Cloak on bad loan for profit boost

Mumbai, Nov. 18: Several public sector banks have resorted to window-dressing their accounts to show higher profits in the second quarter.

At the heart of the accounting pyrotechnic are the banks' non-performing assets, which have proved to be a huge drag this fiscal.

Instead of confessing to their bad assets, the banks have indulged in some nimble play to lower the bad loan provisions in their books, resulting in their second-quarter results acquiring a much undeserved gloss.

Banks during this period reduced their provisions for bad loans or their provision coverage ratio (PCR), which is the ratio of provisions to gross NPAs. Bad loans surged in July-September, with companies failing to meet their financial obligations because of the economic slowdown.

Provision is the amount set aside by banks to cover non-performing assets (NPAs). A loan becomes NPA when the interest or the principal is unpaid for 90 days. If there is a rise in loan defaults, the prudent step is to show more provisions.

Analysts point out that the drop in provision cover helped to boost the profits of the PSU lenders.

The State Bank of India, the country's largest lender, reported a higher gross NPA of Rs 49,202.46 crore during the second quarter, while the percentage of gross NPAs rose to 5.15 per cent of total assets from 4.19 per cent in the same period last year. However, provisions dropped 34 per cent on a sequential basis, enabling the bank to report a 30 per cent jump in profit.

Another PSU lender, the Central Bank of India, also felt the impact of the slowdown, but its PCR decreased over the past few quarters.

The loan loss cover came down from nearly 57 per cent in the second quarter of 2011-12 to 40.76 per cent in the first quarter of this fiscal and 39.86 per cent during the second quarter.

Andhra Bank has also seen its provision cover coming down from 61.7 per cent in the second quarter of the last fiscal to 53.2 per cent this fiscal.

Banks, which have lowered their provisions, or the coverage, said their profits would have dropped sharply had they fully provided for their bad loans.

"When the earning profile is under stress because of the economic slowdown, we cannot expect every bank to maintain a very high loan loss cover," said a senior PSU banker, while admitting that lenders also have to pay attention to their bottomline.

According to the banker, the loss cover has dropped because of the current economic environment.

"Yes, making higher provisions is considered a prudent step, but it doesn't always help. Banks have to take a pragmatic approach. If we make excess provisions, it will not only impact the profits but banks will turn risk-averse as well," says another banker who did not wish to be identified.