Servicing pension out of reserves to limit PSU banks Tier II capital

Starting March 31, 2008 banks will have to disclose their pension liabilities in their balance sheets. Under AS 15, banks are required to disclose on their balance sheet the provision for long-term employee benefits after actuarial valuation According to the clauses in the Accounting Standard, these liabilities should be charged to the profit and loss account of the employer. Banks have two options, either to recognize the liabilities in a single year or stager it over several years. They are yet to take al call on this. State-owned banks may find it difficult to raise capital if they choose to service their pension liabilities out of their reserves, as mandated under new accounting changes. Reserves are a part of Tier 1 capital, and Tier II capital is limited to 50% of Tier I capital. Therefore a reduction in reserves will lead to a reduction in Tier I capital and hence limit which can be raised. Capital through debt instruments, such as nonconvertible preference share, is classified under Tier II capital.