Project On Statuary Requirements of Accounting Banking Companies

Page 1

INTRODUCTION TO THE COMPANY
HDFC Bank Limited is an Indian financial services company based in
Mumbai, Maharashtra that was incorporated in August 1994. HDFC
Bank is the fifth or sixth largest bank in India by assets and the second
largest bank by market capitalization as of February 24, 2012. The bank
was promoted by the Housing Development Finance Corporation, a
premier housing finance company (set up in 1977) of India. HDFC Bank
has 1,986 branches and over 5,471 ATMs, in 996 cities in India, and all
branches of the bank are linked on an online real-time basis. As of 30
September 2008 the bank had total assets of Rs.1006.82
2010-11. HDFC Bank is one of the Big Four banks of India, along with:
State Bank of India, ICICI Bank and Punjab National Bank.
BUSINESS FOCUS
HDFC Bank deals with three key business segments. - Wholesale
Banking Services, Retail Banking Services, Treasury. It has entered the
banking consortia of over 50 corporate for providing working capital
finance, trade services, corporate finance, and merchant banking. It is
also providing sophisticated product structures in areas of foreign
exchange and derivatives, money markets and debt trading And Equity
research.
Wholesale banking services
Blue-chip manufacturing companies in the Indian corp to small & mid-
sized corporates and agri-based businesses. For these customers, the
Bank provides a wide range of commercial and transactional banking
services, including working capital finance, trade services, transactional
services, cash management, etc. The bank is also a leading provider of
the above services to its corporate customers, mutual funds, stock
exchange members and banks.

Project On Statuary Requirements of Accounting Banking Companies

Page 2

Retail banking services
HDFC Bank was the first bank in India to launch an International Debit
Card in association with VISA (Visa Electron) and issues the MasterCard
Maestro debit card as well. The Bank launched its credit card business
in late 2001. By March 2009, the bank had a total card base (debit and
credit cards) of over 13 million. The Bank is also one of the leading
players in the merchant acquiring business with over 70,000 Point-of-
sale (POS) terminals for debit credit cards acceptance at merchant
establishments. The Bank is positioned in various net based B2C
opportunities including a wide range of internet banking services for
Fixed Deposits, Loans, Bill Payments, etc. With Finest of Technology
and Best of Man power in Banking Industry HDFC BANK's retail services
have become by and large the best in India and since the contribution to
CASAi,e total number of current and savings account of more than 50%,
HDFC BANK has full potential to become Indias No.1 Private Sector
Bank.

Treasury

Within this business, the bank has three main product areas - Foreign
Exchange and Derivatives, Local Currency Money Market & Debt
Securities, and Equities. These services are provided through the bank's
Treasury team. To comply with statutory reserve requirements, the bank
is required to hold 25% of its deposits in government securities. The
Treasury business is responsible for managing the returns and market
risk on this investment portfolio

Project On Statuary Requirements of Accounting Banking Companies

Page 3

ENVIRONMENTAL ANALYSIS

Business environment includes set of conditions or situation that affects business
activities or decision making. These conditions are broadly classified into internal
environment and external environment.

THE EXTERNAL ENVIRONMENT ANALYSIS

External environment include factors which are outside the control of the business
organization but it provide opportunities or pose threats. External environment is further
classified into two categories micro environment and macro environment.

1) Political Factor

Government and RBI policies affect the banking sector. Sometimes looking into
the political advantage of a particular party, the Government declares some
measures to their benefits like waiver of short-term agricultural loans, to attract
the farmers votes. By doing so the profits of the bank get affected. FDI move to
increase the limits to 49 percent from 26 percent. The Union Budget 2009-10
extended the debt waiver scheme by six more months for farmers owing more
than 2 hectare of land The Union Budget 2008-09 allowed these farmers 25%
rebate on loan if they repay 75%of their overdue within stipulated period of 30th
June 2009.

2) Economic Factor
Cash Reserve Ratio (CRR) reduced by 0.25% to 4.5% of net demand and time liabilities
(NDTL) to potentially inject primary liquidity of Rs. 170 billion; token reduction in lending
rates expected, given comfortable liquidity position and the recent revisions in deposit
rates and lending rates for certain products undertaken by some Banks. Benchmark
Repo rate maintained at 8.0%; Reverse Repo and Marginal Standing Facility (MSF)
stand unchanged at 7.0% and 9.0%, respectively. Bank Rate also maintained at 9.0%
Following a 1% reduction in July 2012, Statutory Liquidity Ratio (SLR) kept unchanged
at 23% of NDTL.

Project On Statuary Requirements of Accounting Banking Companies

Page 4

The primary focus of monetary policy remains inflation control and anchoring of inflation
expectations, despite increasing risks to economic growth. The Reserve Bank of India
(RBI) highlighted that inflationary pressures and risks related to fiscal deficit and current
account deficit constrain it from providing a stronger monetary policy response to boost
economic growth. As policy measures to stimulate growth materialize, monetary policy to
reinforce the positive impact of such actions while retaining a focus on managing
inflation. Guidance provided that liquidity management by the RBI would ensure
adequate credit flows to the productive sectors of the economy and appropriate
responses to shocks brought on by external developments.

3) Social Factor

HDFC announced its plans to make an entry into education sector. The
group plans to focus on small towns wherein it would either set up
schools or take over weak performing boarding schools. According to
McKinsey Global Institutes Bird of Gold report, the discretionary
spending on education is set to increase from 5% in 2005 to 6% in 2015.
HDFC will foray into this sector through a separate subsidiary. It is
widely believed that many schools are planning to set up model, which is
profitable and scalable, as operating under trusts makes it difficult to
segregate profits. As a result, HDFC could look to adopt those schools
that are open to the takeover model. HDFC already has an educational
loan unit Credila Financial Services in which it owns 62.3% stake.
Credila plans to boosts the distribution network and customer base of
HDFC Bank in order to expand and also lower the cost of funds. The
groups likely entry into education sector could be beneficial in the long
run. HDFC Bank ,is partnering with the citys municipal authorities to educate people
about the danger posed by plastic bags to the environment, and to offer recycle paper
bags instead.The bank reinforced the Kolkata Municipal Corporation(KMC) intiated anti-
plastic awarness drive by distributing recycled and eco-friendly paper bags to retailers
and customers across nine markets in the city.Encourage citizens to use environment
friendly and cost effective paper bags as the best substitute
Project On Statuary Requirements of Accounting Banking Companies

Page 5

4) Technological Factor

Productivity ratio of HDFC is increasing significantly over the years.
Number of employees of the group increased to 1,607 in FY2011, as
compared to 797 in FY2010 and 727 in FY2009. While, profit per
employee increased significantly to $491,900, as compared to $117,500
and $7,500 in FY2010 and FY2009 respectively. Administration cost per
asset ratio decline to 0.30% in FY2011, as compared to 0.49 in FY2010
and 0.76 in FY2009. Similarly, cost to income ratio improved to 7.7% in
FY2011 from 13.8% and 30.9% in FY2010 and FY2009 respectively.
Improving productivity would likely enhance the groups profit margin.
ATM The latest developments in terms of technology in computer and
telecommunication have encouraged the bankers to change the concept
of branch banking to anywhere banking. Credit card facility has
encouraged an era of cashless society. Today MasterCard and Visa
card are the two most popular cards used world over. Smartcards or
debit cards to be used for making payments. These are also called as
electronic purse Today banks are also using SMS and Internet as major
tool of promotions and giving great utility to its customers. For example
SMS functions through simple text messages sent from your mobile.
CORE BANKING SOLUTIONS -It is the buzzword today and every bank
is trying to adopt it is the centralize banking platform through which a
bank can control its entire operation the adoption of core banking
solution will help bank to roll out new product and services






Project On Statuary Requirements of Accounting Banking Companies

Page 6

VISION AND MISSION

HDFC BANK

VISION

HDFC Bank is a young and dynamic bank, with a youthful and enthusiastic team
determined to accomplish the vision of becoming a world-class Indian bank.

MISSION

HDFC mission is to be World Class Indian Bank", benchmarking ourselves against
international standards and best practices in terms of product offerings, technology,
service levels, risk management and audit & compliance. The objective is to build
sound customer franchises across distinct businesses so as to be a preferred
provider of banking services for target retail and wholesale customer segments, and
to achieve a healthy growth in profitability, consistent with the Bank's risk appetite.
They are committed to do this while ensuring the highest levels of ethical standards,
professional integrity, corporate governance and regulatory compliance.

Business strategy emphasizes the following :

Increase the market share in Indias expanding banking and financial services
industry by following a disciplined growth strategy focusing on quality and not on
quantity and delivering high quality customer service. Leverage the technology
platform and open scalable systems to deliver more products to more customers and
to control operating costs. Maintain the current high standards for asset quality
through disciplined credit risk management. Develop innovative products and
services that attract the targeted customers and address inefficiencies in the Indian
financial sector. Continue to develop products and services that reduce the cost of
funds. Focus on high earnings growth with low volatility

Project On Statuary Requirements of Accounting Banking Companies

Page 7

ANALYSIS OF HDFC
LONG TERM OBJECTIVE

HDFC Banks mission is to be a World Class Indian Bank. The objective
is to build sound customer franchises across distinct businesses so as
to be the preferred provider of banking services for target retail and
wholesale customer segments, and to achieve healthy growth in
profitability, consistent with the banks risk appetite. The bank is
committed to maintain the highest level of ethical standards,
professional integrity, corporate governance and regulatory compliance.
HDFC Banks business philosophy is based on four core values:
Operational Excellence, Customer Focus, Product Leadership and
People.

LEADERSHIP

HDFC bank own the leadership awards the Best Bank at Bloomberg
UTV's Financial Leadership Awards 2011 and declared the Best Bank
in the Private Sector category at the NDTV Business Leadership
Awards 2010.therefore we can conclude that HDFC is better in
leadership than ICICI bank.

POLICY
RBI is the policy maker of all the banks which is followed by every
bank in India All the monetary policy controlled by RBI
CRR,SLR,REPO RATE.REVERSE REPO RATE is decided by RBI
and base rate decided by individual banks under the guidance of
RBI

Project On Statuary Requirements of Accounting Banking Companies

Page 8

FINANCIAL ANALYSIS

HDFC Bank
Consolidated Balance Sheet ------------------- in Rs. Cr. -------------------


Mar '12 Mar '11 Mar '10 Mar '09 Mar '08



12 mths 12 mths 12 mths 12 mths 12 mths



Capital and Liabilities:


Total Share Capital

465.23 457.74 425.38 354.43

469.34

Equity Share Capital 469.34 465.23 457.74 425.38 354.43

Share Application Money 0.00 0.00 0.00 400.92 0.00

Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Init. Contribution Settler 0.00 0.00 0.00 0.00 0.00

Preference Share Application
0.00 0.00 0.00

0.00 0.00



Money


Employee Stock Opiton 0.30 0.00 2.91 5.49 0.00

Reserves 29,741.11 25,120.83 21,158.15 14,262.74 11,180.72

Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

Net Worth 30,210.45 25,586.06 21,615.89 15,089.04 11,535.15

Deposits 246,539.58 208,287.21 167,297.78 142,644.80 100,631.38

Borrowings 26,334.15 14,650.44 13,171.80 2,775.84 4,478.86

Total Debt 272,873.73 222,937.65 180,469.58 145,420.64 105,110.24

Minority Interest 183.66 121.66 75.89 43.35 36.92

Policy Holders Funds 0.00 0.00 0.00 0.00 0.00

Group Share in Joint Venture 0.00 0.00 0.00 0.00 0.00

Other Liabilities & Provisions 37,786.88 29,317.57 20,783.21 22,844.24 16,510.76

Total Liabilities 340,871.06 277,841.28 222,868.68 183,353.92 133,156.15

Mar '12 Mar '11 Mar '10 Mar '09 Mar '08



12 mths 12 mths 12 mths 12 mths 12 mths



Assets


Cash & Balances with RBI

25,100.89 15,483.31 13,527.22 12,553.18

14,991.63

Balance with Banks, Money at
6,183.53 4,737.39 14,594.88

4,009.94 2,274.80



Call


Advances 198,837.53 160,831.42 126,162.73 99,027.37 63,426.90

Investments 96,795.11 70,276.67 58,508.28 58,715.15 49,288.01

Gross Block 6,024.90 5,328.86 4,777.65 4,019.68 2,437.58

Accumulated Depreciation 3,646.99 3,127.91 2,628.59 2,287.40 1,241.29

Net Block 2,377.91 2,200.95 2,149.06 1,732.28 1,196.29

Capital Work In Progress 0.00 0.00 0.00 0.00 0.00

Other Assets 21,869.30 13,626.33 5,205.07 5,528.89 4,453.89

Minority Interest 0.00 0.00 0.00 0.00 0.00

Group Share in Joint Venture 0.00 0.00 0.00 0.00 0.00

Total Assets 341,055.01 276,773.65 222,103.33 182,540.85 133,193.07



Contingent Liabilities 844,393.94 559,718.86 466,309.73 396,639.98 208,498.36

Bills for collection 39,610.71 28,869.10 20,940.13 17,939.62 17,092.85

Book Value (Rs) 128.74 549.97 472.23 345.29 325.45


Project On Statuary Requirements of Accounting Banking Companies

Page 9

P/L account

HDFC Bank

Previous Years

Profit & Loss account ------------------- in Rs. Cr. -----------------
--


Mar
'12
Mar '11 Mar '10 Mar '09 Mar '08


12
mths
12 mths 12 mths 12 mths 12 mths


Income
Interest Earned

19,928.21 16,172.90 16,332.26 10,115.00

27,286.35
Other Income 5,333.41 4,433.51 3,810.62 3,470.63 2,205.38


Total Income 32,619.76 24,361.72 19,983.52 19,802.89 12,320.38

Expenditure
Interest expended

9,385.08 7,786.30 8,911.10 4,887.12

14,989.58
Employee Cost 3,399.91 2,836.04 2,289.18 2,238.20 1,301.35

Selling and Admin Expenses 2,647.25 2,510.82 3,395.83 2,851.26 974.79

Depreciation 542.52 497.41 394.39 359.91 271.72

Miscellaneous Expenses 5,873.42 5,205.97 3,169.12 3,197.49 3,295.22

Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0.00

Operating Expenses 9,241.64 8,045.36 7,703.41 7,290.66 3,935.28

Provisions & Contingencies 3,221.46 3,004.88 1,545.11 1,356.20 1,907.80


Total Expenses 27,452.68 20,435.32 17,034.82 17,557.96 10,730.20

Mar
'12
Mar '11 Mar '10 Mar '09 Mar '08


12
mths
12 mths 12 mths 12 mths 12 mths

Project On Statuary Requirements of Accounting Banking Companies

Page 10


Net Profit for the Year 5,167.09 3,926.40 2,948.70 2,244.94 1,590.18

Extraordionary Items -2.12 -2.65 -0.93 -0.59 -0.06

HDFC BANK



Profit brought forward 6,174.24 4,532.
79
3,455.5
7
2,574.63 1,932.03



Total 11,339.2
1
8,456.
54
6,403.3
4
4,818.98 3,522.15



Preference Dividend 0.00 0.00 0.00 0.00 0.00

Equity Dividend

1,009.08

767.62

549.29

425.38

301.27


Corporate Dividend Tax

163.70

124.53

91.23

72.29

51.20




Per share data (annualised)



Earning Per Share (Rs) 22.02 84.40 64.42 52.77 44.87



Equity Dividend (%) 215.00 165.00 120.00 100.00 85.00

Book Value (Rs)

127.52

545.53

470.19

344.44

324.38




Appropriations



Transfer to Statutory Reserves 1,250.08 997.52 935.15 641.25 436.05

Transfer to Other Reserves

516.70

392.64

294.87

224.50

159.02


Proposed Dividend/Transfer to

1,172.78

892.15

640.52

497.67

352.47


Govt




Balance c/f to Balance Sheet

8,399.65

6,174.
24

4,532.7
9

3,455.57

2,574.61




Total 11,339.2
1
8,456.
55
6,403.3
3
4,818.99 3,522.15



HDFC Bank

Previous Years




Cash Flow
---------------
----
---------------
----
inRs.Cr.




Mar '12 Mar '11 Mar '10 Mar '09 Mar '08



Project On Statuary Requirements of Accounting Banking Companies

Page 11



12 mths 12 mths 12 mths 12 mths 12 mths





Net Profit Before Tax 7513.17 5818.66 4289.14 3299.25 2280.63

Net Cash From Operating Activities

-11355.61 -375.83 9389.89 -1736.14

3583.43


Net Cash (used in)/from

-686.85 -1122.74 -551.51 -663.78

-619.82


Investing Activities








Project On Statuary Requirements of Accounting Banking Companies

Page 12

COMPETITION ANALYSIS

1) Industry Structure (Using Porters five forces model)

PORTER'S FIVE FORCES MODEL
Porter's five forces analysis is a framework for industry analysis and
business strategy development formed by Michae l E. Porter of Harvard
Business School in 1 979. It draws upon industrial organization (IO)
economics to derive five forces that determine the competitive intensity
and therefore attractiveness of a market. Attractiveness i n this context
refers to the overall industry profitability. An "unattractive" industry is one
in which the combination of these five forces acts to drive down overall
profitability. A very unattractive industry would be one approaching "pure
competition", in which available profits for all firms are driven to normal
profit.

Three of Porter's five forces refer to competition from external sources.
The remainder are internal threats

They consist of those forces close to a company that affect its ability
to serve its customers and make a profit. A change in any of the
forces normally requires a business unit to re-assess the marketplace
given the overall change in industry information.

Project On Statuary Requirements of Accounting Banking Companies

Page 13

Competitive Profile Matrix (Based on Key Success factors)

HDFC Bank has revised its deposit rates. The rates have been changed
for maturities ranging from six months 17 days to five years. The bank is
also offering a maximum of 8.75% interest on its retail term deposits.


ICICI Bank, the largest private sector lender in the country, pared
deposit rates by 50 basis points. The revised rates are effective from
Tuesday, the bank said on its website. The lender has cut rates across
maturities ranging from 91 days to less than five years. It now offers a
maximum 8.75% interest on retail term deposit compared to 9.25%
earlier. Axis Bank has also reduced its deposit rates by at least 25 basis
points from Tuesday. The moves hardly surprised the industry analysts
as they have been expecting lenders to reduce their deposit rates to
protect dilution in their interest margins. Last week, State Bank of India
(SBI), the largest commercial bank in the country had pared its deposit
rates by 50-100 basis points. Analysts expect other state-run and
private banks to mirror this move. The net interest margin of banks has
been under stress as the increase in cost of deposits has outpaced the
rise in yield on advances in the past one year. As loan demand has
remained largely muted so far this year the pressure on the margins is
expected to intensify further.


Bank New Rates Effective Date



HDFC Bank 4.00 - 8.75 12-Sep-12


ICICI Bank 4.75 - 8.75 11-Sep-12


Project On Statuary Requirements of Accounting Banking Companies

Page 14

OVERVIEW OF BANK FINANCIAL POLICIES

Accounting Records and Control

Projects financed by the Bank are required to maintain accurate records
of all financial transactions and fully account for the resources provided
for operations. Borrowers are required to establish and maintain
accounting records and documents on all loans made by the Bank.
Records must be systematic and readily accessible to Bank staff or any
other individual(s) duly authorized by the Bank. During the appraisal of
projects, the Bank will evaluate the borrowers accounting system and
controls to verify that their standards are acceptable. Where necessary,
the Bank will advise and work with the borrower on ways of
strengthening it. Where no accounting system or suitable controls have
been set up, the Bank will require that appropriate measures be taken as
a condition for the loan. On occasions where an executing agency is
responsible for the implementation of a project, it is the policy of the
Bank to also evaluate the agency to ensure that the accounting system
and controls in place are adequate and can independently and reliably
report the financial transactions of the project. Chapter 3 highlights those
accounting principles and practices considered by the Bank to be
essential and consistent with sound project accounting.

Financial Reporting
The Bank has a mandate to promote sound, efficient and well-managed
projects. One of the key objectives of financial repoIting is to monitor
and ensure that loan resources are properly accounted for by the
borrower and that these resources are used efficiently for economic
development. Reporting requirements covered in this document are
Project On Statuary Requirements of Accounting Banking Companies

Page 15

aimed primarily at achieving this.The Bank seeks to receive accurate
and timely information on the operational performance and financial
status of the project during the implementation period. The information
required are designed to strengthen the financial management and
reporting capabilities of the borrower and/or executing agency in
connection with the implementation of Bank funded projects. They can
also be very useful for managerial decision-making, provided that such
information is made available on a timely and consistent basis; Chapter
4 discusses the financial statements and related reports required by the
Bank. A general description of the contents of each statement, as well
as the general format for preparing them are presented in the text and
Annex, respectively. Supplementary financial information which may be
required by the Bank are dealt with in Chapter 4. .

Auditors Report
Annual financial statements of all Bank funded projects must be
submitted for auditing by a competent independent auditing firm, to
certify the reliability of the information and data contained in the financial
statements. The services of a qualified auditor should be engaged to
conduct a thorough examination of all pertinent records, review the
borrowers accounting policies, operating procedures and financial
control mechanisms, to identify deficiencies or weaknesses that could
affect the smooth operation and efficiency of the project. Upon the
completion of the auditors work, the auditor would issue an opinion on
the financial statements. The major elements required to be covered in
the auditors report are discussed in Chapter 5. The procedure and
selection criteria for appointing auditors which borrowers are expected to
follow are also covered.

Project On Statuary Requirements of Accounting Banking Companies

Page 16

ACCOUNTING
Accounting Policies and Standards
The Bank encourages borrowers to use internationally accepted
accounting principles and practices in the maintenance of accounting
records and compilation of financial reports. This helps to reduce
inconsistency in reporting and provide a basis for comparison vis-a-vis
other borrowers. Under the same token, the Bank recognizes that
accounting practices may differ from country to country. The
sophistication of the accounting system in place will also vary from
project to project, depending on the characteristics and nature of the
project. Nonetheless, the Bank considers it essential that the accounting
standards and practices of all Bank funded projects must be guided by
the following fundamental principles:
Full accountability of all financial resources including resources
internally generated from operation and those acquired externally
(e.g. Loans, Grants, etc.);
A true and fair view of the financial position and financial
performance presented by the financial statements;
Financial statements should contain full disclosure of all material
information and should be. accompanied by supplementary notes
to explain or qualify various accounts;
Full disclosure of the accounting principles and financial policies
adopted by the borrower or executing agency as well as disclosure
of any subsequent changes in either existing accounting practices
or financial policies should be included in the notes to the financial
statement; and
Annual financial statements are to be audited and certified by an
independent and qualified auditor as a fair presentation of the
entitys financial position.
Project On Statuary Requirements of Accounting Banking Companies

Page 17

Loan Accounts and Records
Financial statements should at all times be supported by accurate
accounting records maintained in accordance with internationally
accepted accounting practices and standards. The Bank requires all
borrowers to keep detailed accounts on the draw-down and utilization of
its loans. These include general ledger accounts and subsidiary ledger
accounts for project expenditures as well as supporting documents
related to these expenditures such as invoices, contracts, bills of lading,
insurance certificate, etc. Detailed information on the various loan
accounts and registers required by the Bank to be maintained by
borrowers are provided in the Banks Disbursement Handbook. To
recapitulate the major ones:


i) A currency register for each currency disbursed, to be used to record
disbursements and repayments related to the Banks loan. Transactions
are to be recorded in the specific currency disbursed or repaid When
properly maintained, this account should show the borrowers liability to
the Bank in the specific currencies disbursed. The account serves as a
basis for verifying bills sent to borrowers and is very useful in settling
billing disputes.

ii) A summary register denominated in the Banks Unit of Account (BUA)
to which individual disbursements are to be recorded. This register
should be periodically compared and reconciled with the quarterly
disbursement statement sent to borrowers by the Bank at the end of
each quarter. The register will serve as a control for UA amounts
available to the borrower for disbursements.

Project On Statuary Requirements of Accounting Banking Companies

Page 18

FINANCIAL REPORTING
General Requirements
Reporting requirements are generally determined by the characteristics
of the project, borrower and/or executing agency. The requirements
described in this chapter take into account the various types of entities to
which the Bank provide loans. For financial reporting purposes these
can be categorized into three major groups, namely: (i) government, (ii)
autonomous or semi-autonomous agencies, and (iii) national and
multinational development finance institutions and agencies. Borrowers
are required to submit annual financial statements on projects financed
partly or wholly by the Bank. Financial statements must satisfactorily
report the results of operations and effectively summarize all financial
transactions relating to the project. Financial statements should be made
available throughout the period while disbursements are being made on
the loans 4.1.3 For certain types of projects however, the Bank may
require the borrower to submit financial statements beyond the
disbursement period of the loan. This may occur in the case where the
project financed is designed to improve the long-term institutional or
financial performance of the entity. Under these circumstances, the Bank
may want to review the results of operations for as long a period as may
be necessary to assess the impact of the loan. Lines of credit to national
and sub-regional development finance institutions (DFIs) is an example
of one of the types of loans which the Bank will want to closely monitor
even after the loan has been fully disbursed.In some cases, the Bank
may require borrowers to submit interim financial statements during the
course of the year. Interim financial statements are not required to
provide comprehensive financial details as in the case of annual
financial statements. Instead they are specifically designed to monitor
the implementation and progress of the project during the year.
Project On Statuary Requirements of Accounting Banking Companies

Page 19

Specific Requirements

Financial Reporting for Projects Implemented by Autonomous or Semi-
autonomous Agencies Most revenue-earning projects or projects with
commercial orientation are executed or operated by autonomous or
semi-autonomous agencies. When the project or agency responsible for
implementing or operating the project is a financially autonomous or
semi-autonomous entity, a comprehensive set of financial statements
showing the operating results of the project should be made available to
the Bank There is a common practice for executing agencies to prepare
consolidated financial statements which include financial transactions
related to the project(s) being executed. Consolidated financial
statements which combine the operations of the executing agency and
that of the project, should provide sufficient details to allow the accounts
of the project and that of the executing agency to be separately
analyzed. During the project appraisal and loan negotiations, Bank staff
will determine and advise the borrower of the extent to which the
projects accounts are to be separated and reported. This will also be
specified in the loan agreement.
Financial statements submitted to the Bank by autonomous and semi-
autonomous agencies should normally include the following:
i. an income statement or statement of revenue and expenditure;
ii. a balance sheet;
iii. a cash flow statement; and,
iv. Notes containing supplementary information and disclosure to
explain entries in (i) and (ii) above.



Project On Statuary Requirements of Accounting Banking Companies

Page 20

NET INCOME before and after appropriations.

When using the classification others for revenue or expenditure items,
full explanation should be provided in the supplementary notes in
respect of any amount considered materially significant. A sample format
for a typical income statement is presented in Table I of the Annex.

1. Balance Sheet - The balance sheet is intended to show the
financial position of the borrower/executing agency or project at
the end of the reporting period. The statement should provide a
breakdown of assets into: fixed asset (plant, building, machinery);
current assets (inventories, account receivable, short term
investments, cash) and other assets. Alongside assets should be
presented current and long-term liabilities. Current liabilities should
contain all obligations due within one year, including taxes and
other accrued expenses and the portion of the long term
obligations maturing in one year. The overall presentation of the
balance sheet including the capital structure of the entity, should
as much as possible, reflect the characteristics of the entity;
appropriately highlighting key variables such as paid- in capital,
reserves, leverages liquidity, etc. Table II of the Annex contains an
example of the format for a balance sheet.

4.4.6 Cash Flow Statement - A cash flow statement provides
information on the changes in net assets and the financial structure
including the liquidity and solvency of the entity during the reporting
period. The statement should report cash flows during the period
classified by operating, investing and financing activities.

Project On Statuary Requirements of Accounting Banking Companies

Page 21

PROJECT AUDITING & AUDITORS REPORT

Auditing Standards
Auditing standards to be applied when auditing a project are those
prescribed by legislation or otherwise adopted by the governing
accounting body in the particular country. In some countries, the latter is
the Institute of Certified Public Accountants, Institute of Chartered
Accountants or an organization of similar status established to formulate
policies and standards for accounting and auditing in the country.
Despite differences in each country, it is expected that local auditing
standards for the most part will be consistent with internationally
accepted auditing standards.

Criteria for the Selection of Auditors
The borrower is responsible for the selection and appointment of
auditors. Auditors should be appointed well in advance of the close of
the financial period for which the audit is to cover to allow sufficient time
to plan and carry out a comprehensive examination of the borrowers
financial statements.Prior to appointing any auditor, the borrower must
provide the Bank with the names of candidates for its review. However,
where audit fees are to be financed as a component of the Banks loan,
the borrower must apply procedures stipulated in the Banks Rules of
Procedure for Procurement of Goods and Services. It is the policy of the
Bank not to become directly involved or influence the borrowers
decision in the selection of auditors. The Bank, rather, provides
guidance to borrowers in the form of professional advice based on its
experience, working relationship and knowledge of the qualifications of
the various auditing firms. Subsequent appointment of auditors and
contract renewals should be subject to review at least on an annual
Project On Statuary Requirements of Accounting Banking Companies

Page 22

basis.The Bank considers it essential to take into account when
selecting an auditor, certain basic standards with respect to the
independence, qualifications and experience of the auditor. These are,
that auditors must be completely independent and under no
circumstances be controlled or influenced by the entity being audited,
officers of the entity or the persons appointing them. Any previous
financial or business ties with the entity or officers of the entity being
audited must be disclosed;

(a) auditors must be well qualified and possess appropriate
professional qualifications in accounting and auditing or have
equivalent certification from an accredited institution with adequate
years of experience in the field;

(b) auditors must be well-established and have good standing in the
community. They must also demonstrate competence with a
proven track record of having performed auditing work of a similar
nature and complexity.











Project On Statuary Requirements of Accounting Banking Companies

Page 23

N No on n P Pe er rf fo or rm mi in ng g A As ss se et ts s
T Th he e a ac cc cu um mu ul la at ti io on n o of f h hu ug ge e n no on n- -p pe er rf fo or rm mi in ng g a as ss se et ts s i in n b ba an nk ks s h ha as s a as ss su um me ed d
g gr re ea at t i im mp po or rt ta an nc ce e. . T Th he e d de ep pt th h o of f t th he e p pr ro ob bl le em m o of f b ba ad d d de eb bt ts s w wa as s f fi ir rs st t
r re ea al li iz ze ed d o on nl ly y i in n e ea ar rl ly y 1 19 99 90 0s s. . T Th he e m ma ag gn ni it tu ud de e o of f N NP PA As s i in n b ba an nk ks s a an nd d
f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s i is s o ov ve er r R Rs s. .1 1, ,5 50 0, ,0 00 00 0 c cr ro or re es s. .

W Wh hi il le e g gr ro os ss s N NP PA A r re ef fl le ec ct ts s t th he e q qu ua al li it ty y o of f t th he e l lo oa an ns s m ma ad de e b by y
b ba an nk ks s, , n ne et t N NP PA A s sh ho ow ws s t th he e a ac ct tu ua al l b bu ur rd de en n o of f b ba an nk ks s. . N No ow w i it t i is s
i in nc cr re ea as si in ng gl ly y e ev vi id de en nt t t th ha at t t th he e m ma aj jo or r d de ef fa au ul lt te er rs s a ar re e t th he e b bi ig g b bo or rr ro ow we er rs s
c co om mi in ng g f fr ro om m t th he e n no on n- -p pr ri io or ri it ty y s se ec ct to or r. . T Th he e b ba an nk ks s a an nd d f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s
h ha av ve e t to o t ta ak ke e t th he e i in ni it ti ia at ti iv ve e t to o r re ed du uc ce e N NP PA As s i in n a a t ti im me e b bo ou un nd d s st tr ra at te eg gi ic c
a ap pp pr ro oa ac ch h. .P Pu ub bl li ic c s se ec ct to or r b ba an nk ks s f fi ig gu ur re e p pr ro om mi in ne en nt tl ly y i in n t th he e d de eb ba at te e n no ot t o on nl ly y
b be ec ca au us se e t th he ey y d do om mi in na at te e t th he e b ba an nk ki in ng g i in nd du us st tr ri ie es s, , b bu ut t a al ls so o s si in nc ce e t th he ey y h ha av ve e
m mu uc ch h l la ar rg ge er r N NP PA As s c co om mp pa ar re ed d w wi it th h t th he e p pr ri iv va at te e s se ec ct to or r b ba an nk ks s. . T Th hi is s r ra ai is se es s
a a c co on nc ce er rn n i in n t th he e i in nd du us st tr ry y a an nd d a ac ca ad de em mi ia a b be ec ca au us se e i it t i is s g ge en ne er ra al ll ly y f fe el lt t t th ha at t
N NP PA As s r re ed du uc ce e t th he e p pr ro of fi it ta ab bi il li it ty y o of f a a b ba an nk ks s, , w we ea ak ke en n i it ts s f fi in na an nc ci ia al l h he ea al lt th h a an nd d
e er ro od de e i it ts s s so ol lv ve en nc cy y. . F Fo or r t th he e r re ec co ov ve er ry y o of f N NP PA As s a a b br ro oa ad d f fr ra am me ew wo or rk k h ha as s
e ev vo ol lv ve ed d f fo or r t th he e m ma an na ag ge em me en nt t o of f N NP PA As s u un nd de er r w wh hi ic ch h s se ev ve er ra al l o op pt ti io on ns s a ar re e
p pr ro ov vi id de ed d f fo or r d de eb bt t r re ec co ov ve er ry y a an nd d r re es st tr ru uc ct tu ur ri in ng g. . B Ba an nk ks s a an nd d F FI Is s h ha av ve e t th he e
f fr re ee ed do om m t to o d de es si ig gn n a an nd d i im mp pl le em me en nt t t th he ei ir r o ow wn n p po ol li ic ci ie es s f fo or r r re ec co ov ve er ry y a an nd d
w wr ri it te e- -o of ff f i in nc co or rp po or ra at ti in ng g c co om mp pr ro om mi is se e a an nd d n ne eg go ot ti ia at te ed d s se et tt tl le em me en nt ts s. .

Project On Statuary Requirements of Accounting Banking Companies

Page 24

NON PERFORMING ASSETS (NPA)

WHAT IS A NPA (NON PERFORMING ASSETS) ?
Action for enforcement of security interest can be initiated only if the secured asset is
classified as Nonperforming asset.Non performing asset means an asset or account of
borrower ,which has been classified by bank or financial institution as sub standard ,
doubtful or loss asset, in accordance with the direction or guidelines relating to assets
classification issued by RBI .An amount due under any credit facility is treated as past
due when it is not been paid within 30 days from the due date. Due to the improvement in
the payment and settlement system, recovery climate, up gradation of technology in the
banking system etc, it was decided to dispense with past due concept, with effect from
March 31, 2001. Accordingly as from that date, a Non performing asset shell be an advance
where

i. Interest and/or installment of principal remain overdue for a period of more than 180
days in respect of a term loan,
ii. The account remains out of order for a period of more than 180 days ,in respect of
an overdraft/cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 180 days in case of bill purchased
or discounted.
iv. Interest and/or principal remains overdue for two harvest season but for a period not
exceeding two half years in case of an advance granted for agricultural purpose ,and
v. Any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts
With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt 90 days overdue norms for identification of
NPAs ,from the year ending March 31,2004,a non performing asset shell be a loan or an
advance where;
i. Interest and/or installment of principal remain overdue for a period of more
than 90 days in respect of a term loan,
ii. The account remains out of order for a period of more than 90 days ,in
respect of an overdraft/cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 90 days in case of bill
purchased or discounted.
iv. Interest and/or principal remains overdue for two harvest season but for a
period not exceeding two half years in case of an advance granted for
agricultural purpose ,and
Project On Statuary Requirements of Accounting Banking Companies

Page 25

FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of the rising NPAs. But the
problem of NPAs is more in public sector banks when compared to private sector banks and
foreign banks. The NPAs in PSB are growing due to external as well as internal factors.
EXTERNAL FACTORS :-
----------------------------------
Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery
of loans and advances. Due to their negligence and ineffectiveness in their
work the bank suffers the consequence of non-recover, their by reducing their
profitability and liquidity.

Willful Defaults
There are borrowers who are able to payback loans but are intentionally withdrawing it.
These groups of people should be identified and proper measures should be taken in order
to get back the money extended to them as advances and loans.
Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs.
every now and then India is hit by major natural calamities thus making the
borrowers unable to pay back there loans. Thus the bank has to make large amount
of provisions in order to compensate those loans, hence end up the fiscal with a
reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to
irregularities of rain fall the farmers are not to achieve the production level thus they
are not repaying the loans.

Industrial sickness
Improper project handling , ineffective management , lack of adequate resources ,
lack of advance technology , day to day changing govt. Policies give birth to
industrial sickness. Hence the banks that finance those industries ultimately end up
with a low recovery of their loans reducing their profit and liquidity.





Project On Statuary Requirements of Accounting Banking Companies

Page 26

INTERNAL FACTORS :-
---------------------------------

Defective Lending process

There are three cardinal principles of bank lending that have been followed by
the commercial banks since long.
i. Principles of safety
ii. Principle of liquidity
iii. Principles of profitability



i. Principles of safety :-

By safety it means that the borrower is in a position to repay the loan both
principal and interest. The repayment of loan depends upon the borrowers:

a. Capacity to pay

b. Willingness to pay

Capacity to pay depends upon:
1. Tangible assets
2. Success in business

Willingness to pay depends on:
1. Character
2. Honest
3. Reputation of borrower
The banker should, there fore take utmost care in ensuring that the enterprise or business
for which a loan is sought is a sound one and the borrower is capable of carrying it out
successfully .he should be a person of integrity and good character.

Inappropriate technology
Due to inappropriate technology and management information system, market driven
decisions on real time basis can not be taken. Proper MIS and financial accounting
Project On Statuary Requirements of Accounting Banking Companies

Page 27

system is not implemented in the banks, which leads to poor credit collection, thus
NPA. All the branches of the bank should be computerized.

Improper SWOT analysis
The improper strength, weakness, opportunity and threat analysis is another reason
for rise in NPAs. While providing unsecured advances the banks depend more on
the honesty, integrity, and financial soundness and credit worthiness of the borrower.

Banks should consider the borrowers own capital investment.

it should collect credit information of the borrowers from_

a. From bankers.
b. Enquiry from market/segment of trade, industry, business.
c. From external credit rating agencies.

Analyze the balance sheet.

True picture of business will be revealed on analysis of profit/loss a/c
and balance sheet.

Purpose of the loan

When bankers give loan, he should analyze the purpose of the loan. To
ensure safety and liquidity, banks should grant loan for productive
purpose only. Bank should analyze the profitability, viability, long term
acceptability of the project while financing.


Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit
appraisal the bank gives advances to those who are not able to repay it back.
They should use good credit appraisal to decrease the NPAs.

Managerial deficiencies

The banker should always select the borrower very carefully and should take
tangible assets as security to safe guard its interests. When accepting
securities banks should consider the_

Project On Statuary Requirements of Accounting Banking Companies

Page 28

1. Marketability
2. Acceptability
3. Safety
4. Transferability.
The banker should follow the principle of diversification of risk based on the famous
maxim do not keep all the eggs in one basket; it means that the banker should not
grant advances to a few big farms only or to concentrate them in few industries or in
a few cities. If a new big customer meets misfortune or certain traders or industries
affected adversely, the overall position of the bank will not be affected.Like OSCB
suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest
defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector
Orissa hand loom WCS ltd (2439.60lakhs).

Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs. Absence of regularly visit of
bank officials to the customer point decreases the collection of interest and principals
on the loan. The NPAs due to willful defaulters can be collected by regular visits.

Re loaning process
Non remittance of recoveries to higher financing agencies and re loaning of the
same have already affected the smooth operation of the credit cycle. Due to re
loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day
by day.