NPA divergence of Rs 29,000 cr in 12 banks: Why there is more to accounting jugglery than meets the eye
First Post
Dinesh Unnikrishnan
Recently, Bank of Baroda reported a divergence of Rs 5,250 crore in
gross NPAs for the year ended March 2019.
An element
of trust deficit is taking hold in the investor community towards banks that
have under-reported their non-performing assets (NPAs) in the last fiscal year
but was caught later by the Reserve Bank of India (RBI) inspection team. The
small investors now prefer to stay away from such companies till the firms come
clean on the corporate governance issues, analysts say.
The total
gross NPA divergence figures reported by banks so far stands at Rs 29,231 crore
from 12 banks. That’s a big number. The stark divergence in banks’ estimates vs
that of the RBI has raised many eyebrows in the investor community prompting
them to avoid such companies till clarity emerges.
Starting
with private sector lender Yes Bank to the country’s largest lender, State Bank
of India (SBI), a dozen banks have reported divergence on their gross NPAs that
has taken the shareholders by surprise. Accounting for the real NPA numbers,
the profit numbers reported would have been different. Some banks would have
even reported a loss.
This anomaly has created an
atmosphere of distrust among small shareholders who are looking at these
companies with caution. “Clients are not worried so much about State Bank
because they have adequate provisions coverage but that isn’t the case with
many other banks which have reported divergence,” said Jaikishan Parmar, senior
equity analyst at Angel Broking Ltd.
The Growing Mismatch
Recently, Bank of Baroda
reported a divergence of Rs 5,250 crore in gross NPAs for the year ended March
2019. This was the latest instance. In a similar RBI inspection, it was earlier
found that SBI under-reported Rs 11,932 crore of bad loans for the fiscal year
2018-19. But, in the case of SBI, the report of NPA divergence didn’t create
much concern among shareholders as the combined NPA provisions were adequate at
around 82 percent. Other banks that have reported the NPA divergence post the
RBI inspections include Yes Bank (Rs 3,277 crore), Punjab National Bank (Rs
2,617 crore), Central Bank of India (Rs 2,565 crore), Uco Bank (Rs 1,218
crore), Bank of India (Rs 1,117 crore), Union Bank of India (Rs 589
crore), Indian Overseas Bank (Rs 358 crore), Indian Bank (Rs 184
crore), Allahabad Bank (Rs 67 crore) and Lakshmi Vilas Bank (Rs 57 crore).
Banks didn't learn lessons
What is surprising is that the reports of the NPA divergence in
several banks are coming after a long, painful NPA clean up the process or
Asset Quality Review (AQR), initiated by the RBI under Raghuram Rajan way back
in 2015. That was a period of intense scrutiny of banks’ balance sheets and
everyone thought banks have come clean on their balance sheet problems post the
AQR process. But a large number of the NPA under-reporting cases raise doubts
that there is more dirt hidden under the carpet. Banks have, probably, not
learnt their lessons from the AQR-1.
Deliberate or computing error?
How did so
many banks fail to accurately compute their NPA figures? In some cases, there
is a possibility of bank managements intentionally conniving with auditors to
show a better-than-actual look of asset quality numbers to the shareholders and
promoters, Parmar said.
“It could
have been intentional; there is indeed a possibility.” Banks such as Yes Bank
had faced the RBI ire post the identification of numbers, which followed
management revamp at the top level.
Divergence
figures are not too big in many cases. Also, ever since divergences came to
public, banks have begun to make higher provisions to cover up the mess. But
none of these have calmed down the investors, especially the retail investors,
another analyst who didn’t want to be named said. “Our clients, almost all of
them, now say they aren’t interested in companies with governance issues. There
is certainly an impact on the investor sentiments on account of the mismatch in
reported numbers.”
Things may
change from this point with the RBI and market regulator Securities and
Exchange Board of India (SEBI), tightening grip on companies with shoddy
corporate governance standards. Banks have to regularly update the status of
performance of loans under the special mention accounts categories which would
mean further manipulation, deliberate or not, will not be easy, analysts said.
But, it
will take longer for the investor faith to return to companies perceived to
have corporate governance issues. The stocks of these entities have taken a hit
with shareholders dumping these shares. In the case of Yes Bank, the stock
price has fallen 20 percent after the NPA divergence announcement.
“Investors are waiting for these entities to come clean. They are on a wait and
watch mode,” Parmar said.
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