Note The Bank Account!

The excess in dud-loan provisioning made by a few private banks over what was declared in their Annual Reports for fiscal’16 is a manifestation of a deeper problem which goes beyond “Notes to Accounts”. But first let’s get this bit out of the way - Axis Bank, ICICI Bank and Yes Bank have made public such a divergence, but are they to the fault?

The fountainhead of the current narrative started with the Reserve Bank of India’s (RBI) Asset Quality Review (AQR) in December 2015 which saw gross non-performing advances (NPA) at the systemic level rise by 210 basis points (bps) to 7.6 per cent of gross advances at end-March’16. It was due to reclassification of restructured advances. As a result, the overall stressed advances rose only marginally by 20 bps to 11.5 per cent during the period due to a reduction in restructured standard advances ratio by 230 bps to 3.9 per cent. While banks and many borrowers cringed, just about everybody else cheered it.



And to ring in greater transparency, better discipline with respect to compliance as well as to involve other stakeholders, the Reserve Bank of India (RBI) also said it will mandate disclosures in the “Notes to Accounts” to the financial statements of banks wherein divergences (in NPA provisioning) exceeded a specified threshold.

Who’s To Fault?
Now while the intention to do so was announced by RBI in its Fourth Bi-monthly Monetary Policy Statement, (September 29, 2015), it was given effect to only on April 18 this year. Banks were told wherever (a) additional provisioning requirements assessed by RBI exceeded 15 per cent of the published net profits after tax for the reference period or (b) the additional Gross NPAs (identified by RBI) exceeded 15 per cent of the published incremental Gross NPAs for the reference period or both.

Now, look at the sequence of events.

From the time the AQR was announced and the circular on divergence in provisioning for dud-loan be made public, two rounds of inspections of banks have been undertaken by Mint Road. Banks’ statutory auditors took cognisance of the AQR when they audited banks at end-March’16. But here again, the AQR was “subjective” -- as in RBI decided which account was to be classified as NPA; many auditors went by what Mint Road’s provisioning norms stated otherwise. And this is not to suggest they did not take the AQR observations on-board.

And come April 18 this year, a case for divergence being made public was notified by RBI, and all hell broke loose.

The question to be posed here is – why did it take Mint Road one-and-half-years to issue a circular on its intention which was announced in its Fourth Bi-monthly Monetary Policy Statement, (September 29, 2015)?

The point is there is no way statutory auditors could have noted the “under-provisioning”.

Time To Revisit P J Nayak’s Report
The P J Nayak Committee Report to Review Governance of Boards of Banks in India (2014) had noted “With RBI also having moved away from detailed to risk-based supervision, the annual financial inspections investigate the asset quality reporting accuracy of banks less rigorously. It appears desirable therefore that RBI conducts random and detailed checks on asset quality in these banks”

So why is Mint Road not being questioned?

The Report also said wherever significant evergreening is noticed penalties are to be levied through cancellations of unvested stock options and claw-back of monetary bonuses on officers concerned and on all whole-time directors; and that the Chairman of the audit committee be asked to step down from the board.

The problem is there is no definition on what constitutes ever greening of accounts!

And lastly, bear this in mind. As on date only private banks’ divergence on provisioning (over what was declared in their Annual Reports for fiscal’16) is in public domain. If the same were to happen in the case of state-run banks, it will raise some uncomfortable questions. RBI officials sit on the boards of state-run banks. You will soon have a situation wherein one set of Mint Road officials “qualify” the books of the very same banks on the issue of “under-provisioning” on the boards of which their colleagues sat and deliberated as they munched biscuits and sipped tea!

For the Nayak Committee had observed “what is puzzling” is that as a proportion of loan assets the deterioration in asset quality is almost entirely in state-run banks, with a remarkable stability in the asset quality of private banks.

“There appear to be three broad explanations for such a divergence. Either private sector bankers are 'better' bankers in the companies they choose to lend to, or they are able to sell their assets to other banks and NBFCs before the assets become problematic; or else they successfully evergreen their assets”.

And now we have a situation wherein it is three private banks who have been rapped on their knuckles.

Wait for a like story to unfold in state-run banks -- you will not have had green, but red faces all around!