INSUBCONTINENT EXCLUSIVE:
2023, seeing poor preparedness of banks to make the transition
The new rules are expected to add to the burden of higher capital requirement for banks, especially loanloss provisions.
It is estimated
the RBI conducted an impact assessment on the implementation of Ind-AS in 2016, banks already submit parallel accounting based on the new
on par with the International Financial Reporting Standard (IFRS) 9, under which banks are required to undertake early recognition of
provision for losses on loans and off-balance sheet exposures based on an expected credit loss (ECL) model
Currently, Indian banks follow the Generally Accepted Accounting Principles (GAAP), which requires banks to recognise mark-tomarket
losses.
Ind-AS is expected to increase transparency and comparability of the financial statements of Indian banks with their global
counterparts.
It will also impact key function areas like regulatory reporting and capital adequacy ratios
Globally, banks have adopted the new accounting standards in 2018 and saw a slight uptick in their loan loss provisions.
"The IFRS 9 moves
away from the incurred credit loss model to expected credit loss model, which would mean that the timing of recognition of loss could be
Due to this, the provisioning have to be increased and could in turn impact the capital adequacy ratio," said Sandip Khetan, partner, EY
India.
The incurred credit loss model used by the banks is based on RBI guidelines where it considers by how many days the loan is delayed
before classifying it as a stressed asset
On the other hand, under the new model, banks would be expected to factor in economic cycles and whether there is a potential bubble while
arriving at the health of a loan under the expected credit loss model
This would mean that banks would have to calculate probability of a loan getting bad, before there are any indication of it going bad.
Last
year, the government announced the merger of 10 public sector banks to create four big banks, but is yet to notify this move
years the government has infused nearly Rs 3.5 lakh crore into public sector banks, but the return to its largest shareholder has been
In the latest Union budget, the finance minister did not announce any capital infusion for stateowned banks as it front loaded Rs 68,855
crore, out of Rs 70,000 crore earmarked for capital infusion for the current fiscal, to take care of the mega-merger plan announced in
August 2019.
Indian banks are sitting on a bad loan pile of Rs 9.5 lakh crore which is likely to rise further