Beyond accounting

Deferment of Ind-AS for banks is a short-term fix

The Reserve Bank of India (RBI) has decided to defer the implementation of the Indian Accounting Standards (Ind-AS) for banks for the second year running — this time until further notice. The norms, which were to kick in on April 1, would have enhanced the comparability of the financial statements of local banks with those of their global peers. The reason given by the RBI is that adherence to Ind-AS by banks would have required legislative changes to comply with the new disclosures — an amendment to the third schedule of the Banking Regulation Act (1949). What’s unsaid is that Ind-AS would also have increased the pressure on capital for banks, especially due to the early loss provisioning aspect in the new accounting format. It would have meant banks make provisioning for borrowing accounts based on their historical loan-loss experiences, and factor in expectations and the economic environment a firm operates in. In short, banks would have to improve their ability to forecast credit losses with precision.

The Ind-AS rollout will now happen only after a new government settles in following the elections this summer, but the reality is when it is introduced, the issue of higher capital in banks will have to be dealt with. One estimate by a rating agency puts at Rs 1.1 trillion the additional provisioning banks would have made in the first quarter of the new fiscal year if Ind-AS had been implemented. It would have been particularly worrisome for state-run banks, which would have had to raise substantial capital way beyond the Rs 1.9 trillion infused by the Centre recently. Given the state of the fisc, it is anybody’s guess how these demands can be fulfilled. The issue is further compounded by the fact that many state-run banks will anyway see a marked increase in their capital consumption, in particular due to the specific accounts identified by the RBI and referred to the National Company Law Tribunal under the Insolvency and Bankruptcy Code, involving huge haircuts.

While the deferment is a breather for banks as well as the Central government, this does not bode well for the health of the banking system, because banks that do not recognise their problems might not be in a position to resolve them. It also rings in other complications from a strictly accounting point of view. While banks will continue to report on the Indian GAAP (generally accepted accounting principles) basis, non-banking finance companies and housing finance companies will be on Ind-AS — they transited to the new regime during the just concluded fiscal year. It can also pose challenges for banks which are associated or have invested in an arm preparing accounts in accordance with the Ind-AS road map. These disparities would entail maintaining two sets of accounting formats, have them audited, and reconcile differences between them.

The bigger picture is that it also shows a lack of coordination between the RBI and the finance ministry. The latter had recommended a road map for banks to the Ministry of Corporate Affairs (MCA) four years ago for implementing Ind-AS. The MCA clarified the applicability of Ind-AS to banks from April 1, 2018, onwards. Based on this, the RBI had issued directions to banks to submit their Ind-AS pro forma financial statements for the half-year ended September 30, 2016, latest by November 30, 2016. Yet nothing has moved since then.