The Reserve Bank of India (RBI) plans to guide banks in their transition to Indian Accounting Standards (IndAS) from 1 April next year—particularly on bad-loan provisioning, which will be based on expected future losses.

The transition will be challenging for banks in terms of the skills required to adapt to the new standards, as well as the higher amount of provisioning that will be needed, RBI said in its Financial Stability Report (FSR), released last Friday.

Under current rules, banks set aside money to cover losses incurred. Under IndAS, they must make provisions after assessing expected losses, in line with international norms.

Migrating to IndAS may increase banks’ provisioning requirements by 30%, RBI deputy governor S.S. Mundra recently said.

In the FSR, the central bank said while it is finalising regulatory guidance related to expected credit loss (ECL)—the centrepiece of IndAS for banks—lenders should simultaneously design their own accounting frameworks. 

Determining ECL based on the probability of default is quite subjective, and different banks may assess the same asset differently.

According to N.S. Venkatesh, executive director at Lakshmi Vilas Bank, regulatory guidance from RBI would be positive as computing expected credit loss is a complex task even though there are prescribed parameters.

“A guiding norm would ensure that there is not too much deviation and the balance sheet reflects the true picture of the bank as well (as that) of the economy,” he said.

RBI had asked banks last year to submit pro-forma Ind AS financial statements based on the financial results for the six months ended 30 September 2016. In the FSR, the central bank said that while banks had initiated the process, more efforts are required for the switch-over. “The analysis of pro forma financial statements submitted by the banks revealed wide variations in underlying assumptions leading to divergence in provisioning requirements,” it said.

“Nevertheless, non-standard assumptions across banks run the risk of assets with similar impairment characteristics treated differently, making it imperative to put in place some basic standardisation of treatment,” the report added. #casansaar (Source - LiveMint)