Operating Expenses
The following items are included under this head:
(i) Payments to and Provisions for Employees: This item includes salaries and wages of staff, allowances, bonus, other staff benefits like provident fund, pension, gratuity, leave fare concession, staff welfare, medical allowance to staff, etc. It may be noted that provision for terminal benefits like pension and gratuity is usually made only at the head office level. Salaries and allowances payable to the bank’s staff and officers are usually governed by agreement with the employee unions or awards of a judicial tribunal.
(ii) Rent, Taxes and Lighting: This item includes rent paid by the bank on buildings, municipal and other taxes, electricity charges and other similar charges and levies. Auditor should specifically review cases where rental increases are in dispute & unpaid. Necessary provisions / disclosures should be appropriately made. It may be noted that income-tax and interest on tax are not to be included under this head. Similarly, house rent allowance and other similar payments to staff would not appear under this head.
(iii) Printing and Stationery: This item includes books and forms and stationery used by the bank and other printing charges except those incurred by way of publicity expenditure. While some stationery may have been purchased by the branch, other stationery (particular security paper like draft forms, cheque books) would have been received by the branch from the head office. Auditor should specifically note the bank policy in this regard whether the same is expensed out on purchase or on usage. In any case any unusable or outdated stationery should be expensed out. If any Stationery is shown as an asset, necessary physical verifications should be done.
(iv) Advertisement and Publicity: This item includes expenditure incurred by the bank for advertisement and publicity, including printing charges of publicity material. Auditor should specifically review such agreements to find out commitments made for such expenses in future periods.
(v) Depreciation on Bank’s Property: This item includes depreciation on bank’s own property, motor cars and other vehicles, furniture, electrical fittings, vaults, lifts, leasehold properties, non-banking assets, etc. Depending on the procedure followed in the bank, provision for depreciation may be either centralised at the head office level through fixed asset management software or decentralized and manual at branches and other offices. Auditor should specifically review the useful life at the year end and provide for additional depreciation in case there is any downward revision in the useful life.
(vi) Directors’ Fees, Allowances and Expenses: Expenditure incurred in this regard is recorded under this head. This item is dealt with at the head office level and would not therefore be relevant at the branch level.
(vii) Auditors’ Fees and Expenses: Remuneration payable to Statutory Auditors and Branch auditors and expenses in connection with audit like reimbursements are recorded under this head. This item is usually dealt with at the head office level and would not therefore be relevant at the branch level.
(viii) Law Charges: All legal expenses and reimbursement of expenses incurred in connection with legal services are to be included here. Auditor should specifically review the Legal agreements to note future commitments for payables. Expenses paid to advocates recovered from Borrowers by direct debit to that account should be specifically noted for consistency in accounting.
(ix) Postage, Telegrams, Telephones, etc.: This item includes all postal charges like stamps, telegrams, telephones, teleprinters, etc. Issuance of Telegrams has been discontinued since 15th July 2013 and this head is now just for academic purposes.
(x) Repairs and Maintenance: This item includes repairs to bank’s property, their maintenance charges, etc. Amortization of such expenses should be specifically noted.
(xi) Insurance: This item is usually dealt with at the head office level and may not therefore be relevant at the branch level. This includes Premium paid to DICGC, Insurance of Cash on Hand, in ATM & in transit and also Insurance of Fixed Assets, Employee Fidelity Insurance, Fraud Covers, Coverage for Cyber Risks. Auditor should specifically ensure that all risks are insured adequately. Decision not to insure specific risks / assets should be approved at appropriate Management levels & Auditor should obtain the relevant documents for record.
(xii) Direct Marketing Expenses: These are the expenses incurred majorly for sourcing of retails loans/credit cards and collection of retail overdue loans. RBI circular RBI/2006/167/DBOD.NO.BP.40/21.04.158/2006-07 dated 3rd November 2006 clearly states that activities of internal audit, compliance function and decision making functions like compliance with KYC norms for opening deposit accounts, according sanction for loans (including retail loans) and management of retail loans cannot be outsourced.
(xiii) Other Expenditure: This item includes all expenses other than those included in any of the other heads, like, license fees, donations14, subscriptions to papers, periodicals, entertainment expenses, travel expenses, etc. The Notes and Instructions for compilation of profit and loss account, issued by the Reserve Bank, require that in case any particular item under this head exceeds one per cent of the total income, particulars thereof may be given in the notes.
Some banks follow the policy of providing for the promotional points earned by the customers on the use of Debit/Credit cards. These provisions could be shown under this head.