Altered Income Recognition Norm Could Be A Breather For Banks

While banks are reeling under the recent decisions of Reserve Bank of India which may adversely affect their profitability for the year ended March 31, 1997, the policy initiative of amending the prudential norm of income recognition may provide some relief.

Reversing an earlier decision to allow scheduled commercial banks to book only income from government securities on an accrual basis, the apex bank has now authorised commercial banks to account other kinds of income on an accrual basis as well.

Banks can now book income from securities of corporate bodies and public sector undertakings in respect of payment of interest and repayment of principal on an accrual basis where such payments have been guaranteed by the government, either the centre or at the state level.

 

Banks may also book income from dividend on shares of corporate bodies on accrual basis provided such dividend on the shares has been declared in the annual general meeting of the corporate body under consideration and provided the owner's right to receive payment is established.

This was conveyed to the chief executives of all commercial banks excluding regional rural banks by a recent circular of the apex bank.

The policy decision also reverses a strict stand taken by the apex bank in January that income from dividend on shares of corporate bodies should be booked on cash basis and income on bonds of corporate bodies should be booked on accrual basis provided interest is serviced regularly and as such in not in arrears.

The earlier stringent measure by the central bank came in the wake of certain violations by commercial banks in the booking of income which had been brought to the notice of the Reserve Bank. Subsequently, the commercial banks has made representations to the apex bank asking for certain relaxations in this respect. This measure by RBI comes in the wake of these representations. This relaxation is important particularly because recent measures by RBI may adversely affect the profitability of banks.

For example, the recent directive asking banks to make provisions for additional non-performing assets set out in the annual financial inspection reports of the central bank, may necessitate a significant amount of additional provisioning by banks.

This will inevitably take its toll on the bottomlines of public sector banks.

Also, according to recent reports, RBI is reconsidering its decision to allow commercial banks to account for the excess provisions made in the previous year on the credit side of their profit and loss accounts for the year ended March 31, 1997. This may prevent banks from reaping the rewards of lowered interest rates in the fiscal year 1996-97.

The relaxation provided in the form of permission to book certain kinds of income on an accrual basis may provide some relief.