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RBI prods banks to adopt US GAAP for NPAs
Atmadip
Ray
Mumbai, Jan 2: The Reserve Bank has nudged banks to
adopt the US GAAP (generally accepted accounting principles)
mode of accounting to deal with NPAs. RBI has recently despatched
letters to Corporation Bank, ICICI Bank, Bank of America and
Citibank inviting their comments on the issue and its implications
on balance sheets of banks. The central bank has also asked
Indian Banks Association to send in letters to other banks,
on behalf of RBI, requesting “early” responses from them.
“RBI has been encouraging banks to adopt US GAAP to increase
transparency”, a senior RBI official said.
It has also been gathered that some major banks have approached
the banking regulator over the issue.
The US GAAP method follows a discounted cash flow approach towards
valuation of securities, while the RBI rules seek to follow
a market value approach when making valuation of secured part
of loans.
“Under the RBI guidelines, banks should make higher provisionings
towards NPAs. However, under US GAAP, accounting treatment of
NPAs is a more liberal one and its adoption would allow banks
to make lesser provisions,” a senior official with a PSU bank
said.
Since accounting treatments vary significantly from one country
to another, it is advisable to adopt US GAAP so as to have effective
communication with global investors as also to increase transparency,
said another banker.
Primary reasons for the differences between US GAAP and Indian
method is in the provisioning aspects for NPAs. RBI requires
banks to determine and report NPAs at book value net of all
write-offs and provisions. Under the US GAAP, banks are required
to determine NPAs based on the evaluation of the willingness
and ability of the borrower to repay, and estimate the realisable
part thereof, based on an analysis of the underlying collateral
and/or the underlying cash flows of the borrower.
In a bid to move towards internationally best accounting practices
and to ensure greater transparency, RBI has decided to adopt
the 90-days norm to deal with NPAs from March 31, 04. It has
also asked banks to commence making additional provisions for
NPAs from March 31, 02 onwards, which would strengthen their
balance sheets and ensure smooth transition to the 90-days norm
by March 31, 04.
As per the RBI requirements, banks have submitted their action
plans by December 31. The implementation of the plans will be
monitored by the central bank on a half-yearly basis.
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