The ICICI Bank wrote off unsecured portions of doubtful corporate loans totalling ₹5,000-5,600 crore in 2016-17, CEO Chanda Kochhar  said in a note early April. Photo: Abhijit Bhatlekar/ Mint.
The ICICI Bank wrote off unsecured portions of doubtful corporate loans totalling ₹5,000-5,600 crore in 2016-17, CEO Chanda Kochhar said in a note early April. Photo: Abhijit Bhatlekar/ Mint.

ICICI Bank masked bad loans through change in accounting policy

As a result of the changed accounting policy, ICICI Bank's NPA for 2016-17 was 7.89%, but had the new policy not been implemented, gross NPAs would have been higher at around 8.5%

Mumbai: As a multi-agency probe into dealings by ICICI Bank Ltd and its chief executive Chanda Kochhar has gathered pace in recent weeks, more skeletons are tumbling out of the closet of the country’s second-largest private bank. As financial year 2016-17 drew to a close, the ICICI Bank management wrote off unsecured portions of doubtful corporate loans totalling 5,000-5,600 crore, according to a note Kochhar sent to the bank’s board in early April.

The change in accounting policy that enabled these “technical write-offs" was cleared by the bank’s board only in the new financial year, and never communicated to shareholders, as required by banking and market regulators. Thanks, in part, to the changed policy, ICICI Bank managed to keep its 2016-17 bad loan ratios low. Mint has reviewed a copy of the note.

Publicly traded entities in India have to mandatorily disclose material changes in their accounting policy to shareholders. Not doing so violates India’s accounting standard (AS) norms and regulations prescribed by both the banking and markets regulators.

“It is mandatory for the bank and any listed company to strictly follow the AS norms and compulsorily disclose any change in accounting policies so that the public and the shareholders are able to take an informed decision before investing or divesting in ICICI Bank stock," said a senior regulatory official, requesting anonymity.

“Non-disclosure of changes in accounting policies is (a) violation of accounting norms and rules set by the RBI and Sebi, because it misleads the investors," the official said. “NPAs are a crucial component of a bank’s business. Disclosure of any change in accounting of NPAs is therefore a must, especially considering the current scenario and the regulators’ seriousness regarding bad assets at banks."

A week into the new financial year, on 7 April 2017, the ICICI Bank board approved the change in accounting policy, but the accounting entries in the lender’s books were made before the approval came, in the second, third and last week of the previous month, following directions from the top management. This indicates the board knew about the change in the accounting policy and had given its in-principle approval.

In a note for the board meeting dated 6-7 April 2017, managing director Kochhar said ICICI Bank was modifying the policy for writing off non-performing assets in corporate credit facilities and the same was put up for the audit committee’s approval on 5 April 2017. Mint has reviewed a copy of the board note.

“From the quarter ending 31 March, 2017, it is proposed that in addition to credit facilities of borrowers classified as loss assets, the unsecured portion of loans of borrowers classified as doubtful would be eligible to be considered for write-off," Kochhar’s note to the board said.

“The write-off would be based on a borrower specific evaluation of collectibility. The write-off of credit facilities as per the above proposal would be considered as a technical write-off for the purposes of disclosures in the financial statements and other regulatory reporting. Based on the non-performing loans outstanding at 31 December, 2016, it is estimated that the unsecured portion of non-performing loans classified as doubtful in the range of 5,000 crore to 5,600 crore would be eligible to be considered for a write-off at 31 March, 2017."

An ICICI Bank spokesman declined to comment.

As a result of the changed accounting policy, ICICI Bank’s gross NPA for 2016-17 was 7.89%. Had the new policy not been implemented, gross NPAs would have been higher at around 8.5%.

The proposal was approved by the audit committee on 5 April 2017 and the ICICI Bank board on 7 April 2017. The board note termed this part as “significant changes since the last review and material disclosures".

However, the bank did not disclose this change in accounting policy to its shareholders, either along with its annual results, or separately through stock exchanges filings or in its annual report, thus violating accounting rules and existing financial regulatory norms.

“If a change is made in the accounting policies, which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted," states AS norms. The Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) have made it mandatory for banks to comply with AS norms.

Section 28 of AS 5 states that if there are changes in accounting policies, investors should be able to compare financial statements of an enterprise over a period of time to identify trends in its financial position, performance and cash flows.

Section 29 of AS states that a change in accounting policy should be made only if the adoption of a different accounting policy is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate presentation of the financial statements of the enterprise.

Justifying the rationale behind the change, the board note originating from the bank’s impaired loans accounting group of ICICI Bank, undersigned by Kochhar and then executive director N.S. Kannan said: “The bank’s ability to recover the unsecured portion of NPAs for more than a year is generally constrained by the non-availability of any tangible security. While the bank continues to pursue recovery efforts mainly through legal recourse and other steps such as exercising its right over intangible security in the form of personal or corporate guarantees, these measures are generally long drawn with uncertainty in recovery. Hence it is proposed to undertake a technical write-off of the unsecured portion of non-performing loans (NPLs) in the doubtful category."

A bank typically writes off loans when it turns into a loss asset (after becoming an NPA), the bank is sure of its inability to recover the dues and a 100% provisioning is made.

A write-off of a bad loan brings down the gross NPA percentage.

Until FY2016, ICICI Bank used to write off only loss assets.

Unsecured loans consist of contingent funding obligations, which primarily include bank guarantees and letters of credit issued on behalf of the bank’s clients. The provisioning requirement for unsecured “doubtful" assets is 100%.

Unsecured exposure is defined as an exposure where the realizable value of the security, as assessed by the bank/approved valuers/RBI’s inspecting officers, is not more than 10%, ab-initio, of the outstanding exposure.

As of 31 March 2017, ICICI Bank had unsecured advances worth 1.06 trillion compared with 88,589.65 crore at the end of March 2016.

Interestingly, ICICI Bank’s annual report for fiscal 2017 mentions other developments regarding changes in board and various committees from the board meeting held on 6-7 April 2017, but it is silent on such a significant change in accounting policy.

“In fiscal 2017, the bank recovered/upgraded non-performing assets amounting to 2,538 crore and wrote-off/sold non-performing assets amounting to 15,175 crore. As a result, gross NPAs (net of write-offs) of the bank increased from 26,721 crore at 31 March, 2016 to 42,552 crore at 31 March, 2017," said the bank’s annual report.

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