At a review meeting with PSB chiefs in early April 2024, the Department of Financial Services (DFS), under the finance ministry, examined key business data for the sector over the past week. It found a sharp fall in the credit and deposit portfolios of most PSBs between March 31, the last day
of the financial year, and April 5. The decline in banks’ assets and liabilities ranged from 2 per cent to 5 per cent.
Advances and deposits typically spike in the last few days of every quarter — and particularly in March, when the financial year ends — only to drop soon after. This is a feature of balance sheets of most banks, not just PSBs.
How is this done? Banks attract large, high-cost deposits towards the end of March, for just a few days — bulk term deposits from individual customers, as well as government funds. They also move unused working capital limits into current and savings accounts (Casa). Term deposits maturing by March-end can also be used to bolster savings accounts for the year-end, if customers agree.
On the asset side, branches encourage borrowers to use idle cash credit and overdraft limits for a few days. Banks also extend very short-term corporate loans at a very low rate. Money raised through such loans often finds its way into the deposit portfolio of the same bank or a different one, almost simultaneously. Besides, banks also grant loans against fixed deposits to boost loan growth. Those with foreign branches and/or large corporate loans in the kitty might facilitate intra-group transactions just before year-end and reverse them early April.
Why are these done? All such transactions inflate both sides of a bank’s balance sheet — advances and deposits — albeit for a short time. They don’t generate sustainable interest income; the purpose is to enhance the size of the balance sheet and make the key ratios look handsome on the reporting date.
The root cause of this phenomenon is bankers’ obsession with balance-sheet growth, even if that does not add to profitability. Pressure on achieving targets plays a role. The recently revised performance-linked incentive (PLI) framework for PSBs is likely to add further pressure on senior management to chase higher business volumes over the year-end.
Indeed, window dressing improves year-end numbers, but it also involves a cost. To support a sudden, short-term increase in assets, banks need to raise matching liabilities, often through high-cost bulk deposits. This pushes up the marginal cost of funds and compresses net interest margin (NIM), loosely the difference between cost of funds. This kind of funding scramble can drive up short-term money market rates and distort liquidity conditions.
There are other issues as well. For instance, a temporary increase in deposits adds to a bank’s cost for maintaining the cash reserve ratio (CRR) and statutory liquidity ratio (SLR). CRR refers to the portion of liabilities that commercial banks need to keep with the central bank on which they do not earn any interest. To meet the SLR norm, they need to invest in government securities. Besides, as the deposit pile goes up, even if for a few days, banks need to pay higher premiums for the insurance cover of deposits. These raise their costs.
Sustainable performance in banking comes from NIM on average balances over the year, not on the one-day balance on March 31 and the quarter ends.
There is another side to this phenomenon. A spike in loan balances could be the result of bankers at different levels chasing the targets. Though not exactly designed this way, it artificially reduces the reported gross and net non-performing asset (NPA) ratios in percentage terms on that date. It’s simple maths.
Beyond window dressing, there also are other ways to make a balance sheet look handsome. For instance, net profits can be boosted in the short term through one-off items like provisioning reversals, deferred tax adjustments or volatile treasury gains, even when true operating profit and NIMs are growing slowly.
Banks wrote off about ₹9.75 trillion of loans over 11 five financial years to FY25, according to media reports citing Minister of State for Finance Pankaj Chaudhary’s written reply to the Lok Sabha on March 16. Loan write-offs were to the tune of ₹31,723 crore in FY15. From there, they peaked to ₹1.59 trillion in FY20, two years after the banking industry’s bad assets peaked. Since then, the write-offs have been declining, reaching ₹47,568 crore in FY25. Large-scale write-offs have contributed to a decline in the gross NPA ratios of banks.
A write-off removes a loan from the asset side of the balance sheet and reduces reported NPAs, but it does not erase the borrower’s legal liability. Banks continue their recovery efforts through courts, tribunals, the Sarfaesi Act of 2002, and the Insolvency and Bankruptcy Code of 2016. Write-offs are an accounting and tax-efficiency tool to clean up legacy portfolios. Recovery through this route adds to a bank’s profit.
While write-offs are legitimate, if banks prominently disclose cumulative write-offs and recovery figures in their balance sheets, it will be easy to assess the quality of past credit underwriting and recovery performance over time.
The Reserve Bank of India (RBI) is aware of all these. Its June 2023 directive, “Framework for Compromise Settlements and Technical Write-offs”, aims at improving transparency and discipline by standardising how regulated entities use settlements and technical write-offs as resolution tools.
The framework requires all regulated entities to adopt board-approved policies. It lays down conditions such as minimum ageing and collateral deterioration, mandates that approvals be granted by an authority at least one level higher than the original sanctioner and requires board approval for compromise in fraud and wilful-defaulter accounts.
Over the years, in its inspection reports and circulars, the RBI has repeatedly warned banks against window dressing. There have also been instances where the regulator has imposed monetary penalties on banks for not complying with its directions. Recent supervisory communications have stressed strict adherence to income recognition and asset-classification (IRAC) norms and the need to fix accountability for delays in recognising credit impairment.
On the governance front, the RBI’s new “Commercial Banks – Governance Directions, 2025”, effective from November 28, 2025, enhances board responsibilities across public, private and foreign banks. The directions sharpen the board’s role around four core functions: Overseeing the bank’s risk profile, ensuring the integrity of internal controls, securing expert management and safeguarding stakeholder interests.
They call for a stronger and non-executive audit committee of the board, with members having financial expertise, independent chairs, stricter quorum rules, and structured board agendas that give equal prominence to risk, compliance, customer protection and financial inclusion, along with business growth. Proposals to strengthen the enforcement toolkit, including the use of malus and clawback on executive pay and the potential for additional capital requirements in cases of serious governance failures, aim to discourage short-termism and superficial compliance.
Malus and clawback are contractual provisions that allow banks to recover or cancel executive compensation due to misconduct, restated financial results, or poor performance. Malus reduces or forfeits unvested or unpaid bonuses, and clawback recovers already-paid compensation.
These measures seek to realign incentives so that boards and senior executives prioritise long-term balance-sheet strength and transparent reporting over short-term showings.
The most effective way to combat window dressing is to change how performance is measured and how governance expectations are set. Instead of focusing on specific points in time, the focus can be on averages and sustainability of business. If internal targets, regulatory assessments and market narratives emphasise growth in average advances and deposits, risk-adjusted returns and operating profit over the entire year, the temptation for last-day number games will vanish.
Banks can base annual performance reviews and incentives on average business volumes, risk-adjusted NIMs, multi-year credit-cost trends and actual operating profit instead of the March 31 balance sheet and headline net profit.
The RBI and DFS can also link decisions on capital, dividend and senior-management compensation to through-the-cycle metrics.
What we need is stable, predictable balance sheets, high governance standards and credible financial statements — not institutions that look strong only on a single day of the year.
The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book: Roller Coaster: An Affair with Banking.
To read his previous columns, log on to www.bankerstrust.in. X: @TamalBandyo
