Accounts, Audit, Returns and Inspection

Section 25: assets in India. The assets in India of every banking company at the close of business on the last Friday of every quarter shall not be less than seventy-five per cent of its demand and time liabilities in India, and the company must submit a quarterly return of those assets and liabilities. The section exists so that a bank operating in India, including a foreign bank's branch, cannot fund Indian deposits and hold the assets abroad.

Returns: sections 26, 27 and 28

Section 26: the return of unclaimed deposits. Every banking company shall, within thirty days after the close of each calendar year, submit a return in the prescribed form of all accounts in India which have not been operated upon for ten years. For an account in respect of a minor or in respect of which a decree or order of a court applies, the period runs from the date of the minor's majority or of the decree.

Section 26A is the fund those deposits go to, and chapter 130 owns it, because it belongs with depositor protection rather than with returns.

Section 27: monthly returns and the power to call for more. Every banking company shall submit a monthly return in the prescribed form and manner showing its assets and liabilities in India at the close of business on the last Friday of every month. Section 27(2) empowers the Reserve Bank, at any time, to direct a banking company to furnish it with such statements and information relating to its business or affairs, including any business or affairs with which it is concerned, as the Reserve Bank may consider necessary, and to call for information every half year regarding investments and the classification of advances.

Section 28: publication. The Reserve Bank, or the National Bank in the case it names, may, if it considers it in the public interest, publish any information obtained by it under the Act in such consolidated form as it thinks fit.

Section 28 is the basis of the Reserve Bank's statistical publications, and its wording is the reason those publications are consolidated: the section authorises publication in consolidated form, not the disclosure of one bank's affairs.

Accounts and audit: sections 29 to 34A

Section 29: accounts and balance sheet. At the expiration of each calendar year, or of a twelve-month period ending on a date the Central Government notifies, every banking company incorporated in India, in respect of all business transacted by it, and every banking company incorporated outside India, in respect of all business transacted through its branches in India, shall prepare a balance sheet and profit and loss account as on the last working day of that year in the forms set out in the Third Schedule.

The Third Schedule form is the point. An ordinary company prepares accounts in the Companies Act form; a bank prepares them in the form the Third Schedule prescribes, which is designed to show a banking balance sheet, with deposits, borrowings, advances and investments in the order a supervisor wants to read them.

Section 29A: the power over associate enterprises, inserted in 2017. The Reserve Bank may, if it considers necessary in the public interest or in the interest of depositors or banking policy, direct a banking company to annex to its financial statements or furnish separately such statements and information relating to the business or affairs of any associate enterprise of the banking company as the Reserve Bank may specify, and may cause an inspection of any associate enterprise.

Section 30: audit. The balance sheet and profit and loss account prepared under section 29 shall be audited by a person duly qualified under any law to be an auditor of companies. Section 30(1A) requires the previous approval of the Reserve Bank for the appointment, reappointment or removal of an auditor. Section 30(1B) empowers the Reserve Bank to order a special audit where it is satisfied that it is necessary in the public interest or in the interests of the banking company or its depositors, and section 30(1C) provides for the expenses of that audit.

Section 30(3) tells the auditor what to report on, which goes beyond an ordinary audit: whether the information and explanations were satisfactory, whether the transactions of the company that came to his notice were within the powers of the company, whether the returns from branches were adequate, and the other matters the section lists.

Section 31: submission. The accounts and balance sheet, together with the auditor's report, shall be published in the prescribed manner and three copies furnished to the Reserve Bank within three months from the end of the period to which they relate, extendable by the Reserve Bank by not more than three months.

Section 32: copies to the registrar. Where a banking company furnishes its accounts and balance sheet to the Reserve Bank, three copies shall at the same time be sent to the registrar, and those copies are deemed to be the copies required to be filed under the Companies Act.

Section 33: display by foreign banks. A banking company incorporated outside India shall, 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.

Section 34: not retrospective. Nothing in sections 29 to 33 shall apply to any balance sheet or accounts for any year that ended before the commencement of the Act.

Section 34A: confidential documents. Notwithstanding anything contained in any law, no banking company shall be compelled to produce or give inspection of any of its books or documents relating to any matter the disclosure of which the Reserve Bank certifies would be against public interest, in any proceeding before an industrial tribunal or other authority, subject to what the section allows.

Section 35: inspection

Section 35(1). Notwithstanding anything to the contrary in the Companies Act, the Reserve Bank at any time may, and on being directed so to do by the Central Government shall, cause an inspection to be made by one or more of its officers of any banking company and its books and accounts; and the Reserve Bank shall supply to the banking company a copy of its report on such inspection.

Section 35(1A) empowers the Reserve Bank to cause a scrutiny of the affairs of a banking company and its books and accounts, which is a lighter and quicker instrument than a full inspection.

Section 35(2) provides for inspection on the direction of the Central Government where the Reserve Bank has reported, and section 35(3) obliges every director, officer or employee of the banking company to produce the books, accounts and documents in his custody and to furnish any statements and information relating to the affairs of the company as the inspecting officer requires, within the time specified.

Section 35(4) allows the Central Government, on the Reserve Bank's report, to direct the company to take remedial action, and in a serious case to prohibit it from receiving fresh deposits or to direct the Reserve Bank to apply for its winding up, which is where this chapter joins chapter 110.

A worked example

Sahyadri Bank Ltd. closes its year on 31 March. It prepares a balance sheet and profit and loss account in the Third Schedule form under section 29, has them audited under section 30 by an auditor whose appointment the Reserve Bank approved, publishes them, and furnishes three copies to the Reserve Bank within three months under section 31, with three more to the registrar under section 32.

Meanwhile it files a monthly return of assets and liabilities as on the last Friday of each month under section 27, a quarterly return of assets in India under section 25, and, within thirty days of the calendar year's end, a return of accounts not operated for ten years under section 26.

The Reserve Bank notices that advances to one group have grown sharply. It may call for a statement under section 27(2), order a special audit under section 30(1B), require information about an associate enterprise under section 29A, or send its officers to inspect under section 35. It chooses to inspect, and must give the bank a copy of the report.

During the inspection a general manager declines to produce the group's loan files. He is in breach of section 35(3), which obliges every officer to produce the books and documents in his custody and to furnish the information required.

Some months later a workman's union in an industrial dispute demands the same files. The bank may resist under section 34A if the Reserve Bank certifies that disclosure would be against the public interest.

Four instruments, and when each is used

What it does NOT mean

Section 24 is not the cash reserve. The cash reserve is cash, under section 18 or under section 42 of the 1934 Act. The statutory liquidity ratio under section 24 is assets, principally approved securities and gold, held in addition to that cash.

Section 28 does not authorise publishing one bank's affairs. It authorises publication of information obtained under the Act in consolidated form.

Section 34A is not a general banking secrecy provision. The duty of secrecy to the customer comes from the contract and from Tournier, worked in chapter 330. Section 34A is narrower: it protects the bank from compelled production in an industrial or similar proceeding where the Reserve Bank certifies public interest.

And an inspection report is not published. It goes to the bank, and its contents inform the Reserve Bank's use of its other powers.

Limits and criticism

The statutory liquidity ratio has been criticised throughout its life as financial repression, because a high ratio directs bank funds to the Government at a rate the Government sets, crowding out private borrowers. The counter-argument is that it is a genuine liquidity buffer, and the truth is that the same instrument has served both purposes.

The audit regime depends on the auditor, and the Reserve Bank's approval power under section 30(1A) is the answer to the risk that a bank appoints an accommodating one. Whether approval is a sufficient safeguard is a fair question after each large fraud.

Section 29A came only in 2017, which is late: the group structures it addresses had existed for decades, and a bank's exposure to its own associates had until then to be pursued through general powers.

Quick revision

Section 24: the statutory liquidity ratio, assets in India of not less than the specified percentage, not exceeding forty per cent, of demand and time liabilities, held in addition to the cash reserve.

Section 25: assets in India not less than seventy-five per cent of demand and time liabilities, with a quarterly return.

Section 26: annual return of accounts not operated for ten years, within thirty days of the year's end. Section 27: monthly return, and the power to call for statements. Section 28: publication in consolidated form.

Section 29: balance sheet and profit and loss account in the Third Schedule form. Section 29A: associate enterprises. Section 30: audit, Reserve Bank approval of the auditor, and special audit. Sections 31 to 33: furnishing, the registrar, and display by foreign banks. Section 34: not retrospective. Section 34A: no compelled production where the Reserve Bank certifies public interest.

Section 35: the Reserve Bank may inspect at any time and must when the Central Government directs; a copy of the report goes to the bank; officers must produce books and information.

Test yourself

1. Distinguish the cash reserve from the statutory liquidity ratio. The cash reserve is cash held under section 18, or under section 42 of the Reserve Bank of India Act, 1934 for a scheduled bank. The statutory liquidity ratio under section 24 is assets, principally cash, gold and unencumbered approved securities, of not less than the specified percentage of demand and time liabilities, maintained in addition to that cash reserve.

2. In what form must a bank prepare its balance sheet, and under which section? In the forms set out in the Third Schedule to the Act, under section 29, rather than in the Companies Act form.

3. What must a bank do about an account not operated for ten years? Submit a return of it in the prescribed form within thirty days after the close of the calendar year, under section 26. Where the account is a minor's, the ten years run from his attaining majority.

4. When must the Reserve Bank inspect a banking company? Whenever the Central Government directs it to do so; section 35(1) says it "shall" inspect on such a direction, while it "may" inspect at any time of its own motion.

5. Can a bank be compelled to produce its books in an industrial dispute? Not where the Reserve Bank certifies that disclosure would be against the public interest: section 34A protects the bank from compelled production or inspection of such books and documents in a proceeding before an industrial tribunal or other authority.