Banks may get to spread 10K crore pension liability over many years

12 Jan 2011 Evaluate

Public-sector banks may be allowed to expense their more than 10,000-crore potential pension liabilities over many years, sparing them from taking a one-time blow on their profits and net worth due to new accounting norms. The step will come as a breather for banks which are experiencing a quantum increase in liabilities after the government raised the gratuity limit and effected a 17.5% wage revision and pension grant to retired employees.

The relaxation will, however, apply only for the gratuity limit enhancement, with no changes in accounting treatment being considered for wage revision or the pension burden. In the last Union Budget, the government amended the Gratuity Act, leading to an employee receiving 10 lakh on retirement instead of a capped 3 lakh. Banks have estimated that the outgo on this would be around 4,000 crore. If banks do not receive any relaxation, profits will dip and reserves will shrink. Lower reserves will mean that banks' capital adequacy ratio that reflects the financial soundness of banks, which includes reserves, equity and senior debt, will fall significantly. RBI mandates that banks maintain a capital adequacy ratio of 9% and most banks currently have a CAR in the region of 11-14%.

Under the current framework - accounting standard-15 (AS-15), banks cannot amortize pension and gratuity liabilities. The international equivalent to this standard, called IAS-19, with which the current standard will converge eventually, however, provides for a 'corridor approach', meaning the regulator can exempt them from the rules.

Register Now to get our Free Newsletter & much more!

Register