How to Prepare P&L Account and Balance Sheet for Banking Companies

Open the annual report of any bank in India and you’ll notice something odd if you’re used to reading company financial statements: the balance sheet looks nothing like the one you studied in your corporate accounting chapters on manufacturing or trading companies. There’s no “Shareholders’ Funds” and “Non-Current Liabilities” split. Instead, you see items like Demand Deposits, Borrowings, and Bills for Collection. That’s because banks don’t follow the general Schedule III format under the Companies Act. They follow a format written specifically for them, one that regulators have guarded closely since 1949. This post breaks down exactly how a banking company prepares its profit and loss account and balance sheet, why the format looks the way it does, and who’s responsible for signing off on it.

Why banks use a different format 🔗

Every company incorporated under the Companies Act, 2013 prepares its financial statements as per Schedule III. Banks are a specific exception. Section 29 of the Banking Regulation Act, 1949 requires every banking company to prepare its balance sheet and profit and loss account in the forms set out in the Act’s Third Schedule, or as close to those forms as the circumstances allow. Where the Companies Act’s requirements on financial statements don’t conflict with the Banking Regulation Act, they continue to apply, but the layout itself comes from the banking law, not the general company law.

The reasoning is straightforward once you think about what a bank actually is. A manufacturing company’s balance sheet revolves around inventory, plant, and receivables. A bank’s balance sheet revolves around other people’s money: deposits it owes back, advances it has lent out, and investments it holds to stay liquid. Depositors, the Reserve Bank of India, and other banks all need to compare one bank’s financial position against another’s using an identical structure. A uniform, prescribed format makes that comparison possible and gives the regulator a consistent lens to assess a bank’s health.

Form A: How the balance sheet is structured 🔗

The balance sheet, prepared as Form A of the Third Schedule, is a vertical statement broken into Liabilities and Assets, each supported by detailed schedules that carry the actual numbers. The face of the balance sheet just shows the schedule number and the total; the real detail sits inside these twelve prescribed schedules.

The liabilities side 🔗

On the liabilities side, the schedules cover:

• Capital – authorised, issued, subscribed, and called-up capital for banking companies, or the capital contribution structure for nationalised and cooperative banks.
• Reserves and surplus – statutory reserves, capital reserves, share premium, revenue reserves, and the balance carried in the profit and loss account.
• Deposits – split into demand deposits, savings bank deposits, and term deposits, and further split between deposits of branches in India and outside India.
• Borrowings – money borrowed in India and outside India, including from the RBI and other banks.
• Other liabilities and provisions – bills payable, inter-office adjustments, accrued interest, and other residual items.

The assets side 🔗

On the assets side, you’ll find:

• Cash and balances with the RBI – cash in hand, including foreign currency notes, and balances kept with the central bank.
• Balances with banks and money at call and short notice – split between India and abroad.
• Investments – government securities, other approved securities, shares, debentures, and bonds, again split between India and outside India.
• Advances – the loans and credit facilities the bank has extended, its single largest revenue-generating asset.
• Fixed assets and other assets – premises, other fixed assets, and residual items like interest accrued but not yet received.

A final schedule captures contingent liabilities (guarantees, letters of credit, and similar off-balance-sheet exposures the bank is contingently responsible for) and bills for collection, which are shown separately because the bank doesn’t own these amounts; it’s merely collecting them on a customer’s behalf.

Form B: How the profit and loss account is structured 🔗

The profit and loss account, prepared as Form B of the Third Schedule, follows a similar schedule-based approach, though banks today prepare it using the more detailed schedule numbering carried forward in the RBI’s Master Direction on presentation and disclosures in financial statements, which consolidates the RBI’s instructions on how each schedule should be compiled.

Income: interest earned and other income 🔗

A bank’s income is split into two schedules. Interest earned covers interest and discount on advances and bills, income on investments, interest on balances with the RBI and other inter-bank funds, and any other interest income. Other income covers commission, exchange and brokerage, profit on the sale of investments, profit on the revaluation of investments, profit on the sale of fixed assets, and miscellaneous income. Separating interest income from fee-based and non-core income lets a reader immediately see how much of a bank’s earnings come from its core lending and investment activity versus everything else.

Expenditure: interest expended and operating expenses 🔗

On the expenditure side, interest expended covers interest paid on deposits, on RBI and inter-bank borrowings, and other interest payments. Operating expenses covers payments and provisions for employees, rent, taxes, lighting, printing, stationery, advertising, depreciation, director’s fees, auditor’s fees, law charges, postage, repairs, insurance, and other overheads.

Provisions and appropriations 🔗

Below operating profit, the account shows provisions and contingencies, which include the provisions a bank must make for non-performing assets under the RBI’s income recognition and asset classification norms, along with provisions for tax and other contingencies. What’s left after these provisions is the net profit for the year. The account then shows appropriations of that profit: the transfer to the statutory reserve (a bank must transfer at least twenty per cent of its profit to this reserve every year before declaring any dividend, as required by Section 17 of the Banking Regulation Act), transfers to other reserves, proposed dividends, and the balance carried forward.

Who signs and audits these statements 🔗

Preparing the statements in the right format is only half the job; the law is equally specific about who must vouch for them. Under Section 29(2) of the Banking Regulation Act, the balance sheet and profit and loss account of a banking company incorporated in India must be signed by the manager or principal officer, along with at least three directors if the bank has more than three directors on its board, or by all the directors if it has three or fewer. For a foreign bank operating through branches in India, the manager or agent of its principal office in India signs the statements.

Before any of this reaches shareholders or depositors, it has to be audited. Section 30 of the Banking Regulation Act requires the balance sheet and profit and loss account to be audited by a person qualified to audit companies, and a bank needs the RBI’s prior approval before appointing, reappointing, or removing its auditor. The auditor’s report has to specifically state whether the explanations given were satisfactory, whether the bank’s transactions stayed within its powers, whether branch returns were adequate for the audit, and whether the profit and loss account shows a true picture of profit or loss for the period. The RBI can also order a special audit of a bank’s accounts if it believes this is necessary in the public interest or in depositors’ interest.

Filing with the RBI and the Registrar of Companies 🔗

Once the statements are finalised, signed, and audited, they don’t just sit in the bank’s own records. Section 31 of the Banking Regulation Act requires the audited accounts and balance sheet, along with the auditor’s report, to be published in the prescribed manner, with three copies furnished to the RBI within three months of the end of the accounting year. The RBI can extend this deadline by up to a further three months if a bank needs it. Separately, the Banking Regulation Act also requires copies of the balance sheet and accounts to be sent to the Registrar of Companies, the same authority every other company reports to, which keeps banks within the general regulatory net even while they follow a specialised format.

Why this format matters beyond ticking a compliance box 🔗

It’s easy to treat this as dry statutory detail, but the structure exists for a practical reason. A depositor comparing two banks, an analyst studying a bank’s asset quality, or the RBI assessing systemic risk all need the numbers laid out the same way every time. Splitting interest income from other income shows how dependent a bank is on core lending versus fee income. Splitting deposits by type shows how stable or flighty a bank’s funding base is. Requiring a mandatory transfer to the statutory reserve before any dividend protects depositors by making sure profits aren’t paid out to shareholders before the bank has built up a cushion. None of this happens by accident. It’s the direct outcome of a format designed, tested, and refined by regulators over more than seven decades to keep India’s banking system transparent and comparable.

What do you think? Now that you’ve seen how differently a bank’s balance sheet is structured compared to a regular company’s, does it change how you’d read a bank’s annual report? And why do you think the law insists on a mandatory statutory reserve transfer before any dividend can be paid out?

References

1. https://www.indiacode.nic.in/bitstream/123456789/1885/1/A194910.pdf
2. https://upload.indiacode.nic.in/schedulefile?aid=AC_CEN_2_11_00002_194910_1517807317779&rid=731
3. https://www.rbi.org.in/scripts/BS_ViewMasDirections.aspx?id=12158
4. https://indiankanoon.org/doc/34973/
5. https://indiankanoon.org/doc/1153380/
6. https://indiankanoon.org/doc/1972853/