about 7 months ago
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 “Under-reporting bad loans.”  “Window-dressing.”

That sounds ominous but means the same thing; RBI has made it sound and look like some usual, routine accounting practice, calling it “divergence.”

Potato or Potatoe – it’s the same thing; you can even call it ‘batata’ but it’s the same vegetable. Call it divergence or under-reporting, this act basically means that banks underplay the NPA numbers in order to shore up their earnings and margins, which in turn helps generate a better sentiment from the stakeholders while pushing up the stock price too. RBI works at its own pace and by the time its risk assessment report comes out, its over 6 months since the fiscal numbers were reported.

That’s what divergence is - difference between RBI’s assessment and that reported by the lender. Last week, SBI, declared its ‘divergence.’ Needless to say, it was the highest reported divergence by any bank in FY19 fiscal – it underreported bad loans by Rs.11,932 crore and  provisioning by Rs.12,036 crore for FY19. Based on this huge divergence between SBI’s assessement and that of RBI, the impact on the bottomline is huge. The bank, as per its assessment, ended FY19 fiscal with a net profit of Rs.862 crore but after RBI scrutinized the books and said that the NPAs were under-reported, the bank actually ends the fiscal with a net loss of Rs.6968 crore.

And on Saturday, PNB, the second largest bank, following the footsteps of the largest bank, reported that it had under-reported its Gross as well as Net non-performing assets by Rs 2,617 crore for FY19, as per RBI's risk-assessment report. Also, the divergence in provisioning for bad loans in FY19 was to the tune of Rs.2,091 crore. PNB had reported, on its assessment of bad loans, a net loss of Rs.9975 crore and now, post the RBI assessment, the net loss stands increased at Rs.11,336 crore.

In November this year, SEBI issued a directive stating that all listed banks had to necessarily disclose any divergence in the NPAs within 24 hours of receiving RBIs risk assessment report. The disclosures need to be made in case the banks' additional provisioning for non-performing assets (NPAs) assessed by the RBI exceeds 10% of the reported profit before provisions and contingencies, and if the additional gross NPAs identified by the RBI exceed 15% of the published incremental gross NPAs.

Earlier, banks used to wait to publish it in their annual report by which time, it was meaningless and would get lost in the number jumble. It is thanks to SEBI that we now hear more and more about this divergence. Indian Bank, Union Bank, Indian Overseas, Bank of India, Yes Bank, Lakshmi Vilas Bank and many were have reported a divergence.

‘Divergence’ was always happening. This window dressing by banks is now out in the open, thanks to RBI but more to SEBI. But the attitude of banks and even of the stakeholder is so casual about this; divergence has been accepted as a routine happening. That’s how immune we have become to this practice of banks.

The Risk Assessment report from RBI is prepared after a detailed review of the relevant bank records and a multi-level discussion with the top executives of the concerned bank. The final report is not a unilateral RBI document, but is based on a mutual discussion and acceptance of the RBI findings of such divergence in loss provisioning.

Thus the questions which plague our mind:

  • What is the guarantee that the divergence is not much more but has got pruned down, thanks to discussions with the top brasses at the banks?
  • How can one have faith in any numbers which these banks now publish?
  • We can believe the numbers only when the divergence gap narrows but when such wide gaps keep coming up year-after-year, what really is the sanctity of the numbers from the banks?
  • What is baffling is that RBI directives in terms of recognizing NPAs is so detailed an clear; so how comes such wide divergences come unless it is deliberate?
  • Despite so much inspection and rules now in place to bring in more transparency, how come banks continue to window dress? Large divergence means the banks have consciously chosen to not follow these guidelines in order to hide their losses thus indulging in window dressing.
  • Isn’t  window dressing a punishable offence?
  • When there is now proof as clear as daylight, why never, ever any action is taken action officials who manipulate the books?
  • How come not a single case of ‘over-reporting’ has ever come to light?
  • How come the auditors never come across any discrepancy and only RBI could find the under-reporting cases?

The fact that not a single bank challenged the findings of RBI means they knew all along. These banks were recently recapitalized to the tune of Rs.2.5 lakh crore. So much public money is being poured into banks and they continue duping us with falsified numbers. Good money continues to chase bad money. If banks do not clean-up, how will the banking crisis of NPAs ever get resolved?

The worry is how to trust any numbers from any bank?  Wide-spread and consistent divergence has eroded whatever little faith we had in the banks.

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