After coming down heavily on banks for not making adequate provision for increased pension liabilities arising out of wage revision, the Reserve Bank of India (RBI) now wants all public sector banks to have uniform pension liabilities.
“RBI says the salary structure is same, the mortality rate is similar and the attrition rate is almost the same for all government-owned banks—at around 0.5 per cent. There is no reason for different actuarial estimates for banks. It feels all public sector banks should have similar actuarial estimates,” said a banker after discussing the matter with RBI officials. The basic pension of retirees from all government banks is 50 per cent of the last salary drawn.
Bankers said actuaries of different banks have different estimates, particularly on parameters like the discount rate and the attrition rate for calculating pension liability, which has led to a variation in the burden. As far as the mortality rate is concerned, most banks follow Life Insurance Corporation of India's estimates.
The pension provision issue cropped up in the last quarter of the previous financial year, when State Bank of India (SBI) had sought the regulator's approval for pension provision from the bank's capital reserve for wage increases. As a prudential practice, banks make provision out of their profit and loss account. To use capital reserves for provision, banks need RBI's approval. After RBI’s approval, SBI charged nearly Rs 8,000 crore from its reserves to provide for pension liabilities. As a result, SBI’s capital eroded, with Tier-I capital falling below eight per cent.
Though RBI had allowed SBI to make provisions from reserves for pension liabilities, the regulator had made it clear that such requests would not be entertained in the future. The central bank had come down heavily on the bank’s chairman and managing directors at an interaction. The regulator had also made it clear such practices were non-compliant with International Financial Reporting Standards.
In 2010-11, provisioning had increased sharply because of the pay revisions agreed during the ninth bipartite settlement. Wages were raised 17.5 per cent and a second pension option was given to both current and retired employees. Gratuity limits were also increased from Rs 3.5 lakh to Rs 10 lakh. According to RBI's financial stability report, the expected additional liability for 24 public sector banks was Rs 30,366 crore, which constituted 81.9 per cent of their net profit for 2009-10. Indian Banks' Association has been mandated by RBI to prepare a pension scheme to facilitate the assessment by banks and help provide adequate provisions for such liabilities.