Reserve Bank of India
August 30, 2021
All Commercial Banks and
Primary (urban) Cooperative Banks
Madam/ Dear Sir,
Master Direction on Financial Statements – Presentation and Disclosures
The Reserve Bank of India has, from time to time, issued several guidelines/instructions/directives to the banks on the presentation of financial statements, regulatory clarification on compliance with accounting standards, and disclosures in notes to accounts.
2. A Master Direction incorporating, updating and where required, harmonizing across the banking sector the extant guidelines/instructions/directives on the subject has been prepared to enable banks to have all current instructions on presentation and disclosure in financial statements at one place for reference. However, it may be noted that in addition to these disclosures, Commercial Banks shall comply with the disclosures specified under the applicable regulatory capital framework.
3. Reserve Bank of India has issued this Direction in the exercise of its powers conferred under section 35A and section 56 of the Banking Regulation Act, 1949, and all the powers enabling it on this behalf.
Chief General Manager
Reserve Bank of India (Financial Statements – Presentation and Disclosures) Directions, 2021
In exercise of the powers conferred by section 35A and section 56 of the Banking Regulation Act, 1949 the Reserve Bank of India being satisfied that it is necessary and expedient in the public interest and in the interest of banking policy to do so, hereby, issues the Directions hereinafter specified.
Chapter – I
1. Short title and commencement
These Directions shall be called the Reserve Bank of India (Financial Statements – Presentation and Disclosures) Directions, 2021.
These Directions shall come into effect on the day these are placed on the official website of the Reserve Bank of India.
These Directions shall be applicable to:
a) all banking companies1, corresponding new banks, regional rural banks (‘RRBs’) and State Bank of India as defined under subsections (c), (da), (ja) and (nc) of section 5 of the Banking Regulation Act, 1949 (collectively referred to as ‘Commercial Banks’ hereinafter)
b) primary co-operative banks as defined under clause (ccv) of subsection 1 of section 56 of the Banking Regulation Act, 1949 (hereinafter referred to as ‘Urban Co-operative Banks’ or ‘UCBs’).
The term ‘banks’ used in these directions shall include both Commercial Banks and UCBs.
Chapter – II
Format of the Balance Sheet and Profit and Loss Account
3. In terms of the provisions of section 29 of the Banking Regulation Act, 1949, Commercial Banks shall in respect of all business transacted by them prepare a Balance Sheet and Profit and Loss Account as on the last working day of the year or the period, as the case may be, in the Forms set out in the Third Schedule of the Banking Regulation Act, 1949. In exercise of the powers conferred by section 29(4) of the Banking Regulation Act, 1949, the Government of India has specified the Forms in the Third Schedule, vide notification S.O.240 (E) dated March 26, 1992, published in the Gazette of India. These are reproduced in Annexure I to these Directions.
4. In terms of the provisions of section 29 read with section 56 of the Banking Regulation Act, 1949, UCBs shall in respect of all business transacted by them prepare a Balance Sheet and Profit and Loss Account as on the last working day of the year or the period, as the case may be, in the Forms set out in the Third Schedule of the Banking Regulation Act, 1949 as substituted by clause (zl) of section 56 of the said Act.
Chapter – III
Notes and instructions for compilation
5. The general instructions for the compilation of Balance Sheet and Profit and Loss Account for Commercial Banks are specified in Part A of Annexure II. Commercial Banks shall ensure strict compliance with the Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006, as amended from time to time, subject to Directions/Guidelines issued by the Reserve Bank of India. UCBs shall be guided by the announcements of the Institute of Chartered Accountants of India (ICAI) regarding applicability2 of Accounting Standards, subject to Directions/ Guidelines issued by the Reserve Bank of India. Part B of Annexure II specifies guidance with respect to relevant issues in the application of certain Accounting Standards for Commercial Banks. It shall be applicable mutatis mutandis to UCBs, unless stated otherwise in the said Annexure.
Chapter – IV
Disclosure in financial statements – notes to accounts
6. Banks shall disclose information as specified in Annexure III in the notes to accounts of the financial statements. These disclosures are intended only to supplement and not to replace disclosure requirements under other laws, regulations, or accounting and financial reporting standards. More comprehensive disclosures than the minimum required under these Directions are encouraged, especially if such disclosures significantly aid in the understanding of the financial position and performance.
Chapter – V
Consolidated Financial Statements
(not applicable to LABs, RRBs and UCBs)
7. In addition to standalone financial statements prepared as per the formats prescribed under section 29 of Banking Regulation Act, 1949, Commercial Banks (other than RRBs), whether listed or unlisted, shall prepare and disclose Consolidated Financial Statements (CFS) in their Annual Reports, in the formats prescribed in Annexure IV. The CFS shall normally include a consolidated balance sheet, consolidated statement of profit and loss, principal accounting policies, and notes to accounts. The CFS shall also be submitted to the Department of Supervision (DOS), Reserve Bank of India within one month from the publication of the bank’s annual accounts.
8. CFS shall be prepared in terms of the applicable accounting standards. For the purpose of financial reporting, the terms ‘parent’, ‘subsidiary’, ‘associate’, ‘joint venture’, ‘control’, and ‘group’ shall have the same meaning as ascribed to them in the applicable accounting standards. A parent presenting CFS shall consolidate all subsidiaries – domestic as well as foreign, except those specifically permitted to be excluded under the applicable accounting standards. However, the reasons for not consolidating a subsidiary shall be disclosed in the CFS. The responsibility of determining whether a particular entity shall be included or not for consolidation would be that of the Management of the parent entity. The Statutory Auditors shall mention in their audit report, if they are of the opinion that an entity which ought to have been consolidated has been omitted.
9. In cases where different entities in a group are governed by different accounting norms laid down by the concerned regulator/s, the balance sheet size may be used to determine the dominant activity and accounting norms specified by its regulator may be used for the consolidation of similar transactions and events. Where banking is the dominant activity, accounting norms applicable to a bank shall be used for consolidation purposes in respect of like transactions and other events in similar circumstances.
10. An RRB shall be treated as an associate in the CFS of its sponsor bank.
11. The valuation of investments in subsidiaries that are not consolidated and associates that are not included using the “Equity Method” shall be as per the relevant valuation norms issued by the Reserve Bank of India.
12. The Board of Directors of banks shall invariably record the intent of holding the investment for a temporary period or otherwise at the time of investment in the subsidiary, associate and joint venture. In the absence of a record of such intent by the Board at the time of such investment, the investee entity shall be consolidated into the CFS.
Chapter – VI
Inter-branch account – provisioning for net debit balance
13. Banks should segregate the credit entries outstanding for more than five years in the inter-branch account and transfer them to a separate ‘Blocked Account’ which should be shown under ‘Other Liabilities and Provisions – Others’ or in the case of UCBs, under ‘Other Liabilities- Suspense’. Any adjustment from the Blocked Account should be permitted only with the authorisation of two officials, one of whom should be from the Controlling/Head Office if the amount exceeds Rupees One lakh. The balance in Blocked Account shall be reckoned as a liability for the purpose of the maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
14. Banks shall maintain category-wise (head-wise) accounts for various types of transactions put through inter-branch accounts, so that the netting can be done category-wise. As on the balance sheet date, banks shall segregate the debit and credit entries remaining unreconciled for more than six months and arrive at the net position category-wise. The balance in the Blocked Account shall also be considered. Thereafter, the net debit under all the categories of inter-branch accounts shall be aggregated and a provision equivalent to 100 per cent of the aggregate net debit shall be made. While doing so, banks shall ensure that the net debit in one category is not set-off against net credit in another category.
Reconciliation of Nostro account and treatment of outstanding entries
15. Banks shall take steps to have a strong control over reconciliation and put in place a system of real-time reconciliation. Escalation of differences, if any, should be done immediately. There should be close monitoring of pending items in Nostro accounts by top management at short intervals. All unreconciled credit entries in Nostro accounts which are outstanding for more than three years shall be transferred to a Blocked Account and shown as outstanding liabilities. The balance in the Blocked Account will be reckoned for the purpose of CRR/SLR. Banks shall make 100 percent provision in respect of all unreconciled debit entries in the Nostro accounts, which are outstanding for more than two years.
16. In the past, Commercial Banks other than RRBs were permitted to transfer to profit and loss account (followed by subsequent appropriation to general reserve) outstanding credit entries of individual value less than USD 2,500 or equivalent in Nostro accounts originated up to March 31, 2002, subject to certain conditions. Banks that availed this benefit shall ensure that any future claims in respect of these entries are honoured. Further the amount appropriated to the general reserve shall not be available for the declaration of dividend.
Transfer to/appropriation from Reserve funds
17. In terms of sections 17(1),11(1)(b)(ii) and 56 of the Banking Regulation Act, 1949 banks are required to transfer, out of the balance of profit as disclosed in the profit and loss account, a sum equivalent to not less than 20 per cent of such profit to Reserve Fund. These provisions are a minimum statutory requirement. However, in order to augment capital, Commercial Banks (excluding LABs and RRBs) shall transfer not less than 25 per cent of the ‘net profit’ before appropriations to the Statutory Reserve.
18. Unless specifically allowed by extant regulations, banks shall take prior approval from the Reserve Bank of India before any appropriation is made from the Statutory Reserve or any other reserve. Banks are further advised that:
a) all expenses including provisions and write-offs recognized in a period, whether mandatory or prudential, shall be reflected in the profit and loss account for the period as an ‘above the line’ item (i.e. before arriving at the net profit/loss for the year);
b) draw down from reserves, with the prior approval of Reserve Bank of India, shall be effected only ‘below the line’ (i.e. after arriving at the net profit / loss for the year); and
c) suitable disclosures shall be made of such draw down in the ‘Notes on Accounts’ to the Balance Sheet.
19. Subject to compliance with applicable laws, banks, without prior approval of Reserve Bank of India, can utilize the share premium account for meeting issue expenses3 of shares to the extent that such expenses are incremental costs directly attributable to the transaction that otherwise would have been avoided. The share premium account shall not be utilized for writing off the expenses relating to the issue of debt instruments.
20. In respect of provisioning for frauds, banks that have reported the fraud within the prescribed time shall have the option to make the provision for the same over a period, not exceeding four quarters, commencing from the quarter in which the fraud has been detected. Where such a bank chooses to provide for the fraud over two to four quarters and this results in the full provisioning being made in more than one financial year, subject to compliance with applicable laws, it may debit reserves other than the Statutory Reserve by the amount remaining un-provided at the end of the financial year by credit to provisions. However, subsequently, it should proportionately reverse the debits to the reserves and complete the provisioning by debiting profit and loss account, in the successive quarters of the next financial year. Where there has been delay, beyond the prescribed period, in reporting the fraud to the Reserve Bank, the entire provisioning is required to be made at once.
21. Unreconciled credit balances in any transitory account representing unclaimed balances shall not be transferred to the profit and loss account or to any reserves.
Deferred tax liability (DTL) on Special Reserve created under Section 36(1) (viii) of the Income Tax Act, 1961
22. Banks shall make provisions for DTL on the Special Reserve created under section 36(1) (viii) of Income Tax Act, 1961.
23. Banks shall ensure that balance sheet and profit and loss account reflects true and fair picture of its financial position. Instances of window dressing of financials, short provisioning, misclassification of NPAs, under-reporting/ incorrect computation of exposure/risk weight, incorrect capitalization of expenses, capitalization of interest on NPAs, deliberate inflation of asset and liabilities at the end of the financial year and subsequent reversal immediately in next financial year, etc. shall be viewed seriously and appropriate penal action in terms of the provisions of the Banking Regulation Act, 1949 shall be considered.
Chapter – VII
Repeal and other provisions
Repeal and saving
24. With the issue of these Directions, the instructions/guidelines contained in the circulars issued by the Reserve Bank of India listed in Annexure V stand repealed. All the instructions/guidelines given in the above circulars shall be deemed as given under these Directions. Any reference in other Circulars/ Guidelines/Notifications issued by the Reserve Bank containing reference to the said repealed Circulars, shall mean the reference to these Directions, namely, the Reserve Bank of India (Financial Statements – Presentation and Disclosures) Directions, 2021, after the date of repeal.
Notwithstanding such repeal, any action taken, purported to have been taken or initiated under the Circulars hereby repealed shall continue to be governed by the provisions of the said Circulars.
Application of other laws not barred
25. The provisions of these Directions shall be in addition to, and not in derogation of the provisions of any other laws, rules, regulations or directions, for the time being in force.
26. For the purpose of giving effect to the provisions of these Directions or in order to remove any difficulties in the application or interpretation of the provisions of these Directions, the Reserve Bank of India may, if it considers necessary, issue necessary clarifications in respect of any matter covered herein and the interpretation of any provision of these Directions given by the Reserve Bank of India shall be final and binding.