Accounting for Banking

Concept: A centralized networked software application that connects all branches of a bank, enabling customers to execute transactions (any-branch banking) and updating accounts in real time.

Differences:

1. Withdrawal: Demand deposits (current/savings) are withdrawable on demand via cheque/ATM; time deposits (fixed deposits) are withdrawable only on maturity.
2. Interest: Demand deposits offer zero or low interest; time deposits pay higher fixed interest rates.

Concept: A financial undertaking issued by a bank (issuing bank) at the request of an importer (applicant), guaranteeing payment to the exporter (beneficiary) upon presentation of specified complying documents.

Concept: A legal contract where the bank guarantees that the liabilities of a debtor will be met if the debtor fails to fulfill contractual obligations. Type: Performance Guarantee (Bid Bond, Advance Payment Guarantee).

Distinction:

• Nostro Account: ‘Our account with you’ — a Nepalese bank’s account maintained in foreign currency with a foreign bank abroad.
• Vostro Account: ‘Your account with us’ — a foreign bank’s account maintained in Nepalese currency with a Nepalese bank.

Concept & Rate: The minimum percentage of total deposit liabilities that commercial banks must maintain in cash reserves with Nepal Rastra Bank. Currently in Nepal, the statutory CRR is 4.0%.

Concept: The minimum percentage of total deposits that commercial banks must maintain in specified liquid assets (cash, gold, government treasury bills and bonds). In Nepal, SLR is 12% for Class A commercial banks.

Concept:

It measures a bank’s available capital cushion against financial risks under Basel III guidelines (minimum 11% in Nepal).

Concept: Real-Time Gross Settlement (RTGS) is an electronic fund settlement system where high-value fund transfers are processed individually and settled immediately in real time without netting.

Rate: Under Nepal Rastra Bank Directives, loans overdue by 3 to 6 months are classified as Substandard, requiring a 25% loan loss provision.

Accounting Entries:

1. On Opening L/C (Contingent Liability):
   • Customer Liability for L/C A/c Dr. (Full L/C amount)
   • To Bank Liability for L/C A/c
2. On Collection of Margin & Commission:
   • Customer Current A/c Dr. (Margin + Commission)
   • To Margin Deposit on L/C A/c (Cash margin)
   • To L/C Commission A/c (Revenue earned)
3. On Receipt of Documents & Settlement:
   • Bank Liability for L/C A/c Dr. (Reverse contingent liability)
   • To Customer Liability for L/C A/c
   • Customer Current A/c Dr. (Balance payable)
   • Margin Deposit on L/C A/c Dr. (Margin utilized)
   • To Nostro A/c / Foreign Bank A/c (Funds remitted abroad)

1. Classification: Current deposits (non-interest), Savings deposits (daily product interest), Fixed deposits (tenure-based compounding), Call deposits (corporate overnight). 2. Interest Calculation: In Nepal, NRB mandates daily product basis calculation:

, credited quarterly.

1. Tier 1 Capital (Core Capital): Paid-up equity capital, statutory general reserve, retained earnings, share premium, capital redemption reserve. 2. Tier 2 Capital (Supplementary Capital): General loan loss provision (up to 1.25% of risk-weighted assets), subordinated term debt, exchange equalization reserve, investment adjustment reserve.

CAMELS Dimensions:

• C (Capital Adequacy): Risk-weighted capital compliance.
• A (Asset Quality): NPL ratio, loan concentration, provisioning.
• M (Management Quality): Corporate governance, internal audit, risk systems.
• E (Earnings Performance): ROA, ROE, Net Interest Margin (NIM).
• L (Liquidity): CD ratio, CRR, SLR compliance.
• S (Sensitivity to Market Risk): Foreign exchange and interest rate gap exposures.

1. Money Market Operations: Inter-bank lending/borrowing, treasury bills (T-bills), Repo/Reverse Repo with NRB to manage daily liquidity. 2. Forex Operations: Currency trading, managing NOSTRO balances, handling forward exchange contracts to hedge import/export currency fluctuations.

Inter-branch Reconciliation: Balancing transactions originating in one branch and responding in another (drafts, transfers). Causes for Discrepancies: Transit delays, unresponded entries, clerical errors in branch code/account numbers, system communication lags.

1. Calculation of Loan Loss Provision:

Total Provision Required: Rs. 23.00 Crores.

2. Significance in Bank Accounting: Provision is debited to the Profit & Loss statement as an expense and credited to the Loan Loss Reserve on the balance sheet, ensuring realistic asset valuation and tax compliance.

NFRS Financial Statements Structure:

1. Statement of Profit or Loss:
   • Interest Income minus Interest Expense = Net Interest Income
   • Fee and Commission Income minus Expense = Net Fee & Commission
   • Net Trading Income & Other Operating Income = Total Operating Income
   • Less: Impairment charge for loans and other losses
   • Net Operating Income minus Personnel & Operating Expenses = Operating Profit
   • Less: Income tax expense = Profit for the Year
2. Statement of Financial Position:
   • Assets: Cash and cash equivalents, Balances with NRB, Derivative financial instruments, Loans and advances to banks and customers, Investment securities, Property and equipment.
   • Liabilities: Due to banks, Due to customers (deposits), Borrowings, Provisions, Current tax liabilities.
   • Equity: Share capital, General reserve, Regulatory reserve, Retained earnings.

1. Bills for Collection: Commercial banks act as collecting agents. Recorded as contingent accounts: Dr. Bills for Collection A/c, Cr. Customers for Bills for Collection A/c. On realization, contingent entry is reversed and cash credited to customer. 2. Remittance: Demand Drafts and TT: Dr. Cash/Customer A/c, Cr. Drafts Payable A/c, Cr. Commission A/c. 3. Electronic Banking: ConnectIPS and ATM transactions generate real-time settlement through clearing houses (NCHL). Bank earns transaction interchange fee and reduces cash handling overhead.