S & P For Greater Bank Disclosures

International rating agency Standard and Poor's (S&P) has pointed out certain areas where inadequate disclosures are made by Indian banks. "There are several areas where the level of disclosure could be improved to meet the need of investors and creditors," S&P said in its Bank System Report on India.

Indian banks reported advances on the balance sheet net of write offs and provisions rather than on a gross basis and non performing loans were not disclosed, the rating agency said. "The Indian definition of non performing assets is still liberal by international standards," said S&P.

Under the system of accounting followed by Indian banks, income recognition is done on an accrual basis and loans are considered to be performing up to 180 days past due.

 

This has been viewed by S&P as a relatively liberal practice. Banks also did not give a breakup of specific and general provisions for bad and doubtful debts that were charged against income. Any changes in provisions for bad and doubtful debts, including write offs and recoveries were also not disclosed, S&P observed.

Other inadequate disclosures were in the area of assets and capital ratios adjusted for risk, the report said. Commenting on the accounting standards and policies observed by Indian banks, the rating agency said, "Indian banks are not required to prepare consolidated accounts, and equity accounting for associated companies is not undertaken. Instead, investments in associate companies are carried at historical cost.

" This made it difficult to assess the impact of subsidiaries on the financial condition of the parent, it said. The issue of preparing consolidated accounts was important in the Indian context as many banks and financial institutions offered non banking services through a range of what it has termed `non-consolidated subsidiaries'.

The report has also pointed out that the quality of external audit is not high, referring to an instance when the Reserve Bank of India (RBI) had black-listed over 200 audit firms involved in branch-level audit in January 1998.

"The RBI has published guidelines for branch selection for audit purposes and Indian banks also make use of multiple external auditors which can complicate the audit process," the S&P report said.