Low provisioning poses systemic risk: RBI

The Reserve Bank of India, in its Financial Stability Report, today said banks should create adequate reserves to deal with pension liabilities and avoid approaching the regulator for privileges. The directive comes in the backdrop of revised pension liabilities eating into public sector banks’ fourth quarter earnings in the last financial year.

RBI said under-provisioning and non-compliance with accounting standards could pose systemic stability issues. RBI, which has taken up the issue with the Indian Banks’ Association, said, “Banks are also being advised to make a proper assessment of their superannuation liabilities and provide for them from the year in which the periodical wage settlements fall, and not from the year in which such settlements are signed.”

The additional liability for State bank of India (SBI) stood at Rs 11,707 crore, for which the bank had requested for RBI's approval to spread additional costs evenly over the future working lifetime of the employees. The regulator, however, did not agree, since the rise in the liability was linked to the wage revision and could have been reasonably anticipated.

“However, from a purely systemic stability point of view, the impact on SBI’s profitability being very significant, regulatory dispensation allowing adjustment against reserves to meet the additional pension liability, the net liability for the current year was allowed,” RBI said. Hence, SBI provided for Rs 2,473 crore to the profit and loss account and Rs 7,927 crore was charged to the reserves. As a result, SBI’s net profit declined 99 per cent in the fourth quarter of the last financial year.

RBI said going forward, it was necessary that banks build adequate provisions for such liabilities in a phased manner since regulatory dispensation is not sought. This would also prevent burdening in the year the settlement was signed.