6 – Accounting for Banking Companies

Introduction:

A banking firm is any corporation that does or transacts banking operations in India. The laws of the Companies Act 1956, and more especially the Banking Regulation Act, govern the banking business in general. The Banking Regulation Act of 1949 was enacted on March 16, 1949, in response to a long-felt need to control the banking business in India and protect the interests of many depositors. Economic growth requires the existence of a well-organized, regulated, and efficient financial sector. Banks are the institutions in charge of mobilising and channelling funds in a country. In India, the following institutions conduct business:

(a) Nationalized banks

(b) State Bank of India and Associates banks

(c) Foreign banks with branches in India

(d) Cooperative banks

(e) Rural banks and

(f) Private sector banks.

Section 6 of the Banking Regulation Act permits a bank to participate in certain types of activity incidental to the banking business in addition to banking. Section 8 of the Banking Regulation Act bans a bank from purchasing, selling, or dealing in goods unless it is in connection with the realisation of a security held by it or the activity of collecting or negotiating bills of exchange.

6.1 Banking Accounting

Banking is defined in Section 5(h) of the Banking Companies Act as “the accepting for loan or investment of money deposits from the public, repayable on demand or otherwise and withdrawable by check, draught, and order or otherwise.” (Until 1949, there was no separate legislation to regulate banking firms; but, since that year, the provisions of the Banking Regulation Act and the Companies Act, 1956 apply to corporations carrying on banking activities, including nationalised banks.) Section 6 of the Act states that, in addition to the usual business, a banking company may engage in the following activities:

(a) acting as agents for any Government or local authority or any other person or persons,

(b) carrying on and transacting any guarantee and indemnity business and

(c) undertaking and executing trusts.

A banking corporation is not permitted to conduct any other form of business. No financial firm may directly or indirectly deal in the purchasing, selling, or bartering of commodities unless in connection with the realisation of security granted to or retained by it or engage in any trade or purchase, sell, or barter goods for others, except in connection with bills of exchange. Immovable property, other than that required for its use, must be disposed of within seven years after purchase.

6.1.1 Non-banking Assets

A bank cannot purchase certain assets but can always lend against them as collateral. This means that, in the event of a loanee’s failure to repay the loan, the bank may be forced to seize such assets. In that situation, the assets will be classified as “non-banking assets” on the balance sheet. These must be discarded within seven years. Income from or profit on the sale of such assets and loss on the sale of such assets must be separately shown in financial statements such as the bank’s Profit and Loss Account.

6.2 Banking Account Fundamentals

Accountants design the accounting systems used by bookkeepers. They build internal controls to safeguard resources, apply standards-setting organisation principles to accounting records, and prepare financial statements, management reports, and tax returns based on that data. Accountants include auditors who verify accounting records and provide an opinion on financial accounts and management, tax, and forensic accounting specialists.

6.2.1 Accounting and Bookkeeping: What’s the Difference?

Bookkeeping is a tedious but necessary element of accounting. It is the recording and summarising of an organization’s economic activities—sales made, bills paid, capital received—as individual transactions (annually, quarterly, even daily). Except in the smallest organisations, these transactions are now recorded electronically; nevertheless, before computers, they were kept in physical books, hence bookkeeping.

6.2.2 Double-entry Bookkeeping

A company’s economic events are documented as transactions and applied to the books (hence accounting).

For instance, the cash account records the cash on hand, but the sales account records transactions. Even tiny businesses have hundreds of accounts on their chart of accounts, while major corporations have thousands.

Transactions are recorded in journals, which were (and still are) physical books for some small businesses; nowadays, however, journals are often included as part of accounting software. Each transaction has a date, an amount, and a description.

Consider the following scenario: you own a stationery store. On April 19, you are visited by a saleswoman from an antique company, and you purchase a lamp for your workplace for $250. A journal entry to record the transaction as a debit to the Office Furniture account and a $250 credit to Accounts Payable may be stated as follows (Dr. is an abbreviation for debit, while Cr. is an abbreviation for credit):

Date	Account	Dr.	Cr.
April 19	Office Furniture	250
	Accounts Payable		250
(Bought antique lamp; voucher #0016)

Each accounting transaction must affect at least two accounts, including one debit and one credit.

6.2.3 Maintaining Accurate Accounting Records

Even a seemingly straightforward transaction like this creates many accounting concerns.

Example: Date: Assume you agreed to buy the lamp over the phone on April 15, but the paperwork wasn’t completed until April 19. And the lamp didn’t arrive on the 19th, but on the 23rd. Or perhaps you thought even as you bought it that you didn’t like it all that much and that there’s a good possibility you’ll return it before the 30th when the sale becomes final. On which date – the 15th, 19th, 23rd, or 30th – did an economic event occur that required a transaction to be recorded?

Amount: The sales price is $250, but you can obtain a 10% discount (to $225) if you pay within 30 days; however, if business is slow, you may require the whole 90 days to pay. However, you know that the antique market is also a shambles; even if you agreed to pay $250, you could shave another $50 off the price if you threaten to return it. On the other hand, as a stationery store owner, you know one of your clients has been hunting for a lamp like that for a long time, and he informed you in February that he’d spend $300 for one.

So, what quantities should you record on April 19 (assuming you record a transaction on that date)? $250, $225, $200, or $300?

Accounts: You’ve deducted money from the Office Furniture account. But in reality, you routinely buy and sell antiques to your customers, and you’re always willing to sell the lamp if you get a decent offer. Should the light be documented in the Purchases account, which is used for inventories, rather than the Office Furniture account, which is used for fixed assets? If this were a large corporation, there may be dozens of office furniture sub-accounts to pick from.

Accountants rely on various sites to provide answers to such inquiries. There are basic, time-honoured accounting conventions: norms established by various rule-making agencies, long-standing industry traditions, and, most importantly, their expertise and judgement.

The crucial point is that even the most fundamental accounting questions – when did an economic event occur? What is the transaction’s worth? Which accounts are affected by the transaction? It can become very complicated, and the correct answers can be complex. There is no excuse for outright manipulation of company performance or shoddy audits, which unfortunately occur. However, the seeming precision of financial statements, no matter how meticulously created, is undermined by the uncertainty and ambiguity of the company activities they strive to depict.

6.2.4 Credits and Debits

We’re used to thinking of “credit” as something “positive” — our account is credited when we get a refund, and you get “extra credit” for being courteous. Meanwhile, a “debt” is something bad – a debit diminishes our bank balance; it’s also used to denote a deficiency or disadvantage.

In accounting, debit refers to the left-hand side. The credit relates only to the right side of the coin. When you receive cash — a “positive” thing – you debit and boost the cash account. When you utilise cash, a “bad” thing, you reduce Cash by crediting it. On the other hand, when you make a sale, you credit the Sales account; when someone returns what you sold, you debit the Sales account.

The terms “good” and “bad” have nothing to do with credit and debit.

Debit is on the left, and credit is on the right.

Accounting on an Accrual Basis vs. Accounting on a Cash Basis: As previously demonstrated, determining when an economic event happens and an accounting transaction should be recorded is a question of judgment. Accrual accounting considers the financial reality of the business rather than cash inflows and outflows.

Although cash basis statements are easier to understand and make sense for many individual taxpayers and small enterprises, they produce misleading financial accounts. Consider a Halloween costume company: it designs, manufactures, and sells costumes all year but only gets paid in October. If sales were only recognised when cash was received, October would show a considerable profit while the rest of the months would show losses. Accrual accounting attempts to match revenues produced during a period with expenses incurred to create them, regardless of when cash comes in or out.

‘Debit’ and ‘Credit’ Rules

Personal Account: Charge the recipient (his account would be debited if he sold goods on credit to a person). Credit the giver (on a credit purchase of furniture, the seller’s account is credited).

Authentic Account: Deduct what comes in (when cash is received, the cash account is debited). What comes in must be credited (when furniture is purchased for cash, the cash account is credited).

Nominal Account: Deduct all losses and expenses from this account (when salary is paid to an employee instead of his account, the salary expenses account is debited). All profits and income should be credited (when the commission is received, the commission account is credited rather than the person from whom the commission is received). The following is provided: Tables 7.1 and 7.2 offer a summary of debits and credits to various accounts and journal entries.

Summary of Effect of Debit & Credit on various Accounts

Name of the account	Effect on balance when the account is debited	Effect on balance when the account is credited
Asset accounts	Balance Increases	Balance Decreases
Liability Accounts	Balance Decreases	Balance Increases
Capital Account	Balance Decreases	Balance Increases
Expenses Account	Balance Increases	Balance Decreases
Income or revenue a/c	Balance Decreases	Balance Increases

Journal Entries

Nature of Transaction	Account to be debited	Account to be credited
Commencement of business with cash	Cash account	Capital account or any other liability account
Purchase of assets or goods out of for cash	Asset account or purchase account	Cash account
Purchase of assets or goods on credit	Asset account or purchase account	Seller’s account or Creditor’s account
Sale of assets or goods for cash	Cash account	Asset or sale account
Sale of assets or goods on credit	Buyer’s or Debtor’s account	Asset or sale account
For any type of expenses which are due within the accounting period	Expenses account (respective head)	Cash account for cash payment. In case of on credit account of the supplier of the service
For any type of income due within the accounting period	Cash account for cash entry or account of the buyer of services for on-credit entry	Income Account (respective head)
For outstanding expenses	Expenses account (respective head)	Outstanding expenses a/c
For pre-paid expenses	Pre-paid expenses account	Expenses account (respective head)
For outstanding or accrued income	Account of the person from whom such income is to be received	Income account (respective head)
For income received in advance	Income account (respective head of account)	Income received in advance account
Depreciation on fixed assets	Depreciation account	Asset account on which depreciation charged
For goods taken for personal use	Drawing account	Respective asset account
Payment made by cheque to creditors	Creditor’s account	Bank account
Payment received by way of cheque from debtors	Bank account	Debtor’s account
For transfer of Opening stock	Trading account	Opening stock account
For transfer of Closing stock	Closing stock account	Trading account

6.2.5 Accounting Equations

Capital or owner’s equity = Assets – outside liabilities

Asset = Capital + outside liabilities

Outside liabilities = Assets – Capital

Income i.e., profit = Revenue – Expenses

Revenue = Expenses + profits

6.2.6 Capital Receipt and Revenue Receipt

Capital receipts are sums received in the form of capital introduced by the promoters, term loans received by banks, and sale revenues from fixed assets. Such receipts have no bearing on profit or loss. These either increase or decrease the obligation.

Revenue receipt is money received in the usual and regular course of business, such as the sale of products and services. It impacts the profit and loss statement and is recorded on the profit and loss account’s credit side. Table 7.3 provides instances of several types of faults.

 Different Types of Error

Error	Explanation and example
Error of principle	When a real or personal account transaction is treated as a nominal account item. Machinery installation charges debited to wages, as installation was done by the factory labourers.
Error of omission	When there is complete omission to record a transaction e.g. cash sales of ` 5,000 not recorded. Neither cash account debited nor sales account credited. Or Though cash has been debited, but sales are not posted to the sales book.
Error of commission	Where posting has taken place but there is some mistake. The examples for each case above are given as under: Sales of ` 5,670 recorded as ` 6,570 Sales of ` 5,670 recorded in the purchase book A balance of ` 34,000 in the sales book is taken as ` 43,000 in the trial balance In the debtors’ ledger, debited an amount of ` 5,400 as ` 4,500 to the debit of the buyer of goods on credit The amount of ` 2,000, or the account of goods sold to one Mr. Ramesh credited, was credited to his account instead of debiting his account While balancing the account of Mr. Ramesh, the balancing was done for an amount of ` 8,500 instead of ` 9,500.
Compensating error	Cash received from Ramesh ` 2,500 debited to cash account for ` 2,000 and cash paid to Mr. Dinesh ` 2,500 recorded in the cash book as ` 3,000.

 

6.2.7 Depreciation

Depreciation is the gradual decrease in the value of a fixed item over time. This is a continuous process that reduces the book value of the assets. The rate at which its value falls varies from asset to asset and is determined by various factors such as wear and tear, passage of time, obsolescence, market price decline, and so on. Charging depreciation distributes fixed asset costs over the asset’s useful life.

Straight Line Method vs. Fixed Instalment Method: Which is better? The SLM approach charges depreciation on the asset’s original value, which includes installation and transportation costs but excludes scrap value, if any.

For example, if an asset was purchased for ‘2 lac including tax,’ ‘l0,000 was spent on its installation, and another ‘5000 was spent on its shipment, etc. If its scrap value is also projected to be 35,000, the amount of annual depreciation at the end of four years of commercial usage will be 45,000 [(2,00,000 + 10,000 + 5,000 – 35,000)/4].

Written Down Value Method (WDV) or Diminishing Balance Method (DBM): Depreciation is paid at a fixed rate on the diminishing balance under the WDV method (called written down balance i.e. original cost less depreciation). This also implies that the asset’s cost less the scrap value will be written off throughout its estimated commercial life. In the preceding example, a 25% depreciation rate will be applied to’1,80,000 during the first year, and a 25% depreciation rate will be applied to’1,35,000 (1,80,000 – 45,000) during the second year, with a depreciation amount of’33,750 (25 percent of’1,35,000).

6.2.8 Bank Consolidation

Reconciliation is a declaration that a party uses to reconcile its cashbook with the bank passbook based on specific causes of differences between these two books.

Reconciliation Procedure

When the task of reconciliation is assigned, the following approach might be used:

1. Compare two books, namely the cash book and the passbook, to identify transactions that appear in one but not the other.
2. Begin with the balance of one book, such as the cash book or the passbook. This sum might be either a credit or a debit balance. This results in four scenarios (debit or credit balance as per cash book or as per passbook).
3. Adjust the balance with the starting point by adding or subtracting the amount of the transaction, depending on the nature of the transaction.
4. The solution will be the opposite balance at the completion of these modifications (if balance is credit in cash book, it will be debit in pass book and vice versa).

Entry of adjustments: Following the completion of the process of trial balancing or drawing final accounts, management may notice that certain expenses to be incurred have not been paid and that certain expenses have been paid in advance. Similarly, some revenue may have been due but has not yet been received, while some income may have been due but has not yet been received. As a result, unless the final accounts are updated, the true profit or loss situation may not be reported. Tables 7.4 and 7.5 provide a summary of some of the revisions.

 Adjustment Entries for various Kinds of Transactions

Nature of transactions	Account to be debited (along with the name of the financial statement)	Account to be credited (along with the name of the financial statement)
Outstanding/unpaid expenses (like rent, wages, depreciation etc.)	Respective expenses a/c (profit and loss account)	Expenses outstanding (balance sheet)
Prepaid expenses (such as insurance, commission etc.)	Prepaid expenses (balance sheet)	Respective expenses a/c (profit and loss account)
Income accrued/due not received (Any kind of Income)	Accrued income (balance sheet)	Respective Income account (profit and loss account)
Income received In advance (any kind of income)	Respective income a/c (profit and loss account)	Income received in advance (balance sheet)
Provision against doubtful debts	Expenses provisions – doubtful debts (profit and loss accounts)	Provision for doubtful debts (balance sheet)
More provisions for doubtful debts (for the additional amount only)	Expense provisions-doubtful debts (profit and loss accounts)	Provision for doubtful debts (balance sheet)
Writing-off of bad debts (when no provision is already available)	Expenses: write-off bad debts (profit and loss account)	Respective party’s accounts (balance sheet)
Write-off of bad debts (when provision is already held)	Provision for doubtful debts (balance sheet )	Respective party’s accounts (balance sheet)
Write-off of bad debts (when adequate provision is not held)	Provision for doubtful debts (balance sheet) Expenses write-off of bad debts for shortfall amount (P & L Account)	Respective party’s accounts (balance sheet)
Excess provision on doubtful debts	Provision for doubtful debts (balance sheet)	Expenses provision doubtful debts (profit and loss account)
Interest on capital not paid	Expenses: Interest on capital (Profit and loss account)	Capital account (balance sheet)
Interest on drawings	Capital or drawings account (balance sheet)	Income-interest on drawings (profit and loss account)

 

 Effects of Different Accounts on Various Adjustments

Transaction	Trading account	Profit/loss account	Balance Sheet
Closing stocks	Credit Side		Asset Side
Depreciation		Debit side	Reduction from Fixed Asset
Expenses outstanding	In addition to related exp. a/c debit side	In addition to related exp. a/c debit side	To be shown as a liability
Prepaid expenses	Reduction from related exp. a/c	Reduction from related exp. a/c	To be shown as an asset
Accrued income		Addition to related income account	To be shown as an asset
Income received in advance		Reduction from related income a/c	To be shown as a liability
Interest on capital		Intt. Account to be debited	Add to the amount of capital
Interest on drawing		Intt. Account to be credited	Reduction from capital
Provision for bad debts		Debts to P& L account	Reduction from the amount of debtors
Discount on debtors		Debit to discount account to P&L a/c	Reduction from the amount of debtors
Commission payable to Manager*

 

* If the commission is to be calculated before charging such commission = Net profit before such commission × rate/100.

If the commission is to be calculated after charging such commission = Net profit before such commission X rate/100 + rate.

 Summary of Adjustments with Journal Entries

Nature of transaction	Account to be debited	Account to be credited
Closing stocks	Closing stocks	Trading account
Outstanding expenses	Concerned Expenses account	Outstanding expenses a/c
Prepaid expenses	Prepaid/unexpired expenses account	Concerned expenses account
Accrued or outstanding income	Accrued income	Concerned income account
Income received in advance	Concerned income account	Income received in advance
Depreciation	Depreciation account	Asset account
Interest on capital	Interest on capital a/c	Capital account
Interest on drawings	Capital account	Interest on drawings a/c
Interest on loan	Interest account	Interest outstanding a/c
Bad debts	Bad debt account	To debtor’s account
Making provision for bad debt	Profit and loss account	To provision for bad and doubtful debt account
Provision for discount on debtors	Discount allowed a/c	To provision on debtor’s account
Provision for discount on creditors	Provision for discount on creditors	To profit and loss account
Accidental loss, say fire	Loss by Fire	To trading account for stock of goods or other asset’s account which has been damaged
Commission payable on profits	Commission on profits	Profit and loss account
Drawings of goods by the promoter	Drawings account	Purchase account
Goods received, but bill not received	Purchase account	Supplier’s account
Claim admitted by insurance company, but money not received	Insurance company	Trading account
Returns inwards	Returns inward	Debtor’s account
Returns outward	Creditor concerned	Returns outward account

6.3 Accounts of Corporations

A joint stock company is founded through formation by the rules of the Companies Act of 1956. These corporations are artificial legal persons with their legal entity apart from their members. It could be a private firm, a public company, or a government agency. While a private corporation must have at least two members and a maximum of fifty, a public or government firm must have at least seven members with no upper limit. In the case of a public firm, the minimum capital should be ‘5 lac with a 25% stake from the general public. A firm must have three crucial documents: a Memorandum of Association, a Certificate of Incorporation, and a Certificate of Commencement of Business.

In terms of share capital, it can be classified as authorised, issued, subscribed, or paid-up capital, as stated in the Table below:

 Description of Types of Capital

Nature of Capital	Description
Authorised Capital	Maximum amount of capital, that a company could raise and is capital clause in MOA of the company.
Issued capital	The amount offered to the public for subscription can be up to the authorized capital.
Subscribe capital	The number of shares and the face value of the prospective shareholders want to take up.
Paid up capital	The amount received from the shareholder against the allotted shares.

6.4 Significant Facts

When dealing with a company’s accounts connected to the issuance of shares by a company, the following facts must be kept in mind:

1. Voting rights are attached to an equity share.
2. Preference shareholders have voting rights if the dividend has been outstanding for more than two years in the case of cumulative preference shares and three years in the case of non-cumulative preference shares.
3. Reissued forfeited shares may be issued at a discount if the reissue price plus the money previously collected from the defaulting shareholder is greater than the amount recognised as paid up on the reissue of the share.
4. It is obligatory to annul the discount on the issue of shares account when shares issued at a discount are forfeited.
5. A preference share has a preferential right exclusively to the return of capital upon the company’s liquidation. It has no legal claim to the dividend.
6. The entries for surrendering the shares are the same as those for forfeiture of shares.
7. There is a capital redemption reserve available for claiming fully paid bonus shares.
8. A corporation can buy its stock as well as debentures.
9. A convertible preference share can be converted into equity shares.

• The face value of a share is the amount specified on the share certificate. The paid-up value is the amount called by the corporation and paid by the shareholder, which may or may not be the same as the face value.
• Shareholders are not entitled to dividends on calls-in-advance payments.
• A share cannot be issued at a discount greater than 10% of its nominal value unless approved by the Central Government. However, a company that has operated for at least one year can issue shares at a discount.
• It is not possible to redeem a partially paid preference share.
• The balance of the share forfeited account following the reissue of the forfeited shares, i.e. transferred to capital reserve.
• Transfers from the profit and loss account and dividend equalisation account are permitted to the capital redemption reserve account.

6.4.1 The Balance Sheet

Part I of Schedule VI of The Companies Act, 1956, specifies the prescribed form of the Balance Sheet.

The Companies Act established two types of balance sheets known as:

• Horizontal form
• Vertical form

Format of Summarised Balance Sheet (Horizontal Form)

Schedule VI Part I

Balance Sheet of ….Co. Ltd. As at …

Figures for the Previous year `	Liabilities	Figures for the current year `	Figures for the Previous year `	Assets	Figures for the current year `
	1. Share Capital 2. Reserves and surplus 3. Secured Loans 4. Unsecured Loans 5.  Current Liabilities and Provisions (a) Current Liabilities (b) Provisions			1. Fixed Assets 2. Investments 3. Current Assets, Loans and Advances (a) Current Assets (b) Loans and Advances 4. Miscellaneous Expenditure 5. Profit and Loss A/c

 

The format of the detailed Balance Sheet of a company in a horizontal form is given below:

Format of the Detailed Balance Sheet in a Horizontal Form

Horizontal Form of Balance Sheet

Balance Sheet of….. (Name of the company) as on…..

Figures for the Previous year `	Liabilities	Figures for the current year   `	Figures for the previous year `	Assets	Figures for the current year   `
	Share Capital: Authorised …shares of `…each Preference Equity Issued : …shares of `…each Preference Equity Less: Calls Unpaid: Add: Forfeited Shares Reserves and Surplus: Capital Reserve Capital Redemption Reserve Securities Premium Other Reserves Profit and Loss Account Secured Loans: Debentures Loans and Advance from Banks Loans and Advances from subsidiary Companies Other Loans and Advances Unsecured Loans: Fixed Deposits Loans and Advances    from subsidiary companies Short-Term Loans and Advances Other Loans and   Advances Current Liabilities and Provisions: A.  Current Liabilities Acceptances Sundry Creditors Outstanding Expenses B. Provisions: For Taxation For  Dividends For Contingencies For Provident Fund Schemes For Insurance, Pension and Other similar benefits			Fixed Assets: Goodwill Land Building Leasehold Premises Railway Sidings Plant and Machinery Furniture Patents and Trademarks Livestock Vehicles Investments: Government or Trust Securities, Shares, Debentures, Bonds Current Assets, Loans and Advances: (A)   Current Assets: Interest            Accrued            on investments Stores and Spare parts Loose Tools Stock in Trade Work in Progress Sundry Debtors Cash and Bank balances (B)   Loans and Advances: Advances      and     Loans      to Subsidiaries Bills Receivable Advance           Payments           and unexpired discounts Miscellaneous – Expenditure: Preliminary Expenses Discount on the Issue of Shares and Other Deferred Expenses Profit and Loss Account (debit Balance: if any)

 

Format of the Balance Sheet in vertical Form

Balance Sheet of ….. as on …..

Particulars	Schedule Number	Figures as at the end of the current financial year	Figures as at the end of the previous financial year
I.     Source of Funds: 1.    Shareholder’s Funds: (a)    Share capital (b)    Reserves and Surplus 2.    Loan Funds: (a)    Secured loans (b)    Unsecured loans Total (Capital Employed) II.    Application of Funds 1.    Fixed Assets: (a)    Gross block (b)    Less: depreciation (c)     Net block (d)    Capital work-in-Progress 2.    Investments: 3.    Current Assets, Loans and Advances: (a)    Inventories (b)    Sundry Debtors (c)     Cash and Bank Balances (d)    Other Current Assets (e)    Loans and Advances Less: Current Liabilities and Provisions: 4.    (a)   Current liabilities (b)    Provisions Net Current Assets (a)    Miscellaneous expenditure to the extent not written-off or adjusted. (b)    Profit  and  Loss  account  (debit  balance,  if any) TOTAL

 

1st Illustration

The following are the capital funds and assets of a commercial bank. Divide the capital funds into two categories: Tier I and Tier II capital. Determine the risk-adjusted asset, risk-weighted asset, and risk-weighted assets ratio:

Capital Funds:	Figures in ` Lakhs
Equity Share Capital	4,80,00
Statutory Reserve	2,80,00
Capital Reserve (of which ` 280 lakhs were due to revaluation of assets and the balance due to sale)	12,10
Assets:
Cash Balance with RBI	4,80
Balance with other Bank	12,50
Certificate of Deposits with other commercial Bank	28,50
Other investments	78,250
Loans and Advances:
(i)   Guaranteed by government	128,20
(ii)  Guaranteed by public sector undertakings of Government of India	702,10
(iii)  Other	52,02,50
Premises, furniture and fixtures	182,00
Other Assets	201,20
Off-Balance Sheet Items:
Acceptances, endorsements and letters of credit	3,70,250
Solution
Capital Funds – Tier I :
` in Lakhs	` in Lakhs
Equity Share Capital	48,000
Statutory Reserve	28,000
Capital Reserve (arising out of sale of assets)	930
	76,930
Capital Funds – Tier II :
Capital Reserve (arising out of revaluation of assets)                   280
Less: Discount to the extent of 55%                    154	126
Total	77,056
Risk Adjusted Assets
Funded Risk Assets                            ` in       Percentage Lakhs           Weight	Amount ` in lakhs
Cash Balance with RBI                        480                  0	–
Balance with other Banks                  1,250              20%	250

Certificate of deposits                                                         2,850	22.5%	641
Other Investments                                                        78,250	102.5%	80,206
Loans and Advances:
(i)   Guaranteed by government       12,820	0	–
(ii)  Guaranteed by public sector undertaking of Central Govt.                                                 70,210	10%	70,210
(iii)  Other                                                      5,20,250	100%	5,20,250
Premises, furniture and fixtures Other Assets                                                        18,200	100%	18,200
20,120	100%	20,120
Total		7,09,887
Off-Balance Sheet Item                ` in Lakhs	Credit Conversion Factor
Acceptances, Endorsements                                                    3,70,250 and Letters of credit	100%	3,70,250
Total		10,80,127
Risk-Weighted Assets Ratio:    i / ii × 100

= 77,056 / 10,80,127 × 100 = 7.13%

Expected ratio is 9%. So the bank has to improve the ratio.