Bank Reconciliation of inter branch/office entries

Reconciliation is a financial process that compares internal financial statements with external sources to identify discrepancies and maintain financial reliability.

Reconciliation is a financial process that compares transactions and activity to supporting documentation and resolving any discrepancies that may have been discovered. Inter-office adjustments are differences that may occur due to incomplete recording of transactions between branches or the head office.

In the new CBS environment, the branch reconciliation is done by the IT department at the Head Office in most of the banks. However, the practice of reconciliation of various banks may differ, in most of the banks the inter-branch accounts are normally subdivided into segments or specific areas e.g. ‘Draft paid/payable’, ‘inter-branch remittances’, ‘H.O.A/c’ etc.

The problem with reconciliation at the branch level, which has not been resolved by computerization, is usually of suspense and sundry deposit accounts. The entries in these two heads are for the purpose of keeping temporary records of certain unclear items till the precise nature thereof has been determined or pending transfer thereof to the appropriate head of accounts.

In the double entry system of accounting when the total amount of the debit side and credit side of the journal do not tally then such difference between the two sides is temporarily added to the shorter side either as suspense a/c or sundry creditor a/c till the mistake is identified. Amounts are particularly debited to the Suspense account pending reconciliation of amounts deposited by a company and the payment made by various branches on this account. The identified fraud transactions remain in suspense head awaiting adjustment.

An inter-branch transaction occurs when one branch of an organization deals with another branch of the same organization. Inter-office adjustments (net) will appear in the balance sheet of a bank under other liabilities only.

The branches involved in the transaction debit and credit each other as if they were not part of the same corporate entity. The major types of transactions, that result in Inter Office debit or credit entry are issue of remittance instruments like drafts on other branches, payment of remittance instruments like drafts by other branches, payment to/ Receipt from other branches of the proceeds of instruments received/sent for collection /realization/clearing, transactions through NEFT, ECS and RTGS, ATM transactions of the customers either at ATM linked with other branch or merchant establishment, transactions through payment gateway of ATM, etc. 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. The balance of inter-office changes, if credited, should be shown under the heading of other liabilities. Only the net location of the inter-office accounts, both domestic and international, should be demonstrated. It Includes interest owed and payable and interest incurred but not owed on deposits and borrowings Includes net allowance for income tax and other taxes. Various taxes include the interest tax, surplus provisions for the payment of bad loans, surplus provisions for the depreciation of shares, non-disclosure of contingency funds as reserves, etc.

Nostro stands for ‘our account’. A Nostro account is an account maintained by a bank or an institution of one country with a correspondent bank in a foreign country. The Nostro account is usually maintained in the currency of the country where the correspondent bank is situated. Vostro stands for ‘your account’. A Vostro account is an account maintained by a foreign bank or other correspondent bank with a domestic bank. The account is usually maintained in the currency of the country where the domestic bank is situated. Suppose a domestic bank (State Bank of India) opens a foreign account with Citigroup (the USA) in currency $ USD. For the SBI, this will be a Nostro account, and for Citigroup, it is a Vostro Account. Every foreign exchange transaction causes an inflow of foreign exchange into India or an outflow of foreign exchange from India and affects the position of foreign currency assets or liabilities. Thus such transaction is required to be reported to RBI.  

Nostro account and Vostro account reconciliation is the process of comparing and managing a bank’s Nostro/Vostro accounts with other accounts. Nostro accounts are foreign currency accounts that a bank holds with another financial institution. The process of Nostro/Vostro account reconciliation involves, identifying and matching transactions and comparing the transaction details, such as the date, amount, and currency, to ensure they match.

Resolving discrepancies in Nostro and Vostro accounts:

Resolving discrepancies in the Nostro account and Vosro account includes investigating the transaction details, contacting the corresponding bank, correcting any errors in the transaction records, and ensuring the final balances match if the final balances in the Nostro accounts do not match, further investigation is required.

Banks have their own procedure to eliminate long outstanding entries. The top management of banks decides on making provision /writing off such old outstanding entries in Suspense a/c based on periodical review with details of old outstanding entries along with narrations. Elimination of outstanding entries in ‘Sundry Deposits’ or ‘Sundries Account’ is also equally important to be cleared expeditiously as the old outstanding in Sundry Creditors account is also fraud-prone.