Opinion DC Comment 13 Dec 2019 Banks must follow th ...

Banks must follow the rules

DECCAN CHRONICLE.
Published Dec 13, 2019, 12:29 am IST
Updated Dec 13, 2019, 12:29 am IST
Though the divergence could stem from differences of opinion on when a loan is bad, it will have material impact on bank profits.
Reserve Bank of India (RBI).
 Reserve Bank of India (RBI).

Even four years after the Reserve Bank directed all banks to come clean on their financial health by declaring bad loans and making adequate provisions, nine banks, including the nation's largest, State Bank of India, have admitted to under-reporting bad loans to the extent of over Rs 20,000 crores in the financial year 2018-19. This under-reporting or divergence (as described by banks) was discovered during an RBI assessment. The errant banks, which disclosed this information to stock exchanges in compliance with Sebi regulations, include SBI, Central Bank of India, Union Bank of India, Bank of India, Indian Overseas Bank, UCO Bank, Indian Bank, Yes Bank and Lakshmi Vilas Bank.

Though the divergence could stem from differences of opinion on when a loan is bad, it will have material impact on bank profits. For instance, if SBI correctly declared its bad loans at the end of 2018-19, it would have to set aside Rs 12,036 crores for provisioning — resulting in a loss of Rs 6,968 crores instead of a profit after tax of Rs 862 crores as reported earlier. Public sector banks are typically conservative in recognising bad loans as lower profits mean lower tax outgo and lesser funds for lending. The banks, however, must understand that hiding such market sensitive information from investors amounts to fraud. Yet no action is expected against the banks.

 

At the macro level, the under-reporting of financial stress — like a government’s practice of hiding uncomfortable reports — shows that nobody has any idea about the country's real financial health. It seems the problem in the economy is deeper than what most people thought, and that it is heading directionless with the driver having his sight somewhere else.

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