Mohan Lavi

RBI mustn’t dither...

Mohan R Lavi | Updated on March 17, 2019

... in mandating banks to implement Ind AS

It looks like banks in India can never be out of the news for an extended period of time. The latest news doing the rounds is that banks have asked the Reserve Bank of India to defer the implementation of Ind AS. The reason: the impact of Ind AS could be immense on their P&L account and balance sheet, which are already extremely weak.

In its role as the regulator, the RBI might accede to the request since we are already in the middle of March and there is no guidance yet from the central bank on critical concepts of Ind AS.

It is expected that the RBI will announce that banks, along with insurance companies, should transition to Ind AS from financial year 2020-21. Whatever be the pressures, the RBI would do well not to defer the implementation of Ind AS for the banking sector.

To a large extent, the delay in the implementation of Ind AS in banks can be attributed to the RBI. In 2014, a committee was appointed to study the impact of Ind AS on banks and a report was submitted in 2015. The committee came out with a comprehensive report on the impact that Ind AS in general and the standard on financial instruments in particular would have on banks.

The report made it amply clear that mark-to-market accounting for unrealised gains/losses and fair value of the treasury investments of banks would hit banks the most.

The report also stated that the much-discussed provision for non-performing assets (NPAs) would have a limited impact due to the prudential norms on asset classification and income recognition prescribed by the RBI.

The committee also found a way out in that it recommended that while the prudential norms should be the floor limit for provisioning, the Expected Credit Loss (ECL) model for Impairment that is mandated by Ind AS 109 could take care of any additional provisioning by the banks. All the other Ind ASs would have a minimal impact on the banking sector.

Despite having the committee report as a document for reference, the RBI decided to tread slow on announcing a transition date. In recent years, the RBI has had a lot of distractions in the form of Governor-level changes and differences of opinion with the government on dividend payouts. The net result: no time to focus on Ind AS.

Impact of Ind AS

There can be no two opinions on the fact that transitioning to Ind AS would impact income, profits, assets and liabilities of banks. Most banks would have enough and more resources to handle Ind AS implementation. Truth be told, most banks have some experience in transitioning to Ind AS.

A couple of years back, the RBI had asked banks also to do a dry run of Ind AS. Many have a bare-bones ECL model in place. Even if there is a significant impact, it’s banks better go ahead and brace for it since a mere deferment doesn’t take away the problem or resolve it. Ironically, non-banking financial companies, which have issues that are probably more serious than those of fairly stable banks, have transitioned to Ind AS in the current financial year.

The RBI should mandate that banks transition to Ind AS from April 1, 2019, as originally intended. Since the announcement has been delayed, they can give banks some relief on first-time adoption. But deferring the transition lock, stock and barrel is going to be seen as an excuse to camouflage the true positions at banks in the hope that these issues will evaporate with the efflux of time.

The writer is a chartered accountant

Published on March 17, 2019

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