Banks Make Provisions For Employee Benefits

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Employee-benefit provisioning to hit public sector banks hard-Financial Express 02.04.2014

By Sri Nitin Shrivastava 

The additional provisioning towards employee benefits by public sector banks (PSBs) will weigh on their earnings in next several quarters. The PSBs have begun the provisioning exercise against an impending wage hike, effective from November 2012.

An analysis of 22 PSB earnings for the first nine months of current fiscal shows the employee benefit-related provisioning costs stood at R9,357 crore, constituting 17.37% of total employee costs and affected bank operating profits by 9.70%.

While PSBs in the first nine months have charged additional R4,250 crore to income statement towards amortisation related to enhancement in gratuity limit and re-opening of pension option for existing employees (in line with RBI’s February 9, 2011, circular); some banks like SBI have made provision of R1,800 crore towards additional pension liability. PSBs have also made additional provision of nearly R3,300 crore in the nine-month period on ad-hoc basis for wage revision effective November 2012.

These banks have unamortised pension liability of R5,250 crore, likely to be fully amortised by most of them in next five quarters.

Analysts maintain many PSBs like Bank of India, Canara Bank, PNB and Indian Overseas Bank have not fully started providing for higher pension liability due to change in mortality table assumptions separately.

Also many banks like Central Bank, Bank of India, Indian Bank, Corporation Bank and Indian Overseas Bank are provisioning the 10thbipartite wage hike as these banks had assumed 10% wage hike unlike 15% by SBI and PNB.

SBI that has seen 34.90% increase in employee costs in these nine months due to R3,500 crore provisions towards additional employee expenses expects further R600 crore of one-time charges in the fourth quarter towards pension liability. “To an extent, R2,400 crore (of pension provisioning) should be sufficient,” said Arundhati Bhattacharya, SBI chairman at the quarterly earnings analyst call on February 17.

Aditya Narain, MD & India equity strategist at Citigroup Global Markets, in his banking result review for December quarter wrote while private banks are cyclically offsetting revenue slowdown through costs; PSUs are counter-cyclically (or out of control) offsetting revenue ups with high costs.

“While it is difficult to predict the peak in pensions, we believe this is likely to take long and typically happens with the lag of a generation. Moreover, pensions in defined benefit schemes will keep increasing with pay and promotions and so pension costs are likely to keep rising in medium term,” wrote Manish Chowdhary and Sameer Bhise, analysts at IDFC Institutional Equities in their report in February.

Link Financial Express

My Comments are as under

I have huge volume of praise for present RBI governor who is not only intelligent but also brave, bold and firm in his approach,. He did not reduce interest rates under pressure of politicians and corporate houses.

He has made it clear how banks are making provisions for terminal benefits accruing to employees. He has boldly accepted that banks were not and some banks still are not making adequate provisions towards their liability for payment of wage revision, pension, gratuity and other terminal benefits. He said that many provisions which should have been done long ago but banks did not do so to inflate profits and now they amortized these provisions to save their balance sheet from turmoil. 

In the year 2010 and 2011 it was clearly exposed by trade union leaders how public sector banks willfully avoiding making adequate provisions towards pension and bad loans liability and inflated profits. These banks distributed dividends without earning profits and caused capital erosion and now they are facing the self created crisis.

I would also like to hope from him dilution and reduction of all stimulus packages allowed in favour of big corporate houses in the year 2008 to meet so called global fiscal crisis. He should prevail upon bankers to made full provisions honestly and punish severely top officials of banks who willfully and cleverly do not do so despite instructions from RBI. CMDs and ED of banks who provided less on wage revision and pension liability should be brought to task because they are willfully repeatedly committing such mistakes.

RBI Governor should create an example of punishing top officials who willfully concealed bad assets for years together and got exposed only when identification of Bad debts started through Core Banking solution under pressure from RBI. Punishment should be awarded to EDs and CMDs of banks who are continuously and who are even now indulged in window dressing of their balance sheet by concealing bad debts through the methods of rephsaing, restructuring, ever greening of bad loans and through tapering technological tools as exposed recently in United Bank of India. I have no doubt that most of banks are still in habit of playing foul game with man, machines and methods.

I put emphasis on punishment to top officials only because it is top officials who propagate bad culture on phone and by giving verbal instruction. Junior level officers do not have guts and courage to protest ill-motivated orders of their bosses in fear of repercussion in form of critical transfers and rejection in promotions for decades ( top officials have ‘Bhrahmastra’ of Interview to reject any good officer on their whims and fancies. ).

 It is the dirty game of rising in career that top officials inflated profits for decades, at least after the reformation and free era launched from 1991 and which continues even now in one form or the other. The culture of “Yes Sir” and flattery has damaged the fundamentals of all public sector banks and it will need some surgical operations and also some change in treatment.

As regards interest rate, I praise him once again that he did not reduce interest rate to give benefits to corporate. Rather I would like to suggest that RBU should once again adopt and prescribe Uniform interest rate structure for all banks keeping in view national priorities to avoid unnecessary, unwarranted and avoidable competition among banks of the same government. Banks should focus on business expansion by extending excellent service to customers and not by sacrificing bank’s income at the cost of investors and depositors.

Reduction of interest rate by big banks like SBI or PNB results in loss to weak bank which is part of the same government. And ultimately it is the government which has to bear the loss by way of capital infusion.

RBI should not promote the habits of first demanding dividend from these banks and then infusing capital. Government and RBI in particular should stop the culture and tradition of first damaging banks for political advantage and then coming to rescue of these banks as they have given treatment to other public sector undertakings.

RBI should stop Window Dressing done by EDs and CMDs of public sector banks during last fortnight on every financial year to inflate business by 5 to 10 percent and earn false image .Banks which could not achieve growth of business by 10 percent in entire year usually achieve the target by booking false growth of 5 to 10 percent only in last fortnight. Under pressure of Top officials of the bank , every Branch Head , Regional Head and Zonal head have to indulge in window dressing during last few days of the year in the same way as government officials spend entire budget during last few days of March every year . Government should stop this unhealthy practice without delay and should stop building pressure on target .