Delay in transition to Ind-AS: not such a bad idea for banks

ET CFO |
Keyur Dave , Partner and Leader
Accounting Advisory Services
|

06 April 2018

Deferment of the new accounting standards for banks to April 1, 2019 has its pros and cons. In the meantime, it offers banks additional time to up their game.

Five days after a deadline for implementation of Indian Accounting Standards (Ind-AS) passed, the Reserve Bank of India officially deferred the transition to the next year. While banks are heaving a sigh of relief as they get more time to gear up, investors and analysts are somewhat disappointed by the delay.

“The deferment of Ind-AS to April 1, 2019 brings respite for bank managements given that they are busy dealing with Insolvency and Bankruptcy Code (IBC) and its implications,” says Abhishek Pandey, Managing Director at advisory firm, Duff & Phelps India.

Pandey also points out to the dearth of an “entire ecosystem around such implementation.” Service providers still don’t have a robust products for this transition, especially for the implementation of standards such as Ind-AS 109 which corresponds to the International Financial Reporting Standards (IFRS) 9 and deals with the concept of Expected Credit Loss (ECL).

Charanjit Attra, Partner, Financial Accounting Advisory Services (FAAS), EY India agrees. “The extension of one year would help the banks set up their IT infrastructure to meet up the requirements of Ind AS particularly for the computation of the ECL. Banks should use this period to build robust processes for Ind AS adjustments,” he says.

And banks seem to agree. “This gives us an opportunity to tie some of the loose ends that are there; see if there are any more meaningful changes that needs to be made based on whatever clarification comes,” says Jaideep Iyer, Head of Finance, Strategy and Investor Relations at RBL Bank.

The clarifications that Iyer is referring to includes detailed guidelines on capital adequacy requirements especially under Basel III and how they are consistent with the Ind-AS approach.

Further, the Indian government is in the midst of a recapitalisation exercise for the state-owned banks. The new accounting standards, therefore, must be consistent with all these changes.

The primary standard that is being awaited for financial companies is Ind-AS 109 which is essentially a forward-looking way to loss provisioning. This standard marks a significant shift in accounting credit impairment rules is still under discussion and evaluation by RBI.

IFRS 9 (global version of Ind-AS 109) came into play globally starting January 2018. With the delay, the RBI and the Indian banking sector will therefore get the benefit of the actual impact on existing balance sheets. This is expected to provide some clarity on capital adequacy and evaluation of capital for regulatory purposes.

“The Basel committee has come up with some recommendations on how countries are moving to IFRS 9 and how they can deal with capital adequacy,” says 
Sai Venkateshwaran, Partner and Head - Accounting Advisory Services at KPMG.

“They have come up some transitional approaches especially to spread the impact on the capital to a period of four to five years for dealing with their capital requirement,” says Venkateshwaran.
 
Currently for global investors the bigger issue was around identification and cleaning of bad loans. That is priority for investors over Ind-AS implementation, thus keeping the banks clear to focus on IBC for now might not be a bad bet even from capital flow perspective.Abhishek Pandey, MD, Duff & Phelps India

Indian banks have been submitting the pro forma statement on the new format to the regulator since October 2017. This perhaps has shown to the regulator the level of preparedness amongst the banks.

Since banks will have to submit the first Ind-AS report in June 2019, the comparatives for those reports will have to be prepared for this year. 

Therefore, the banks have been asked to continue with the pro forma statements for monitoring purposes.

The delay while being welcomed by the banking industry has its downsides too. The deferment will create issues for listed Indian banks when they seek capital as their results will not be strictly comparable with their global peers.

“This deferment could create some issues in terms of comparability of accounts of Indian banks with their global peers, and thus the flow of capital might get impacted,” agrees Duff & Phelps’ Pandey.

“However, currently for global investors the bigger issue was around identification and cleaning of bad loans. That is priority for investors over Ind-AS implementation, thus keeping the banks clear to focus on IBC for now might not be a bad bet even from capital flow perspective,” he adds.

Keyur Dave, Partner and National Leader, Accounting Advisory at accounting and tax advisory firm, BDO India LLP is a bit more despondent. He reckons that a few Indian banks have gone through rough months in recent past and others have issues with corporate governance.

“In such situation, the role of a regulator is to to address such issues with better guidance and disclosures. Rather than that, we are allowing Indian banks to continue with old accounting standards which is not addressing our current banking issues,” says Dave.

For now, it seems the banks have an opportunity to use this gift of additional time to beef up their systems and processes.

Pandey believes a closer look and assessment of the valuation of large corporate loans would also be helpful. “It would also serve as segue for Ind-AS implementation in future,” he says.