Public sector banks (PSBs) may have to set aside about Rs 14,000 crore before January 2013 as unamortised pension liabilities to comply with Basel-III norms, according to rating agency CARE.
Unamortised items are those for which provisions have not been made. Banks are required to write-off all unamortised pension liabilities from the books before January 2013 under the new regulatory norms.
As a consequence, PSBs are required to write off roughly Rs 14,000 crore, representing four to 12 per cent of their net worth in 2011-12. The return on equity (ROE) of banks may be severely hit if these liabilities are charged to the profit and loss account, CARE said in a research note.
To avoid a dent in ROE, most banks would seek approval from the Reserve Bank of India to directly write off from the reserves account. RBI had permitted State Bank of India to write-off pension liability worth Rs 7,900 crore from reserves in financial year 2011.
If RBI refuses to allow banks to directly adjust the unamortised amount with the balance sheet (reserves), then ROEs of public sector lenders may be hit severely in the current fiscal.
CARE said most PSBs changed their pension assumptions in FY11. It is likely to reduce the impact of increase in retirement liabilities. The current pension assumptions of PSBs appear to be aggressive compared with those of private sector banks.
PSBs have estimated an average salary escalation of 4.6 per cent against private banks’ estimate of 5.1 per cent and estimates of major US banks, like Bank of America and JP Morgan, of four per cent. Thus, any correction made to the pension assumption will negatively impact profitability in the coming years. Also, most banks are currently using outdated mortality tables of FY1994-96 provided by LIC. This further increases banks’ pension fund investment risk, it added.