RBI relief on provisions helps banks

Pension & gratuity liabilities could have wiped out profits

Pension and gratuity liabilities of retired employees have made a huge dent in banks’

profits in 2010-11 and were it not for the Reserve Bank of India's permission to make provisions for them over five years, in equal instalments, the liabilities could have wiped out their profits in FY11.

Though analysts were expecting pension liabilities of banks to have some impact on profits in the last quarter, State Bank of India on Tuesday shocked markets by making a provision of over Rs 9,492 crore towards pension and gratuity in the fourth quarter of FY11. However, other banks have not made a similar move.

Total pension and gratuity liability of top 14 public sector banks, including SBI, in FY11 was Rs 34,041.02 crore, much more than their aggregate net profit of Rs 33,400 crore in the year. However, due to the central bank’s five-year amortisation allowance, the provisions made in FY11 profit and loss account amounted to Rs 16,136 crore, including SBI's 100 per cent provision for its pension liability. The remaining Rs 15,454.15 crore has to be amortised in the next four years.

The only saving grace for banks is that the very high pension and gratuity figures for FY11 emanates from a one-time settlement between the Indian Banks Association and bank unions, which led to the increase in pension and gratuity liability of banks.

SBI and IDBI Bank were not to be impacted by this decision. The huge rise in SBI's pension and gratuity liability emanates from the amendment to SBI Pension Fund Rules.

The total pension liability of SBI was over Rs 11,707 crore in 2010-11. Out of which Rs 1,306.70 crore was provided for till December 2010. SBI made a provision of Rs 7,927.41 crore towards pension liabilities in the last quarter of the year. Its gratuity liability for the year was Rs 1,965 crore, out of which Rs 1,565 crore has been accounted for and the remaining Rs 400 crore will be amortised in the next four years.

After SBI, Bank of India set aside the highest amount for pension and gratuity at Rs 1,235.97 crore in the fourth quarter of 2010-11. The bank has to amortise Rs 2,112.89 crore in the next four years.

“There was a dual hit for banks in this quarter. Apart from existing employees, they had to make provisions for retired employees too. As the RBI circular came in the last quarter of 2010-11, banks were forced to make provision in the fourth quarter instead of spreading it over the entire period,” said Krishnan ASV, a banking sector analyst at Ambit Capital.

In February 2011, RBI allowed banks to spread their pension liability towards existing employees over five years, but did not allow them to do the same for retired employees. So, banks were forced to provide the entire cost towards retired employees in the fourth quarter itself.

All banks except Oriental Bank of Commerce, which had provided Rs 150.85 crore for retired employees in the previous quarters, made provisions in the fourth quarter. OBC did not make any provision in the last quarter.

As per RBI rules, the total quantum of such a liability is spread over five years starting 2010-11. Some banks have been setting aside some amount towards this in the past few quarters.

“Provision for pension of retired employees had to be made in 2010-11 as per the RBI circular. Our balance sheet is now completely clean,” said a senior SBI official.

(With inputs from Kumar Shankar Roy in New Delhi)

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