RBI wants banks to agree on method for enough margin on pension, related liabilities
After taking a significant hit on net profits in 2010-11, public sector banks (PSBs) may now have to set aside funds for employee benefits such as pension and gratuity on a monthly basis, to avoid piling of liabilities towards year-end. At present, some banks set aside funds on a quarterly basis and others yearly, as there are no norms in this regard.
The issue arose after the country’s largest bank, the State Bank of India (SBI), wanted an okay for allowing it to dip into reserves for making pension provisions in the last financial year. To ensure this did not recur, the Reserve Bank of India (RBI) had asked banks to work out a way to create adequate reserves in a phased manner to deal with pension liabilities and avoid approaching the regulator for privileges.
In a meeting of the Indian Banks’ Association (IBA) last week, bankers mooted the idea of making pension provision on a monthly basis, with any adjustments needed to be done while finalising the quarterly results. A debate is on regarding how to bring uniformity regarding liabilities among banks. “There is a need for consensus among bankers regarding cost computation on various parameters. Mortality, for example, a key variable for calculating pension liabilities, differs bank to bank. There is a need for some homogeneity regarding actuarial valuation,” said the chairman and managing director of a PSB.
Some banks also suggested regulatory fiat to bring uniformity on the provisioning requirement if a consensus is not arrived at. RBI, however, is unlikely to issue a circular on this issue. It wants banks to agree on the the matter between themselves.“Pension provisioning is an ongoing process. Banks are free to make provisions even on a monthly basis if their respective boards decide to,” said a senior IBA official.
According to accounting standards, banks are supposed to make ongoing provisions for employee costs but banks provide only when the settlement amount is ascertained close to the settlement date. This issue caught the regulators’ attention when SBI’s net profit dipped by 99 per cent due to a one-time provisioning in the last financial year. RBI said such under-provisioning could lead to systemic risks.
In 2010-11, the provisioning had increased sharply because of the pay revisions agreed upon under the ninth bipartite settlement. Wages were raised 17.5 per cent, a second pension option was given to existing and retired employees and gratuity limits were increased from Rs 3.5 lakh to Rs 10 lakh. According to the financial stability report, the expected additional liability was Rs 30,366 crore for 25 PSBs, which constituted 81.9 per cent of their net profit for 2009-10.
Since the impact was significant, RBI allowed banks to amortise the liabilities towards existing employees over five years. Hence, PSBs absorbed Rs 4,971 crore towards pension and Rs 1,677 crore towards gratuity in the profit and loss account for the year ended March 31, 2011, while carrying an unamortised expenditure of Rs 16,897 crore for pension and Rs 2,903 crore for gratuity in the balance sheets as on March 31.
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