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Jul 11, 2011, 06.53 PM IST | Source: CNBC-TV18

IBA likely to ask banks to provide for expected wage hike

Public sector banks are likely to start building up provisions for next wage revision starting December 2012.

Gopika Gopakumar

Correspondent, CNBC-TV18

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Public sector banks are likely to start building up provisions for next wage revision starting December 2012. The Indian Banks Association has sent this proposal to the Reserve Bank of India (RBI) seeking the regulator's approval.

The RBI had asked banks to make advance provisions because bank P&Ls show too much volatility at times of wage revisions. CNBC-TV18's Gopika Gopakumar reports.

Wage revisions in the past have led to a significant impact on public sector banks profitability. It is to avoid this that RBI in its Financial Stability Report said that banks should phase out the provisions due to the liabilities arising out of wage revision.

This will ensure that the burden is not concentrated in the year when the settlement is signed.

The Indian Banks Association has now suggested that banks are building up advanced provisions starting December 2012. That’s when the new wage bipartite agreement will fall due.

IBA has also suggested that each bank make an assumption of the expected wage revision and start providing for it over a period of six quarters. This will ensure that the banks profitability is not hit. IBA has already sent their proposal to the RBI for their approval.

Sources in RBI say this is easier said that done because banks will have to disclose their expectation of wage hike and this may embolden the unions to bargain for higher wages in the next agreement.

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