The Hindu Business Line : No write-back of provisions on farm loans waived

Bangalore, Aug 5 For banks that hoped to make their balance sheets presentable in the second quarter, the Reserve Bank of India has quietly slipped a spanner in the works.

Most banks had hoped to convert their weak bottom lines into profits, by writing back provisions on non-performing loans. Bankers had hoped to offset losses on the large depreciation provided on their investment portfolios in the first quarter, by writing back provision on overdue farm sector non-performing assets. Post-farm loan waiver, these advances had ceased to be NPAs though the payment from the government will be over three years. The total farm loan waiver package is about Rs 72,000 crore. The entire compensation payout is expected to be completed only by July 2011. T

he RBI in a notification on July 30 mandated that banks would not be allowed to write back the provisions made on the overdue farm loans. Instead, the RBI’s notification said that the write-back of the provisions would be permitted only after full settlement of the waiver scheme. This was because a provision represented a permanent loss to the bank’s balance sheet on account of delayed cash flows.

Separate account

The RBI also stipulated that banks create a separate account for the government compensation on the loans. This account was expected to mature only by July 2011, which is the deadline for completion for the government compensation on the loan waiver scheme.

The RBI allowed write-back of the excess provisions on the outstanding farm waiver debts or after full receipts from the government.

Bankers, however, said that the notification was likely to dent their second quarter results especially if the current trend continued in the debt markets.

This was particularly since most of them had already completed churning of their investment portfolios. Churning implied transfer of a portion of their investment portfolio to the Held to Maturity category from the marked-to-market categories.

Moreover, bankers said, the government was yet to clearly specify the terms of the compensation. Currently the arrangement was that 32 per cent of the compensation would be paid out by September this year, another 19 per cent by July 2009, 39 per cent by July 2010 and the remaining 10 per cent July 2011

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