RBI is pushing lenders to increase the quality of their disclosures

The Reserve Bank of India (RBI) is putting pressure on regulated entities (REs) to enhance the quality of their disclosures so that they meet accounting standards and the needs of end users, according to Deputy Governor M Rajeswara Rao.

“It is said that with great power also comes great responsibility. “With greater flexibility in accounting and prudential norms comes greater responsibility in disclosures,” Rao said.

In his address at the Conference of Statutory Auditors and Chief Financial Officers of Commercial Banks and All India Financial Institutions (Regulated Entities/REs), he emphasized that disclosures are the cornerstone of transparency.

“Explicit disclosures bridge the gap between what management knows and what external users can infer from the financial statements. But the key question is how much disclosure is ‘good enough’ to ensure clear understanding without burdening users with information overload.

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“Striking the balance between comprehensive disclosure and brevity is a difficult step. When disclosures are clear and comprehensive, they increase market confidence,” Rao said.

Referring to the disclosures being made by NBFCs (Non-Banking Finance Companies) in terms of ECL (Expected Credit Loss) framework, he said that on observation of the disclosures of accounting policies of some NBFCs, RBI found that most of the disclosures were made in broad These were essentially repetitions of the text of the relevant accounting standards.

“We could not obtain any specific insights such as discussion of the assumptions and methods applied in measuring ECL, shared credit risk characteristics for estimating expected losses on a collective basis, qualitative criteria in determining significant increase in credit risk (SICR), etc. .

“To address this situation, we are pushing REs to enhance the quality of their disclosures,” Rao said.

principle-based guidelines

The Deputy Governor said that RBI’s assessment of the implementation of the principle-based guidelines in NBFCs shows that the flexibilities offered by them, while valuable, have fallen short in some cases where their application is concerned.

Highlighting some of the issues and challenges that the RBI faced and which could have been evaluated more carefully by the auditors, Rao said: “However, sales from assets under the (principle-based) standard amortized cost category are permitted. An entity needs to assess how consistent such sales are with the objective of collecting contractual cash flows.

“In practice, we have seen significant selling from the amortized cost category through securitization and direct transfers.”

The deputy governor said it was not clear how such a sale was consistent with a business model that aims to hold assets to collect contractual cash flows.

Rao gave another example of how the impairment framework prescribed under Ind AS (Indian Accounting Standards) 109 is applied.

“While the framework is forward-looking and the movement of assets from Stage 1 to Stage 2 is required to assess any significant increase in credit risk (SICR) it is necessary to take into account more forward-looking criteria than in the past only (DPD) , It is observed that some NBFCs mainly rely on 30 DPD norms.

“DPD is a lagging indicator, which is not always in sync with using the forward-looking view of ECL (expected credit loss),” he said.

In the case of asset reconstruction companies (ARCs), the RBI found that no provision was made for management fees and expenses which remained unrealizable for more than 180 days.

Such observations have necessitated the Reserve Bank to issue guidelines from a prudential perspective so that such unrealized management fees can be deducted from regulatory capital while calculating the capital adequacy ratio.

“The examples highlighted above highlight our concern about regulated entities using the flexibilities offered in the principles-based framework which are not free from bias. We are of the view that auditors require greater skepticism on such issues,” Rao said.

As independent evaluators, they emphasized that auditors should critically evaluate and challenge management’s judgment and assumptions to ensure that these align with the underlying principles of accounting standards and prudential norms. .