Freeze on NPA in Q3FY21

 FREEZE ON NPA IN Q3FY21

 From the financial results published by the banks for the quarter ended 31st December 2021, one is unable to arrive at actual GNPA and NNPA position of the banks. While financial results indicate a certain ratio, notes to accounts indicate that the ‘proforma’ NPA is something more added to what is shown under financial figures reported in the format. The confusion is on account of Supreme Court ruling that no account which is shown as standard in the books of a bank as on 31st August 2020 shall be shown as NPA till further orders from the court. To implement the court order and at the same time keep transparency to enable the reader to have a fair view of the financial results of a bank, I wrote to RBI as under:


“In line with the Supreme Court’s (SC) interim order “the accounts which were not declared NPA till August 31 shall not be declared NPA till further orders”, the banks have not shown 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. 

In this regard, you will appreciate that while the financial results given in figures captures the attention of public, more particularly the investors, the same cannot be said about matters mentioned in notes to accounts. The statutory auditors are also not mentioning this under “emphasis of matter”. This is bound to create confusion among public especially the retail investors. 

 For more transparency and fair view of the financial results reported, I suggest as under: 

As per the interim order, individual accounts which were standard assets as on 31st August cannot be declared as NPAs till fresh orders. This does not prevent the banks to include these accounts in the financial results reported for the bank as a whole for GNPA and NNPA reporting purposes. A suitable caption with necessary asterisks will serve the purpose 

Suggestion:  

Now under the financial figures, the following are the heads 

 GNPAs (Amount) 

 NNPA (Amount) 

 GNPA % 

 NNPA% 

 The above narration can be changed like this

 GNPAs as per RBI IRAC Norms (Amount)* 

 NNPA as per RBI IRAC Norms  (Amount)* 

 GNPA as per RBI IRAC Norms %* 

 NNPA as per RBI IRAC Norms %*  

 At the end of financial figures reported, the asterisk* shown above 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 

This will ensure transparency of financial figures and also the investing public and others to have a fair judgment on the results reported.  

 Submitted for consideration and implementation.

 Regards “

The information that the investors will be deprived off, by not making the GNPA and NNPA as part of financial results in one place, can be explained with the help of results published by two banks

1. Yes Bank 

Published under Finanial report format: 

GNPA: Rs.29547 cr.(15.04%)

No mention is there in notes to accounts about the amt that will be added to GNPA, if the SC order is not in place. However in the presentation in one slide, it is mentioned that accounts where overdues beyond 90 days not reported due to SC order is Rs.8322 cr. of which restructuring not invoked is equal to Rs.7058 cr. 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)

How many investors will do this kind of calculation?

2. Bandhan Bank

Published under Finanial report format: 

GNPA: Amount Rs.859 cr. (1.1%)

NNPA: Amount Rs.201 cr (0.3%)

No mention is there in the presentation about the amt 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). 

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.

If my suggestion is implemented, the investor will understand not only what is reported, but also what is in store, by looking at the financial results alone.

Hope RBI appreciates the concern and take remedial measures.

 V.Viswanathan

 25th January 2021


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