The RBI has, however, rejected the proposal. According to sources, the bank has categorically ruled out any change in the current practice in respect of foreign exchange transactions and their year-end translation.

The banks have been following the guidelines laid down by the RBI and the Foreign Exchange Dealers Association of India (Fedai) instead of the AS-11 of the Institute of Chartered Accountants of India.

Indian business entities follow the norms laid out by AS-11 whereas banks follow Fedai guidelines for the treatment of foreign exchange transactions.

The Fedai guidelinesstates that all assets and liability both monetary and non-monetary of the foreign entity should be translated at the yearly closing rate. The guideline states that the resulting profit should not be booked in the profit and loss account but treated under the head `other liabilities.' However, exchange loss--if any--should be debited from the P&L account.

In contrast, the AS-11 states that fixed assets should be translated at the exchange rate prevailing at the date of the transaction. As per the norm, any profit or loss arising due to currency fluctuation should be put under the profit and loss account.

According to sources, a few bank chairman lobbied hard with the RBI to treat their foreign assets under AS-11 as they can book notional profit (on account of the depreciating rupee against the dollar) even though they will be required to pay tax on this "income". The RBI, however, rejected the proposal outright.

"Some of the banks have not finalised their balance sheets hoping that the RBI clearancewould come through. Now that the central bank has rejected the proposal, they will end up posting a drop in net profits," sources said.

The fiscal 1998-99 was particularly bad for the banking industry as the credit offtake was sluggish. This, coupled with cuts in the prime lending rates, have led to a fall in interest incomes of all the banks. Besides, most of the banks are saddled with huge proivisioning requirement on account of rising non-performing assets (NPAs) and the proposed 12.25 per cent wage hike for bank employees with effect from November 1997.

In stark contrast to the previous year, banks in fiscal 1999 do not have the advantage of the writeback of excess provisioning on account of lower yield to maturity (UTM) of Government securities. The writeback of excess provisioning largely contributed to boost the bottomlines of big PSU banks in fiscal 1998.