Legal provisions relating to other liabilities and provisions

The liabilities of a bank are generally comprised of Paid-up Capital, Reserves, Securities
Premium, Deposits, Debts and Other Liabilities and Provisions. In this report the focus would
be put on Other Liabilities and Provisions and the legal provisions related to it. Legal
provisions are necessary for these items in order to have proper disclosure of the financial
position of the Bank, to know how the Bank is actually financed and for repayment of such
liabilities if and when Bank stops functioning. This in turn provides security to general public
from any kind of malpractices and fraud. Bills Payable, Inter Office Adjustments (net),
Interest accrued and others (including Provisions) are the major components under
Other Liabilities and Provisions.

Bills Payable- It is an instrument which is issued by a bank to a customer or other bank

against money received from them. Legal provisions relating to Bills Payable are mostly
governed by the Negotiable Instruments Act, 1881 and provisions made by ICAI. Any person
fit to contract and even minor can draw bill on banks. As per the provisions, banks are
obliged to pay the amount stated in the bill as and when such bill is presented for collection.
A bank can as well co-accept a bill but for this a number of safeguards are stated by the RBI.
Almost immediately as the bill is repaid, entry for the same should be done in the register. If
the bill is returned to the customer before its expiry, then the bank is supposed to keep a
copy of such bill with itself and the expenses of making such copy should be borne by the
customer. However, as per the Negotiable Instruments Act, 1881, there are certain situations
under which the Bank may refuse to honour bill presented by the customer, like when the bill
drawn is not complete, when the bill is presented after the period mentioned in the Limitation
Act, 1963, or when the Bank comes to know that the customer is not psychologically well,
etc.

Demand Draft is defined as per section 85 ( a) of Negotiable Instruments Act, 1881 as an

order to pay money drawn by one office of a bank upon another office of the same bank for a
sum of money payable to order on demand. It is not payable to bearer (Sec 31 RBI Act). It
has features similar to bill of exchange. Cash cannot be accepted as a mode of issuing
demand draft of Rs.50000/ or above. In those cases it can be issued only to the debit of
customers account.

Inter Office Items- The items those are generally included in Inter office Items are
unclaimed deposits due to death matured and marginal Deposits, Subsidy Payable, Interest
Suspense etc., and these are found on the liabilities side of the balance sheet.

Some of the general guidelines laid down by RBI for Inter Office Items:

The Circular DBOD No. Fol. BC. 114/ 16.01.001- 93, circulated on 28 April, 1993
have made it mandatory for the banks to settle the outstanding entries of its different
branches within 6 months. Through a circular dated 26 February, 2003, RBI has
lessened the time available to the banks from 12 months to 6 months on making
provisions against the net accumulated debit balance in the inter-branch accounts.
This is effective from the year ending on 31st March 2004.
 The Circular BP.BC.73/21.04.018/98, circulated on 27th July, 1988 has made it
mandatory for the banks to sort out the credit entries that have been held due in the
inter-branch accounts for more than five years to be transferred into a separate block
account, that would be presented under Other Liabilities and Provisions
Others.

Legal Provisions for Unclaimed Deposits: According to Section 26 of Banking

Regulation Act, 1949, the banks are supposed to furnish to RBI in December of every
year an annual statutory return for those unclaimed accounts on Form 9 which
havent been operated for the last 10 years or more. The assets of a dead person
are passed on to the state Government, in case he hasnt left behind a legal heir.
Interest for a term Deposit maturing on Sunday, non-business working day or on a
holiday should be collected at the contracted rate till the next successive working
Day. However, in case of a matured deposit for a dead person, the acceptance of
interest is entirely left to the discretion of the Individual banks.

Other Liabilities and Provisions- Mostly explicit contingent liabilities are recognized by the
law and these need to be recorded as soon as contingency is apparent, while implicit
liabilities are not recorded in the financial statements until the time the failure actually occurs.
Notes and instructions are issued by the RBI stating which items fall under this category.
Surplus in provision for bad and doubtful debts, contingency funds, proposed dividend, other
liabilities like unclaimed dividend, and provisions such as, provision for gratuity, provision
made for audit fees are some of the items that fall in the explicit contingent liability category.
On the other hand, implicit contingent liabilities include items like failures of repayment of
non-guaranteed pension funds, defaults of sub-national governments and public entities on
non-guaranteed debt, default of central bank on its obligations, environmental recovery,
disaster relief and other such items. Fiscal authorities are also often compelled to cover such
implicit contingent liabilities, the failure of which may threaten the soundness of the system
by elevating risks of creation of asset bubbles and over borrowing. Thus, contingent liabilities
can be defined as contractual obligations of the government to provide for any default made
by the borrower either on principal amount borrowed or interest to be paid on such amount
or both.

One of the other main reasons to maintain appropriate records of other liabilities and
provisions as prescribed by different laws is for the calculation of CRR to be maintained by
the banks. Certain percent of sum total of demand and time liabilities and other liabilities and
provisions need to be maintained as cash reserve with the RBI, failing which the bank may
be penalised. Hence, we understand that Legal provisions for other liabilities and provisions
are necessary for treatment of these items in preparation of final accounts, for proper
functioning of banks and to provide for public interest and safety.

References

Books

Banking Law and Practice, Institute of Company Secretaries of India

Guidance Note on Audit of Banks, Institute of Chartered Accountants of India
Websites

http://www.advocatekhoj.com/library/bareacts/reservebankofindia/index.php?
Title=Reserve%20Bank%20of%20India%20Act,%201934
http://www.advocatekhoj.com/library/bareacts/negotiableinstruments/index.php?
Title=Negotiable%20Instruments%20Act,%201881
http://www.advocatekhoj.com/library/bareacts/bankingregulation/index.php?
Title=Banking%20Regulation%20Act,%201949
http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7340
http://www.rbi.org.in/commonman/english/scripts/Notification.aspx?Id=375
http://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=16