The fact & fiction on PSU bank results

MUMBAI: The just-released Reserve Bank of India report on Trends and Progress of Banking in India contains many nuggets of information, not all which have received the attention they deserve - partly because the RBI is prone to understatement and often the most useful data are relegated to the statistical appendix.

Prima facie, based on their annual reports, the nationalised banks had fared rather poorly during 2005-06, with the operating profit of 19 such banks down by 0.5% to Rs 23,011 crore, while the combined net profit was higher by a mere 5.9% to Rs 10,021 crore.

But, tucked inside the report is a statement on the interest income accruing to these banks from the recapitalisation bonds issued by the government and adjusting for this income, the working results show a further setback - a drop of 1.4% in operating profit to Rs 20,970 crore and and a rise of only 4% in net profit to Rs 7,980 crore.

In other words, the coffers of government banks had swelled to the tune of more than Rs 2,000 crore only on account of extra amount earned from the recap bonds.

The report carries a detailed bank-wise amount by of interest received by then on the recapitalisation bonds issued by the Central government at various points of time to shore up their capital base.

Nationalised banks were obliged to take recourse to these bonds during the period of banking reforms to strengthen their balance sheet and to adjust to the new dispensation in the banking milieu sought to be ushered in by the central bank.

What was a rescue act has turned out to be a bonanza in that this income has served to boost the bottomline of banks in various degrees.  Take the year ending March 2006 to gauge the impact of the recap bonds on the working results of banks and to understand how they changed the profit profile of quite a few banks.

Based on the annual reports, all the 19 banks were in the black during 2005-06.

But, adjusted for interest on these bonds, two banks - Bank of Maharashtra and UCO Bank - were engulfed in a tide of red ink in the latest year, while in 2004-05, both had reported a net profit.

There were turnaround cases as well in that Indian Bank and Punjab and Sind Bank emerged from a loss in the preceding year to show a profit during the year ending March 2006 -  from (-) Rs 5 crore to Rs 90 crore in the case of the former and from (-) Rs170 crore to Rs 14 crore in respect of the latter.

The table on interest earned on recap bonds suggests that the financial performance of nationalised banks was mixed in the last fiscal.

Interestingly, in the case of quite a few banks, without the interest booked on recap bonds, the net profit figure was sharply lower during 2005-06.

Thus, while the net profit was as high as Rs 257 crore for Central Bank of India, but for the income from this source, the profit would be down to Rs 82 crore; for Indian Bank, the unadusted and adjusted profit would be Rs 504 crore and Rs 90 crore and for United Bank of India the corresponding numbers are Rs 205 crore and Rs 32 crore.

The impact on the UCO Bank was dramatic in that, while this bank reaped a net profit of Rs 200 crore, without the recap bond interest income, it plunged in to the red last year, the loss being Rs 18 crore. The same impact is evident in respect of Bank of Maharashtra in that it transited into a loss from a surplus .The full data are set out in the table.