As they battle the NPA menace, banks are set to see “huge ramifications” next fiscal with the implementation of new accounting norms that will require the lenders to make higher provisioning for loans. The Indian Accounting Standard (Ind AS) 109, set to be effective from April 1, 2018, is likely to have an impact on the “banking numbers”, ICAI President Nilesh Shivji Vikamsey said. The Institute of Chartered Accountants of India (ICAI) is the apex body of chartered accountants in the country. While the new accounting standard is broadly aimed at ensuring that there are no credit shocks like those seen during the global financial crisis in 2008, it would have an effect on the “banking numbers”.
Converged with the International Financial Reporting Standard (IFRS), Ind AS 109 would be applicable for all entities, including banks and non-banking finance companies. Indian Accounting Standard (Ind AS) is converged with IFRS. “It (Ind AS 109) is an accounting policy that has to be followed and that will have huge ramifications on the numbers. The provisioning will be more and P&L (Profit & Loss) will be impacted,” Vikamsey told PTI in an interview.
There might be a “hit on the banking numbers, including the capital adequacy provisioning where the RBI and the government may have to come with some moratorium or so,” he noted. From the current accounting system that focuses on ‘incurred credit loss’, entities would be moving to ‘expected credit loss’ proposition with Ind AS 109. The transition would also come against the backdrop of mounting NPAs (Non Performing Assets) estimated to be worth over Rs 7 lakh crore in the banking system. The government and the RBI have been working on ways to deal with the menace.
Vikamsey said the biggest challenge for the banking sector would be when banks go for Ind AS 109, with prior year numbers. The new accounting standard would be applicable world over from January 1, 2018 while it would be effective in India from April 1 that year. Ind AS 109 is converged with IFRS 9. “There the recognition norms will change. Now we have a very objective criteria… There will be a lot of subjectivity while coming to those numbers. Each bank would have different expected credit loss,” he said.
The expected credit loss would depend on the risk management models that banks would be following. “There will be some subjectivity and RBI is looking at how to have some kind of homogeneity as far as applicability is concerned,” the ICAI President noted.