IndAS norms on early loss recognition back into play, but in different form

The central bank has also said any action by lenders with an intent to conceal the actual status of accounts or evergreen stressed accounts will be subject to stringent supervisory action

The Reserve Bank of India’s (RBI’s) move to align the definition of ‘financial difficulty’ with the guidelines issued by the Basel Committee on Banking Supervision has bought the now deferred Indian Accounting Standard (IndAS) norms on early loss recognition back into play, albeit in a different form.

The central bank has also said any action by lenders with an intent to conceal the actual status of accounts or evergreen stressed accounts, will be subject to stringent supervisory and enforcement actions as deemed appropriate.

This could include, but is not limited to, higher provisioning on such accounts and monetary penalties.

Banks are to pay a heavy price in terms of non-implementation of a viable resolution proposal (RP). If the delay exceeds 180 days from the end of the review period, they have to provide for an additional 20 per cent; and if over a year, it is to be 15 per cent. In all, the total additional provisioning is 35 per cent.

The RBI had put out a ‘non-exhaustive indicative list of signs of financial difficulty’, in the now defunct February 12 circular, struck down by the Supreme Court. 

But it has been fleshed out and made more rigorous. It says that financial difficulty is to be identified even in the absence of arrears on an exposure, the robustness of the bank-board approved policy and the outcomes would be examined as part of the supervisory oversight of the central bank.

The widened terms of what is to constitute financial difficulty say “a borrower is not in default; but it is probable that the borrower will default on any of its exposures in the foreseeable future without the concession. For instance, when there has been a pattern of delinquency in payments on its exposures.” 

It includes a borrower’s outstanding securities, which have been delisted or are in the process of being delisted or are under threat of being delisted from an exchange due to non-compliance with the listing requirements or for financial reasons.

The key difference is that under IndAs, banks would have had to make early loss provisioning, but this is offset by the provisioning which all lenders have to make on a delay in the implementation of the RP spelt out in the circular issued on Friday.

The RBI had indefinitely deferred the IndAS norms which were to come into effect from April 1, 2019, as it would have called for higher capital for bad loan provisioning by banks. 

The deferment was the second – banks were to implement IndAS from April 2018; it also needed legislative amendments to make the format of financial statements compatible with IndAS.

The thinking behind the new norms was first put in public domain by RBI’s deputy governor, NS Vishwanathan on October 29, 2018. On defaults, he disagreed with the view that when borrowers are affected by external factors beyond their control, they should be treated as ‘genuine’ defaulters and some leniency in prudential norms is warranted.

Vishwanathan held the above as a fallacy, even though he conceded it is important to appreciate that some defaults are inevitable part of the lending business. 

He was of the view that the recognition of default or accounting for deterioration in the quality of assets should be independent of the reasons for such default or deterioration. “It is the RP which should be a function of the ability and willingness of the borrower to honour his obligations," he said.  "Where a borrower has temporarily lost his ability to pay due to circumstances beyond his control, a quick and efficient restructuring of the debt either outside the courts or within the insolvency framework would be in order,” he added.

APEX BANK MOVE

• RBI aligns definition of “financial difficulty” with Basel Committee on Banking Supervision norms
• Financial difficulty is to identified even in the absence of arrears on an exposure
• Robustness of the bank-board approved policy and the outcomes would be examined as part of the supervisory oversight
• Lenders have to make higher provisions if they conceal status or evergreen stressed accounts
• Banks to be subject to stringent supervisory and enforcement actions