Low provisioning poses systemic risk: RBI

Posted By: Religare
Subscribe to GoodReturns

Low provisioning poses systemic risk: RBI
The Reserve Bank of India suggested the banks to have adequate reserves so that they are able to deal with pension liabilities without seeking privileges from the regulators.

The directive, stated in RBI's Finanacial Stability Report, came to the highlight after the revision of pension liabilities eating into public sector banks' fourth quarter earnings in the last financial year, was done.

RBI further said that considering the regulatory dispensation yet to sought, the adequate provision would help to prevent burdening in the year when the settlement was signed. RBI, concerning with the fact that the issue may cause systemic stability issues, under-provisioning and non-compliance with accounting standards, has already concerned with the Indian Banks' association about the same.

It added, “Banks are also being advised to make a proper assessment of their superannuation liabilities and provide for them from the year in which the periodical wage settlements fall, and not from the year in which such settlements are signed."

Recently, a case with State Bank of India came to notice, where the bank's additional liability stood at Rs 11,707 crore. Therefore, when RBI was asked to grant approval for spreading the additional cost over the future working lifetime employees, the central bank denied the request. RBI stated that the rise in the liability was linked to the wage revision.

However, keeping in mind the significance of SBI's profitability, with respect to the systemic stability point, the net liability was granted, for the current year, to the bank. Hence, SBI provided for Rs 2,473 crore to the profit and loss account and Rs 7,927 crore was charged to the reserves. As a result, SBI's net profit declined 99 per cent in the fourth quarter of the last financial year.

Read more about: rbi, economy, policy, bank
Story first published: Wednesday, June 15, 2011, 11:31 [IST]
Please Wait while comments are loading...
Company Search
Enter the first few characters of the company's name or the NSE symbol or BSE code and click 'Go'