Banks Told To Book Income Only On Cash Basis

The Reserve Bank of India has cracked down on public sector commercial banks that have been taking advantage of loopholes in its guidelines governing accounting of income on investments.It has laid down that banks book income from dividend on shares of corporates and mutual funds units when the income is received, that is, on a cash basis.

So far, there were no clear guidelines. Taking advantage of this, commercial banks often resorted to booking income on an accrual basis to beef up their bottom lines. Perusal of their balance sheets reveals such anomalies.

The PNB balance sheet for 1995-96 is a case in point. The auditors' report states: The decrease in the loss by Rs 98.31 crore on account of recognition of income towards dividend on Unit 64 for the years 1991-92 to 1994-95 purchased from the State Bank of Saurashtra in 1991-92 is in contravention of consistent accounting practices of recognising income on cash basis.

The bank has, in its defence, said the income had been recognised to give effect to the judgement of a special court of the Supreme Court regarding purchase of the units from the State Bank of Saurashtra, and that it had sought legal opinion on the matter RBI sources told Business Standard that in several instances, the income was not received by the bank. The result was an overstatement of profits or understatement of losses.The RBI has now ruled that commercial banks should treat income from investments on a cash basis. An exception has been made for income on government securities, and bonds/debentures of corporates, which carry pre-determined interest rates, and where interest is serviced regularly.

This was decided at a meeting in December 1996 of the Bank Audit Committee, consisting of the president and other representatives of the ICAI and the CMDs of some banks. The meeting was presided over by S P Talwar, RBI deputy governor at the time. A recent RBI circular states: It has been observed that there is no uniform accounting practice among banks in booking of income on dividend on shares of corporates and units of mutual funds.While some banks have been booking such income on a cash basis, some have booked the income on an accrual basis.

The RBI has now laid down that it is not prudent to treat such income as income unless it is received.