The Finance Ministry has written to all public sector banks asking them to ensure profits are not overstated and to make appropriate provisions for bad loans.
In a letter to heads of public sector banks, the Finance Ministry said "instances of over-reporting of profit have been continuing year after year and no corrective action seems to have been taken to stop the recurrence".
The letter assumes significance in the light of rising bad debts in the banking sector.
According to a senior official of a public sector bank, the letter has been issued recently by the Finance Ministry.
Sometimes there could be a difference of opinion about the classification of NPA which gets sorted out at the time of external audit or Annual Financial Inspection (AFI) by the Reserve Bank of India (RBI), the official said.
If the bank is unable to convince the RBI for not classifying some loans as NPA and subsequently not making provisions, then the bank has to make provision after AFI, the official said.
To that extent the profit is depressed later, the official said.
Banks have been trying to follow prudential guidelines of RBI on NPA in letter and spirit but there could be differences of opinion which gets resolved after AFI and reconciliation of accounts takes place, the official added.
During the third quarter of the current fiscal, banks profitability was hit due to jump in bad loans and restructured loans.
There has been about 19% rise in restructured loan against the previous quarter as textiles, steel and infrastructure companies have suffered due to lower output and higher cost of funds.
Besides, there is NPA pressure for banks from the aviation and power sectors. They are struggling to recover Rs 19,000 crore from the ailing national carrier Air India.
Worried over rising bad loans in certain sectors, the RBI is expected to meet banks to take stock of the NPA situation soon.
"Stress sectors are well known, the issues which are there. But we don't think there is a great concern as of now," RBI Deputy Governor KC Chakrabarty had said earlier this week.
"But any how we are going to discuss it [NPA issue] with the banks in the coming days. We are going to meet banks during this month or first week of March," he had said.
