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BANKS Masters of Commerce (Accounts) 2012-2013 Semester I

Submitted In Partial Fulfillment of the requirements For the Award of Degree of Masters of Commerce - Accounts By University of Mumbai SIES college of science arts and commerce, Nerul

CERTIFICATE This is to certify that of M.Com Accounts Semester I (2012-13) has successfully completed the project of banks under the guidance of Mr. Dhanabalu R. Naikar.

Course Coordinator

Principal

Project guide/Internal Examiner

External Examine

DECLARATION

I Malvika Pande a student of M.com Accounts Semester I (2012-13) hereby declare that I have completed the project on Banks.

The information submitted is true and original to the best of my knowledge.

Signature

ACKNOWLEGEMENT
I would sincerely like to give my heartfelt acknowledgement and thanks to my parents. Any amount of thanks given to them will never be sufficient. I would like to thank the University of Mumbai, for introducing Banking and Insurance course, thereby giving the student a platform to abreast with changing business scenario, with the help of theory as a base and practical as a solution. I would sincerely like to thank our Principal Mrs. Rita Basu. I would also like to thank my project guide Mr. Dhanabalu R. Naikar for his/her valuable support and guidance whenever needed. I would like to thank the officials of IDBI bank who gave me their valuable time and gave explanations for the questions asked. I also feel heartiest sense of obligation my library staff members & seniors who helped in collection of Data and materials and also in this processing as well as in drafting manuscript. Last, but not the least, I would like to thank my friends & colleagues for always being there.

OBJECTIVE OF THE PROJECT:


To understand the laws Governing Banks in India. To understand the various terminologies of banks which they need to abide. To understand the NPAs in the banks. To Understand the Financial reporting of Banks in Indian Economy.

Sr. No. 1 2 3 4 5 6 7 8 9

Topic Introduction to Banks Role of Bank Function of Banks Statues Governing Banks Important Terminologies of Banking Sector NPAs in Banks An Analysis of State Bank of Indias Financial Statement Conclusion Reference

Page No. 1-3 4-7 8-13 14-17 18-30 31-45 46-51 54 55

PROJECT ON BANKING

INTRODUCTION OF BANKING The development of banking is an inevitable precondition for the healthy and rapid development of the national economic structure. Banking institutions have contributed much to the development of the developed countries of the world. Today we cannot imagine the business world without banking institutions. The idea of banks began as long ago as 1,800 BC in Babylon. In those days moneylenders made loans to people. Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1770; both are now defunct. The oldest bank in existence in India is the State Bank Of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank Of Bombay and the Bank Of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank Of India, which, upon India's independence, became the State Bank Of India in 1955. The term bank is derived from the French word Banco which means a Bench or Money exchange table. In olden days, European money lenders or money
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changers used to display (show) coins of different countries in big heaps (quantity) on benches or tables for the purpose of lending or exchanging. In general terms, the business of accepting and safeguarding money owned by other individuals and entities , and then lending out this money in order to earn a profit. Banking sector acts as the backbone of modern business. It provides various services to facilitate its customers banks also accepts money from the people in the form of deposits which are usually repayable on demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It also acts as a custodian of funds of its customers. A bank provides easy payment and withdrawal facility to its customers in the form of cheques and drafts, It also brings bank money in circulation. This money is in the form of cheques, drafts, etc.

MEANING AND DEFINITION: Bank is an institution that deals with money and its substitutes and provides crucial financial services. The principal type of banking in the modern industrial world is commercial banking & central banking. Banking Means "Accepting Deposits for the purpose of lending or Investment of deposits of money from the public, repayable on demand or otherwise and withdraw by cheque, draft or otherwise." -Banking Companies (Regulation) Act,1949

The concise oxford dictionary has defined a bank as "Establishment for custody of money which it pays out on customers order." Infact this is the function which the bank performed when banking originated. Banking in the most general sense, is meant the business of receiving, conserving and utilising the funds of community or of any special section of it. -By H.Wills & J. Bogan

Thus ABank: Accept deposits of money from public, Pays interest on money deposited with it. Lends or invests money Repays the amount on demand, Allow the money deposited to be withdrawn by cheque or draft.

FUNCTIONS OF BANKS:

PRIMARY FUNCTIONS OF BANKS The primary functions of a bank are also known as banking functions. They are the main functions of a bank.

PRIMARY FUNCTIONS Acceptance of Deposits Making loans & advances Loans Overdraft Cash Credit Discounting of bills of exchange

These primary functions of banks are explained below.

1. Accepting Deposits The bank collects deposits from the public. These deposits can be of different types, such as :a. Saving Deposits b. Fixed Deposits c. Current Deposits d. Recurring Deposits

a. Saving Deposits This type of deposits encourages saving habit among the public. The rate of interest is low. At present it is about 5% p.a. Withdrawals of deposits are allowed subject to certain restrictions. This account is suitable to salary and wage earners. This account can be opened in single name or in joint names.
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b. Fixed Deposits Lump sum amount is deposited at one time for a specific period. Higher rate of interest is paid, which varies with the period of deposit. Withdrawals are not allowed before the expiry of the period. Those who have surplus funds go for fixed deposit.

c. Current Deposits This type of account is operated by businessmen. Withdrawals are freely allowed. No interest is paid. In fact, there are service charges. The account holders can get the benefit of overdraft facility.

d. Recurring Deposits This type of account is operated by salaried persons and petty traders. A certain sum of money is periodically deposited into the bank. Withdrawals are permitted only after the expiry of certain period. A higher rate of interest is paid.

2. Granting of Loans and Advances The bank advances loans to the business community and other members of the public. The rate charged is higher than what it pays on deposits. The difference in the interest rates (lending rate and the deposit rate) is its profit. The types of bank loans and advances are :a. Overdraft b. Cash Credits c. Loans d. d. Discounting of Bill of Exchange

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a. Overdraft This type of advances are given to current account holders. No separate account is maintained. All entries are made in the current account. A certain amount is sanctioned as overdraft which can be withdrawn within a certain period of time say three months or so. Interest is charged on actual amount withdrawn. An overdraft facility is granted against a collateral security. It is sanctioned to businessman and firms.

b. Cash Credits The client is allowed cash credit upto a specific limit fixed in advance. It can be given to current account holders as well as to others who do not have an account with bank. Separate cash credit account is maintained. Interest is charged on the amount withdrawn in excess of limit. The cash credit is given against the security of tangible assets and / or guarantees. The advance is given for a longer period and a larger amount of loan is sanctioned than that of overdraft.

c. Loans It is normally for short term say a period of one year or medium term say a period of five years. Now-a-days, banks do lend money for long term. Repayment of money can be in the form of installments spread over a period of time or in a lump sum amount. Interest is charged on the actual amount sanctioned, whether withdrawn or not. The rate of interest may be slightly lower than what is charged on overdrafts and cash credits. Loans are normally secured against tangible assets of the company.

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d. Discounting of Bill of Exchange The bank can advance money by discounting or by purchasing bills of exchange both domestic and foreign bills. The bank pays the bill amount to the drawer or the beneficiary of the bill by deducting usual discount charges. On maturity, the bill is presented to the drawee or acceptor of the bill and the amount is collected.

B. SECONDARY FUNCTIONS OF BANKS

The bank performs a number of secondary functions, also called as non-banking functions. Agency functions Collection of cheques & Bills etc. Collection of interest and dividends. Making payment on behalf of customers Purchase & sale of securities Facility of transfer of funds To act as trustee & executor

These important secondary functions of banks are explained below.

1. Agency Functions The bank acts as an agent of its customers. The bank performs a number of agency functions which includes :a. Transfer of Funds b. Collection of Cheques
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c. Periodic Payments d. Portfolio Management e. Periodic Collections f. Other Agency Functions a. Transfer of Funds The bank transfer funds from one branch to another or from one place to another. b. Collection of Cheques The bank collects the money of the cheques through clearing section of its customers. The bank also collects money of the bills of exchange. c. Periodic Payments On standing instructions of the client, the bank makes periodic payments in respect of electricity bills, rent, etc. d. Portfolio Management The banks also undertakes to purchase and sell the shares and debentures on behalf of the clients and accordingly debits or credits the account. This facility is called portfolio management. e. Periodic Collections The bank collects salary, pension, dividend and such other periodic collections on behalf of the client. f. Other Agency Functions They act as trustees, executors, advisers and administrators on behalf of its clients. They act as representatives of clients to deal with other banks and institutions. 2. General Utility Functions The bank also performs general utility functions, such as :a. Issue of Drafts, Letter of Credits, etc. b. Locker Facility c. Underwriting of Shares
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d. Dealing in Foreign Exchange e. Project Reports f. Social Welfare Programmes g. Other Utility Functions a. Issue of Drafts and Letter of Credits Banks issue drafts for transferring money from one place to another. It also issues letter of credit, especially in case of, import trade. It also issues travellers' cheques. b. Locker Facility The bank provides a locker facility for the safe custody of valuable documents, gold ornaments and other valuables. c. Underwriting of Shares The bank underwrites shares and debentures through its merchant banking division. d. Dealing in Foreign Exchange The commercial banks are allowed by RBI to deal in foreign exchange. f. Social Welfare Programs It undertakes social welfare programs, such as adult literacy programs, public welfare campaigns, etc.

OTHER UTILITY FUNCTIONS : Safe custody of customers valuable articles & securities. Underwriting facility Issuing of traveller's cheque letter of credit Facility of foreign exchanges Providing trade information Provide information regarding credit worthiness of their customer.

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BANKING REGULATION ACT, 1949 The Banking Regulation Act, 1949 defines Banking Company, as any company which transacts the business of banking in India. The Act provides that any company which is engaged in the manufacture of goods or carries on any trade and which accepts the deposits of money from public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause. Under this Act, Banking means the 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. Certain provisions of the Banking Regulation Act also apply to the State Bank of India, any corresponding new bank, a regional rural bank and any subsidiary bank. The Negotiable Instruments Act was enacted in 1881. This Act has defined and amended the law relating to Promissory Notes, Bills of Exchange and Cheques. Banks are governed as companies under the Companies Act, 1956. The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and 1980 governs nationalization of banks. The Bankers' Books Evidence Act, 1891 was legislated to amend the Law of Evidence with respect to Bankers' Books. The Hire-Purchase Act, 1972 has defined and regulated the rights and duties of parties to hirepurchase agreements and for matters connected with or incidental thereto. The Industrial Disputes (Banking and Insurance Companies) Act, 1949 provides for the adjudication of industrial disputes concerning certain banking and insurance companies. The Act was originally in force from 16 March 1949 as the Banking
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Companies Act, 1949. It was amended and renamed as Banking Regulation Act, 1949 and extended to the cooperative banks from 1 March 1966 as the Banking Regulation Act, 1949. Objectives of the Banking Regulation Act broadly are: 1. to safeguard the interest of depositors; 2. to develop banking institutions on sound lines; and 3. to attune the monetary and credit system to the larger interests and priorities of the nation.

STATUES OF BANKING REGULATION ACT, 1949: Section 5(b): Banking is: 1. the accepting, 2. for the purpose of lending or investment, 3. of deposits of money 4. from the public 5. repayable on demand or otherwise and 6. withdrawable by cheque, draft, order or otherwise. A cooperative society which accepts deposits from the public i.e., members and non-members and utilizes these for lending will be deemed to be transacting banking business

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Section 6: Business The businesses a bank may carry on are summarized into three categories: 1. Main business i.e., Banking i.e., borrowing, taking or lending money, dealing in Bills of Exchange, Bills of lending and Debentures, issuing letters of credit, buying/selling foreign exchange, acquiring or underwriting stocks. 2. Allied business: Acting as agent/trustee/administrator, carrying on guarantee business, providing safe custody. 3. Dealing in property is restricted to (i) property coming in satisfaction of claims or as security and (ii) property necessary for its own sake. 4. A bank is prohibited from doing any business other than those mentioned in Section 6. Section 8 specifically prohibits a bank from engaging in trading. However, banks, as agents, have supplied registers, articles or have financed hire purchase. What is important is that the purchases should be carried out purely on indent basis; bank must have no ownership of the article and it should not involve bank's own funds. Explanation: (1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely:--

a) contracting for public and private loans and negotiating and issuing the same; b) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of State,
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municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue; c) carrying on and transacting every kind of guarantee and indemnity business; d) undertaking and executing trusts; e) acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described in this sub- section; f) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company; g) any other form of business which the Central Government may, by notification in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage.

Section 11: Section 11 in The Banking Regulation Act, 1949 Requirement as to minimum paid up capital and reserves.Minimum capital The value of paid up capital and reserves should not be less than Rs.1 lakh. Value is the real value or exchangeable value and decision of RBI on valuation is final. Explanation: the aggregate value of its paid- up capital and reserves shall not be less than fifteen lakhs of rupees and if it has a place or places of business in the city of Bombay or Calcutta or both, twenty lakhs of rupees.
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The banking company shall deposit and keep deposited with the Reserve Bank either in cash or in the form of unencumbered approved securities, or partly in cash and partly in the form of such securities-(i) an amount which shall not be less than the minimum required (ii) as soon as may be after the expiration of each year, an amount calculated at twenty percent of its profit for that year in respect of all business transacted through its branches in India, as disclosed in the profit and loss account prepared with reference to that year under section 29.

Any amount deposited and kept deposited with the Reserve Bank under 2 sub- section (2) by any banking company incorporated outside India shall, in the event of the company ceasing for any reason to carry on banking business in India, be an asset of the company on which the claims of all the creditors of the company in India shall be a first charge.

If any dispute arises in computing the aggregate value of the paid- up capital and reserves of any banking company, a determination thereof by the Reserve Bank shall be final for the purposes of this section.

Section 18: Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) Every non-scheduled urban cooperative bank (UCB) has to maintain, on daily basis, by way of cash reserve, an amount not less than 3% of the total of its Demand and Time Liabilities (DTL) as obtaining on the last Friday of the second preceding fortnight. It can maintain the balance in the form of cash resources with
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itself or in current account with RBI or State Bank of India (SBI) or concerned State Cooperative Bank (SCB) / District Central Cooperative Bank (DCCB) or by way of net balance with any other bank notified by the Govt. of India. It has to submit a return (in Form I) every month to the concerned Regional Office (RO) of the Urban Banks Department (UBD) of RBI showing the position of cash reserve so maintained and its DTL at the close of alternate Fridays during the preceding month. Banks have to submit the return within 20 days from the month to which it relates.

SECTION (20) Restrictions on loans and advances.-

(1) Notwithstanding anything to the contrary contained in section 77 of the Companies Act, 1956 , no banking company shall,-(a) grant any loans or advances on the security of its own shares, or (b) enter into any commitment for granting any loan or advance to or on behalf of-(i) any of its directors, (ii) any firm in which any of its directors is interested as partner, manager, employee or guarantor, or (iii) any company not being a subsidiary of the banking company or a company registered under section 25 of the Companies Act, 1956 , or a Government company of which, or the subsidiary or the holding company of which any of the directors of the banking company is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest, or (iv) any individual in respect of whom any of its directors is a partner or guarantor.

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Section 21 RBI's power to control advances RBI, in the public interest or in the interest of depositors, may determine policy in relation to advances of banks, or a bank in particular, and all banks or the concerned bank shall be bound to follow the policy. RBI may also give directions to: 1. a) 2. b) 3. c) 4. d) 5. e) purpose; margin; maximum amount; rate of interest; and other terms and conditions on which advances or other financial

accommodation may be given. EXPLANATION: Power of Reserve Bank to control advances by banking companies.(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined. (2) Without prejudice to the generality of the power vested in the Reserve Bank under sub- section (1), the Reserve Bank may give directions to banking

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companies, either generally or to any banking company or group of banking companies in particular, as to-(a) the purposes for which advances may or may not be made, (b) the margins to be maintained in respect of secured advances, (c) the maximum amount of advances or other financial accommodation which, having regard to the paid- up capital, reserves and deposits of a banking company and other relevant considerations, may be made by that banking company to any one company, firm, association of persons or individual, (d) the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given. (3) Every banking company shall be bound to comply with any directions given to it under this section.

Sections 29 and 31 Accounts and Balance sheet Every UCB shall prepare Balance Sheet (BS) and Profit & Loss (P&L) Account as on the last working day of the year in the prescribed form. The Principal Officer and three Directors should sign the BS and P & L Account. The accounts and BS, together with auditor's report, should be published in a local newspaper and three copies thereof submitted to RBI within six months from the end of the year.Banks with deposits of less than Rs.20 lakhs may only display the accounts in every office of the bank instead of publishing in newspaper.

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Explanation: Section 31 in The Banking Regulation Act, 1949 Submission of returns.- The accounts and balance- sheet referred to in section 29 together with the auditor' s report shall be published in the prescribed manner and three copies thereof shall be furnished as returns to the Reserve Bank within three months from the end of the period to which they refer: Provided that the Reserve Bank may in any case extend the said period of three months for the furnishing of such returns by a further period not exceeding three months.

Section 35 in The Banking Regulation Act, 1949 Inspection: RBI may on its own, and on a direction from the Govt. of India, inspect, through its officers, any UCB and its books and accounts. RBI shall supply to the bank a copy of its report. It shall be the duty of every Director, officer or employee of the UCB to produce to any officer making inspection all such books, accounts and other documents in his custody or power and to furnish to him any statement and information relating to the Bank within such time as the said Officer may specify.

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IMPORTANT TERMINOLOGIES IN BANKING Accrued interest: Interest due from issue date or from the last coupon payment date to the settlement date. Accrued interest on bonds must be added to their purchase price. Arbitrage: Buying a financial instrument in one market in order to sell the same instrument at a higher price in another market. Bond: Publicly traded long-term debt securities, issued by corporations and governments, whereby the issuer agrees to pay a fixed amount of interest over a specified period of time and to repay a fixed amount of principal at maturity. Book Value: The amount of stockholders equity in a firm equals the amount of the firms assets minus the firms liabilities and preferred stock. Broker: Individuals licensed by stock exchanges to enable investors to buy and sell securities. Capital Gain: The amount by which the proceeds from the sale of a capital asset exceed its original purchase price. Capital Markets: The market in which long-term securities such as stocks and bonds are bought and sold. Certificate of Deposits (CDs): Savings instrument in which funds must remain on deposit for a specified period, and premature withdrawals incur interest penalties. Collateral: A specific asset pledged against possible default on a bond. Mortgage bonds are backed by claims on property. Collateral trusts bonds are backed by
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claims on other securities. Equipment obligation bonds are backed by claims on equipment. Commercial Paper: Short-term and unsecured promissory notes issued by corporations with very high credit standings. Compound Interest: Interest paid not only on the initial deposit but also on any interest accumulated from one period to the next. Contract Note: A note which must accompany every security transaction which contains information such as the dealers name (whether he is acting as principal or agent) and the date of contract. Convertible Bond: A bond with an option, allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm. A conversion price is the specified value of the shares for which the bond may be exchanged. The conversion premium is the excess of the bonds value over the conversion price. Coupon Rate: The annual rate of interest on the bonds face value that a bonds issuer promises to pay the bondholder. It is the bonds interest payment per dollar of par value. Credit Rating: An assessment of the likelihood of an individual or business being able to meet its financial obligations. Credit ratings are provided by credit agencies or rating agencies to verify the financial strength of the issuer for investors. Currency Board: A monetary system in which the monetary base is fully backed by foreign reserves. Any changes in the size of the monetary base has to be fully matched by corresponding changes in the foreign reserves.
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Earnings per Share (EPS): The amount of annual earnings available to common stockholders as stated on a per share basis. Earnings Yield: The ratio of earnings to price (E/P). The reciprocal is price earnings ratio (P/E). Equity: Ownership of the company in the form of shares of common stock. Equity Call Warrants: Warrants issued by a company which give the holder the right to acquire new shares in that company at a specified price and for a specified period of time. Ex-dividend (XD): A security which no longer carries the right to the most recently declared dividend or the period of time between the announcement of the dividend and the payment (usually two days before the record date). For transactions during the ex-dividend period, the seller will receive the dividend, not the buyer. Face Value/ Nominal Value: The value of a financial instrument as stated on the instrument. Interest is calculated on face/nominal value. Future Value: The amount to which a current deposit will grow over a period of time when it is placed in an account paying compound interest. Futures Contract: A commitment to deliver a certain amount of some specified item at some specified date in the future. Hedge: A combination of two or more securities into a single investment position for the purpose of reducing or eliminating risk.

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Leverage Ratio: Financial ratios that measure the amount of debt being used to support operations and the ability of the firm to service its debt. Liquidity: The ability to convert an investment into cash quickly and with little or no loss in value. Market Capitalization: The product of the number of the companys outstanding ordinary shares and the market price of each share. Market Capitalization: The product of the number of the companys outstanding ordinary shares and the market price of each share. Option: A security that gives the holder the right to buy or sell a certain amount of an underlying financial asset at a specified price for a specified period of time. Oversubscribed: When an Initial Public Offering has more applications than actual shares available. Investors will often apply for more shares than required in anticipation of only receiving a fraction of the requested number. Investors and underwriters will often look to see if an IPO is oversubscribed as an indication of the publics perception of the business potential of the IPO company. Preference Shares: A corporate security that pays a fixed dividend each period. It is senior to ordinary shares but junior to bonds in its claims on corporate income and assets in case of bankruptcy. Present Value of an Annuity: The amount to which a stream of equal cash flows that occur in equal intervals will discount back to present when it is depreciated in an account paying compound interest.

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Price/Earnings Ratio (P/E): The measure to determine how the market is pricing the companys common stock. The price/earnings (P/E) ratio relates the companys earnings per share (EPS) to the market price of its stock. Warrant: An option for a longer period of time giving the buyer the right to buy a number of shares of common stock in company at a specified price for a specified period of time. Window Dressing: Financial adjustments made solely for the purpose of accounting presentation, normally at the time of auditing of company accounts. Yield to Maturity: The rate of return yield by a bond held to maturity when both compound interest payments and the investors capital gain or loss on the security are taken into account. Zero Coupon Bond: A bond with no coupon that is sold at a deep discount from par value. Bills receivables: in merchant accounts are all promissory notes, bills of exchange, bonds, and other evidences or securities which a merchant or trader holds, and which are payable to him.

BOOKS MAINTAINED BY BANKS The accounts of English banks are generally kept on the double entry system already explained, the only one which affords u material and steady control against many possible mistakes and fraudulent entries. A banker's accounts, however, although framed on the same principle as a merchant's, cannot be laid down in the
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same form, considering the great difference in the transactions of the two branches of trade. A banker has merely to deal with money or what is considered as the equivalent of money, and to this, his sole article of trade, his business, and therefore his accounts, must, of course, exclusively relate.

Books Used.Bankers, like merchants, not being all devoted to the same particular branch or branches of the trade, are obliged to adopt special books, so as to record their transactions in the simplest and most suitable form, and to connect their recording entries in such a way as will more likely afford them the means of controlling accounts at any time. It is, therefore, almost impossible that exactly the same set of books should be adopted by all of them. The books generally used are the waste book (divided into received waste book and paid waste book, being provisional records of all moneys received and paid), the day book, the general ledger, the cash book, the current account ledger, the deposit account ledger, the bill books. Following the particular method of book-keeping already mentioned, whereby transactions are initially recorded, according to their nature, in separate books, then journalized and posted in bulk under their proper heads of account; most banking establishments keep the day book and the general ledger as check-summaries of the cash, deposit, bill and current account looks ; the importance of such summaries being all the greater for that very reason, as it is by their means that the real position of every account towards the house, and thus the financial position of the house itself, can be ascertained.

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The Day Book.The day book is, like the merchant's journal, a chronological record of every day's transactions, grouped, however, under the respective heads of account to which they relate: current accounts, deposit receipts, bills discounted, interest paid on deposit receipts, etc. This form of entry is the most suitable for posting, while it affords a correct view of the daily transactions of each branch of the business. The day book is also intended as a most effective check on the correctness of cash entries. To this effect it is kept as a collective account of all persons and concerns towards cash, so that its debtor side is charged with the sums for which cash was credited, and it is credited with those wherewith cash is charged. Summing up the figures of the two sides of the book, then adding to the Cr. side the cash in handy with which business was commenced in the morning, and to the Dr. side the cash in hand at the close of the day's transactions, the two columns must agree, provided the cash entries have been correctly made. This book is sometimes divided into paid day book and received day book.

The General Ledger.-The general ledger contains the separate details of each account mentioned in the day book, such as: current accounts, bills discounted agents' account, bills unpaid, interest account, deposit account, lodgments, investments, expenditure, cash with branches, proprietor's account, etc. This book is, therefore, a complete record of all the sums paid or received by the house for any particular concern, the account whereof is thus always regularly posted up. The entries are posted daily the day book and the amounts registered neither the debit or in the credit money column, as corresponding to the Dr. or Cr. entry in the day book.
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The general ledger is usually balanced weekly, the operation being done by comprising the Cr. and Dr. Totals of each amount, and caring the difference to the Dr. or to the Cr. side of a special column, under the head of balance. With the figures of such balances a weekly balance- sheet is usually drawn up. The amount of cash in hand being added to the debit balances the total certain to agree " if the postings were Correctly made," with the sum of the credit balances, including the capital of the bank, which must figure on the credit side of the capital account in the ledger. The Main Ledger may have various Subsidiary Ledgers to account for a class of transactions at one place. Posting in the Main and Subsidiary Ledgers should be made daily and preferably by a person other than the Cashier, giving date and reference of Cash Book/Journal Voucher number. A Ledger folio will be allotted to each account and its cross reference will be given in the Cash Book or Journal against the relevant entry. If the Progressive Balance format of Ledger is used then net balance (debit or credit) should be worked out after each entry in a Ledger Folio otherwise monthly balance may be struck out for each account in the Ledger. The Cash Book.The cash book is destined, of course, to record all cash transactions, that is all the sums received or paid by the bank. In order to simplify their counts, most banks treat also as cash entries, and Pass through the cash books, some kinds of transactions called transfers, wherein no actual money is either Paid or received, thus making the cash book the true standing-point of bank book-keeping. The cash book is balanced every evening at the close of business, by adding the amount of money received during the day, " specie, notes, bills securities, etc.," to the sum left the day before and deducting from the total the amount of money Paid
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during the day. The rest must agree with the sum actually remaining in the bank at the close of the day's work, which will represent the cash in hand, wherewith the house is to begin its business on the morrow. As far as possible one cash book and one bank account should be maintained by each office. Cash Book with cash and bank column be maintained. If there is more than one bank account, then one bank column for each bank account may be earmarked. The disbursing officer while signing the cash book should exercise following checks: i) compare each entry of payment with the gross amount chargeable of the voucher. That the voucher bears the pay order recorded by himself and the entry of disbursement signed by himself. ii) see that while examining the posting of a voucher, the deductions shown in the voucher other than those pertaining to the work itself, are posted in cash column in both receipt and payment side as contra entry. iii) verify or get verified the totals of the cash book. iv) verify the balance brought forward and carried forward. v) classification of receipt and expenditure be checked. vi) the amount of receipt be checked with that entered on the counterfoil of the receipt. vii) any correction made in the cash book should be signed by the disbursing officer himself in red ink by drawing the pen through incorrect entry and inserting the correct entry

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Current Accounts.The current account ledger contains the individual current account of the banker's customers, agents or correspondents, the bulk amount of whose transactions is recorded in the general ledger under the heads of: current accounts, and agents' accounts. The book is intended to show at any time each customer's position towards the bank, and must, therefore, be posted every day. The form of a bank current account is not always exactly the same. When the bank allows no interest on a customer's credit balance, the sole columns for the Dr. and Cr. entries are required in his account; but when interest is allowed, two more columns are necessary on either side; the one for the number of days for which interest is to be calculated, the other for the amount of interest allowed or charged in a certain period. The calculation of interest on interest - bearing accounts is usually made, by means of interest tables, either at a fixed rate, or on the current fluctuating market rate; counting from the day of the payment or receipt of money, down to the day when the account is balanced and rendered, which is done at fixed periods - generally half-yearly - according to the custom of the bank. It is to be remarked that no interest is usually charged on less than ten shillings, while fractions above ten shillings are treated as a whole pound. The credit or debit interest is generally added to the amount of the corresponding side of account, and carried over to the new account.

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JOURNAL All business transactions having monetary value pass through the Journal. As a Cash Book is maintained for cash transactions (including bank transactions), the cash transactions need not to pass through the Journal. Journal is also a book of original or initial entry. Entries in the Journal should be made as soon as transactions occur, in the order of their occurrence. Journal Book should be maintained in its standard format having columns for date, particulars, LF, debit (Rs.) and credit (Rs.). A brief narration of the transaction should be given in the particulars column. When Journal entry is put into ledger, the concerned Ledger Folio number should be entered in the LF column for cross reference. Following nature of transactions among others will be passed through the Journal: i) Opening and closing entries of all the Liabilities and Assets accounts of the Ledger appearing in the Balance Sheet. ii) Closing entries of the Ledger accounts whose balances are transferred to Profit and Loss Account. iii) Purchase of stock, stores, construction material and Tools and Plant, etc., on credit for works or stores. iv) Transfer of material from one work to another or to the stores. v) Receipt of steel on a work or stores crediting the Head Office account. vi) Issue of materials from stores to the works.

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vii) Rectification of errors. viii) Purchase and sale of fixed assets on credit. ix) Raising of bills for hire charges of machinery and equipment. x) Placing the amount of passed final bills of contractors under Miscellaneous Deposits when the contractors do not turn up to receive the payment.

FINANCIAL STATEMENTS OF IDBI BANK

BALANCE SHEET (Rs crore) Mar ' 11 Sources of funds Owner's fund Equity share capital Share application money Preference share capital 35

Mar ' 10

Mar ' 09

Mar ' 08

Mar ' 07

984.57

724.86

724.78

724.76

724.35

0.99

Mar ' 11 Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital workin-progress Investments 68.06 68,269.18 1,405.82 1,073.51 1,895.77 4,375.10 11,686.25

Mar ' 10

Mar ' 09

Mar ' 08

Mar ' 07

7,502.26

6,719.52

6,075.13

5,511.60

1,80,485.79 1,67,667.08 1,12,401.01 1,93,157.60 1,75,894.20 1,19,845.31

72,997.98 79,797.88

43,354.04 49,589.99

4,085.27

3,873.95

3,894.76

3,856.40

1,937.72

1,979.56

2,022.07

2,063.91

1,250.35 897.20

1,127.40 766.98

1,173.59 699.10

1,089.08 703.41

162.04 73,345.46

77.56 50,047.60

44.80 32,802.93

11.05 25,675.31

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Mar ' 11 Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Notes: Book value of unquoted investments Market value of quoted investments Contingent liabilities 66,863.11 -2,547.64 6,753.77 4,206.13

Mar ' 10

Mar ' 09

Mar ' 08

Mar ' 07

4,444.91

4,882.96

4,154.02

6,003.73

8,030.62

6,160.40

10,261.89

9,781.04

-3,585.71

-1,277.45

-6,107.86

-3,777.31

70,818.99

49,614.70

27,438.97

22,612.46

1,38,274.78 1,28,293.03 1,16,577.14 1,04,037.89 1,08,527.82


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Mar ' 11 Number of equity shares outstanding (Lacs) 9845.68

Mar ' 10

Mar ' 09

Mar ' 08

Mar ' 07

7248.62

7247.81

7247.64

7243.54

PROFIT AND LOSS A/C (Rs crore) Mar ' Mar ' 11 Mar ' 10 Mar ' 09 Income Operating income Expenses Material consumed Manufacturing expenses Personnel expenses Selling expenses Administrative 1,026.50 46.34 2,309.97 756.99 45.84 1,173.96 569.24 48.38 811.35 384.61 25.25 599.00 282.90 11.01 597.99
38

Mar ' 07

08

20,039.87 17,063.60 12,668.35 9,159.74 6,994.23

Mar ' Mar ' 11 Mar ' 10 Mar ' 09 expenses Expenses capitalized Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Other write offs 3,382.81 2,385.14 270.27 2,655.41 1,976.78 2,081.60 253.47 2,335.07 08

Mar ' 07

891.90 414.84 211.15 625.99

1,428.97 1,008.86 933.66 113.73 1,047.39 786.47 138.48 924.94

14,271.93 13,005.22 10,305.72 7,364.41 5,687.49 127.04 90.98 52.70 83.50 122.00 -

Adjusted PBT Tax charges Adjusted PAT Non recurring items Other non cash adjustments Reported net profit Earnigs before

11,743.56 734.94 1,653.01 -2.69

2,244.09 346.31 1,032.57 -1.43

994.69 127.10 845.26 13.28

841.44 93.25 728.64 0.81

504.00 52.31 451.69 178.62

1,650.32 2,120.72

1,031.13 1,102.33

858.54

729.46

630.31

879.58 2,044.36 1,661.02

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Mar ' Mar ' 11 Mar ' 10 Mar ' 09 appropriation Equity dividend Preference dividend Dividend tax Retained earnings 344.60 55.27 1,720.85 217.46 31.47 853.40 181.20 30.79 144.95 22.27 08

Mar ' 07

108.65 18.47

667.59 1,877.14 1,533.90

FINANCIAL RESULTS FOR THE QUARTER ENDED JUNE 30, 2012

Highlights of Q1 FY 13 financial results vis--vis Q1 FY 12 (June 30, 2011)

Net profit up 28 % to NII grew by 10% to

427 Crore (from 1,271 Crore (from

335 Crore) 1,152 Crore)

NIM at 2.09% (from 2.08%) Business up 8.5% to 3,59,527 Crore (from 3,31,378 Crore) 1,76,282 Crore) 338 Crore)

Deposits increased by 9% to

1,91,747 Crore (from

Fee based income increased by 23% to

417 Crore (from

Mumbai, July 31, 2012: : The Board of Directors of IDBI Bank Ltd. (IDBI) met in Mumbai today to consider the unaudited financial results for the quarter
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ended June 30, 2012, which are as under: Working results:

(Rs. in Crore) Q1 2012-13 Total Income Interest income Non-Interest Income Total Expenses Interest expenses Operating expenses Operating Profit Provisions (net) Net Profit 6787 6270 517 5658 4999 659 1129 702 427 Q1 2011-12 6060 5629 431 5029 4476 553 1031 696 335 FY 2011-12 25489 23370 2119 21433 18825 2607 4056 2025 2032

Profitability: IDBI reported a net profit of 427 crore for the quarter ended June 30, 2012 as

against Rs. 335 crore in the corresponding quarter. This amounts to an increase in net profit by 28% for the quarter compared to corresponding quarter of the previous year. Net Interest Income (NII) for the quarter ended June 30, 2012 stood at 1,271 crore as against 1,152 crore in the corresponding quarter of the

previous year, recording a growth of 10%.

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Business: As of June 30, 2012, IDBIs total business (deposits and advances) stood at 3,59,527 crore as against 3,31,378 crore as of June 30, 2011,

registering a growth of 8.5%. Deposits increased to 1,91,747 Crore at end-June 2012 from 1,76,282 crore at

end-June 30, 2011 with a growth of 9%. Aggregate assets as of June 30, 2012, stood at against 2,71,899 crore as

2,49,683 crore as at end- June 30, 2011, registering a growth of 9%. 417 Crore

Fee based income for the quarter ended June 30, 2012 increased to as against CAR: 338 Crore for the quarter ended June 30, 2011.

The Bank's CAR stood at 14.36% (Tier I - 8.24%) as of June 30, 2012 as against 13.83% (Tier I 8.11%) as of June 30, 2011. Significant developments during FY 2012-13(April Till date)

IDBI Bank was adjudged winner under Development Finance-Led Poverty Reduction category for its Rural Transformation Fellowship Program (RTFP) in the ADFIAP (Association of Development Financing Institutions in Asia & the Pacific) Awards 2012 in Istanbul, Turkey. The Bank also received the Best Website Award at the ceremony. IDBI Bank along with the countrys 9 largest PSU lenders has formed a consortium for jointly financing infrastructure projects with project cost of 1000 crore and above. The consortium aims to speed up the sanction process, bring uniformity in the approach and terms of lending and thereby facilitate early financial closure of the infrastructure projects.
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IDBI Bank entered into a Memorandum of Understanding (MOU) with the Government of Karnataka (GoK) at the Global Investors Meet (GIM) held at Bangalore. Under this MOU, GoK will furnish to IDBI Bank, the list of MOUs entered with the investors and the Bank will deploy additional funds as required for the proposed investments, subject to due diligence. IDBI Bank launched Indias first web-based market making portal and dedicated the same exclusively to the Retail Investors of the country. The Portal is available to general public from May 15, 2012.

IDBI Bank Becomes the First Primary Dealer in the Country to Facilitate Transaction on the Recently Launched Web-based Negotiated Dealing System [NDS] Auction of Gilts, conducted by RBI from time to time.

IDBI Bank unveiled a state-of-art Currency Chest (one of the largest in the country) at Bandra-Kurla Complex, Mumbai.

IDBI Bank extended relief in the form of financial assistance to four drought affected villages allotted to the Bank under financial inclusion, in the districts of Satara, Sangli and Solapur in Maharashtra.

NON PERFORMING ASSETS

Concept of NPA The concept of non-performing assets refers to which ceases to generate income. In case of banks, all loans and advances are its assets, which can be classified into
43

performing and non-performing assets. RBI has advised the banks not to charge interest on those loans and advances classified as non-performing asset. DefinitionA non-performing asset has been defined to be a credit facility in respect of which the interest and/or installment of principle has remained overdue for a specified period of time.

WHAT IS NPA? With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where; 1. Interest and /or instalment of principal remain overdue for a period of more than 90 days in respect of a Term Loan, 2. The account remains 'out of order' for a period of more than 90 days, in respect of an overdraft/ cash Credit(OD/CC). 3. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, 4. Interest and/ or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and 5. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
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CLASSIFICATION OF ASSETS Assets can be classified as 1. Standard Assets A standard asset is an asset, which is not a non-performing asset. A standard asset is one, which does not carry more than normal risk attached to the business. Such an asset is not a non-performing asset and is performing advance or a standard asset. 2. Sub Standard Asset A sub standard asset is one which has remained a NPA for a period less than or equal to 18 months. 3. Doubtful assets An asset is classified as doubtful asset if it has remained an NPA for a period exceeding 18 months. 4. Loss AssetsA loss asset is one where loss has been identified by the bank or the internal or the external auditors or the RBI inspectors but the amount has not been written off wholly. Effects of NPAs The NPA problem is one of the foremost formidable problems that have shaken the entire Banking Industry. The high level of NPAs in banks and financial
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institutions has been a matter of grave concern to the public as bank credit is the catalyst to the economic growth of the country and any bottleneck in the smooth flow of credit, one cause for which is the mounting NPAs is bound to create adverse repercussions in the economy. The efficiency of a bank is not always reflected only by the size of its ba lance sheet but by the level of return on its assets. NPAs do not generate interest provisions for such NPAs from their current profits 1. Effect on Profitability: a) They erode current profits through provisioning requirements. b). They result in reduced interest income. c) They require higher provisioning requirements affecting profits and capacity to increase good quality risk assets in future. d) They limit recycling of funds. e) Bank has to spend for making efforts for recovery such as expenses on notice; follow-up and filing of civil suit & because of this expenses profit get reduced. f) This decline in profit has a bearings on variables like the capital to risk-weighted asset ratio (CRAR) with the dip in profit it becomes difficult for the Bank to raise Tier I capital This is because Tier I capital consist of statutory and capital reserve that are essentially built from profit. g) In the face of declining profit, in order to maintain the stipulated CRAR, the bank may have to raise Tier 2 capitals through bond issue the interest cost then will be higher.

46

2. Narrow banking: a) Narrow banking means only operation with the existing assets base & not expanding the business. If NPAs are high RBI may ask a bank to do only narrow banking. b) RBI may impose adverse restrictions on business of bank if NPA percentage is very high. For Example Restriction on opening new branches, Expansion of international operations may be curtain.

3. Effects on Efficiency: a) When NPAs are very high all productivity ration of the bank such as ROI (Return on Investment.) Productivity per employee and profitability ratios are adversely affected. b) The most important business implication of the NPAs is that it leads to the credit risk management assuming priority over other aspects of banks functioning. The banks whole machinery would thus be pre-occupied with recovery procedures rather that concentrating on expanding business. c) Implications can be psychological like play safe attitude and risk aversion, lower moral and disinclination to take decisions at all levels of staff in the bank.

6. Effect on reputation of the bank: The lesser appreciated implications are reputation risks arising out of grater disclosures on quantum and movement of NPAs, provisions etc. High NPA

47

diversely affected the image of bank and banks capacity to generate further business is reduced.

Rates of Provisioning for Non-Performing Assets and Restructured Advances

Category of Advances

Existing Rate (%)

Revised Rate (%)

Sub- standard Advances 10


15 25 20

Secured Exposures Unsecured Exposures Unsecured Exposures in respect of Infrastructure loan accounts where certain safeguards such as escrow accounts are available. Doubtful Advances Unsecured Portion Doubtful Advances Secured Portion

20 15

100

100

20

25 40 100

For Doubtful upto 1 year For Doubtful > 1 year and upto 3 years For Doubtful > 3 years Loss Advances Restructured accounts classified as standard

30 100

100

100

48

advances in the first two years from the date of restructuring ; and

0.25 to 1.00 (depending upon the category of advance)

in cases of moratorium on payment of interest/principal after restructuring period covering moratorium and two years thereafter. Restructured accounts earlier classified as NPA and later upgraded to standard category 0.25 to 1.00 (depending upon the category of 2

in the first year from the date of upgradation

advance)

NPAs Particulars Gross Advances Gross NPAs Gross NPAs as % of Gross Advances Total Provisions held Net Advances Net NPAs Net NPAs as % of Net Advances Provision Coverage Ratio Provision Coverage Ratio as per RBI Guidelines Mar-12 182799 4551 2.49 1640 181158 2911 1.61 41.19 68.28 Mar-11 158205 2785 1.76 1107 157098 1678 1.06 39.75 74.66

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SUMMARY OF NPAs AS ON MARCH 31, 2012 For the Year As on 01.04.2011 Additions (First Time NPA) Less: (i) Trans to Countercyclical Prov Buffer (i) Upgradations (ii) Recoveries (iii) Write off As on 31.03.2012 419 55 319 4551 192 30 319 1640 227 25 0 2911 112 -112 Gross NPA 2785 2560 Provision 1107 1187 Net NPA 1678 1373

CLASSIFICATION OF NPAs AS ON MARCH 31, 2012 Particulars Gross NPA Provision Net NPA % of Provision to Gross NPA

Sub Standard Assets Doubtful Assets Loss Assets Total

2 450 11981 120 4551

385 1135 120 1640

2065 846 0 2911

15.72 57.30 100.00 36.04

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