Banks create Deferred Tax Assets (DTAs) by writing off bad loans. This helps in boosting the capital adequacy (CAR) ratio. These assets are helpful for a bank that is in profit but if the profit projections are weak then reliance on DTAs to boost the capital base becomes a questionable proposition. Earlier, there were no guidelines for the treatment of DTAs in India. Now, putting in place accounting standard 22 by ICAI and RBI guidelines for the treatment of DTAs would ensure that CAR is not propped up because RBI guidelines treat the DTAs as intangible assets and deducted from capital base.

Deferred Tax Assets are nothing but savings related to taxes on income in respect of an accounting period, which are disclosed in the financial statements. These assets, which are mainly created when a bank makes losses, for example by writing-off bad loans, materialize only if enough taxable profits are made in the subsequent years to recoup the losses. It is precisely for this reason that deferred tax assets should be recognized and carried forward only to the extent that there is reasonable certainty that sufficient future taxable income would be available against which such assets can be realized.

Consequently, if the outlook for profit remains weak, then reliance on deferred tax assets to boost capital base becomes a questionable proposition. This was exactly the situation in which Resona found itselfauditors had questionned the profit forecast made by the Resona management and insisted on the bank cutting its deferred tax assets substantially. It is also reported that deferred tax assets accounted for a large proportion of capital base in respect of several other banks in Japan which were making big losses.

The Economist in its issue dated May 24-30, 2003 reported that the capital adequacy ratio of "Resona"Japan's fifth largest bank had fallen to around 2% i.e., half the required minimum for domestic banks in that country and the Japanese Government had agreed to inject public money to the tune of ¥2 tn ($17 bn) into the bank to prevent it from collapsing.

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