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Sebi seeks replies from Yes Bank, ICICI and Axis Bank on bad loan divergences

LiveMint logoLiveMint 01-06-2017 Jayshree P. Upadhyay

Mumbai: The Securities and Exchange Board of India (Sebi) has sought explanations from three private sector banks which reported bad loans that diverged widely from the assessment of the Reserve Bank of India (RBI), said two people with direct knowledge of the matter.

Separately, the National Stock Exchange of India Ltd (NSE) has sought an explanation from Yes Bank Ltd on the divergence. Additionally, the exchange may seek responses from Axis Bank Ltd and ICICI Bank Ltd, the other banks which have so far reported such a divergence, said two other people familiar with the exchange’s plan.

In responses to the two exchange communications sent to Yes Bank on 26 May, the lender said that it had complied with all relevant listing regulations and adhered to the RBI circular. A copy of Yes Bank’s replies has been uploaded on the exchange’s website.

Axis Bank said that it had responded to Sebi’s queries.

“The financial statements of the bank are prepared in compliance with the extant RBI guidelines and the accounting standards to represent true and fair position as on the date of reporting and are audited in accordance with the auditing standards issued by ICAI (Institute of Chartered Accountants of India),” an Axis Bank spokesperson said.

Yes Bank and ICICI Bank disclosed these divergences in their annual report in the “notes to accounts” section. In an 18 April circular, the central bank had told banks to make a disclosure in their financial statements if the divergence exceeded 15%. Axis Bank is yet to come out with its annual report, but disclosed this in an investor call. In an emailed response, a Yes Bank spokesperson said that “the divergences identified by the RBI, as part of the annual risk-based supervision (RBS) were advised (marked as) to be kept confidential”.

An email sent to ICICI Bank on Wednesday did not get a response.

“NSE is examining the annual report of ICICI Bank and results of Axis Bank to get the correct picture. If the reporting on non-performing assets is inadequate, explanations would be sought,” said one of the two people familiar with the exchange’s plans.

An NSE spokesperson declined to comment.

Interestingly, rival BSE Ltd has found the disclosures made by the banks in their annual reports and results as adequate.

“In the specific instances of Yes Bank, Axis Bank and ICICI Bank, it may be noted that the auditors have not raised any qualifications to the financial results. All three banks have included reference to the RBI circular in the notes to accounts,” said BSE said.

As per Sebi’s listing obligation and disclosure requirement (LODR) norms, all material information needs to be disclosed. Any variation in numbers needs to be qualified (or pointed out) by auditors and this qualification has to be followed by an explanation from the management and the opinion of the auditor.

Experts said the issue of different interpretation of disclosures by the two exchanges is based on audit reports not being qualified.

“Disclosure of a material divergence between the RBI’s and a bank’s assessment of NPAs is a disciplinary measure. A material divergence will lead to the financial statements not giving a true and fair view. It should have jolted the auditors out of complacency. Then why have the auditors not qualified their reports,” said R. Narayanaswamy, professor of finance and control at the Indian Institute of Management-Bangalore.

On Monday, Mint reported that the Institute of Chartered Accountants of India (ICAI) had written to RBI seeking information on these divergences.

“Undoubtedly divergences are price-sensitive and should have been communicated to the exchanges at the earliest. Any delay needs to be explained and the material divergences should have been disclosed to the exchanges as soon as RBI inspection was over. The banks shouldn’t have waited for RBI directive as a prudent governance measure,” said J.N. Gupta, co-founder and managing director of Stakeholder Empowerment Services (SES), a proxy advisory firm.

In its annual report for 2016-17, Yes Bank said its bad loan classification at the end of March 2016 varied from that of RBI to the tune of Rs4,176 crore.

This was 558% more than the Rs748.9 crore of bad loans it had reported for that year. Similarly, RBI’s classification of Axis Bank’s bad loans was 156%, or Rs9,478 crore, more than the bank’s disclosure in fiscal 2016. For ICICI Bank, this divergence was 19.5%, or Rs5,105 crore, more.

All three banks have said that their latest audited statements (for fiscal year 2017) fully reflect the impact of the divergence.

“Divergence in the asset classification and provisioning as per the annual inspection conducted by the RBI is a prevailing process and is duly complied with by all banks. Hitherto, disclosing any content of the RBI inspection report was not permitted,” said Axis Bank.

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