Almost in each and every country, a substantial part of Gross Domestic Product (GDP) comes from industry and business sectors. This is why good performance of industrial, commercial and service organisations is very essential for economic development of a country. One of the tools of determining performance is financial statement which is known as structured representation of the financial position and performance of an organisation. Financial statements of all the organisations other than banks and financial institutions are important only for the organisations.
But financial statements of banks and financial institutions are important for these organisations as well as for the country. This is because, the main activity of a bank or a financial institution is to provide loans to different commercial, industrial and service organisations. Providing more loans to various organisations indicates more industrialisation in the country. More industrialisation is helpful to reduce unemployment problem as well as to increase economic growth of the country. Similarly, information as regards profitability, recovery of principal amount and interest is also essential. If the principal and the interest are recovered regularly, it indicates good performance, and if the recovery is not regular, it indicates bad performance of the industry.
So, correct information of financial statements of all the banks and financial institutions of the country is important to assess and project the economic growth of the country. It is to be mentioned that in compliance with the Banking Companies Act and the Bangladesh Accounting Standard, all the banks and financial institutions prepare and present the annual financial statements.
The Bangladesh Bank has recently asked all commercial banks not to recover interest on default loan unless and until it is realised. According to the present accounting system of interest income, no interest will be accounted for as income on overdue loans and advances. Questions may be raised why, despite having specific guideline, such a warning is given on the same issue. It can be said that doubts about genuineness of profitability of banks based on which the warning letter is issued are not irrelevant. With regard to preparation of financial statements showing correct performance of a bank, there remain some observations based on review of recently published financial statement of the bank for the year 2012.
A review of 10 financial statements of commercial banks reveals that total accrued interest income is Tk 141,494 million and realised (cash) interest income is Tk 149,769 million i.e. realised interest income is 106 per cent of total accrued interest income. According to the present banking scenario, it is completely unbelievable because these results reveal that almost 106 per cent of accrued interest on loans and advances is being realised. If the operating result of the banking sector is like this, there is no scope of huge amount of bad loans, and there is no scope of increase of such loans. But, if we pay our attention to the statistics of classified loan, we can see that during the year 2011, classified loan was Tk 226,440 million which was 6.22 per cent of total outstanding loan balance. During the year 2013 such balance reached up to Tk 567,200 million which is 11.91 per cent of total outstanding loan balance.
So the increasing trend of classified loan indicates that there remain some doubts about genuineness of operating profit which has been shown in the financial statements. Despite such upward trend of classified loan, the total operating profit earned for the year 2013 by 25 commercial banks was Tk 142,510 million which was to some extent higher than that of the year 2012. As earlier mentioned, there remains a close relationship between realised interest income and default loan. If the amount of default loan is more, the investment income will be less; similarly, if the default loan is less, the investment income will be more.
When any loan is classified as default loan on accrual basis of accounting, its interest cannot be taken as income and again, when a loan becomes default, it starts from failing to repay interest on the loan. So, on cash basis, the income will be reduced. In these circumstances, the statistics with regard to cash recovery of interest income of the bank and amount of classified loan reflects complete contradictory results. These results create confusion whether the figures which have been presented in the financial statement, are correct or not. One of the elements of financial statements, 'interest receipts in cash', is not possible to be ascertained without analysing each and every loan. But the amount is presented in the financial statements, without analysing each and every loan and even without collecting data from the branches. The figures are determined from the records of the head office.
Each and every figure of financial statements is very important to know the position of the bank. These financial statements are important not only for decision making but also for compliance of law. So, it should be prepared presenting correct figures. Normally, a statement of cash flows of all the banks is prepared setting the head office of the banks as the bench mark. But according to the nature of the cash flow, without analysing each and every loan, it is difficult to determine the proper sources of the cash flow.
For example, in case of a cash credit loan, suppose, opening balance as on January 01,2013 was Tk 30 million, during the year interest is charged on the loan at Tk 4.5 million and repayment made is Tk 5.5 million. In that case, if we analyse the loan, it can be seen that recovery of interest is Tk 4.5 million and principal recovery is Tk 1.0 million. On the other hand, if the loan by nature would have been term loan, out of recovered amount of Tk 5.5 million, recovery of interest would have been a different amount, not more than Tk 3.0 million and recovery of the principal would have been the balance amount. From this example, it is clear that necessary information needs to be collected from branches where loan accounts are maintained to prepare correct financial statements of a bank which fulfils the objectives of the International Accounting Standards.
It is pertinent to mention that interest on loans and advances is accounted for at branch level of the bank. In the branch, in most of the cases, there remains a lack of expertise, especially of manpower having accounting background. Moreover, as regards the banking business, there is a policy to fix up branch-wise profitability. In theise circumstances, all the branch in-charges remain under some obligations to achieve the profit target. To achieve such target, sometime the branch in-charge may inflate the actual profit through accruing interest on non-performing loans and advances. So, to stop the practice of overstating profit of the bank and financial institutions, branch-level accounting and accountability system need to be strengthened and every branch should be brought under annual audit by chartered accountants.
The writer, an FCA, is Council Member and ex-Vice President, the Institute of Chartered Accountants
of Bangladesh.
sha.hossain@gmail.com
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