Indian Banking Sector Reforms: Disclosure Norms

Banks should disclose in balance sheets maturity pattern of advances, deposits, investments and borrowings. Apart from this, banks are also required to give details of their exposure to foreign currency assets and liabilities and movement of bad loans. These disclosures were to be made for the year ending March 2000.

In fact, the banks must be forced to make public the nature of NPAs being written off.  This should be done to ensure that the taxpayer’s money given to the banks as capital is not used to write off private loans without adequate efforts and punishment of defaulters.

A Close look: For the future, the banks will have to tighten their credit evaluation process to prevent this scale of sub-standard and loss assets.  The present evaluation process in several banks is burdened with a bureaucratic exercise, sometimes involving up to 18 different officials, most of whom do not add any value (information or judgment) to the evaluation.  But whether this government and its successors will continue to play with bank funds remains to be seen.  Perhaps even the loan waivers and loan “melas” which are often decried by bankers form only a small portion of the total NPAs.  As mentioned above, much more stringent disclosure norms are the only way to increase the accountability of bank management to the taxpayers.  A lot therefore depends upon the seriousness with which a new regime of regulation is pursued by RBI and the newly formed Board for Financial Supervision.

RBI norms for consolidated PSU bank accounts

The Reserve Bank of India (RBI) has moved to get public sector banks to consolidate their accounts with those of their subsidiaries and other outfits where they hold substantial stakes.  Towards this end, RBI has set up a working group recently under its Department of Banking Operations and Development to come out with necessary guidelines on consolidated accounts for banks. The move is aimed at providing the investor with a better insight into viewing a bank’s performance in totality, including all its branches and subsidiaries, and not as isolated entities. According to a banker, earlier subsidiaries were floated as external independent entities wherein the accounting details were not incorporated in the parent bank’s balance sheet, but at the same time it was assumed that the problems will be dealt with by the parent.

This will be a path-breaking change to the existing norms wherein each bank conducts its accounts without taking into consideration the disclosures of its subsidiaries and other divisions for disclosure. As per the proposed new policy guidelines, the banks will be required to consolidate their accounts including all its subsidiaries and other holding companies for better transparency.

Result: This will require the banks to have a stricter monitoring system of not only their own bank, but also the other subsidiaries in other sectors like mutual funds, merchant banking, housing finance and others. This is all the more important in the context of the recent announcements made by some major public sector banks where they have said they would hive off or close down some of their under performing subsidiaries.

The Investors Advantage

Getting all these accounts consolidated with that of the parent bank will provide the investor a better understanding of the banks’ performances while deciding on their exposures. More so, since a number of public sector banks are now listed entities whose stocks are traded on the stock exchanges. Some public sector banks are even preparing their accounts in line with US GAAP norms in anticipation of a US listing. These norms will therefore be in line with the future plans of these banks as well. The working group was set up following the need to bring about transparency on the lines of international norms through better disclosures.

These new norms will necessitate not only that the problems are handled by the parent, but investors are also aware of what exactly the problems are and how they affect the bottom lines of the parent banks. Now, under the new guidelines, this will no longer be an external disclosure to the parent banks’ books of accounts.

Rather, point out bankers, this will very much form an integral part of the parent’s balance sheet. For instance, if a subsidiary is not performing well or making losses, this will reflect in the parent’s balance sheet.

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