The Hindu Business Line : Debunking the staid look

THE spate of changes to legislation in our country continues unabated. The latest in line are the changes proposed to the till-now staid Banking Regulation Act by the Banking Regulation (Amendment) and Miscellaneous Provisions Bill, 2003.

The scope of the Act has been enlarged include banking cooperative societies too. Benchmarks to commence or continue as a bank are aggregate paid-up capital and reserves of Rs 100 crore, in the case of a local area bank Rs 5 crore and in the case of a banking cooperative society Rs 25 lakh.

For banking companies incorporated outside India, the same benchmarks of Rs 100 crore apply.

Banks in existence at the commencement of this Act and which have not met the criteria have been given a minimum of three years and a maximum of six years to satisfy the above conditions.

It would have been preferable to fix the benchmarks as per local regulations of the foreign country owing to the vagaries of the exchange rate and also to compare the performance of the bank with local competition.

Sections that would be of interest to professionals in India would be the ones relating to the financial statements of the bank.

Apart from the traditional form of the balance-sheet as prescribed at present, in case the banking company has a subsidiary, the balance-sheet of the banking company should also include, a copy of: a) the balance sheet of the subsidiary; b) its profit and loss account; c) the report of its board of directors; d) the reports of its auditors; and e) a statement of the banking companies interest in the subsidiary.

Determining the financial year of the subsidiary as per the regulation would require an effort in mathematics.

The provisions state that where the financial year of the subsidiary does not coincide with that of the banking company, the financial year of the subsidiary shall not end on a day which precedes the banking company's financial year by more than six months.

Where the financial year of the subsidiary is shorter in duration than that of the banking company, references to financial year shall be construed as reference to two or more financial years of the subsidiary, the duration of which in the aggregate is not less than the duration of the banking company's financial year.

In addition to these, disclosures are also to be made of the extent of the holding banking companies interest in the subsidiary and the net aggregate amount of the subsidiary's profit or loss.

In cases of mismatches in financial years, disclosure is also to be made of the change in the holding company's interest in the subsidiary and the details of any material changes which have occurred between the differing financial periods in respect of the fixed assets, investments, monies lent and monies borrowed.

As a safety clause, it has also been provided that in case some of the information mentioned above is not available, a report in writing to that effect would suffice.

Audits would apply in respect of all banking companies and banking cooperative societies having demand and time liabilities aggregating Rs 100 crore. Considering the fact that scams in cooperative banks have been surfacing as frequently as terrorist attacks in Kashmir, it would be prudent to bring all cooperative banks under the umbrella of audits.

The cap of Rs 100 crore also appears to be too high considering the fact that the same Act has fixed a minimum of Rs 25 lakh as the minimum aggregate of paid-up capital and free reserves to commence or continue business in banking. The duties of the auditor also appear to be onerous.

He is supposed to state in his audit report whether or not the banking company has complied with the provisions of this Act or any directions, notifications or orders issued thereunder and has furnished to the RBI such statements, information or particulars as are required to be furnished under the provisions of the Act.

In case the auditor is satisfied on enquiry that a banking company or banking cooperative society has not complied with the provisions of this Act or any directions, notification or order issued thereunder or failed to furnish any statements information or particulars as are required to be furnished under the provisions of this Act, he shall make a report to the RBI of such non-compliance.

In case the auditor makes or intends to make such a report, he is also bound to include it in his report issued under Section 227(2) of the Companies Act, 1956.

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