Financial Standards and Codes: Report of Advisory Group on Banking Supervision

Loan accounting, transparency and disclosures (Contd)

Summary of Recommendations

1. As per extant guidelines, if a loan under the doubtful category does not migrate to the loss category (for which 100 per cent provision is required to be made), the account remains under-provided as, after three years in the doubtful category, only a maximum of 50 per cent provision is created on the secured portion. This loophole needs to be plugged in view of the limitations with which realisation of collateral suffers in the country.

2. Within a given timeframe of, say, 3-5 years, the level of provisions on standard assets should be raised to international standards. Similarly, even on the secured portion of doubtful debts, provision beyond 50 per cent will have to be stipulated if the condition and realisabilty of collaterals so demand.

3. The formulae-based system of classification and provisioning should give way to a more closer to reality assessment of the realisabilty of assets, relying on a risk assessment-based system.

4. Portfolio-based approach to provisioning may be considered in the case of groups of small homogenous loans.

5. Banks have put in place credit risk management systems which are also being streamlined and improved. With the help of these systems, banks should now be able to adopt analytical and statistical methods for determining their requirements and provisioning/charge-off.

6. In preparing its future guidelines on provisioning, RBI may undertake ratio analysis of overall provisioning to past due and impaired loans, and to total loans, over time and across institutions. Banks also may be asked to undertake such an analysis and make it a part of their mandatory disclosures.

7. At present, all banks irrespective of their size, scope and complexity of operations, are required to make the same credit risk disclosures. RBI may take early steps to introduce the concept of materiality in the matter of disclosures.

8. The levels of disclosure in the balance sheets of Indian banks should be gradually improved so that, within the period of next two to three years, these meet the international best practices in these regards. A coordinated approach between the ICAI and RBI may be adopted for this purpose.

9. Several changes need to be made in disclosure practices. These have been classified in Chapter 6 under the following categories: (1) General balance sheet disclosures, (2) Internal control and management systems, (3) Credit risk disclosure and (4) Management of risks.

10. Among other things, detailed discussions on operational, legal and strategic risks may be made mandatory in management’s letter/directors’ report to the shareholders.