NEW DELHI: Banks are divided over ways to provide for pension liabilities according to new accounting norms that mandate greater disclosure.
While some big banks have dipped into reserves and taken a one-time hit, the others have decided to stagger it over five years.
Experts are of the opinion that given greater capital adequacy requirement of banks, a one-time hit may not be preferable.
State Bank of India, Union Bank, Canara Bank, Punjab National Bank and others took a one-time hit on reserves while adopting the new AS-15 norms, others such as Bank of India and Bank of Baroda have been amortising the hit over five years.
Watson Wyatt India senior benefits consultant Chris Mayes said, "Since banks have stringent capital adequacy requirements set under Basel II, a sudden hit on their reserves was not preferable and, in some cases, would probably have meant falling foul of their capital adequacy requirements."
A top PNB banker said, "There is no point in being over-capitalised. We can afford to dip into our reserves and take a one-time hit. Going forward, we will only need to make provisions for the current year."
For banks, the revised accounting standard for employee benefits is set to impose a huge burden. Their existing liability is estimated at a staggering Rs 26,000 crore.
Because of AS 15 accounting methods the new standard necessitates, this liability is likely to go up by another Rs 14,000 crore, accounting experts said.
Prior to the revised norms, banks were not mandated to provide for their pension liabilities and disclose it in their balance sheets. Therefore, banks were under no compulsion to regularly fund their pension liabilities.
This would have ultimately resulted in huge unfunded pension obligations which banks might have found difficult to honour.
When a company first adopts the accounting standard AS-15 (revised 2005), it is likely that the net asset or liability recognised on the balance sheet under this revised standard is different to that recognised on the balance sheet under the old AS-15 (1995) standard.
This is called the transitional asset/liability and is to be adjusted against the Company reserves, Mr Mayes said.
A transitional asset must be recognised against reserves immediately.
Some banks have therefore used the limited revision to the AS-15 (revised 2005) standard and have spread the hit on their reserves to be recognised over 5 years. Any transitional liability not recognised against the reserves is still required to be disclosed as an unrecognised liability, he added.
For example, Punjab National Bank has dipped into its reserves for Rs 1, 600 crore to provide for new accounting norms for pension liabilities, instead of staggering it over a period of 5 years.
Despite this, its capital adequacy ratio as per Basel II norms stands at 13.46%. Going forward, the bank only needs to provide for the current year’s pension liability.
Bank of Baroda made a provision of Rs 180 crore against its profits for employee benefits under AS 15 and also made a provision of Rs 100 crore for salary arrears.
Public sector banks employ a total of 2.55 lakh officers and 4.73 lakh clerical staff, who are under the existing system known as the defined benefit system.
Over the past three years, on an average, about 12,000-13,000 people have joined public sector banks.