Sebi asks banks to explain bad loan under-reporting

Wants to ensure banks and auditors adhered to disclosure requirements; evaluating RBI status report

The Securities and Exchange Board of India (Sebi) is examining the conduct and quality of audits and disclosures at YES Bank, Axis Bank and ICICI Bank on their bad loans.The regulator has sought explanations from the private sector lenders on whether they adhered to disclosure requirements. The move comes after the Reserve Bank of India’s (RBI’s) report on huge divergence in actual non-performing assets and those disclosed by banks.

Axis Bank’s official spokesperson confirmed they had received a communication from Sebi in this regard and had already responded. “The financial statements of the bank are prepared in compliance with the extant RBI guidelines and the accounting standards to represent true and fair position as on the date of reporting and are audited in accordance with the auditing standards issued by ICAI,” he said.

The spokesperson said as directed by the RBI, disclosures on divergence will be made as part of the notes to accounts of the audited financial results of the bank for March 2017.

“These are materially significant developments from shareholders’ perspective. Under the listing obligations and disclosure requirements, disclosure made by a company should be precise and accurate,” said a regulatory official, on condition of anonymity. “Investors should have all the right to know about the financial health of banks or companies before taking an investment decision.” 

Sebi would seek a report from the RBI on the matter and accordingly take a decision on what action is needed, a source said.

In an e-mailed response, a YES Bank spokesperson said: “The RBI circular mandating banks to make divergences public came into effect on April 18 and was duly adhered to, in fullest conformity with the extant regulations. Hitherto, the divergences identified by RBI, as part of the Annual Risk Based Supervision were advised to be kept confidential.”

E-mails sent to ICICI Bank did not elicit any response. 

“Sebi expects listed entities to come out with fair disclosure. Any misrepresentation of facts could be seen as fraudulent disclosure. However, given the huge divergence of practices with respect to recognising doubtful and bad debt, it would be hard to categorise a disclosure as fraudulent,” said Sandeep Parekh, founder, Finsec Law Advisors.  

Meanwhile, the Institute of Chartered Accountants in India (ICAI) is said to have written to the RBI for information over the stated divergences. “ICAI is always ensuring that the accounting and the auditing standards in India are benchmarked with international standards. The profession is well-geared to meet the challenges. However, it is also required to ensure that the process of appointment of auditors in banks should be made more robust, to enhance the independence of the auditors,” said Manoj Fadnis, deputy president, Confederation of Asia Pacific Accountants and a former president of ICAI.

The RBI’s notification of April 18 stated, “There have been instances of material divergences in banks’ asset classification and the provisioning from RBI norms, thereby leading to the published financial statements not depicting a true and fair view of the financial position of the banks….it has been decided that banks shall make suitable disclosures as per the annex…” 

In its report for 2016-17, YES Bank said its bad loan classification at the end of March 2016 varied from that of RBI to the tune of Rs 4,176 crore. This was nearly six times more than the Rs 748.9 crore of bad loans it had reported for that year. Similarly, the RBI’s classification of Axis Bank’s bad loans was 2.6 times more than the bank’s disclosure in FY16. For ICICI Bank, this divergence was 19.5 per cent.