Accounts and Audit of Banking Companies under Sections 29 to 34A

A bank's accounts are not only a record for its shareholders. They are the means by which the regulator, the depositor and the market learn whether the institution is sound. The Banking Regulation Act therefore prescribes the form of the accounts, who must audit them, when they must be filed and published, and when a bank may decline to produce its books. It also deals with money nobody has claimed, which has become a subject of practical importance as deposits have grown.

Figure 1: The annual accounting cycle of a banking company

1. The Balance Sheet and Profit and Loss Account

• The obligation (Section 29): at the expiration of each calendar year, or of a period of twelve months ending on such date as the Central Government may by notification specify, every banking company must prepare, as on the last working day of that year or period, a balance sheet and a profit and loss account in the forms set out in the Third Schedule, or as near to them as circumstances admit.
• Who it covers: banking companies incorporated in India, and in respect of business transacted through branches in India, banking companies incorporated outside India.
• Signature: the balance sheet and accounts must be signed, in the case of a company incorporated in India, by the manager or principal officer and by at least three directors where there are more than three, and in the case of a foreign company by the manager or agent of the principal office in India.
• The Third Schedule: Form A is the balance sheet and Form B the profit and loss account. They are supplemented by eighteen schedules covering capital, reserves, deposits, borrowings, investments, advances, fixed assets, interest earned, operating expenses and contingent liabilities, which give the standardised shape in which every Indian bank's accounts appear.
• Disclosure: beyond the statutory forms, the Reserve Bank prescribes notes to accounts disclosing capital adequacy, asset quality, provisioning coverage, the divergence between the bank's own assessment of non-performing assets and the supervisor's, related party transactions, exposures and the liquidity coverage ratio.

2. Audit

• The requirement (Section 30(1)): the balance sheet and profit and loss account must be audited by a person duly qualified under any law for the time being in force to be an auditor of companies.
• Approval of appointment (Section 30(1A)): a banking company may not appoint or reappoint an auditor without the previous approval of the Reserve Bank, which is a significant departure from company law, where the auditor is the shareholders' choice alone.
• Special audit (Section 30(1B)): where the Reserve Bank is of opinion that it is necessary in the public interest or in the interest of the banking company or its depositors, it may direct a special audit of the company's accounts for any transaction or class of transactions, by the company's own auditor or by another duly qualified auditor, and the expenses are borne by the banking company.
• Powers of the auditor (Section 30(2)): the auditor has the powers of, exercises the functions vested in, and discharges the duties of, and is subject to the liabilities and penalties imposed on, auditors of companies by the company law.
• Additional matters (Section 30(3)): the auditor must state in his report whether the information and explanations required have been found satisfactory, whether the transactions of the company that came to his notice have been within the powers of the company, whether the returns received from branch offices have been found adequate, and any other matter he considers should be brought to the notice of the shareholders.
• Long form audit report: the Reserve Bank additionally requires a long form audit report addressing credit appraisal, asset classification, provisioning and internal control, which is the practical instrument of audit based supervision.

3. Returns, Filing and Publication

• Submission (Section 31): the accounts and balance sheet, together with the auditor's report, must be published in the prescribed manner and three copies furnished as returns to the Reserve Bank within three months from the end of the period to which they relate. The Reserve Bank may extend the period by a further period not exceeding three months.
• Registrar (Section 32): where a banking company is required by the company law to furnish its balance sheet and accounts to the Registrar of Companies, it must at the same time send three copies to the Registrar, and those copies are deemed to satisfy the company law requirement.
• Display by foreign banks (Section 33): a banking company incorporated outside India must, not later than the first Monday in August of any year in which it carries on business, display in a conspicuous place in its principal office and every branch in India a copy of its last audited balance sheet and profit and loss account, and keep it displayed until replaced.
• Other returns: banks file an extensive set of periodical returns under Section 27, including monthly returns of assets and liabilities and such further returns as the Reserve Bank may call for, which supply the data on which supervision actually rests.
• Accounting provisions not retrospective (Section 34): nothing in the accounting provisions applies to any balance sheet or account for a period ending before the commencement of the Act.

4. Confidential Documents

Figure 2: When a bank may decline to produce its books

• The protection (Section 34A(1)): notwithstanding Section 11 of the Industrial Disputes Act, 1947, or any other law, no banking company shall, in any proceeding under that Act or in any appeal or other proceeding arising from it, be compelled to produce or give inspection of any of its books of account or other document, or to furnish or disclose any statement or information, where it claims that the material is confidential and would disclose reserves not shown as such in its published balance sheet or particulars of provisions for bad and doubtful debts and other usual or necessary provisions not shown in it.
• The certificate (Section 34A(2)): where a question arises in such a proceeding whether any amount out of those reserves or provisions should be taken into account, the authority may refer it to the Reserve Bank, which, having regard to the principles of sound banking, certifies whether the amount may be taken into account and to what extent. The certificate is final and cannot be called in question in the proceeding.
• Who it covers (Section 34A(3)): for this purpose "banking company" includes the Reserve Bank, the State Bank of India, regional rural banks and certain development and financial institutions.
• Why it exists: in wage and bonus disputes before industrial tribunals, employees sought disclosure of hidden reserves to show that the bank could afford higher payments. A bank's ability to absorb losses depends in part on provisions and reserves that are deliberately not displayed, and compelled disclosure could signal weakness and precipitate a run. The section protects that information while leaving the Reserve Bank to decide how much of it the tribunal may count.

5. Unclaimed Deposits

• The return (Section 26): every banking company must, within thirty days after the close of each calendar year, submit a return to the Reserve Bank in the prescribed form, as at the end of that year, of all accounts in India which have not been operated upon for ten years, giving particulars of the depositors.
• Dormant accounts: the Reserve Bank separately requires banks to classify an account as inoperative after two years of no customer induced transaction, to make efforts to trace the depositor, and not to levy charges for reactivating it.
• The Fund (Section 26A): the Reserve Bank establishes a Depositor Education and Awareness Fund, inserted by the Banking Laws (Amendment) Act, 2012. Every banking company must credit to the Fund the amount to the credit of any account that has not been operated upon for ten years, or any deposit or amount remaining unclaimed for more than ten years, within three months from the expiry of that period.
• The depositor's right survives: where the depositor later claims the amount, the banking company is liable to pay him, together with interest at the rate specified, and may then claim a refund from the Fund. The transfer to the Fund extinguishes nothing.
• Use of the Fund: the money is applied for the promotion of depositors' interests and such other purposes as may be specified, and the Fund is administered by a committee constituted by the Reserve Bank, which publishes an annual account of it.
• Tracing: the Reserve Bank launched the UDGAM portal in August 2023, a centralised search facility through which a depositor or a legal heir can locate unclaimed deposits across banks from a single place, which is the practical answer to the growth of the Fund.

6. Questions Arising

Why must the Reserve Bank approve the appointment of a bank's auditor?

Because the auditor is, in practice, part of the supervisory chain. The Reserve Bank cannot inspect every branch of every bank every year, and relies heavily on the statutory auditor's work, in particular the long form audit report on credit appraisal and asset classification. Section 30(1A) gives the Bank a say in who performs that function, and its norms on eligibility, rotation and the number of bank audits a firm may hold are directed at the auditor's independence from the bank's management.

What is divergence in non-performing asset reporting, and why is it disclosed?

A divergence arises where the Reserve Bank's supervisory assessment of a bank's non-performing assets or provisioning exceeds the bank's own reported figures by more than a prescribed margin. The Bank requires the difference to be disclosed in the notes to the accounts, because understating bad loans was the central failure of the years before the asset quality review. Disclosure converts a supervisory finding into information the market can price.

7. Quick Revision

8. Frequently Asked Questions

In what form must a bank prepare its accounts?

In the forms set out in the Third Schedule to the Banking Regulation Act, 1949: Form A for the balance sheet and Form B for the profit and loss account, with the accompanying schedules. Section 29 requires them to be prepared as on the last working day of the year or specified twelve month period.

Can the Reserve Bank order a special audit of a bank?

Yes. Under Section 30(1B), where the Reserve Bank is of opinion that it is necessary in the public interest or in the interest of the banking company or its depositors, it may direct a special audit of the accounts for any transaction or class of transactions, by the company's own auditor or another qualified auditor, and the expenses are borne by the banking company.

What happens to a bank deposit that is never claimed?

Where an account has not been operated upon for ten years, or a deposit has remained unclaimed for more than ten years, the bank must credit the amount to the Depositor Education and Awareness Fund under Section 26A within three months of the expiry of that period. The depositor does not lose the money: he may still claim it from the bank, with interest, and the bank then claims a refund from the Fund.

When may a bank refuse to produce its books under Section 34A?

In a proceeding under the Industrial Disputes Act, 1947, or one arising from it, a bank cannot be compelled to produce books, documents or information that it claims are confidential and would disclose reserves not shown as such in the published balance sheet or undisclosed provisions for bad and doubtful debts. If the question is whether such reserves should be taken into account, the authority may refer it to the Reserve Bank, whose certificate is final. The section gives no general privilege in other litigation.

Who appoints the auditor of a banking company?

The company does, in the ordinary way, but not without the previous approval of the Reserve Bank under Section 30(1A). The auditor must be qualified to audit companies, and has the powers, duties and liabilities of a company auditor, together with the additional reporting obligations in Section 30(3).

9. Related Topics and Provisions

• Inspection, directions and penalties
• Capital, reserve fund and shareholding in banking companies
• Management of banking companies
• Non-performing assets and provisioning norms
• Deposit insurance
• The banker and customer relationship