State Bank of India's profits are expected to take a hit of Rs 800 crore (Rs 8 billion) for each of the next five years with the bank needing to make additional provision of around Rs 4,000 crore (Rs 40 billion) due to changes in accounting norms for employees' retirement benefits, known as accounting standard-15 (AS-15).
The country's largest lender accounts for almost 30 per cent of the additional provisioning that the 83 commercial banks taken together would have to make beginning 2007-08. The additional liability for the banking industry is estimated at around Rs 14,000 crore (Rs 140 billion).
All companies, including banks, were earlier required to make an additional provision from their reserves in 2007-08 itself.
However, the accounting standards board of the Institute of Chartered Accountants of India (ICAI) earlier this week approved changes in the manner in which companies, including banks, could make the additional provisioning.
The changes give companies the option to meet the additional liability out of their profits, evenly over five years. Earlier, AS-15 required all companies to adjust the additional provisioning against reserves.
The changes would now be forwarded to the ICAI council for formal approval and then notified by the government's National Advisory Committee on Accounting Standards (NACAS).
SBI Chairman OP Bhatt had earlier said the bank would take a hit of Rs 4,000-5,000 crore (Rs 40-50 billion) due to the application of the standard.
SBI needs to make such a large provisioning as it offers gratuity, pension as well as provident fund benefits to its close to 200,000 employees, unlike other banks which offer only two benefits -- gratuity and pension or provident fund, according to a senior SBI official.
Banks under the aegis of the Indian Banks' Association (IBA) had been lobbying with both the Reserve Bank of India (RBI) and the ICAI to modify the proposed AS-15 and allow banks to spread the liability over the remaining service period of an employee.
According to a banking analyst, banks would prefer spreading the liability over five years over a one-time adjustment against reserves to minimise the financial impact of complying with AS-15.
She said, "Banks will have to work out a strategy on how to spread out the additional provisioning over various quarters for amortising the liability. They can choose a strong quarter to make higher provisions," said the analyst.
For SBI, a one-time adjustment would result in at least 13 per cent reduction in its reserves, considering its reserves position of Rs 30,503.66 crore (Rs 305.036 billion) at the end of March 2007.
"The bank's capital adequacy would fall if it is adjusted against its reserves in one year. We will have to look at our projected profits for the next five years and see if it is not impacting profits substantially; then look at spreading the liability over five years," said a senior SBI official.
The bank posted a net profit of Rs 4,541.31 crore (Rs 45.413 billion) for 2006-07. SBI plans to raise additional capital of around Rs 12,000 crore (Rs 120 billion) this year to support its growth plans and comply with increased capital requirements under the new Basel II norms.
The bank's capital adequacy at the end of March 31, 2007, stood at 12.34 per cent. The bank plans to comply with the Basel II norms by September 2007, six months before the Reserve Bank of India's (RBI's) requirement.
