Auditors raise serious questions about Kerala Bank bad loans

By CL Jose

Has bank resorted to evergreening loans to conceal loss?

KOCHI/December 20-2021: Is the profitability claimed by Kerala State Cooperative Bank (KSCB) or Kerala Bank, real; and where is the bank headed?

Kerala Bank, created through the merger of 13 district cooperative banks after a lot of controversies and political squabbling, has announced Rs374.75 crore and Rs61.99 crore net profit for the financial years 2019-20 and 2020-21 respectively.

The bank, which is the dreamchild of the Left political system in the state has raised a lot of hope in the state’s troubled financial space,  and so have the amount of controversies surrounding the bank and its financial health, right from the beginning.

Auditors raise serious questions

But the auditors’ comments published along with the latest annual report, have raised eyebrows in the financial markets as they have rightly questioned the asset quality of the bank, which will have serious bearig on the profitability, capital adequacy, networth etc.

The external auditors of the bank have raised serious doubts not only about the true scale of the bank’s bad loans, but more seriously, have stated that the bank has failed on several fronts including on the deduction of tax (TDS) on cash withdrawals by cooperative societies exceeding the prescribed limits

According to accounting experts, concealment of bad loans as hinted at by the auditors, could have helped Kerala Bank in painting a rosy picture of the bank’s performance, and thus report profits in lieu of a real loss.

It’s yet to be seen what stand the Reserve Bank of India (RBI) would take on the new revelation by the auditors. As usual, none from Kerala Bank was available for comments though has been trying its level best for months together to talk to one of its personnel. Surprisingly, the annual report or for that matter, any details of the financials of the bank are not posted on its website.

Bad loans 

As per the annual report for 2020-21, the gross NPAs (bad loans) stood at 14.47 per cent and the net NPAs at 10.87 per cent. But with the new revelation by auditors,  the real volume of bad loans could be anyone’s guess.

The auditors have gone to the extent of ‘qualifying’ the accounts of the bank not only that of 2020-21 (FY21) but have done it for the previous year too. In accounting parlance, auditors making a ‘qualified opinion’ about a company’s annual accounts is viewed seriously by the investment community.

An unethical practice followed by certain banks sitting on huge bad loan pile is to evergreen loans that are on the verge of turning ‘bad’ (due to the failure of payment of interest or principal or both). This exercise involves sanctioning new loans to the potential defaulters, who in turn use these funds to regularise or ‘evergreen’ their existing loans so as to look them non-problamatic.

While on the one hand, this helps the borrowers to pre-empt their loans from becoming ‘bad’, on the other,  banks use it to dodge making provisions against their bad loans in the books, and thus help show a good bottom line – a profit instead of a loss or lesser profit when the financial year closes.

The auditors have unambiguously stated that in Kerala Bank, they have observed  on multiple occasions, loans which were non-performing in nature (bad loans), were closed by sanctioning fresh loans.

“We have also observed in some cases, advances which were otherwise non-performing in nature were regularised by crediting the account with the proceeds from the newly sanctioned loans, and new loans were sanctioned to those individuals whose former loans were closed, or interest waiver was made through one-time settlement scheme (OTS),” the auditors noted in their comments.

These exercises indicate that NPAs or bad loans were regularised through book adjustments.

Auditors also said they couldn’t ascertain the volume of such evergreening of loans. “We are unable to quantify the effect of the same in the profit and loss account (P&L),” they revealed further.

They have also made heads-up on the valuation of liabilities for employee terminal benefits, whereas. the bank has not used the services of an independent qualified actuary for the valuation of such liabilities, for example, gratuity.

There are other issues flagged by the auditors like failure of GST reconciliation, inconsistencies in depreciation rates/depreciation methods adopted for the bank’s accounts for the said period.

No new share certificates

Consequent to the merger of 13 district cooperative banks barring the dissident Malappuram Dist Coop Bank, on November 29, 2019, the bank has not yet (as on the audit report date), issued new share certificates in the name of Kerala State Cooperative Bank (KSCB) to the existing shareholders of the merged district cooperative banks.

“Share capital as appeared in the books of the respective banks were added and shown as the share capital of the merged entity,” they noted.

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