‘Banked the unbanked’. ‘Funded the unfunded’. ‘Samudra Manthan of Banks’. ‘Pillars of Jan-Kalyan’. Finance Minister Nirmala Sitharaman used the above on X (formerly Twitter) when speaking about the banking sector. She stated that due to the government’s policy response to recognition of stress, resolution of stressed accounts, recapitalisation and reforms in banks, the financial health and robustness of public sector banks (PSBs) have improved significantly since 2014.
During FY24, PSBs recorded the highest-ever aggregate net profit of ₹1.41-lakh crore, almost four times the ₹36,270 crore logged in FY14.
PSBs declared a dividend of ₹27,830 crore to shareholders (Centre’s share ₹18,088 crore) in FY24. Net non-performing assets (net NPAs) of PSBs declined to 0.76 per cent in March 2024 from 3.92 per cent in March 2015. They were at a peak of 7.97 per cent in March 2018. However, gross NPA ratio of PSBs declined to 3.47 per cent in March 2024 from 4.97 per cent in March 2015. The peak of 14.58 per cent was in March 2018.
Bank credit growth (non-food) was 16 per cent in FY24, the highest in 10 years. This would not have been possible without a significant improvement in the banking sector’s health. Resilience has increased, with the provisioning coverage ratio (PCR) increasing to a healthy 92.99 per cent in March 2024 from 46.04 per cent in 2015. In short, everything in the banking sector has been hunky-dory for the last decade or so.
Ind AS
Indian Accounting Standards (Ind AS) mandate fair valuation, mark-to-market accounting and providing for bad debts on the basis of an expected credit loss (ECL) model. Looking at the growth of the banking sector over the last decade, one would have thought that it could have been an ideal time to mandate banks to follow Ind AS.
The robustness of the balance sheets of banks could have enabled them tide over the impact on ECL provisioning and fair value losses.
However, since 2015, the Reserve Bank of India has been taking only tentative measures to transition to Ind AS. In 2015, a reporting of the working group on the Implementation of Ind AS in banks was published by RBI. Formats were finalised in 2016. The implementation of Ind AS for banks was deferred twice in 2018 and 2019 but non-banking financial companies were brought onto the Ind AS bandwagon.
All the remaining notifications of the RBI have been targeted only at NBFCs. Disappointingly, the latest Annual report of the RBI does not speak about Ind AS at all. It only makes a reference to the ECL model by stating that the bank is moving towards a forward-looking expected credit loss model.
International Financial Reporting Standards (IFRS) are being amended, modified and updated at frequent intervals. Since 2015, four new IFRS have been issued (IFRS 15/16/17/18) while many have been amended. IFRS 18 makes radical changes to the format of the presentation of financial statements and is applicable from the calendar year 2017. India is expected to come out with its version of Ind AS 118 soon — this could be applicable from April 1, 2027.
Historically, the RBI has been prescribing formats for the presentation of the financial statements of banks.
The RBI should take a call on when it would want banks to transition to Ind AS in all aspects. Ind AS 101 mandates that the impact of transition to Ind AS should be transferred to Reserves and Ind AS 1 provides all entities with the option of parking some specified transactions in a statement called ‘other comprehensive income’ which serves as a sort of a cushion for unrealised gains and losses. The time has probably come for the RBI to instruct banks to implement Ind AS.
The writer is a chartered accountant
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