Public sector banks understating NPAs, overstating profits, says govt

NEW DELHI: The finance ministry has written to several public sector banks pointing out that they have not set aside thousands of crores to cover for loan defaults, and have consequently overstated profits.
Pointing out that the Reserve Bank of India's income recognition and asset classification norms have not been followed in several cases, the letter, reviewed by TOI, said "Instances of over-reporting of profit have been continuing year after year and no corrective action seems to have been taken to stop recurrence."

The communication was sent to state-owned lenders earlier this month and is based on inputs received from RBI. As the regulator, RBI conducts Annual Financial Inspection of banks and submits a report asking them to take corrective measures.

In case of one bank, the extent of under-provisioning was in excess of over Rs 5,000 crore over a three-year period. Had the bank set aside funds in line with RBI stipulations, the lender could have ended up reporting losses, the finance ministry pointed out.

When contacted, a finance ministry official confirmed that letters had been sent to banks but did not name them. "The systems are not in place, it is not deliberate," the official said. While asking banks to adhere to the RBI-stipulated norms and initiate action against functionaries "found lax" and auditors, the ministry also suggested that the boards initiate action.

Separately, the finance ministry had convened a meeting of audit committee chairmen of over a dozen banks earlier this month but it was postponed. While TOI tried to contact chairmen of Bank of Baroda, Punjab National Bank, Bank of India, Union Bank of India, Dena Bank and Punjab & Sind Bank, none of them responded to phone calls and text messages.

A senior executive at SBI said that last March, RBI had pointed to certain areas where higher provisioning was required. Over the last three quarters, the executive said, funds had been set aside. "Often, there is a difference in interpretation between what we do and how RBI views a particular issue. When you classify a loan as a non-performing asset is one area where banks and the regulator often disagree," another SBI executive said.

Bankers also said that after RBI submits its financial inspection report, banks make the required changes or often convince the regulator on why they took a particular stance. "Often, RBI agrees with us and the provision requirement is dropped," an executive at another bank said.

Another banking source pointed out that banks had provided for more than 80% of the bad and doubtful assets, known as provision cover, and there was no question of under-providing.