Sai Venkateshwaran

In the primary week of April 2018, the Reserve Bank of India (RBI) issued a press release deferring the implementation of Indian Accounting Standards (Ind AS) for banks by 365 days to at least one April 2019. Now, in March 2019, the question is back on the minds of all banks and their stakeholders – will Ind AS be deferred yet again?

Prior to this deferral, scheduled commercial banks (SCBs), except nearby rural banks (RRBs), based on RBI’s circular of February 2016, have been expected to adopt Ind AS from 1 April 2018 with comparatives for the earlier yr. As in line with RBI’s press launch, positive legislative amendments to the Third Schedule to the Banking Regulation Act 1949 have been under the attention of the authorities to make the format of the financial statements prescribed therein compatible with the necessities below Ind AS.


The press launch additionally referred to the level of preparedness of banks to make this transition.  Further, it became anticipated that the RBI could difficulty operational and different suggestions, which includes the ones referring to prudential norms to allow implementation of Ind AS by using banks.

However, nearly a yr later, it doesn’t seem that the needle has moved on any of those problems—the legislative amendments to the Banking Regulation Act, the tips to be issued by RBI or the general preparedness of banks.  Therefore, it almost seems that a in addition deferral of the implementation date is inevitable.

It has to additionally be referred to those non-banking economic companies (NBFCs) have already transitioned to Ind AS and are nevertheless expecting clarity on numerous operational tips.

What does it entail for the banks and why is that this critical?

Ind AS are converged with International Financial Reporting Standards (IFRS) and, therefore, predicted to decorate the transparency and comparability of the monetary statements of Indian banks with their global opposite numbers.  The adoption of Ind AS is predicted to have a pervasive effect on banks, impacting no longer just accounting and disclosures, however additionally includes their enterprise practices, systems and strategies, regulatory reporting and capital adequacy etc.

Ind AS might additionally require early reputation of a provision for losses on loans and stale-balance sheet exposures primarily based on an expected credit loss (ECL) model, which brings in forward-searching information and macroeconomic elements within the estimation of losses.  Banks in different parts of the arena following IFRS have adopted the ECL version in 2018 and there has been a boom within the loan loss provisions, despite the fact that now not very enormous, partially due to the benign economic and business environment prevailing in other components of the arena.  However, thinking about the scenario in India, this can doubtlessly increase the volume of mortgage loss provisions and consequently boom the capital requirements of those banks.

The timing of adoption of Ind AS by using banks additionally coincides with the creation of Ind AS one hundred fifteen on revenue recognition and Ind AS 116 on rentals.  These are also expected to impact the timing of revenue recognition by banks and also bring forth numerous off-balance sheet leasing arrangements directly to the books.

Considering the effect that each one of this has on a bank’s internal structures and tactics and taking into consideration the level of progress made through most banks, there is lots of floors to be covered by way of banks before they are able to undertake Ind AS.

Impact on regulatory reporting

One of the other motives that could have a bearing at the deferral of Ind AS is the impact that this transition has on regulatory reporting and capital adequacy of banks.  While that is a legitimate issue, mainly in mild of the strain in the banking system because of the quantity of non-acting belongings (NPAs), there can be ways that RBI can adapt to make the accounting transition easier vis-à-vis the corresponding regulatory reporting requirements.

In this context, it is worthwhile to note that the Basel Committee, in mild of the worldwide adoption of IFRS nine and the ECL version for provisions, has determined to preserve, for a meantime duration, the cutting-edge regulatory remedy of provisions and also introduce transitional arrangements to smoothen any capability enormous bad effect on regulatory capital arising as a result of ECL accounting.

As in keeping with these Basel Committee suggestions, regulatory authorities in each jurisdiction can offer to steer on how they intend to classify ECL provisions as specific or popular in calculating regulatory capital requirements.  Further, as consistent with the transitional arrangements, which may be implemented to all ‘extra’ provisions bobbing up due to the adoption of ECL accounting, the additional impact can be absorbed over a length now not exceeding five years on a straight line method.

RBI should definitely bear in mind adopting those transitions and intervening time regulatory remedies as and whilst banks in India migrate to Ind AS, thereby minimizing the impact on regulatory reporting.

Way forward

Considering the impact of this transition at the banking region and the time required to get ready, RBI desires to trouble the operational and different suggestions for each banks and NBFCs so one can allow them to make the transition to Ind AS.  RBI should additionally consider the period in-between regulatory treatment and transition tips issued by the Basel Committee to ensure an easy implementation for this very vital region.  Banks on their part must additionally quicken their efforts to get their era, structures, and methods aligned to the brand new requirements.

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