New accounting norms may add to banks’ bad loans

There is a new twist to the issue of rising bad loans in the banking sector.

Under the new global accounting norms that banks have to adopt from April 1, 2018, the gross level of non-performing assets (NPAs) for banks and non-banking finance companies (NBFCs) could rise significantly. Companies have to migrate to the new norms from April 1,2016.

The quantum of these bad loans would not only affect banks’ profits, but also eat into their capital, raising concerns among RBI and finance ministry officials, who are already grappling with the issue of injecting fresh capital into banks.

According to people familiar with the matter, the RBI is trying to address the issue by asking banks and NBFCs to internally adopt the new system — Ind AS — early on so that everybody gets a head-start on the extent of the problem and tries to resolve it.

“Evaluation and recording of credit losses under Ind AS is significantly different from that used under current accounting norms,” said Jamil Khatri, partner, KPMG. “This could likely lead to a rise in gross NPAs and an increase in the level of provisioning. Ind AS follows an expected loss model which is based on judgment and is significantly different from the norm-based provisioning model under the current system.”

The RBI recently formed a panel to suggest measures to address challenges arising out of implementation of Ind AS by banks. The report, which was submitted to the RBI on Wednesday, suggests change in loan loss provisioning but is silent on the impact on capital adequacy. The central bank has sought comments on the report by November end.

Prime Minister Narendra Modi recently said that the government plans to infuse Rs 70,000 crore into public sector banks to address the issue of bad loans.

The article appeared in the Financial Express.