Page 44 - Banking Finance July 2025

ARTICLE

financial instruments are presented and requiring detailed
disclosures on risks (credit, liquidity, market). Enhanced
disclosures give stakeholders deeper insights into a bank's
risk exposure, but they also demand robust internal controls
to ensure accuracy.

Practical Implications for Banks

The transition to Ind AS has ripple effects across banking
operations, financial reporting, and stakeholder
relationships.
Balance Sheet and Capital Impact: The ECL model often
leads to higher provisions, reducing retained earnings and,
consequently, capital adequacy ratios (CAR). For instance,
a 2022 study by the ICAI found that ECL provisions under
Ind AS 109 were 20-30% higher than under Indian GAAP
for some banks, pressuring Tier 1 capital.
Profitability Dynamics: Deferred revenue recognition
and lease accounting adjustments can dampen short-
Skill Gaps
term profits, challenging banks' ability to meet investor
expectations or declare dividends. Ind AS's principles-based nature requires judgment, not
just rule-following. Bank staff, auditors, and even
Risk Management Overhaul: ECL modelling requires regulators have needed extensive training to interpret
integrating macroeconomic forecasts (e.g., GDP
standards like Ind AS 109 consistently. The subjectivity
growth, inflation) with borrower-specific data. Banks
in ECL assumptions (e.g., defining "significant increase
like State Bank of India (SBI) have invested heavily in
in credit risk") has led to variations across banks,
data analytics to comply, setting a benchmark for the
prompting scrutiny from the RBI.
industry.
Regulatory Alignment: The RBI has maintained its Data Availability and Quality
prudential norms alongside Ind AS, creating dual Accurate ECL estimates hinge on historical loss data and
reporting requirements. For example, if ECL provisions forward-looking indicators. In India, where economic
exceed RBI's mandated provisions, banks must transfer data can be patchy and borrower credit histories
the difference to an impairment reserve, not incomplete (especially in rural areas), banks struggle to
distributable as dividends-a rule that sparked debate on build reliable models. This is compounded by the diversity
capital flexibility. of loan portfolios-from agricultural loans to corporate
exposures-each requiring tailored assumptions.
Challenges in Ind AS Adoption
The journey to Ind AS compliance has been fraught with Regulatory Divergence
obstacles, particularly for a sector as diverse as Indian The RBI's conservative stance often clashes with Ind AS.
banking, which spans public sector giants, private players, For instance, during the COVID-19 pandemic, the RBI
and smaller cooperative banks. allowed moratoriums on loan repayments, but Ind AS
Technological Constraints 109 required banks to assess ECL based on underlying
ECL modelling demands real-time data aggregation and credit risk, not temporary relief. This misalignment
predictive analytics, a tall order for banks reliant on created provisioning gaps, with some banks reporting
legacy systems. While some larger banks have upgraded higher losses under Ind AS than under RBI norms.
their IT infrastructure, smaller entities lag, often
outsourcing calculations to third-party vendors-a Cost of Compliance
solution that raises cost and control concerns. The financial burden of Ind AS adoption-IT upgrades,

40 | 2025 | JULY | BANKING FINANCE