The Deferred Tax Bomb


EXECUTIVE SUMMARY. While the market is commending banks like ICICI and Axis Bank for cleaning up their balance sheets with aggressive loan loss provisions, what is being ignored is the role played by net deferred tax assets (DTA) in partly neutralising the impact of the provisions. DTA is being widely used across the banking industry to inflate current profits and defer the accounting charge to future years. While the creation of DTA is allowed in accounting standards, in the opinion of this writer it is not a prudent practice as it merely defers the inevitable charge to profits. It is time investors paid more attention to this intangible asset, and the regulator modified norms to stipulate a short term reversal in DTA. The practice is rampant in the banking industry, as this study of 8 prominent banks reveals, and it is being used to inflate current profits while giving an impression that the balance sheets are finally being cleaned.