Underprovisioning Makes Banks' Turnaround Seem A Sham

Highly-placed officials in the banking industry say that the much-hyped turnaround in the banking industry has turned out to be a sham as most of the nationalised banks are believed to have ignored the prudential norms laid down by the apex bank.

A number of banks have resorted to underprovisioning to inflate profit figures. "In almost all RBI inspection reports, there is a gap between the central bank's perception of non-performing assets and the consequent provisioning requirement and the actual provisioning made by the banks," one RBI source said. The notable exceptions are the State Bank of India and its seven associate banks and the profit-making nationalised banks like Punjab National Bank, Bank of Baroda, Canara Bank, Corporation Bank and a few others.

 

"The SBI group and the stronger PSU banks are conservative in their NPA estimates. However, most of the weak banks resort to underprovisioning. The RBI inspection reports over the last few years have unearthed massive underprovisioning in Indian Bank and Vijaya Bank in their domestic operations and Indian Overseas Bank in their international operations," sources in the apex bank said. The department of supervision, the operational arm of the board for financial supervision (DFS) of the apex bank conducts the inspection annually.

Both Indian Bank and Vijaya Bank have seen their net worth eroded after cleansing their balance sheets in 1995-96. "Many more banks will face the same fate in the current year if DFS forces them to come clean on provisioning requirements," sources said. K C Chowdhary, CMD of Vijaya Bank ,who took over the reins early this month, said, "The bank did not follow the prudential norms laid down by RBI. Perhaps, the plan was to make actual provisions in future when the bank's bottomline is strengthened." Chowdhary wants to focus on aggressive resource mobilisation and recovery of NPAs and negotiated settlements to turnaround the bank.

In 1994-95, the 19 nationalised banks had provided for Rs 2812.53 crore on account of provisions and contingencies. The extent of underprovisioning by these 19 banks can be gauged from the fact that the SBI and its associates had made a provisioning to the tune of Rs 1,733.72 crore.

In 1995-96, the amount is much higher with Indian Bank alone making a provision for Rs 980. 62 crore for bad loans and another Rs 190 crore on account of reversal of interest on non-performing assets. For Vijaya Bank, the provisions and contingencies have increased five-fold from Rs 45 crore in 1994-95 to Rs 255 crore last year.

According to the RBI norms, non-payment of either principal or interest for two quarters turns an account a non-performing asset (NPA) which is classified into three categories -- substandard, doubtful and loss assets. The apex bank stipulates that an advance should not remain substandard for more than two years. However, that does not mean that a sub-standard asset becomes a doubtful or loss asset only after two years, clarified an RBI executive. In other words, the two-year timeframe is the outer limit and an asset can become a loss or doubtful asset even after six months.

But most of the banks have taken advantage of the loopholes in the RBI guidelines and treated the NPAs as sub-standard for two years as it calls for a provisioning of only 10 per cent of the outstanding. "When they are forced to follow the correct income recognition norms, it will be difficult to protect their bottomlines," sources said.

The banks are required to make 100 per cent provisioning for the unsecured portion of the doubtful assets while the provisioning requirement for the secured part is 20 per cent in the first year, 30 per cent in the third year and 50 per cent in the fifth year. In the case of loss assets, the provisioning requirement is 100 per cent. Loss assets are those where the chances of recovery are nil.