The Reserve Bank of India (RBI) is poised to make a significant move in tune with the global banking standards, aimed at the alignment of its definition of financial difficulty with that of the guidelines provided by the Basel Committee on Banking Supervision. A series of measures, including the reintroduction of the previously postponed Indian Accounting Standard (IndAS) norms, are in the offing. Prepared in accordance with these developments, this article delves into the key elements of this impending paradigm shift.
Spotlight on Indicators of Financial Trouble
In the backdrop of the RBI’s initiative, a non-exhaustive indicative list of signs of financial difficulty has been laid out. This list essentially serves as a guide for recognizing potential financial pitfalls.
The IndAS Comeback
Taking a crucial step forward, the RBI has brought back into focus the IndAS norms that had been indefinitely postponed earlier. These norms were initially slated for implementation from April 1, 2019, but were deferred due to anticipated demands for higher capital for bad loan provisioning by banks. This was not the first such deferment – the banks had also been required to roll out IndAS from April 2018, which was held off due to the need for legislative amendments to make financial statement formats compatible with IndAS.
Defining Indian Accounting Standards (Ind AS)
Indian Accounting Standards, or Ind AS, form a set of rules governing the accounting and recording of financial transactions, as well as dictating the presentation of statements such as profit and loss accounts and company balance sheets. These standards were crafted by the Accounting Standards Board (ASB), established in 1977. The ASB, a committee under ICAI, is composed of representatives from government departments, academicians, other professional bodies like ICAI, along with representatives from ASSOCHAM, CII, FICCI, etc. The Ind AS are named and numbered following the pattern of the International Financial Reporting Standards (IFRS).
International Financial Reporting Standards (IFRS)
A global accounting standard set by the International Accounting Standards Board (IASB), IFRS was created with the intent of establishing a common accounting language to bolster transparency in financial data presentation. The IASB overtook the role of the International Accounting Standards Committee (IASC) in 2001, carrying on its mandate of laying down international accounting standards. The IASB operates out of London.
The Basel Committee’s Role
| Date | Event |
|---|---|
| December 2010 | The Basel Committee on banking supervision published Basel III norms. |
| Post 2010 | Establishment of a global regulatory framework for more resilient banks and banking systems. |
Unveiling Basel III Norms
The Basel III norms came into existence based on a publication by the Basel Committee in December 2010. These constitute a global regulatory framework aimed at fostering more robust banks and banking systems. The norms encompass several facets of global regulatory standards on bank capital adequacy and liquidity, including a countercyclical capital buffer.