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Indian Bank's cumulative losses of amounting Rs 1712.78 crore has turned the bank insolvent. A close look at the balance sheet, however, reveals that the loss figure can be much higher than stated.

The insolvency essentially means that if there is a run on the bank, it will not have enough funds to pay back all the depositors. This is simply due to the fact that the cumulative loss of Rs 1712 crore is well over the net worth of the bank at Rs 1061 crore as of March 31, 1996.

The existence of the net worth is just notional as in real terms it has been totally wiped out by the cumulative loss. Besides, the loss has eaten into the deposits of the bank. Had Indian Bank been a private sector manufacturing company it would have been a BIFR case.

 

The cumulative loss which stood at Rs 376.38 crore on March 31, 1995 jumped to Rs 1712 crore basically due to the massive loss of Rs 1336 crore as of March 31, 1996. This loss itself would have been higher if Indian Bank had made other provisions based on conservative practices. Provi- sions for income and interest tax worth Rs 65.75 crore has not been made in view of the pendency of certain appeals.

The fine print in the notes on accounts has many a tale to tell, the most important being that the loss could have been much higher. It was already known that the huge loss was a result of provisioning for NPAs, which should have been done in the earlier years and also booking of income on the NPAs.

Now the notes say that the loss could be higher. There has been a change in provisioning due to identification of NPAs on the basis of lowest category adopted by any member of the consortium as against leader's classification in the previous year.

One of the main reasons for the increase in loss is the changes in the status of NPAs identified in the earlier years. This has resulted in the creation of an additional provision of Rs 398.51 crore as of March 96. There is an yet another provision of Rs 162.49 crore for NPAs of earlier years which have now been identified by RBI.

There is also a provision of Rs 19.65 crore for loss of principal and interest charged by Indian Bank's foreign branch which is not realisable. A writeoff account for Rs 65.07 crore and provision for wage revision Rs 60.43 crore were added reasons. Due an inadequate security in a few borrowers' accounts the bank had to make another provision of Rs 82.71 crore. All these added up to form the huge loss in the 1995-96.

Indian Bank's record has exposed gaping loopholes in commercial bank auditing and regulation. For the bank, the massive amount set aside for provisions and contingencies (Rs 1113 crore) has wiped out its net worth.

How have the losses been funded? A funds flow analysis shows that the losses have been financed mainly by borrowing. During 1995-96, Indian Bank's borrowings increased by Rs 1463 crore, far more than the Rs 575 crore increase in deposits. Outstanding borrowings from the other banks increased by Rs 745 crore, while the increase in borrowings from