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Rediff News  All News  » Business » RBI allows PSBs to spread pension liability

RBI allows PSBs to spread pension liability

February 10, 2011 11:09 IST
The Reserve Bank of India has allowed public sector banks to expense their pension and enhanced gratuity liabilities over five years.

The RBI move comes as a breather for banks experiencing a quantum increase in liabilities after the government raised the gratuity limit. This would also spare them from taking a one-time blow on their profits and net worth due to new accounting norms.

The provisioning for the enhanced amount will begin from the current financial year ending March 2011. However, the banks will have to amortise at least one-fifth of the total amount every year.

"In view of the exceptional nature of the event, new pension option and enhanced gratuity related unamortised expenditure will not be reduced from Tier I capital," said RBI in a communication to PSB chiefs.

A senior executive of the Indian Bank's Association said it takes-off pressure from the balance sheets as banks would get time to space out the provisions.

Additional pension liability increased following the re-opening of the pension option for existing employees who had not opted for pension earlier.

Increasing the gratuity limit to Rs 10 lakh following an amendment to the Payment of Gratuity Act 1972 had also increased the burden on banks. The extra expenditure was estimated at over Rs 15,000 crore, said an IBA official.

Banks had expressed difficulty to absorb the large amount involved in a single year and sought additional time to amortise the enhanced expenditure.

The RBI said banks will move to the International Financial Reporting Standards from April 1, 2013. Hence, the opening reserves balance of banks will be reduced to the extent of the unamortised carry forward expenditure from the following year.

This issue will become relevant after three years. Till then banks will have a relief, IBA official said. The unamortised expenditure carried forward shall not include amounts relating to separated/retired employees, RBI added.