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C. Shivkumar

BANGALORE, May 19

PUBLIC and private sector banks are reported to have used profits generated from treasury operations to make provisions for non-performing assets during the last financial year — 2002-03.

Sources said here that the profits had helped the large banks to bring down their net non-performing assets ratio to less than five per cent. The netting was done after making provisions. The sources said that while this figure was a big improvement over the past performance, it was still double the international levels, where the net NPAs are in the region of about 2 per cent. Cumulative provisions to NPA coverage for most banks are already over 50 per cent.

Among the banks which have made large profits from treasury operations include the Canara Bank, where the income generated was in excess of Rs 1,200 crore for the last fiscal. In the case of the Indian Bank, treasury operations have given the banks about Rs 1,600 crore, which was at least Rs 200 crore more than the revenue from banking operations. This figure, however, does not include investment income.

These numbers have given the banks substantial resources to write down non-performing assets and make large provisions. As a result, Canara Bank was able to reduce its NPAs by Rs 865 crore. The figures for provisions are actually much larger than the asset reductions. This was because the provisioning also included assets that have been classified as substandard.

However, bankers said here that none of them favoured making accelerated provisions this year. This was because some of the tax issues still needed to be clarified.

As per the amended Section 36 (VIIa) of the Income Tax Act, the tax exemptions on provisions have been raised to 10 per cent of the income, as against 5 per cent in the past. While this amendment is available from the assessment year 2000 onwards, up to 2005, bankers have preferred to avoid any accelerated provisions and the write down of bad debts.

Bankers said in any case, no income was booked out of the distressed assets. Therefore, the tax liabilities were restricted only to the incomes. And phased write-down of assets gave the banker a greater tax shelter, they added.

The sources said this was also one of the major reasons for bankers' indifference to the bond buyback scheme. Unless all the income from the buyback scheme used for provisions was given tax exemption, bankers said, as against the 10 per cent of the income generation, most banks would prefer to stay away from the auctions and opt for the phased write-down. The sources said that phased write-downs allowed the banking sector to defer their liabilities substantially. Tax liability would begin, when the assets that have been written off are recovered and booked as part of the income, the sources added.

Bankers said that the key factor that had helped them make such large provisions was the volatile interest rates during the year, plunging by at least three per cent. However, bankers also added, that treasury operations were unlikely to sustain the same momentum unless there was a further softening of interest rates.

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