Basics of Banking_ Reconciliations in bank branches & Inter Office Transactions

1. BASICS OF BANKING: RECONCILIATIONS IN BANK BRANCHES & INTER OFFICE TRANSACTIONS https://taxguru.in/rbi/basics-banking-reconciliations-bank-branches-inter-office-transactions.html Reconciliation in Banks: The problem about reconciliation at the branch level, which has not been resolved by computerization, is that of suspense and sundry deposit accounts. Suspense account balance is included under ’Other Assets’ in the balance sheet. If the accounts are maintained properly and on a timely basis any entry in suspense account may not arise. But, particularly suspense account is often used to temporarily record certain items like :- a) Accounts temporarily recorded under this head till the precise nature thereof has been determined or pending transfer thereof to the appropriate head of accounts; b) Debit balance arising from payment of interest warrants/dividend warrants pending reconciliation of amounts deposited by a company and the payment made by various branches on this account; c) Losses caused due to frauds and awaiting adjustment A neglect of the control over suspense account can make it an easy target for committing frauds by passing debit entries in the account and siphoning off the amount. Therefore, the reconciliation of outstanding entries becomes important. Details of old outstanding entries in suspense account, along with narrations, are prepared periodically and decision on each entry is taken by the branch or Head Office, Each bank has its own policy towards provision/write off for old outstanding items. Outstanding Entries in ‘Sundry Deposits’ or ‘Sundries Account’ are also expected to be cleared expeditiously even though the entries (Unlike Suspense Account) may not be fraud prone. Inter Office (or Branch) Adjustments (Net) : This item in balance sheet represents the difference on account of incomplete recording of transactions between one branch and another branch or between one branch and head office. It may be noted that only net position is to be shown of inter office accounts, inland as well as foreign. Origination/Response (Reversal) of Inter Office Transactions: In many transactions, undertaken by the branch, one leg of the transaction involved is inter office account. The major type of transactions, which result in Inter Office debit or credit entry are :- 1. Issue of remittance instruments like drafts on other branches 2. Payment of remittance instruments like drafts by other branches 3. Payment to/ Receipt from other branches of the proceeds of instruments received/sent for collection /realization/clearing.

2. 4. Transactions through NEFT,ECS and RTGS 5. ATM transactions of the customers either at ATM linked with other branch or merchant establishment. 6. Transactions through payment gateway of ATM, etc. 7. Payment of instruments like gift cheques/bankers’ cheque/interest warrant/dividend warrant/repurchase warrant/refund warrant/travelers cheque, etc which are paid by branch on behalf of other branches which have received the amount for payment of these instruments from customers concerned. 8. Operations by authorized branches on the bank’s NOSTRO accounts 9. Foreign Exchange transactions entered into the branch for which it has to deal with nodal forex departmentof the bank for exchange of rupees with foreign currency 10. Deposit and withdrawal of money by branches from the currency chest maintained by another branch 11. Cash sent/ received from other branches 12. Head Office interest receivable and payable by branches 13. Profit/loss transferred by the branch to head office account 14. Government receipts and payments handled by the branch either as nodal branch or agent of nodal branch 15. Interest based transactions other than inter account transfers with same branch 16. Credit card related transactions of the customers 17. NOSTRO Accounts of Indian Branches maintained with overseas branches of the bank 18. Capital Fund with Overseas Branches 19. Head Office balance with the overseas branches including subordinate debt lent to the overseas branches 20. Transactions from overseas branches 21. Payment made under LCs of other branches For the bank as a whole, the transactions which remained unmatched/unreconsiled appears as inter office adjustments balance in “Branch Adjustment Account”in the balance sheet of the bank – under the head ‘Other Assets’ if it is debit and under ‘Other Liabilities and Provisions’ if in credit. RBI Guidelines regarding Inter Office Entries: Considering the fraud prone nature and the fact that there are large number of transactions in inter-office account and the non-reconciliation is widely extended across the banks, RBI has taken a number of measures to achieve an expeditious reconciliation of these transactions by the banks concerned. Non reconciliation result in a ‘fraud risk factor’. RBI had instructed the banks to reconcile the entries outstanding in their inter branch accounts within a period of six months: a) Banks have been advised by RBI to segregate the credit entries outstanding for more than 5 year in inter branch accounts and transfer them to a separate ‘Blocked Accounts’ which should be shown in the balance sheet under the head ’Other Liabilities and Provisions – Others’ (Schedule 5). While arriving at the net amount of inter-branch transactions for inclusion in the balance sheet, the aggregate amount of Blocked Account should be excluded and only the amount representing the remaining credit entries should be netted against debit entries. Banks have been advised that any adjustment from Blocked Accounts should be permitted only with the authorization of two officials one of them should be from branch concerned. b) RBI has also advised the banks to maintain head wise accounts for various types of transactions put through inter branch accounts so that netting can be done category wise.

3. c) There may be debits in ‘Inter- Branch Adjustment‘ which may not termed assets (Debits may be because of frauds etc.) Banks are required to arrive at the category wise position of un reconciled entries outstanding in the Inter branch adjustment account for more than six months as on 31 st March and make provision equivalent to 100% of the aggregate net debit under all categories. Banks to ensure :- a. The credit balance in the Blocked Account created is also taken into account b. The net debit in one category is not set off against net credit in another category(DBOD. No. BP.BC.73/21.04.018/2002-03 dated February 26,2003) d) Considering large volume of transactions relating to demand drafts RBI has advised the banks to segregate inter branch transactions relating to DD from other Inter branch transactions. e) RBI has advised banks to restrict originating debits to head office account to cash/funds transfer, purchase of securities/capital assets, withdrawal from Provident Fund, Advances to Inspection and other staff members, etc.