C. Shivkumar

Bangalore, Dec. 12

PUBLIC sector banks are preparing to fork out higher dividends this year with bottom-lines boosted by high recoveries of non-performing assets (NPAs).

Bankers said each of them expected to make recoveries upwards of Rs 750 crore this year. Most of them were focussing on the recovery of written-off assets. At least 50 per cent of their overall recoveries would be from written-off assets, they said.

These recoveries are also expected to help bring down the gross NPA to advances ratio to less than 2 per cent. Currently, the average gross NPA to advances ratio ranges between 4 per cent and 5 per cent. The net NPA is about one per cent.

Besides, the advantage with the written-off NPA recoveries is that they go directly into the profit and loss account. Written-off assets include both doubtful and loss assets. Accordingly, this help the banks to beef up their profits for the current fiscal year, along with the high credit growth.

In the case of substandard assets, only the interest and penal interest is credited to the profit and loss account. The principal recoveries are credited to the capital account.

In fact, bankers said the recoveries were expected to more than offset the shortfallin treasury profits. Treasury profits have steadily fallen during the last two years, driven by hardening yields. Yields have firmed by at least 200 basis points since last year, leading to high depreciation. But the recoveries during the year have helped many of them to prevent depreciation from making a large dent on profits.

Buoyed by the recovery response, bankers said they would exceed the Government's dividend expectations for the current financial year. Dividends estimated from the public sector banks, the Reserve Bank of India and financial institutions for the current year is estimated to be Rs 7,408 crore.

These estimates are on the conservative side. Many of the banks, like Bank of India, are ahead of the target for recoveries of written-off assets. In fact, some are in the process of declaring interim dividends before the third quarter results.

The high recoveries also have a flip side to them. Taxation liabilities of most of them would rise. This would mean that along with the 30 per cent corporate taxes, banks would also end up paying higher dividends.

But, Mr Kanta Kumar, Chairman and Managing Director of the public sector Syndicate Bank, said, " Neither of these are big issues for the banks. We can meet these obligations and still end with large profits."

Besides, the bankers said during the large write-offs, most of them had availed themselves of tax exemptions available under the Income-Tax Act for provisions for NPAs. "We are just returning those credits," they added.

The high payouts notwithstanding, most of them are expected to still end with high capital-to-risk weighted asset ratios of 12 per cent, as the surplus gets transferred to the general reserves.

Related Stories:
The effect of credit growth on NPAs
Good business from bad loans?

(This article was published in the Business Line print edition dated December 13, 2005)
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