Mohan Lavi

A breather for banks

Mohan R Lavi | Updated on April 10, 2018 Published on April 10, 2018

Current milieu not conducive to enforce Ind AS

In a press release titled ‘Statement on Development and Regulatory Policies’, the Reserve Bank of India deferred the implementation of Ind AS for scheduled commercial banks from April 1, 2018 to April 1, 2019. The reason stated for the deferment is that the necessary legislative amendments, to make the format of financial statements prescribed in the Third Schedule to Banking Regulation Act 1949 compatible with accounts under Ind AS, are under consideration of the government. In addition, the RBI is of the opinion that the level of preparedness of many banks warranted the postponement.

Considering the facts that the Ministry of Corporate Affairs( MCA) issued a press release in January 2016 giving a roadmap for banks to transition to Ind AS and that the RBI followed it up with a notification in February 2016, attributing the deferment to a format of financial statements will not convince many. The level of preparedness could be a more logical reason considering the fact that over the last couple of years, banks have had to fight a wide variety of battles such as providing for bad debts, dealing with insolvency cases and PNB-type scams.

Insurance companies — who were also covered in the same roadmap — had a cogent reason to postpone moving over to Ind AS since a brand new IFRS standard on Insurance (IFRS 17) was issued. Considering the length of the new IFRS standards and their fondness for cross referencing paragraph numbers, users would need at least a couple of years to understand and implement the standards.

Banks, however, cannot offer this as a reason for deferment since Indian companies were the first to implement the only accounting standard that would apply to a majority of the transactions of a bank — Ind AS 109 on Financial Instruments.

Though the RBI cannot say it in as many words, the real reason for the deferment is that the present day banking environment is just not conducive for implementing an aggressive accounting standard that would both hasten and possibly increase provisions for bad debts. Even this argument will not convince many who would argue that the environment will never be conducive since no one knows the real extent of the mess that banks are in. It is also a fact that over the last five years or so, banks have attempted to implement IFRS/Ind AS in fits and starts.

Expected credit losses

The accounting standard on financial instruments mandates banks to provide for bad debts on the basis of expected credit loss as against their present practice of waiting for the loss to be incurred. Accounting Standards under IFRS have always believed that the best person to provide for a loan is the person who gave the loan and not the regulator. Banks would have to develop models to provide for bad debts in three stages — on expected cash flows over a year from the moment the loan became past due (stage 1); and on expected cash flows over the lifetime of the loan on a significant deterioration in credit quality (stage 2); and on impairment (stage 3).

To provide a solution, the RBI constituted a committee which recommended that the present provisioning suggested by the central bank can be considered to be the minimum and banks would be free to make additional provisions if they deemed it fit.

The deferment for banks sets up non-banking financial companies and housing loan companies to seek a deferment for implementation of Ind AS since they are invariably clubbed with banks for regulatory purposes. The only bright spot in the deferment is that banks get a year’s time to clean up their books once and for all.

The RBI has ensured that there can be no further bad news coming from banks if and when they implement Ind AS.

The author is a chartered accountant

Published on April 10, 2018
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