Ind-AS for NBFCs from Apr 1: confusion reigns
05 April 2018
Banks get a year’s reprieve from implementation of new accounting standards whereas RBI’s silence on the road ahead for NBFCs creates confusion.
Amid the high decibel coverage about the first bi-monthly monetary policy statement for 2018-19 by the Reserve Bank of India on Thursday, a small paragraph, No. 3 in the obscure sounding ‘Statement on Developmental and Regulatory Policies’ quietly deferred the implementation of new accounting standards for Indian banks to April 1, 2019.
The brief paragraph had no mention of the non-bank finance companies (NBFCs) which were to transition to the new Indian Accounting Standard (Ind-AS) -- closely aligned with the latest International Financial Reporting Standards (IFRS) -- on the same date as the banks, i.e. April 1, 2018.
RBI’s silence on this count has left these finance companies again looking for some guidance from the other end of the court -- the Ministry of Corporate Affairs (MCA). An earlier circular by the Ministry had laid down the roadmap for transition -- NBFCs with more than Rs 500 crore of networth to make the change in April 2018 followed by the rest in April 2019.
“We have to go by the MCA circular which had asked us to follow RBI which is not specifically saying anything (right now),” says V Ravi, CFO of Mahindra & Mahindra Financial Services. “One view can be that, if there is no clarification, we may have to follow Ind AS, unless we are specifically advised not to, like in case of banks.”
The other option is to wait and watch. Jayesh Jain, CFO Hero FinCorp and NB Gupta, Director Finance, Power Finance Corporation both fall in this latter category. As Jain puts it, “We are already in a position, more or less, to do whatever is required and we will publish the results accordingly.”
The RBI had been demanding pro forma statements from the banks and NBFCs for a few quarters already. And these firms had been submitting them to the regulator since October 2017. Given this runway for change, RBI’s silence on NBFCs or indeed the reason for deferment of the deadline for banks is confounding.
RBI’s official reason for deferring the changeover for banks -- the need for amendment of the Banking Regulation Act -- is not applicable for the NBFCs. “So technically, they can’t say that NBFCs are not transitioning,” says Keyur Dave, Partner and National Leader Accounting Advisory, BDO.
NBFCs and banks have the same nature of business though for legal and for risk management purposes the two are split. In the present case, if NBFCs go ahead with the implementation of Ind-AS and banks don’t then the chances of disputes rise due to the non comparability of credit reports of the borrowers by the two sectors, says Dave.
As it seems, banks will continue with a rule-based provisioning for another year, while NBFCs will follow the more punishing Expected Credit Loss (ECL) model.
The risk assessment of a single borrower under these disparate models can lead to major snafus. As Dave explains the recognition of a bad loan in the existing framework for banks will allow them some leeway, whereas the NBFC will have to classify it as a bad loan immediately.
In this context, Abhishek Pandey, Managing Director with advisory firm, Duff & Phelps India says, “it would be premature to assume that deferment on Ind AS will not be provided to NBFCs at all, given that it is not feasible for most NBFCs to adhere to current timelines (based on their preparation).”
“With most of the NBFCs also bleeding with high NPAs, Ind AS deferment would have been welcome. It also raises the question of level playing field if the NBFCs will have to adhere to Ind AS guidelines, while the banks are not required to,” he adds.
Now, all eyes are on the MCA which possibly will come out with a clarification soon. Else, confusion continues to reign.