advances/bills
II. Income on investments
III. Interest on balances with RBI& other inter-bank funds
IV. Others
Total
SCHEDULE 14- OTHER INCOME
As on 31.3... As on 31.3...
(Current year) (Previous year)
I. Commission, exchange and brokerage
II. Profit on sale of investments
Less: Loss sale of investments
III. Profit on revaluation of investments
Less: Loss on revaluation of investments
IV. Profit on sale of land, buildings and other assets
Less: Loss on sale of land, buildings and other assets
V. Profit on exchange transactions
Loss: Loss on exchange transactions
VI. Income earned by way of dividends etc., from
subsidiaries/companies and/or joint ventures abroad/in
India
VII. Miscellaneous income
Total
Note: Under items II to V loss figures may be shown in brackets

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SCHEDULE 15-INTEREST EXPENDED
As on 31.3... As on 31.3...
(Current year) (Previous year)
I. Interest on deposits
II. Interest on Reserve Bank of India/inter-bank borrowings
III. Others
Total
SCHEDULE 16- OPERATING EXPENSES
As on 31.3... As on 31.3...
(Current year) (Previous year)
I. Payments to and provisions for employees
II. Rent, taxes and lighting
III. Printing and stationery
IV. Advertisement and publicity
V. Depreciation on bank’s property
VI. Directors’ fees, allowances, and expenses
VII. Auditor’s fees & expense (incl. branch auditors fees & exp.)
VIII. Law charges
IX. Postages, telegrams, telephones, etc.
X. Repairs and maintenance
XI. Insurance
XII. Other expenditure
Total

Question 10 ICAI Study Material

The following figures are extracted from the books ofAB Bank Ltd. as on 31-03-2021:
Items ₹
Interest and discount received 38,00,160
Interest paid on deposits 22,95,360
Issued and subscribed capital 10,00,000
Salaries and allowances 2,50,000
Directors fee and allowances 35,000
Rent and taxes paid 1,00,000
Postage and telegrams 65,340
Statutory reserve fund 8,00,000
Commission, exchange and brokerage 1,90,000
Rent received 72,000
Profit on sale of investments 2,25,800
Depreciation on assets 40,000
Statutory expenses 38,000
Preliminary expenses 30,000
Auditor’s fee 12,000
The following further information is given:
(1) A customer to whom a sum of ₹ 10 lakhs was advanced has become insolvent and it is expected
only 55% can be recovered from his estate.
(2) There was also other debts for which a provisions of ₹ 2,00,000 was found necessary.
(3) Rebate on bill discounted on 31-03-2020 was ₹ 15,000 and on 31-03-2021 was ₹ 20,000.
(4) Income tax of ₹ 2,00,000 is to be provided.
(5) Dividend declared @ 5%.and also transfer 25% of profit to the reserve fund.

Prepare the Profit and Loss account of AB Bank Ltd. for the year ended 31-03-2021 if the Profit and Loss
account opening balance was NIL as on 31-03-2020.
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Question 11 ICAI Study Material
From the following information, prepare P&L A/c of XY Bank for the year ended 31st March, 2021:
Items ₹ (In ‘000)
Interest on cash credit 18,20
Interest on overdraft 7,50
Interest on term loans 15,40
Income on investments 8,40
Interest on balance with RBI 1,50
Commission on remittances and transfer 75
Commission on letters of credit 1,18
Commission on government business 82
Profit on sale of land and building 27
Loss on exchange transactions 52
Interest paid on deposit 27,20
Auditors’ fees and allowances 1,20
Directors’ fees and allowances 2,50
Advertisements 1,80
Salaries, allowances and bonus to employees 12,40
Payment to Provident Fund 2,80
Printing and stationery 1,40
Repairs and maintenance 50
Postage, telegrams, telephones 80

Other Information:
(i) Interest on NPA is as follows
Earned Collected
( ₹ ’000) ( ₹ ’000)
Cash credit 8,20 4,00
Overdraft 4,50 1,00
Term Loans 7,50 2,50
(ii) Classification of advances (’000 ₹)
Standard 30,00
Sub Standard 11,20
Doubtful assets not covered by security 2,00
Doubtful assets covered by security for one year 50
Loss Assets 2,00
(iii) Investments 27,50
Bank should not keep more than 25% of its investment as ‘held-for-maturity’ investment. The market
value of its rest 75% investment is ₹ 19,75,000 as on 31-3-2021.

Question 12 Inter Nov 2019 (10 Marks)

From the following information, you are required to prepare Profit and Loss Account of Simple Bank for
the year ended as on 31st March, 2021:
₹ (‘000) Item ₹ (‘000)
2019-20 2020-21
71,35 Interest and Discount 1,02,25
5,70 Income from investment 5,60
7,75 Interest on Balances with RBI 8,85
36,10 Commission, Exchange and Brokerage 35,60
60 Profit on sale of investments 6,10
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 30,60 Interest on Deposits 41,10
6,35 Interest to RBI 7,35
36,35 Payment to and provision for employees 42,75
7,90 Rent, taxes and lighting 8,95
7,35 Printing and stationery 10,60
5,60 Advertisement and publicity 4,90
4,90 Depreciation 4,90
7,40 Director’s fees 10,60
5,50 Auditor’s fees 5,50
2,50 Law charges 7,60
2,40 Postage, telegrams and telephones 3,10
2,10 Insurance 2,60
2,85 Repair & maintenance 3,30
Other Information:
(i) The following items are already adjusted with Interest and Discount (Cr.):
a. Tax Provision (’000 ₹) 7,40
b. Provision for Doubtful Debts (’000 ₹) 4,60
c. Loss on sale of investments (’000 ₹) 60
d. Rebate on Bills discounted (’000 ₹) 2,75
(ii) Appropriations :
a. 25% of profit is transferred to Statutory Reserves
b. 5% of profit is transferred to Revenue Reserve.
You are required to give necessary Schedules also.

Solution
Simple Bank
Profit and Loss Account for the year ended 31-3-2021
Particulars Schedule (₹ 000’s) (₹ 000’s)
No. Year ended Year ended
31-03-2021 31-03-2020
I. Income
Interest Earned 13 1,29,30 84,80
Other Income 14 41,10 36,70
Total 1,70,40 1,21,50
II. Expenditure
Interest Expended 15 48,45 36,95
Operating Expenses 16 1,04,80 84,85
Provisions and Contingencies (W.N.-1) 12,00
Total 1,65,25 1,21,80
III. Profit/Loss
Net Profit/Loss for the year 5,15 (30)
Profit/Loss brought forward (30)
Total 4,85 (30)
IV. Appropriations
Transfer to Statutory Reserve 128.75 -
Transfer to Other Reserve 25.75 -
Balance carried over to Balance Sheet 330.5 (30)
Total 4,85 (30)

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 Schedule 13 - Interest Earned
Particulars (₹ 000’s) (₹ 000’s)
Year ended Year ended
31-03-2031 31-03-2020
I. Interest/Discount 1,14,85 71,35
II. Income on Investments 5,60 5,70
III. Interest on Balances with RBI and other inter-
bank fund 8,85 7,75
Total 1,29,30 84,80

Schedule 14 - Other Income

Particulars (₹ 000’s) (₹ 000’s)
Year ended Year ended
31-03-2021 31-03-2020
I. Commission, Exchange and Brokerage 35,60 36,10
II. Profit on Sale of Investments 6,10 60
Less: Loss on sale of Investments (60) -
Total 41,10 36,70

Schedule 15 - Interest Expended

Particulars (₹ 000’s) (₹ 000’s)
Year ended Year ended
31-03-2021 31-03-2020
I. Interest on Deposits 41,10 30,60
II. Interest on RBI/inter-bank borrowings 7,35 6,35
Total 48,45 36,95

Schedule 16 - Operating Expenses

Particulars (₹ 000’s) (₹ 000’s)
Year ended Year ended
31-03-2021 31-03-2020
I. Payments to and provision for employees 42,75 36,35
II. Rent, taxes and lighting 8,95 7,90
III. Printing and stationery 10,60 7,35
IV. Advertisement and Publicity 4,90 5,60
V. Depreciation on the Bank’s Property 4,90 4,90
VI. Director’s fees, allowances and expenses 10,60 4,90
VII. Auditor’s fees and expenses (including 5,50 5,50
branch auditors)
VIII. Law charges 7,60 2,50
IX. Postage, telegrams, telephones etc. 3,10 2,40
X. Repairs and maintenance 3,30 2,85
XI. Insurance 2,60 2,10
Total 1,04,80 84,85
W.N.1 Provision & Contingencies
Particulars (₹ 000’s) (₹ 000’s)
Year ended Year ended
31-03-2021 31-03-2020
Provision for Tax 7,40 -
Provision for Doubtful Debts 4,60 -
12,00 -
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Question 13 ICAI Study Material
How will you disclose the following Ledger balances in the Final accounts of ABC bank
₹ (In Lacs)
Current accounts 700
Saving accounts 500
Fixed deposits 700
Cash credits 600
Term Loans 500
Bills discounted & purchased 800
Additional information:
(i) Current accounts ledger (not included in above figure) are accounts overdrawn to the extent of ₹ 250
lacs.
(ii) One of the cash credit account of ₹ 10 lacs (including interest ₹ 1 lac) is doubtful.
(iii) 60% of term loans are secured by government guarantees, 20% of cash credits are unsecured, other
portion is secured by tangible assets.

CRR & SLR

CRR (Cash Reserve Ratio)
It is 4%* of Net Demand & Time Liabilities to be maintained in RBI (Current A/c)
* Changed to 4% from 22.05.2021

SLR (Statutory Liquidity Ratio)

It is 18%* of Net Demand & Time Liabilities to be maintained in form of
✓ Cash in Hand
✓ Balance with Other Banks
✓ Money at Call & Short Notice
✓ Gold
✓ Approved Government Securities (Unencumbered)
*Effective from 11.04.2020

Where Net Demand & Time Liabilities

Fixed Deposits XX
Recurring Deposits XX
Saving Deposits (Both Demand & Time liabilities portion) XX
Current Accounts (Credit Balance) XX
Demand Deposits XX
Gold Deposits XX
Unclaimed Deposits XX
Margins held against Letter of Credit XX
Total XX
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Question 14 Inter Nov 2019 (5 Marks)
The following information is furnished by ALFA Bank Ltd.
(₹ In Lakhs)
Margins held against letter of credit 200
Recurring accounts deposits 100
Current accounts deposits 375
Demand deposits 125
Unclaimed deposits 75
Gold deposits 235
Demand liabilities portion of saving bank deposit 1325
Time liabilities portion of saving bank deposit 722
Explain CRR and you are required to calculate the amount of Cash Reserve Ratio (CRR) as per the
directions of Reserve Bank of India

Solution
Cash Reserve Ratio (CRR): For smoothly meeting cash payment requirement, banks are required to
maintain certain minimum ready cash balances at all times. This is called as Cash Reserve Ratio (CRR).
Cash reserve can be maintained by way of either a cash reserve with itself or as balance in a current
account with the Reserve Bank of India or by way of net balance in current accounts or in one or more of
the aforesaid ways.
Every Scheduled Commercial Bank has to maintain cash reserve ratio (i.e. CRR) as per direction of the
RBI. The current Cash Reserve Ratio (CRR) is 4% of their Net Demand and Time Liabilities (NDTL).
Margins held against letters of credit Demand Liability 200
Recurring Accounts deposits Time Liability 100
Current deposits Demand Liability 375
Demand deposits Demand Liability 125
Unclaimed deposits, Demand Liability 75
Gold deposits Time Liability 235
Demand liabilities portion of savings bank deposits Demand Liability 1325
Time liabilities portion of savings bank deposits Time Liability 722
Total 3,157
Cash Reserve Ratio = Net (demand + Time) liabilities X 4/100
CRR= 3,157 x 4/100 = 126.28 Lakhs

Capital Adequacy Ratio

Capital Adequacy Ratio (CAR)
Capital adequacy is used to describe adequacy of capital resources of a bank in relation to the
risks associated with its operations. RBI requires Banks to maintain minimum capital risk
adequacy ratio of 9% on an ongoing basis.
Capital Adequacy Ratio = Capital Fund* . X 100
Risk weighted assets + Off Balance Sheet items

*Capital Fund consists of Tier I & Tier II Capital

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A. Tier I capital:
The elements of Tier I capital include
(a) Paid-up capital
(b) Statutory reserves and other disclosed free reserves including share premium if any.
(c) Capital reserve representing surplus arising out of sale proceeds of assets.
(d) Perpetual Non-cumulative Preference Shares (PNCPS) eligible for inclusion as Tier Icapital - subject
to laws in force from time to time.
(e) Innovative Perpetual Debt Instruments (IPDI) eligible for inclusion as Tier I capital
As reduced by:
(i) Intangible assets.
(ii) Current and brought forward losses.
(iii) Deferred Tax Asset (DTA)

B. Tier II capital:
It comprises elements that are less permanent in nature or are less readily available thanthose comprising
Tier I capital. The elements comprising Tier II capital are as follows:
(a) Undisclosed reserves and Perpetual Cumulative preference shares
(b) Revaluation reserves (after discount of 55%)
(c) General provisions and loss reserves (Maximum of 1.25% of Risk Weighted assets)
(d) Hybrid debt capital instruments
(e) Subordinated debt
(f) Investment Reserve Account (Maximum of 1.25% of Risk Weighted assets)

Note: The quantum of Tier II capital is limited to a maximum of 100% of Tier I Capital.
Important weights for the purpose of Ascertainment of CAR are as follows:-
S,No. Item of Asset Risk Weight %
1 Cash, balances with RBI 0
2 Balances in current account with other banks/Claims on Bank 20
3 Investments in Government Securities 0
4 Investments in Bonds issued by Other Banks 20
5 Investments in Venture Capital Funds 150
6 Other Investments 100
7 Loans & Advances guaranteed by Government/Public sector 0
undertakings
8 Advances against term deposits, life policies, NSC, IVP, KVP etc. 0
where adequate margin is available
9 Loans & Advances granted to bank staff which are fully covered by 20
super annuation benefits & mortgage of flat/house
10 Loans & Advances guaranteed by ECGC/DICGC 50
11 Other Loans & Advances/Leased Assets/Educational Loans 100
12 Bank Premises, Furniture & Fittings etc. 100
13 All Off- Balance Sheet Items like LC’s, LG’s, Bills accepted. 100
14 Non funded exposure to Real estate 150

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Question 15
A Commercial Bank has the following capital funds and assets. Segregate the capital funds into Tier I
and Tier II capitals. Find out the risk adjusted asset and risk weighted assets ratio.
₹ (in crores)
Capital Funds
Paid up Equity Share Capital 750
Statutory Reserve 150
Share Premium 150
Capital Reserve (of which ₹40crores were due to revaluation of assets and the 90
balance due to sale)
Assets:
Cash Balance with RBI 60
Claims on Banks 170
Other Investments 2,300
Loans and Advances:
(i) Guaranteed by Government of India/State Government 400
(ii) Granted to Staff of bank, fully covered by SuperAnnuation Benefits and 50
mortgage of Flat/House
(iii) OthersLoans and Advances 6,170
Premises, furniture and fixtures, Other Assets 3,925
Intangible Assets 15
Off-Balance Sheet Items:
Acceptances, endorsements and letters of credit, Guarantee and other obligations 1,550

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Question 16 Inter Jan 2021 (10 Marks)
A commercial bank has the following capital funds and assets. Segregate the capital funds into Tier I and
Tier II capitals. Find out the risk-adjusted asset and risk weighted assets ratio:
Particulars ₹ in Lakhs
Equity Share Capital 29,00
Perpetual Non-cumulative Preference Shares 8,00
Perpetual Cumulative Preference Shares (fully paid up) 5,50
Statutory Reserve 13,50
Capital Reserve (of which ₹ 13.5 lakhs were due to revaluation of 45
assets and the balance due to sale of assets)
Securities Premium 7,00
Assets:
Cash Balance with RBI 3,50
Balance with other banks 4,75
Claims on Banks 10,25
Investments in Bonds issued by other banks 78,00
Investments in venture capital funds 17,00
Other investments 121,00
Loans and advances:
(i) Loans guaranteed by Government 16,10
(ii) Loans guaranteed by public sector undertakings 6,20
(i) Leased assets 4
(ii) Advances against term deposits 15,00
(v) Educational loans 12
Other Assets:
(i) Premises, Furniture & Fixtures and other assets 150,55
(ii) Intangible assets 18
(iii) Deferred tax asset 0.40
Off-Balance Sheet Items
(i) Acceptances, endorsements and letter of credit 203,00
(ii) Non funded exposure to real estate 19,00

Solution
Computation of Tier I and Tier II Capital Fund
S.No. Particulars Amount
(₹ in Lakhs)
I Tier -1 Capital
Equity Share Capital 29,00
Securities Premium 7,00
Perpetual non-cumulative pref. shares 8,00
Statutory Reserve 13,50
Capital Reserve (arising out of sale of assets i.e. (45 – 13.50) 31.50
57,81.50
Less: Intangible assets (18)
Less: Deferred tax assets (0.40)
57,63.10
II Tier II Capital
Perpetual cumulative pref. shares 5,50
Capital Reserve (arising out of revaluation of assets) 13.50
Less: Discount to the extent of 55% (7.43) 6.07
556.07
TOTAL (Tier-I + Tier-II) 63,19.17
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 Risk Adjusted Assets
Particulars (₹ in Lakhs) % of weight (₹ in Lakhs)
Funded Risk Assets
Cash balance with RBI 3,50 0 0
Balance with other banks 4,75 20 95
Claims on Bank 10,25 20 2,05
Investment in bonds issued by other banks 78,00 20 15,60
Investment in venture capital funds 17,00 150 25,50
Other investments 121,00 100 121,00
Loans and advances:
Guaranteed by Government 16,10 0 0
Guaranteed by public sector undertakings 6,20 0 0
Leased assets 4 100 4
Advances against term deposits 15,00 0 0
Educational Loans 12 100 12
Premises, furniture and fixture 150,55 100 150,55
Total (i) 315,81
Off-Balance Sheet Items
Acceptances, endorsements and letters of credit 203,00 100 203,00
Non-funded exposure to real estate sector 19,00 150 28,50
Total (ii) 231,50
Total [(i) + (ii)] 547,31

Risk Weighted Assets Ratio / Capital Adequacy Ratio:

= . Capital Fund x 100
Risk Adjusted Assets
6319.71
= × 100 = 11.55%
54731

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 Practice Questions
Question 1 ICAI Study Material
AB Bank Statement of interest on advances in respect of Performing assets and Non Performing Assets
are as follows:-(₹ in lakhs)
Performing Assets Non Performing Assets
Interest Interest Interest Interest
earned received earned received
Term Loans 240 160 150 10
Cash credits and overdrafts 1500 1240 300 24
Find out the income to be recognized for the year ended 31st March, 2021. (Ans: 1,774 Lakhs)

Question 2 ICAI Study Material

From the following information find out the amount of provisions to be shown in the Profit and Loss
Account of Bank:
Assets ₹ in Lakhs
Standard 4,000
Sub Standard 2,000
Doubtful upto one year 900
Doubtful upto three years 400
Doubtful more than three years 300
Loss Assets 500

Question 3
From the following information, compute the amount of provisions to be made in the Profit and Loss
Account of a Commercial Bank for the year ending on 31-03-2021.

Assets (Category of Advances) ₹ in Lakhs

Standard Advances 5,000
Sub-standard Advances 3,500
(Include secured exposures ₹ 1,000 Lakhs and balances unsecured
exposures ₹ 2,500 Lakhs includes ₹ 1,500 Lakhs in respect of
infrastructure loan accounts where escrow accounts are available)
Doubtful advances- unsecured portion 1,600
Doubtful advances- secured portion
For doubtful up to 1 year 500
For doubtful more than 1 year and up to 3 years 600
For doubtful more than 3 years 300
Loss Advances 100

Question 4 ICAI Study Material

The outstanding amount (funded as well as unfunded) as on 31st March, 2021: ₹ 10,000
Realisable value of security: ₹ 8,000 Period for which the advance has remained in ‘doubtful’ category as
on 31st March, 2021: 2.5 years. Find out the amount of provision as on 31.03.2021 & 31.03.2022

Question 5 ICAI Study Material

Outstanding Balance ₹ 4 Lakhs
ECGC Cover 50%
Period for which the advance More than 3 years remained
has remained doubtful doubtful (as on March 31, 2021)
Value of security held ₹ 1.50 Lakhs
You are required to calculate provisions.
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Question 6 ICAI Study Material
From the following information find out the amount of provisions required to be made in the Profit &
Loss Account of a commercial bank for the year ended 31st March, 2021:
(i) Packing credit outstanding from Food Processors ₹ 60 lakhs against which the bank holds securities
worth ₹ 15 lakhs. 40% of the above advance is covered by ECGC. The above advance has remained
doubtful for more than 3 years.
(ii) Other advances:
Asset Classification ₹ in Lakhs
Standard 3,000
Sub Standard 2,200
Doubtful : for one year 900
: for two years 600
: for three years 400
: for more than three years 300
Loss Assets 600

Question 7 Inter May 2019 (5 Marks)

The following information are given for SM Bank:
Assets ₹ in Lakhs
Standard 75,00
Sub-Standard 60,00
Doubtful : For 1 Year (fully secured) 12,00
For 1 to 3 Year (fully secured) 9,00
For more than 3 Years 9,00
Loss Assets 15,00

Additional Information:
a) Standard Assets includes ₹ 15,00 Lakhs Advances to Commercial Real Estate (CRE).
b) Out of ₹ 60,00 Lakhs of Sub-Standard Asset ₹ 20,00 Lakhs are unsecured. Unsecured includes ₹ 5,00
Lakhs in respect of Infrastructure Loan Accounts with ESCROW safeguard.
c) Doubtful Asset for more than 3 Years includes ₹ 4,00 Lakhs, which is covered by 50% ECGC, value
of security of which is 150 Lakhs.
You are required to find out the amount of provision to be shown in the Profit & Loss Account of SM
Bank.

Question 8 RTP Nov 2020

The following is an extract from the Trial Balance of Novel Bank Ltd. as at 31st March, 2021:
₹
Rebate on bills discounted as on 01.04.2020 78,566 (Cr.)
Discount received 1,60,572 (Cr.)
Analysis of the bills discounted reveals as follows:
Amount (₹) Due Date
2,90,000 June 1, 2021
8,75,000 June 8, 2021
5,65,000 June 21, 2021
8,12,000 July 1, 2021
6,50,000 July 5, 2021
Find out the amount of discount to be credited to Profit and Loss account for the year ending 31st
March, 2021 & pass necessary journal Entries. The rate of discount may be taken at 10% per annum.

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Question 9 Inter Nov 2018 (5 Marks) / RTP May 2021
Forward Bank Ltd furnishes the following information as on 31st March, 2021
₹
Bills discounted 82,23,000
Rebate on bills discounted as on 01.04.2020 1,32,960
Discount received 6,33,990

Details of bills discounted are as follows:

Amount Due Date Rate of Discount (%)
(i) 10,95,000 15.6.2021 14
(ii) 30,00,000 25.6.2021 12
(iii) 16,92,000 5.7.2021 16
(iv) 24,36,000 15.7.2021 16
Calculate the rebate on bills discounted as on 31.3.2021 and pass necessary journal entries.

Question 10 Inter May 2019 (5 Marks)

The following is an extract of Trial Balance of SM Bank, an overseas bank as on 31st March, 2021.
Dr. Cr.
Bills discounted 15,16,800
Discount received 1,26,859
Rebate on Bills discounted not due on 31 st
26,592
March, 20

An analysis of bill discounted is as follows:

Amount in ₹ Due Date Rate of Discount
1,46,200 4th May, 2021 15
2,30,400 12 May, 2021
th
15
4.35,900 28th May, 2021 15
4,36,200 18 June, 2021
th
16
2,68,100 4 July, 2021
th
16
You are required to calculate Rebate on Bills Discounted as on 31st March, 2021 and show necessary
Journal Entries.
Question 11 RTP May 2020 / ICAI Study Material
ABC bank Ltd. has a balance of ₹ 40 crores in “Rebate on bills discounted” account as on 31st March,
2020. The Bank provides you the following information:
(i) During the financial year ending 31st March, 2021 ABC Bank Ltd. discounted bills ofexchange of ₹
5,000 crores charging interest @ 14% and the average period of discount being 146 days.
(ii) Bills of exchange of ₹ 500 crores were due for realization from the acceptors/customers after 31st
March, 2021. The average period of outstanding after 31st March, 2021 being 73 days. These bills of
exchange of ₹ 500 crores were discounted charging interest @ 14% p.a.
Pass necessary Journal Entries in the books of ABC Bank Ltd. forthe above transactions.

Question 12 RTP May 2018

The following are the figures extracted from the books of TOP Bank Limited as on 31.3.2021:
Items ₹
Interest and discount received 59,29,180
Interest paid on deposits 32,59,920
Issued and subscribed capital 16,00,000
Salaries and allowances 3,20,000
Directors fee and allowances 48,000
Rent and taxes paid 1,44,000
Postage and telegrams 96,460
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 Statutory reserve fund 12,80,000
Commission, exchange and brokerage 3,04,000
Rent received 1,04,000
Profit on sale of investments 3,20,000
Depreciation on bank properties 48,000
Statutory expenses 44,000
Preliminary expenses 40,000
Auditor’s fee 28,000
The following further information is given:
(i) A customer to whom a sum of ₹ 16 lakhs has been advanced has become insolvent and it is expected
only 40% can be recovered from his estate.
(ii) There were also other debts for which a provision of ₹ 2,10,000 was found necessary by the auditors.
(iii) Rebate on bills discounted on 31.3.2020 was ₹ 19,000 and on 31.3.2021 was ₹ 25,000.
(iv) Preliminary expenses are to be fully written off during the year.
(v) Provide ₹ 9,00,000 for Income-tax.
(vi) Transfer 25% of the profit to Statutory Reserve.
(vii) Profit and Loss account opening balance was Nil as on 31.3.2020.
Prepare the Profit and Loss account of TOP Bank Limited for the year ended 31.3.2021

Question 13 RTP May 2019

From the following information of Wealth Bank Limited, Prepare Profit and Loss Account for the year
ended 31st March, 2021:
Particulars ₹ in lakhs Particulars ₹ in lakhs
Interest on Cash Credit 364 Interest paid on RecurringDeposits 17
Interest on Overdraft 150 Interest paid on Savings Bank 12
Deposits
Interest on Term Loans 308 Auditor’s Fees andAllowances 24
Income on Investments 168 Directors’ Fees andAllowance 50
Interest on Balance with RBI 30 Advertisement 36
Commission on remittancesand 15 Salaries, allowances andbonus to 248
transfer employees
Commission on Letters ofCredit 24 Payment to Provident Fund 56
Commission on Govt. Business 16 Printing & Stationery 28
Profit on Sale of Land &Building 5 Repairs & Maintenance 10
Loss on exchangeTransactions 10 Postage, courier & telephones 16
Interest paid on FixedDeposits 25
Other Information:
(i) Interest on NPA is as follows
₹ in Lakhs
Earned Collected
Cash credit 164 80
Term Loans 90 20
Overdraft 150 50
(ii) Classification of advances ( In Lakhs)
Standard 60
Sub Standard- fully secured 22
Doubtful assets- fully unsecured 40
Doubtful assets covered fully by security
Less than 1 year 6
More than 1 year upto 3 years 3
More than 3 years 2
Loss Assets 38
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(iii) Investments: -Bank should not keep more than 25% of its investment as ‘held-for-maturity'
investment; the market value of its rest 75% investment is ₹3,95,00,000 as on 31.03.2021.
(iv) Provide 35% of the profits towards provision for taxation.
(v) Transfer 20% of the profit to Statutory Reserves.

Question 14 Inter May 2018 (10 Marks)

Astha Bank has the following Capital Funds and Assets as at 31st March, 2021:
₹ (in crores)
Capital Funds
Equity Share Capital 600.00
Statutory Reserve 470.00
Profit and Loss Account (Dr. Balance) 30.00
Capital Reserve (of which ₹ 25 crores were due to revaluation of assets and the 130.00
balance due to sale of assets)
Assets:
Balance with other banks 15.00
Cash Balance with RBI 35.50
Claims on Banks 52.50
Other Investments 70.00
Loans and Advances:
(i) Guaranteed by Government 22.50
(ii) Guaranteed by DICGC/ECGC 110.00
(iii) Others 9365.00
Premises, furniture and fixtures 92.50
Leased Assets 40.00
Off-Balance Sheet Items:
(i) Acceptances, endorsements and letters of credit, 1,100.00
(ii) Guarantee and other obligations 6,200.00
You are required to:
(iii)Segregate the capital funds into Tier I and Tier II capitals.
(iv) Find out the risk-adjusted assets and risk weighted assets ratio.

Question 15 Inter Nov 2020 (10 Marks)

Vasu Commercial Bank has the following capital funds and assets. Segregate the capital funds into Tier I
and Tier II capitals. Find out the risk adjusted assets and risk weighted assets ratio.
Particulars ₹ in Crores
Equity Share Capital 600.00
Statutory Reserve 250.00
Capital Reserve (of which ₹ 26 crores were due to revaluation of 87.00
assets and the balance due to sale of capital assets)
Assets:
Cash Balance with RBI 20.00
Balance with other banks 28.00
Other investments 38.00
Loans and advances:
(i) Guaranteed by the Govt. 18.50
(ii) Others 6,625.00
Premises, Furniture and fixtures 108.00
Off-Balance Sheet Items
(i) Guarantee and other obligations 600.00
(ii) Acceptances, endorsements and letter of credit 4,200.00

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