The Reserve Bank of India (RBI) has been finally able to shake off its fear of the impact on the general public, of full and true disclosures in the banking industry. For long, it has held out against true disclosure on bank balance sheets on the specious plea that the additional information does not, for one, fall into the format suggested by the Banking Regulation Act and secondly, that no purpose is served by putting the information upfront in the balance sheet. Despite the fact that information such as on the stock of banks' non performing assets (NPAs) became public through other channels "" albeit with some delay "" the RBI continued to drag its feet on ensuring transparency in bank balance sheets.
It has now decided that the single, omnibus entry of provisions in the profit and loss account will have to be split. Provisions under each separate head will have to be disclosed upfront, including provisions for NPAs, for depreciation on the value of securities, and for tax. While each such entry is supposed to have been verified by the bank's statutory auditors, the information therein remains in the exclusive knowledge of a privileged few. Since the entries are clubbed at the balance sheet stage, no analyst or investor can make out either the dynamics of the year's developments nor make reasonable projections as to the impact of future developments on the bank balance sheet. Investors, thus, have no way of extrapolating the impact of interest rate movements on the valuation of securities held by the bank, nor would they know the impact of changes in corporate taxes. To that extent, the RBI directive to banks is welcome. But it still falls short of ensuring full transparency.
For instance, while the RBI has directed banks to disclose the provisions on account of NPAs, it has done little about disclosure of a bank's actual stock of NPAs. That is, there is still no disclosure on the quality of the total asset portfolio: how much is locked into sub-standard or loss assets. Putting down a figure of stocks of NPAs as a percentage of total assets, as the RBI has directed, does not serve the purpose of full transparency in asset quality. For much the same reasons, investors and others need to know the dynamics of NPAs within the bank, as to how much new stock was added during the year and what eventually has been the outcome of the bank's effort to rehabilitate NPAs.
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However, as regards the treatment of valuation of investments, the RBI has incorporated the standard accounting practice abroad of first declaring the gross value of securities, the depreciation thereon and then the net value carried to the balance sheet. Indeed, very few domestic companies do such a thing. The RBI must realise that total transparency in bank balance sheets is desirable not only for purposes of providing information to investors "" both current and potential "" but also that transparency alone can be the only bulwark against wayward managements. There have been instances last year when the RBI realised that NPAs had not been fully accounted for, as determined by the RBI auditors. In fact, bank managements had made no move towards making the required extra provisions for fear of the impact on their balance sheets. Window dressing of accounts, thus, has returned with a different face. The lasting way to put a full stop to this is to turn the arc lights on; with full disclosure norms the urge to
cut corners should disappear.