NPA divergence of Rs 29,000 cr in 12 banks: Why there is more to accounting jugglery than meets the eye

  • 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

  • Recently, Bank of Baroda reported a divergence of Rs 5,250 crore in gross NPAs for the year ended March 2019

  • Ever since divergences came to public, banks have begun to make higher provisions to cover up the mess

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.

 NPA divergence of Rs 29,000 cr in 12 banks: Why there is more to accounting jugglery than meets the eye

Representational image. Reuters

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).

Bank NPA divergence in FY19
Gross NPAs in Rs crore   NPA provisions in Rs crore   Net profit in Rs crore
Bank Reported by banks Assessed by RBI Divergence Reported by banks Assessed by RBI Divergence Reported by banks Adjusted*
SBI 172750 184682 11932 106856 118892 12036 862 -6968
Bank of Baroda 69924 75174 5250 46001 50091 4090 -8339 -10998
Yes Bank 7883 11160 3277 3398 4376 978 1720 1084
Punjab National Bank 78473 81090 2617 48151 50242 2091 -9975 -11336
Central Bank of India 32356 34921 2565 19934 20722 788 -5641 -6430
UCO Bank 29888 31106 1218 18994 20384 1390 -4321 -5226
Bank of India 60661 61778 1117 39392 40838 1446 -5547 -6993
Union Bank of India 48729 49318 589 28397 29984 1588 -2947 -3978
Indian Overseas Bank 33398 33756 358 18647 20909 2262 -3738 -6000
Indian Bank 13353 13537 184 6132 7136 1004 322 -333
Allahabad Bank 28705 28772 67 21261 21714 453 -8334 -8787
Lakshmi Vilas Bank 3359 3416 57 1786 1897 111 -894 -1006
Total 579479 608710 29231 358947 387185 28237 -46833 -66971
*adjusted  after taking into account the divergence in provisioning

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.

(Data support by Kishor Kadam)

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Updated Date: Dec 23, 2019 14:30:02 IST