Indian Banking - No Change in Estimates - Motilal Oswal

INDIAN BANKING: RBI allows amortization of pension and gratuity liability over five years; No change in estimates

Liability on account of pension option and enhanced gratuity limits allowed to be amortized in P&L over a period of five years starting FY11.

Consequent upon the introduction of IFRS from April 1, 2013, amortization impact of two years will reflect in the net worth in 1QFY14.

The unamortized expenditure carried forward as aforementioned shall not include any amounts relating to separated/retired employees.

Appropriate disclosures of the accounting policy to be made in the notes to accounts to the financial statements.

New pension option and enhanced gratuity related unamortized expenditure would not be reduced from Tier I capital thus, no impact on CAR.

As of 3QFY11, some large banks like BOB, PNB and Union Bank guided for full provision of gratuity liability in FY11 itself and amortization of pension liability over a period of five years. These banks have made provisions accordingly. In our view, banks will continue with the same treatment. Banks like Andhra and IOB have made provisions for these liabilities as pre three years amortization and there could be some write back expected in 4QFY11.

Source : Equity Bulls

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