Banks want RBI to defer IndAS roll-out over higher loan-loss provisioning

Banks are seeking an extension for the roll-out of the Indian Accounting Standards (IndAS), set to come into effect from April 1. They have cited higher capital for bad-loan provisioning, pending legislative amendments, and delay in finalising rules by the Reserve Bank of India (RBI) as some of the reasons.

“The government has given capital to banks with great difficulty and banks are under pressure to improve their financials. IndAS will further add to banks’ compliance burden, especially for loan-loss provisions,” said the managing director of a public sector bank. Hence, banks are requesting the central bank to give them breathing space. “Only then will we be in a position to come back and shift to the new accounting standards,” the banker said.

This could be the second time the RBI would defer the roll-out. According to the RBI’s original plan laid out in 2016, banks were to implement IndAS from April 2018. But, the RBI deferred it by a year to April 2019 as necessary legislative amendments to make the format of financial statements compatible with accounts under IndAS were pending.

A top executive of a Mumbai-based government bank said, “As things stand now, the new accounting norms will be effective from April. The current capital requirements do not factor in IndAS. If the new rules are implemented, the capital requirements will go up.”

The loan-loss provision under IndAS is recognised based on the expected credit loss (ECL) model, where a bank has to make provisions based on its historical loan-loss experiences and also factor in future expectations and the economic environment it operates in.

Moreover, the RBI is yet to come out with specific guidelines on particular accounting items, and banks are in the last few weeks of the financial year, bankers said.

Banks would also need to evaluate software systems changes covering assessment of processes, issues having significant impact on information systems, and develop and strengthen data capture systems. “There will be changes required in the software also. So it seems difficult to implement from April,” said a senior banker.

“After the deferment last year, many banks have put the work of changing software and systems on the back burner,” said the head of accounting advisory with a multinational consultancy, adding that implementing such changes would take at least a quarter. In 2016, the RBI in a preparatory guidance note for IndAS had asked banks to conduct a diagnostic analysis of differences between the two accounting frameworks. Banks, on their part, are conducting parallel accounting based on IndAS. Banks would be required to prepare financial statements for the financial year beginning April 2019 as well as for the previous year for comparative purpose under IndAS.

An official with the banking industry lobby group Indian Banks’ Association (IBA) said the banking regulator was unlikely to come out with final rules in the near future. “The guidance for IndAS has not yet been announced. Indications are that the RBI may defer it. Last year, there was talk of the RBI asking some of the larger banks first to shift to the new accounting standards. But even that has not materialised,” he said. There are also some small changes in the legislation, which are unlikely to happen with the Lok Sabha elections around the corner. Non-banking finance companies, another group of financial sector players under the RBI’s regulation, have already transited to the IndAS regime in the current financial year.