A Reserve Bank of India (RBI) working group has recommended that all banks, listed and unlisted, should prepare and disclose consolidated financial statements (CFS) from April 1, in addition to the regular financial statements. The central bank also said the assessment of group capital should exclude intra-group holdings.
The report of the "working group on consolidated accounting and other quantitative methods to facilitate consolidated supervision", which was placed at the board for financial supervision (BFS) on January 29, says that a parent presenting CFS should consolidate all subsidiaries (domestic as well as foreign).
Investments in associates should be accounted for under the 'equity method' of accounting, while investments in joint ventures should be accounted for under the 'proportionate consolidation' method, it said.
The consolidated prudential reports (CPR), which should be initially introduced on a half-yearly basis from April 1 as part of the off-site monitoring system, combines the assets, liabilities and off-balance sheet positions of supervised institutions and their related financial entities and furnish the consolidated financials as a single business entity.
The working group says that existing liquidity requirements applicable to banks on a solo basis need to be extended to the consolidated position of the groups. If the group is a homogeneous group of banks, cash reserve ratio and statutory liquidity ratio could be evaluated on a consolidated basis after netting out intra-group transactions and exposures. In case, the group is a hetrogeneous group suitable, modalities are required to be prescribed by the regulator, it said.
Deduction of investment in deconsolidated entities (subsidiaries) should be in equal proportion from Tier-I and Tier-II capital, in line with international best practice. Presently, investment made by a parent bank towards the equity capital of a subsidiary is deducted from the bank's Tier-I capital.
It pointed out that the key issue in operationalising consolidated supervision was defining the 'target group', that is which institutions in the supervisory jurisdiction should be supervised on group-wide basis. The working group feels that banks having a network of subsidiaries constitute banking groups and are clear candidates for consolidated supervision.
In respect of all registered non-banking deposit taking finance companies that have networks of subsidiaries and are in control of the group, the working group said that supervision may be applied on selective basis, based on pre-determined parameters such as size of the group (in terms of assets and/or income) vis-a-vis that of the parent and strength of linkages and controls between them.
In all the cases, the consolidation may not extend to group companies which are engaged in insurance business and businesses, which do not pertain to financial services.
