What changed
RBI permitted UCBs to defer the incremental gratuity expenditure from the enhanced limits under the Payment of Gratuity Act over five years, instead of charging it fully in FY2010-11. This deferral applies only to active employees, not to retired or separated staff. The deferred amount need not be deducted from Tier-I capital.
What it means for you
UCBs get breathing room to absorb the higher gratuity liability without a sudden dent to their profit and loss account. The five-year spread helps maintain capital ratios since the deferred expenditure is not subtracted from Tier-I capital. Banks must still disclose the deferred amount in annual financial statements.
What you must do
- Calculate the incremental gratuity liability from the amended Payment of Gratuity Act.
- Charge at least one-fifth of the total incremental amount to P&L each year for five years starting FY2010-11.
- Ensure full provisioning for gratuity payable to retired or separated employees in the year of payment.
- Disclose the deferred gratuity expenditure appropriately in annual financial statements.
- Acknowledge receipt of this circular to your Regional Office.
Who it affects
Primary (Urban) Co-operative Banks, Chief Executive Officers of UCBs, Finance and accounts teams of UCBs
Can we defer gratuity cost for employees who retired during FY2010-11?
No, the deferral is not permitted for amounts payable to retired or separated employees. Those must be fully charged to the P&L in the year of payment.
Does the deferred gratuity expenditure impact our Tier-I capital?
No, RBI has clarified that due to the exceptional nature of this event, the deferred expenditure will not be reduced from Tier-I capital of UCBs.