Corporate Front: Balance-Sheet Analysis [Is Allahabad Bank Propping up its Profits?]

CORPORATE FRONT: STRATEGY
Is Allahabad Bank Propping up its Profits?

There's no other way it could have reported a 101 per cent growth in net profits.

By Gautam Chakravorthy

Harbhajan Singh Banking on the balance-sheet of the Allahabad Bank could be risky. Ranked 74 on The BT Best Banks '98 Scoreboard (BT, April 7, 1998), this state-owned bank fared even worse in terms of the most crucial parameter in banking today: its Net Non-Performing Assets (NPA, the sum of sub-standard, doubtful, and loss loans net of the provisions made for them) as a percentage of its Total Advances was 14.84 per cent in 1996-97, placing the bank third from the bottom on this count. Is it surprising, then, that the Allahabad Bank's balance-sheet is attracting attention for all the wrong reasons?

While the bank's 6 auditors-Sundaram & Srinivasan, Parikh & Jain, P.L. Tandon & Co., S.S. Kothari & Associates, S.C. Vasudeva & Co., and C.S. Hariharan & Co.-finally put their signatures on the 1997-98 balance-sheet on June 23, 1998, it took them quite a while to do so. For days, they raised several issues that required numerous clarifications from the management of the Allahabad Bank. Naturally, this has cast a shadow over the 101 per cent growth in net profits that the bank reported: from Rs 64.30 crore in 1996-97 to Rs 129.21 crore in 1997-98.

In fact, a BT balance-sheet analysis reveals that if the auditors' qualifications are totted up, the bank has under-provided-ergo, not provided for in the Profit & Loss Account as a loss-for a sum of Rs 83.82 crore. This under-provisioning, if clubbed with the Rs 33.20 crore in additional profits booked by the bank due to the changes it made in its provisioning norms last year, actually whittle down its net profits to Rs 12.19 crore. Which is tantamount to a fall of 81.04 per cent in its net profits.

Specifically, the auditors have come down hard on Allahabad Bank for not providing for the decline in the value of its investments in one of its wholly-owned subsidiaries, AllBank Financial Services. They note: ''...Investment in the bank's wholly-owned subsidiary, amounting to Rs 60 crore, is valued at cost. Provision has not been made for the erosion in the net worth to the extent of Rs 34.80 crore.''

But the Allahabad Bank defends itself by saying that it circumvented the need for provisioning by classifying its investments in the subsidiary as a ''special'' category other than the ''permanent'' and ''current'' categories. Explained Harbhajan Singh, 57, the Chairman of the bank, in a faxed reply to BT: ''This classification is in accordance with the Reserve Bank of India's (RBI's) guidelines, which allow the bank to value such investments at carrying cost (book value) on a consistent basis.''

Given the fact that the auditors were aware of these guidelines, however, it may be argued that their insistence on issuing a qualification is significant. A Mumbai-based analyst tracking the banking industry goes a step further: ''For a transparent balance-sheet, banks should even mark-to-market their equity portfolio. This is, for example, being done by the State Bank of India.'' But not the Allahabad Bank.

Moreover, the bank also changed its accounting norms for provisions for advances of below Rs 25,000. In 1996-97, Allahabad Bank made a provision of 15 per cent of the outstanding balance in such accounts. Last year, provisions were made on a case-to-case basis. Admits Singh: ''This change did help us book profits of Rs 33.20 crore.'' Interestingly, the bank did not make any provisions for un-reconciled accounts. The reason: ''Since reconciliation is in progress, no provisions have been made.'' Which is rather convenient.

Finally, the Allahabad Bank under-provided for Rs 58.62 crore in terms of its contribution to the Pension Fund in 1997-98. It may be recalled that, in 1996-97, the Indian Banks Association had, in an agreement with the bank unions, agreed to backdate the liability to 1993. And the banks, in consultation with their statutory auditors, decided to provide for these liabilities by 1998.

Like its counterparts, the Allahabad Bank has an answer to every qualification in its balance-sheet. Clearly, however, it is also over-filling the Pandora's Box of under-provisioning.

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