Mumbai, Reserve Bank of India (RBI) Deputy Governor M. Rajeshwar Rao has raised concerns over the quality of disclosures made by some NBFCs and urged the audit community to ensure that entities provide adequate qualitative information to depositors as well as other interested parties.
"Statutory auditors play an important role in maintaining the confidence of stakeholders in the audited financial statements and this is particularly important in the case of the banking industry, where the entire edifice is based on 'trust' and important external stakeholders, i.e. depositors, are fragmented and disorganized," he stated.
Rao was addressing the Conference of Statutory Auditors and Chief Financial Officers of Commercial Banks and All Indian Financial Institutions (AIFI) here on Tuesday.
He emphasized that the RBI has a keen interest in promoting robust and high-quality accounting and disclosure standards for the banking and finance industry as well as having transparent and comparable financial statements that strengthen market discipline.
The lieutenant governor said the RBI, for some time now, has been supplementing rules-based regulations with principles-based regulations to provide regulated entities (REs) with a degree of flexibility in their business decision-making.
"The principles-based approach to regulations is based on the belief that financial reporting reflects the economic reality of a transaction. However, the application of principles-based standards requires significant use of administrative judgment," Rao said .
He said disclosures are the cornerstone of transparency, as they close the gap between what management knows and what external users can infer from the financial statements.
Striking a balance between comprehensive disclosure and conciseness is a tightrope walk. When disclosures are clear and complete, they build trust in the market, he said.
Sharing the RBI's experiences in this regard, Rao said the central bank analyzed the disclosure made by non-banking financial companies (NBFCs) in the context of the ECL (expected credit loss) framework.
“While examining the accounting policy disclosures of some NBFCs, we observed that many of the disclosures were largely a repetition of the text of the respective accounting standards.
"We were unable to obtain specific information, such as the discussion of the assumptions and methods applied to measure ECL, the shared characteristics of credit risk to evaluate the expected loss collectively, the qualitative criteria for determining the SICR (significant increase in credit risk ), etc. "said the lieutenant governor.
To address the issue, Rao said the central bank is pressuring REs to improve the quality of their disclosures.
He urged the auditing community to critically evaluate disclosure practices and ensure they meet the needs of accounting standards and end users.
"Auditors also have the responsibility to ensure that entities provide adequate qualitative information related to governance and control mechanisms," he said.
Rao further said that even as banks navigate an increasingly complex emerging landscape, a harmonized approach by regulators and auditors can eliminate blind spots in risk identification and mitigation.
This, he added, will help achieve the shared goal of financial stability, as well as ensure the strength of individual institutions.
"Statutory auditors play an important role in maintaining the confidence of stakeholders in the audited financial statements and this is particularly important in the case of the banking industry, where the entire edifice is based on 'trust' and important external stakeholders, i.e. depositors, are fragmented and disorganized," he stated.
Rao was addressing the Conference of Statutory Auditors and Chief Financial Officers of Commercial Banks and All Indian Financial Institutions (AIFI) here on Tuesday.
He emphasized that the RBI has a keen interest in promoting robust and high-quality accounting and disclosure standards for the banking and finance industry as well as having transparent and comparable financial statements that strengthen market discipline.
The lieutenant governor said the RBI, for some time now, has been supplementing rules-based regulations with principles-based regulations to provide regulated entities (REs) with a degree of flexibility in their business decision-making.
"The principles-based approach to regulations is based on the belief that financial reporting reflects the economic reality of a transaction. However, the application of principles-based standards requires significant use of administrative judgment," Rao said .
He said disclosures are the cornerstone of transparency, as they close the gap between what management knows and what external users can infer from the financial statements.
Striking a balance between comprehensive disclosure and conciseness is a tightrope walk. When disclosures are clear and complete, they build trust in the market, he said.
Sharing the RBI's experiences in this regard, Rao said the central bank analyzed the disclosure made by non-banking financial companies (NBFCs) in the context of the ECL (expected credit loss) framework.
“While examining the accounting policy disclosures of some NBFCs, we observed that many of the disclosures were largely a repetition of the text of the respective accounting standards.
"We were unable to obtain specific information, such as the discussion of the assumptions and methods applied to measure ECL, the shared characteristics of credit risk to evaluate the expected loss collectively, the qualitative criteria for determining the SICR (significant increase in credit risk ), etc. "said the lieutenant governor.
To address the issue, Rao said the central bank is pressuring REs to improve the quality of their disclosures.
He urged the auditing community to critically evaluate disclosure practices and ensure they meet the needs of accounting standards and end users.
"Auditors also have the responsibility to ensure that entities provide adequate qualitative information related to governance and control mechanisms," he said.
Rao further said that even as banks navigate an increasingly complex emerging landscape, a harmonized approach by regulators and auditors can eliminate blind spots in risk identification and mitigation.
This, he added, will help achieve the shared goal of financial stability, as well as ensure the strength of individual institutions.
