Mumbai: A new rule on how banks should expense pension costs is likely to hit profits of many public sector lenders in the fourth quarter.
Some of the country’s top banks have already begun internal exercises to estimate how much money they will have to put aside this quarter to meet the new norms on providing for pension liabilities, said senior officials.
“A clear picture will emerge only at the end of this quarter when we take into account the actuarial provisions,” Punjab National Bank (PNB) chairman and managing director K.R. Kamath said, and added that he hopes that there will not be any “disproportionate increase” in provisions.
Also See | Pension burden (Graphic)
The genesis of the problem is an agreement between public sector banks and employee unions in 2009 that allowed bank staffers, who had initially opted to get a single lump sum payment on retirement, to shift to regular pension payments. Besides, in an unrelated development, the government also increased the maximum gratuity paid to departing employees from Rs3.5 lakh to Rs10 lakh, following a proposal in the 2010 Union budget.
Both have increased the payouts to be made to retiring and retired bank employees.
Public sector banks were worried that higher pension and gratuity liabilities would eat into their profits this fiscal because of provisioning requirements. On 9 February, the Reserve Bank of India (RBI) told banks they could expense their new pension costs over five years in the case of existing employees rather than make a one-shot provision that would destroy their profits.
However, the accounting breather has not been extended to pension payments to retired employees, whose numbers are unofficially estimated to be around one-fifth of the current staff strength of public sector banks.
The sting in the tail has taken bankers by surprise. They have petitioned RBI through the Indian Banks’ Association, an industry lobby, to relax this norm.
However, a senior central banker shot down the possibility of a further relaxation in the pension accounting requirements.
At the sidelines of a conference organized by Tata Consultancy Services Ltd in Mumbai on Tuesday, RBI deputy governor K.C. Chakrabarty told Mint that it is the “management’s discretion to provide for the amount”, and that it is “perfectly legal” that banks should provide for retired employees.
Calculating the provisions banks will have to make this quarter—and, hence, the precise effect on their profits—is a complex task involving assumptions about the number of retired employees having moved from a lump sum payment to annuities, their average age, life expectancy and discount rates needed to figure out the present value of all future pension payouts.
State Bank of India has its own pension scheme and is not affected by the shift from lump sum payments to annuities.
Others such as IDBI Bank Ltd is also not covered by industry-level wage negotiations because of its origins as a development financial institution spun off from RBI.
Mint spoke with the top five banks that have offered employees the option to shift to pension payments—PNB, Bank of Baroda (BoB), Canara Bank, Bank of India (BoI) and Union Bank of India—to gauge the hit they might have to take.
PNB’s total pension liability is about Rs3,600 crore. Chairman and managing director Kamath did not want to provide a precise number because the bank is working out its potential pension liabilities.
BoB executive director R.K. Bakshi said the actual figure is being worked out, but about one-fifth of its employees fall in the retired category. The bank has an estimated additional pension liability of Rs2,060 crore. Some of this has already been provided for in the previous three quarters.
A senior official of BoI estimates the provision the bank has to make in this quarter could be around Rs.450-600 crore.
According to Canara Bank chairman and managing director S. Raman, the extra provision towards pension could be as high as Rs500-550 crore, but he expects the figure to come down substantially when adjusted with gratuity, which has been fully provided for by the bank.
“The net effect could be Rs100-150 crore in the fourth quarter, which is nothing for a bank of our size,” said Raman. Canara Bank’s total extra liability towards pension is around Rs2,200 crore.
Union Bank could have to provide anything between Rs350 crore and Rs600 crore in the quarter towards pension for its retired employees, according to a senior official. The bank’s additional liability towards pension is Rs2,400 crore.
Graphic by Ahmed Raza Khan/Mint