RBI Deputy Governor M Rajeshwar Rao while addressing the Conference of Statutory Auditors and Chief Financial Officers of Commercial Banks and All India Financial Institutions raised concerns over quality of disclosures made by some NBFCs and principle-based approach in financial reporting
Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao has flagged concerns over quality of disclosures made by some NBFCs and urged the auditing community to ensure that entities provide appropriate qualitative information to depositors as well as other stakeholders.
"The statutory auditors play a significant role in maintaining stakeholder confidence in audited financial statements and this is particularly important in the case of banking industry where the entire edifice is built on 'trust' and the biggest external stakeholders, i.e., depositors, are fragmented and unorganised," he said.
Rao was addressing the Conference of Statutory Auditors and Chief Financial Officers of Commercial Banks and All India Financial Institutions (AIFIs) here on Tuesday.
He emphasised that the RBI has a strong interest in promoting sound and high quality accounting and disclosure standards for the banking and financial industry as well as in having transparent and comparable financial statements that strengthen market discipline.
The deputy governor said the RBI, for some time now, has been supplementing rule-based regulations with principle-based regulations to give regulated entities (REs) a degree of flexibility in their business decision making.
"The principle-based approach to regulations is founded on the belief that financial reporting reflects the economic reality of a transaction. However, application of principle-based standards requires significant use of management judgement," Rao said.
He said disclosures are the cornerstone of transparency as these bridge the gap between what management knows and what external users can infer from financial statements.
Striking a balance between comprehensive disclosure and conciseness is a tightrope walk. When disclosures are clear and comprehensive, they foster trust in the market, he said.
Sharing the RBI's experiences in this regard, Rao said the central bank looked at disclosure being made by non-banking financial companies (NBFCs) in the context of ECL (expected credit loss) framework.
On perusal of the disclosures of the accounting policies of some NBFCs, we observed that much of the disclosures were largely a repetition of the text of respective accounting standards.
"We could not glean any specific insights such as discussion of the assumptions and methods applied in measuring ECL, shared credit risk characteristics to assess expected loss on a collective basis, qualitative criteria in determination of SICR (significant increase in credit risk), etc," the deputy governor said.
To address the issue, Rao said the central bank is nudging REs to enhance the quality of their disclosures. He urged the auditor community to critically evaluate the disclosure practices and ensure that these meet the needs of accounting standards and end-users.
"Auditors also have the responsibility of ensuring that entities provide appropriate qualitative information related to governance and control mechanisms," he said.
Rao further said even as banks navigate an increasingly complex emerging landscape, a harmonised approach by the regulators and auditors can remove the blind spots in risk identification and mitigation. This, he added, will help achieve the shared goal of financial stability as well as ensure robustness of individual institutions.