Banks May Not Write Back Excess Depreciation
Most banks are planning not to write the excess provisions due to the appreciation in the investment portfolio back to the profit and loss account in a bid to boost the bottomline.
Banks like State Bank of India, Bank of Baroda, Bank of India and Union Bank of India are some who have decided not to write back the excess provisions to the profit and loss account. RBI had sometime back barred banks from writing back the excess provisions to the profit and loss account in order to boost the bottomline.
However, this year RBI relaxed the guidelines and allowed banks to write back excess depreciation. But, again the apex bank is considering disallowing the banks of taking the benefits of excess provisions.
The move is in no way expected to hit the profit making banks who had decided not to write back the excess provisions.
However, in case the Reserve Bank reintroduces the ban, the loss making banks are going to be hit. These banks were planning write the excess provisions in the investment portfolio back into the profit and loss account and boost profits. In 1995-96, most banks had made huge provisions in the investment portfolio on account of a major rise in interest rates. In fact, State Bank of India had made a provision in excess of Rs 800 crore toward a depreciation in the market price of government securities. In 1996-97, the interest rates have fallen leading to an appreciation in the realisable market value of gilts. The result is an excess provisioning in the investment portfolio.
Says a senior official of State Bank of India, we do not plan to write back the excess depreciation to the profit and loss account, even the Reserve Bank has permitted it. We think it is not prudent accounting practice. What happens in case the interest rates shoot up in 1997-98.
A Bank of Baroda executive said they will keep the excess provision in the balance sheet as a cushion for future depreciations. In fact, both these banks are looking at the possibility of increasing their current investments with the excess provisions.
As per RBI guidelines, banks have to split their investment portfolio in the current and permanent category and provide depreciation for the former. A minimum of 60 per cent should be in the current category. However, with the excess depreciation in their books, banks plan to increase the current category which has a large chunk of low yielding paper.