Pension pain for PSBs
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Public sector banks have a problem. They will have to set aside more funds for their employees’ retirement dues which could in turn stunt their ability to grow business. A revision in accounting norms by the Institute of Chartered Accountants of India (ICAI) requires banks to top up the provisions that they have already made and step up the provisions they make every year for employees’ retirement benefits. While stepping up provisions will shave off a small percentage of their profits, topping up the provisions that they have already made could have a more damaging effect. By bringing down their net worth, the top-up provisioning could even cripple growth. To avoid such a situation, the industry, through the Indian Banks’ Association, has approached the Reserve Bank of India to give them five years to comply with the revised standards. For ’06-07, ICAI had revised Accounting Standard 15 to bring it in line with international norms. AS 15 relates to employee benefits including retirement benefits. Banks are required to make provisions to meet the bulky payments such as leave encashment, gratuity and pension that they make to employees on retirement. An actuarial valuation is done every year to decide whether the funds set aside today are enough to meet future liabilities. This valuation is done on the basis of some assumptions. It is these assumptions that ICAI has taken a re-look at. It has now told banks to assume that the funds that they have set will generate a return in line with what corporates are willing to pay on new bonds issues. If banks were to calculate the adequacy of their provisions on the basis that ICAI has asked them to, they would find existing provisions short. The law requires banks to maintain adequate provisions and not dip into their income for paying retirement benefits. For extra provisions that banks are required to make every year, some banks are adopting ICAI’s norms. But the problem is the shortfall in the provisions already made. “If RBI insist that banks are fully compliant with the new norms by March ’07, it could face a regulatory issue as many banks may be below the statutory limit,” said a chartered accountant. Source : economictimes.indiatimes.com |