Banks may have to adopt global norms in derivatives

The Reserve Bank of India (RBI) is considering asking banks to adopt the broad principles of international accounting standards (IAS) on derivatives trading.

The brisk pace at which banks' activity in derivatives in the country is increasing has prompted the central bank to think of introducing IAS 39-like accounting principles, RBI Deputy Governor V Leeladhar said today.

IAS 39 accounting principles require disclosure of market and credit risks resulting from the use of derivative instruments, which are currently not disclosed in banks' balance sheets.

The Institute of Chartered Accountants of India (ICAI) is working on accounting standards for banks' exposures to financial derivative instruments. These will be the Indian parallel to International Financial Reporting Standards.

"The formal introduction of these accounting standards by the ICAI is likely to take some time in view of the processes involved. Meanwhile, the RBI is considering the need for banks and financial entities to adopt the broad underlying principles of IAS 39," Leeladhar said.

"Since this is likely to give rise to some regulatory/prudential issues, all relevant aspects are being comprehensively examined. The proposals in this regard would be discussed with the market participants before introduction. Adoption and implementation of these principles are likely to pose a great challenge to both the banks and the RBI," he added.

The RBI considers the absence of clear accounting guidelines in this area "a matter of significant concern".

The risk management framework for derivatives trading, an essential prerequisite, is a relatively new area for Indian banks.

"It is widely accepted that as the volume of transactions increases, which is happening in the Indian banking system, the need to upgrade the accounting framework needs no emphasis," Leeladhar said.

A World Bank committee on accounting and auditing in India recently commented on the absence of accounting standards that deal with recognition, measurement, presentation and disclosures pertaining to financial instruments.

Introduction of accounting standards for derivatives exposure will require banks to invest in technical capability, apart from greater disclosures in financial statements.