October 17, 2016 1:00:50 am
Banks’ capital requirement are set to surge sharply as they start dry run of their books of accounts based on stricter new Indian Accounting Standard (Ind AS) which are slated to kick in from April 1, 2018. The Reserve Bank of India has asked banks and financial institutions to prepare proforma reports or dry runs of their accounts as per Ind AS from October onward this year. The new accounting rules will significantly increase provisioning requirements, bankers and government officials said.
“Moving to new accounting standards will be a big challenge. It will increase the provision requirements and completely change the kind of numbers that the banks will put out,” a senior banker said. For instance, banks will be required to make provisions for “expected losses,” a concept that has been introduced under the new accounting norms.
While the banks have the flexibility in adopting methods for calculating expected losses, the RBI will in due course finalise a policy on expected credit loss provisioning. Under the existing rules, banks recognise loan-processing fees upfront in the profit and loss account, but new norms require these fees to be amortised over the life of the loan.
For banks already stressed under under the weight of bad loans, the new accounting norms would be a double blow as these will affect profitability adversely, necessitating the need for higher capital infusion.
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“The dry runs are being planned to prepare the banks for a gradual transition towards the new rules,” a regulatory official said, ruling out the possibility of any deferment of the new norms. The government and the RBI may “look at is some kind of phase-in of these norms for the banks but not defer it”, sources said. The government has already announced a phase roll out for non-banking finance companies.
Banks will be required to prepared two sets of numbers for 2016-17 — one as per existing Generally Accepted Accounting Principles (GAAP) and second as per the Ind AS. The new rules will be applicable to both consolidated and individual financial statements. “It’s going to be a double whammy but we do not have a choice. Banks capital requirement are going to surge,” the regulatory official said, asking not to be named.
Under the Indradhanush roadmap for reforms in PSU banks announced last year, the government had estimated their capital requirement at Rs 1.8 lakh crore over a four year period — of which the Centre will provide Rs 70,000 crore while banks will have to raise a further Rs 1.1 lakh crore from the markets to meet their Basel-III capital requirements.
As another departure, the new accounting norms establish a single framework for determining fair value for financial reporting of assets and liabilities. This will especially impact the way financial institutions measure fair value for portfolios of derivatives.
Transition to the new accounting rules is also required for the Indian banks to seamlessly enter into transactions with foreign parties. “If the Indian bank opens a LoC (letter of credit) with a foreign entity, but has not transitioned to new accounting regime, its LoC may not be honoured because the foreign entity may not trust their accounts,” the official said. Transition to Ind AS would help also global investors and analysts understand accounts of Indian banks in the international context.
In January, the Ministry of Corporate Affairs mandated the implementation of Ind-AS for firms to align with International Financial Reporting Standards (IFRS) from the first quarter of financial year 2016-17. But banks, insurance and financial services were are required to transition to Ind-AS in 2018-19 (with comparative accounts for 2017-18).
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