Banks get away cooking the books

It has become a sickening practice among public sector banks in particular to drastically reduce profits immediately after a chief executive (CMD) demits office. The new incumbent digs out real and imaginary losses for the period when a CMD lays down office. The latest case is a south-based public sector bank (SPSB) which posted a loss in the quarter ended September 2014, when its CMD retired.

Probably the SPSB’s Q2 results did not represent a “true and fair view” of the bank. Against a net profit of ₹271.72 crore in April-June, there was a net loss of ₹245.51 crore in the quarter ended September 30. The provisions other than tax increased from ₹299.27 crore in Q1 to ₹892.38 crore in Q2.

Significantly, the gross non-performing assets (GNPA) rose from ₹10,351 crore in Q1 to ₹13,334 crore in Q2. In percentage terms it was up from 5.84 per cent to 7.35 per cent. During both quarters, the top management (barring the CMD, of course), the audit committee of the board, the other members of the board and the statutory auditors had not changed. Nor did the economy warrant such a steep deterioration in the quality of the bank’s advances.

Since the introduction of Basle (now Basel) norms about 20 years ago, an advance is classified as NPA not necessarily on the basis of its recoverability or even the value of security, but on whether interest and/or instalments are paid within the stipulated period.

With core banking system now commonplace, the computers should be able to declare an advance as NPA or performing. In this ‘system-driven’ milieu, it is inexplicable how GNPA could increase in one quarter, that too not the final quarter of the year, by ₹2,983 crore or by nearly 29 per cent.

Obviously, the bank had not adopted the system-driven approach or the operatives deliberately tampered with the system. What did the Reserve Bank of India inspectors do? Did the audit committee of the board, which is presided over by a chartered accountant director, come to know of this? Should not the directors representing the Centre and the RBI have questioned this practice?

The role of the RBI and the government directors needs to be examined. Far too often when a PSB posts losses, these individuals are never taken to task. When another SPSB nearly bled to death in the 1990s, these directors were never held accountable, although scores of officials and the then CMD of that bank were hounded by vigilance sleuths. The least the RBI and the Centre should do is to remove them from the board and debar them for at least five years.

If Q2 results of the SPSB reflect the reality, then Q1 results had probably been doctored to show an unreal profitability. Even in Q2 of 2013-14, the provision was ₹619.90 crore, indicating that the figure of ₹299.27 crore in Q1 of 2014-15 appears unduly low. Did the members of the board accept the very low provisions made in Q1? Although the quarterly results are unaudited, they are reviewed by statutory auditors.

In this SPSB, all five central auditors had initialled the results every quarter. Apparently, the statutory auditors seem inclined to not raise unpleasant issues especially when a CMD is demitting office. Would somebody in the Institute of Chartered Accountants of India (ICAI) examine this issue?

A leading credit rating agency downgraded the SPSB concerned by one step after Q2 results were declared. It should have raised the red flag when Q1 results came out. These agencies ought to know that all PSBs tend to inflate profits just before a CMD leaves office. The RBI should attempt to put an end to the window-dressing of accounts when a CMD retires or takes charge. Before making nominations to the board of PSBs, the RBI and the Centre should enlighten the individuals on their duties. And the ICAI should prevail upon their members to be independent.

The writer was a deputy managing director with SBI

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