IBA charts steps to shore up balance sheets of PSU banks

Sumanta Ray Chaudhuri

Kolkata, June 11: Indian Banks’ Association wants public sector commercial banks to bring their profit-making subsidiaries within the ambit of transfer price mechanism. The bankers’ body will ask the PSU banks to tighten their existing internal transfer price mechanism norms, too.

Highly-placed IBA sources told The Financial Express that the dual step of tightening the internal transfer price mechanism norms and roping in the subsidiaries within the transfer price ambit, would enable the banks to come out with presentable financial results for the quarter January-March 2001. The PSU banks’ results for the quarter under review are expected to be under tremendous pressure, as the banks will have to make massive provisioning for their voluntary retirement schemes.

Sources said IBA is of the opinion that through the inclusion of subisidiaries within the transfer price ambit, it can be made compulsory for them to make a substantial fee-based payment to their parent banks. The fee-based income might include fees on brokerage services, share transfer services and marketing of retail products.

IBA is also of the opinion that individual banks might be given the liberty to fix fee-based payments for their respective profit-making subsidiaries. The fee-based income of a bank could be either fixed or proportional to the income of its subsidiary.

The strengthening of the internal transfer price mechanism will result in an increase in the rate of interest payable by branches to central offices against a cut in the rate of interest receivable by branches from central offices. However, IBA is of the opinion that the bank managements may find it very difficult to implement the
second proposal as it will result in the weakening of a number of individual branches.

“Since the unions might be up in arms against such a decision, the banks should immediately start discussions with the unions for an amicable settlement in this regard,” a senior IBA associate said.

Incidentally, when last year the management of State Bank of India revised its transfer price mechanism, it faced stiff opposition from the unions and at one point of time the management had to concede that the revised norms had pushed a number of branches into the red. IBA is of the opinion that such strict measures are necessary at this point of time since the banks’ primary duty will be to keep in mind the shareholders’ interest. According to them, although the banks have the liberty to spread their individual VRS provisioning over a period of five year, most banks would like to go in for one-time provisioning.

The one-time provisioning would not only enable the banks to clean up their balance sheets at a time, it would also help them get some tax benefits. However, at the same time, such bullet provisioning might wipe out the net profit figures of a number of banks, thus affecting their position in the market.

IBA sources said that since the present market condition is not quite conducive for improvement in the high-yield credit offtake scenario, the only option left to the banks is to tighten their transfer price mechanism norms.