Page 43 - Banking Finance July 2025

A R T IC L E
ARTICLE
of transitioning an entire sector to a principles-based understanding of intent and contractual terms, moving
regime. away from rigid categorization.
Impairment via Expected Credit Loss (ECL): The most
Phased Implementation: revolutionary change is the ECL model, replacing the
1. Phase I (From April 1, 2016): incurred loss approach. Banks must now estimate losses
o Applicability: Companies with a net worth of Rs. based on forward-looking data, considering
500 crore or more. macroeconomic factors, historical trends, and borrower-
specific risks. This requires sophisticated modelling and a
o Scope: This phase targeted large companies,
proactive stance on credit risk management.
including listed and unlisted entities meeting the
net worth criterion. Hedge Accounting: For banks using derivatives to
hedge interest rate or currency risks, Ind AS 109 aligns
2. Phase II (From April 1, 2017): accounting with risk management practices, reducing
o Applicability: All listed companies and unlisted volatility in reported profits.
companies with a net worth between Rs. 250 crore
and Rs. 500 crore. The ECL model has forced banks to overhaul their
provisioning practices. For instance, a loan previously
Key Ind AS Standards Reshaping Banking deemed "performing" under Indian GAAP might now require
Several Ind AS standards have profound implications for provisions if economic indicators signal potential distress-
banks, given their reliance on financial instruments, revenue fundamentally altering balance sheets.
streams, and leased assets. Let's explore the most impactful
ones. Ind AS 115: Revenue from Contracts with
Customers
Ind AS 109: Financial Instruments While banks primarily earn interest income (outside Ind AS
Ind AS 109 is arguably the cornerstone of banking 115's scope), fee-based revenues-like loan origination fees,
transformation under this regime. It replaces the older IAS credit card fees, or syndication charges-fall under this
39 framework and introduces three key pillars: classification standard. Ind AS 115 mandates recognizing revenue when
and measurement, impairment, and hedge accounting. performance obligations are satisfied, often deferring
Classification and Measurement: Banks must now income recognition compared to Indian GAAP. For example,
classify financial assets (loans, investments, etc.) based a loan processing fee tied to ongoing services might be
on their business model and cash flow characteristics- amortized over the loan tenure rather than booked upfront,
either at amortized cost, fair value through other impacting profitability timelines.
comprehensive income (FVOCI), or fair value through
profit and loss (FVPL). This shift demands a nuanced Ind AS 116: Leases
Banks with extensive branch networks face significant
changes under Ind AS 116. Previously, operating leases (e.g.,
branch premises) were off-balance-sheet items. Now, banks
must recognize a right-of-use (ROU) asset and corresponding
lease liability, calculated as the present value of future lease
payments. This increases reported assets and liabilities,
affecting key ratios like debt-to-equity and return on assets
(ROA). For a bank with thousands of branches, the
cumulative impact can be substantial.

Ind AS 32 and 107: Financial Instruments
Presentation and Disclosures

These standards complement Ind AS 109 by defining how

BANKING FINANCE | JULY | 2025 | 39