Freeze in NPA in Q3 FY21 revised

 

Are Banks exploiting SC order to not to declare NPAs to their advantage?

In compliance with the Supreme Court’s (SC) interim order that the accounts, which were not declared NPA till August 31 shall not be declared NPA till further orders, the banks have not shown the fresh GNPAs in their unaudited financial results for Q3FY21. Even the accounts, which would have become NPAs during the third quarter in the normal course, are excluded due to the interim order. Of course, the banks have mentioned in their notes to accounts, attached to their financial results in their filings with stock exchanges, as to what would have been the effect on GNPA and NNPA ratio, had the interim order was not in place. However here also they did not indicate, what would be the impact on PCR had the SC’s order was not there.

While the financial results given in figures, as per SEBI format and the presentation slides capture the attention of the public, more particularly the investors, the same cannot be said about matters mentioned in notes to accounts or the matter getting mentioned in one of the slides, without linking it to the final results. The statutory auditors are also not mentioning this under “emphasis of matter”.

To indicate the extent to which the transparency or fair view of the financial position of the bank is getting compromised if the actual results are not grouped under the financial results page, I present below the relevant information in respect of GNPA/NNPA from the quarterly results published by two banks.

1. Yes Bank 

GNPA: Rs.29547 cr. (15.4%)

(Published under Finanial report format)

 

There is no mention in the results or in the notes to accounts about the amount that will be added to GNPA, if the SC order is not in place. However, in the  presentation to analysts, in one of the slides, it is mentioned that the accounts, where the over dues are beyond 90 days, not reported as NPAs due to SC order is Rs.7058 cr., net of restructuring.

If this is added to GNPA of Rs.29547 cr. given under financial report format, then the total GNPA comes to Rs.36605 cr. GNPA in percentage terms is 21.55% (More than 6% of that shown under financial results)

2. Bandhan Bank

GNPA: Amount Rs.859 cr. (1.1%); NNPA: Amount Rs.201 cr (0.3%)

(Published under Financial report format)

 

Here also, there is no mention in the results/ presentation about the amount that will be added to GNPA if the SC order is not in place. However, in the notes to accounts it is mentioned that if SC order is not there, the GNPA will be 7.12% (6% more than reported)and NNPA will be 2.36%(2% more than reported). The GNPA will go up by Rs.4700 cr. five times more than what is shown under results.

 

In both the examples cited above, it is clear that unless the investor read all pieces together and do some calculations, he will not comprehend the implications that may arise out of the court order.

While complying with the SC order is mandatory, still transparency and fair view of the financial position of the banks can be achieved, if the actual positions under different scenarios are presented in one place, preferably under the page showing the financial results, with suitable asterisk for the purpose.

The words “As per IRAC Norms” before or after the GNPA (Amount and per cent), Net NPA (Amount and per cent) in the relevant rows in the financial results should be added with an asterisk*. At the end, the asterisk* can have the following description:

*includes Rs.        in respect of accounts, which were not declared as NPAs in the books of the bank, due to the interim order of the Supreme Court

The above changes will ensure compliance of SC order as well as give the readers a fair view about the results of the bank concerned.

V.Viswanathan

27th January 2021