ACCOUNTING ENTRIES AND BOOKING OF PROFIT

[VASANT KULKARNI]

OURS IS A URBAN COOP BANK REGD. IN MAHARASHTRA AND DOING BANKING BUSINESS AS PER THE BANKING LICENCE ISSUED BY RBI.

OUR BANK CAN ACQUIRE THE PROPERTY OF A BORROWER U/S 100 (RULE 85) OF THE MAHA. COOP SOCIETIES ACT 1960.ACCORDINGLY BY FOLLOWING DUE PROCEDURE THE BANK ACQUIRED THE PROPERTIES OF BORROWERS AND THE ARE NOW SHOWN AS NON-BANKING ASSETS IN THE BOOKS OF BANK.THE DUES OF THE SAID BORROWERS STAND SETTELED AT THE PRICES FIXED BY COOP DEPT..IN SOME CASES FULL AMOUNT IS RECOVERED (PRINCIPLE+INTERSET).NOW THE BANK INTENDS TO SELL THE NON- BANKING ASSETS.PL ADVISE ON THE FOLLOWING.

1)WHETHER THE EXCESS AMOUNT REALISED BY THE BANK AFTER THE SALE OF ASSETS IS TO BE RETURNED TO THE BORROWER OR TAKEN AS CAPITAL GAIN BY BANK?

2)WHILE PASSING THE ENTRIES, THE LOAN ACCOUNT IS CREDITED BY THE VALUE OF ASSETS ACQUIRED viz.THE PRINCIPLE AS WELL AS THE INTEREST THEREON IS BOOKED.BUT THIS IS NOT ALLOWED BY RBI AS IT IS A MERE BOOK ENTRY AND THERE IS NO REALISATION OF INTEREST THEREON.IS THIS VIEW CORRECT?

[DR.MARIAPPAN GOVINDARAJAN]

Whether you have got clarified in the above problem? If not please inform.

AI Summary

Bank acquired property surplus: determine whether excess proceeds must be returned to borrower or treated as bank income. Whether sale proceeds from property acquired by a cooperative bank exceed the borrower's debt and thus must be returned or may be treated as capital gain depends on the acquisition and settlement mechanics and restitution or set off principles; separately, crediting loan accounts for principal and accrued interest when assets are taken in satisfaction of debt raises regulatory concerns because recognising interest without cash realisation may conflict with RBI accounting norms for non-banking assets.