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Tuesday, June 7, 2011

Swings in banks' earnings is not reflective of best practices: RBI

MUMBAI: Violent swings in banks' earnings whenever there is a change of guard, known as the new broom syndrome, is not reflective of best practices, said a central banker in a veiled caution to local lenders to end accounting jugglery to dress up performance.

"Financial reporting should not be as per the minds of bank chairmen," said KC Chakrabarty, deputy governor at the Reserve Bank of India . "When bank chairmen change, profits tend to fall. Things should not turn topsy-turvy if bank chairmen change."

The regulator's comment comes less than a month after the nation's biggest lender, State Bank of India , shocked investors with a 99% plunge in net profit for the fourth quarter of fiscal 2011 as it boosted provisions for various loans, including standard ones. This, some believed, could have been avoided if chairman Pratip Chaudhuri's predecessor, OP Bhatt, had followed some standard practices, instead of getting into a dispute with the central bank over provisions.

"We could see it coming," Chaudhuri told ET in a recent interview. "There was deliberation at the end of the third quarter that a provision should be made. Our auditors were insistent that this provision be made, but the bank management persuaded them to believe that possibly it should be feasible to get a favourable dispensation from the RBI. It does not depend on the quality of the asset, but the view that the RBI takes."

That was not the first time it happened at a state-run bank. When AK Khandelwal took charge as Bank of Baroda chairman from PS Shenoy well over three years ago, profits tumbled. Similarly, Bank of India reported a fall in earnings after Alok Misra succeeded TS Narayanasamy as chairman of the Mumbai-based bank.

This has happened at SBI too in the past. When Janki Ballabh succeeded GG Vaidya in November 2000, net profit declined 45% in the immediate quarter and began improving thereafter. Bhatt, who presided over SBI for five years until March, followed the same script. The quarter after he took charge in June 2006 witnessed a 35% plunge in profits.

Unlike private banks where overall earnings of chief executives hinge a great deal on stock price movements, thanks to generous stock options, salary packages of state-run bank chiefs are linked to that of top civil servants and also to earnings and revenue growth advances of their banks. But even after accounting for incentives, their salaries are way below that of senior executives in private banks.

"It has become a trend for a new chairman to provide excess provision so that improved numbers can be shown during his time," said Cherian Verghese, former chairman of Union Bank of India . Continuity and reputation of the organisation should be the priority. Chairmen should place themselves on a higher pedestal and look beyond their tenure and care for the reputation of the institution on an ongoing basis," he said.

Source: EconomicTimes


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