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Banks To Ensure 'True & Fair' Picture of Financial Position in Balance Sheet, P/L Statements: RBI

In its Master Direction on 'Financial Statements - Presentation and Disclosures' issued for 'all banks', the Reserve Bank of India (RBI) has outlined a detailed format of preparation of financial statements. RBI has also warned banks to stay away from 'window dressing' the financial positions.

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In a bid to streamline all guidelines, instructions, directives related to the presentation and disclosure of financial statements of banks, the Reserve Bank of India (RBI) has issued a 'Master Direction' for all categories of banks—Commercial Banks, Primary (Urban Cooperative Banks. This 106-page document will be called the 'Reserve Bank of India (Financial Statements - Presentation and Disclosures) Directions, 2021.


"A Master Direction incorporating, updating and where required, harmonizing across the banking sector the extant guidelines/instructions/directives on the subject has been prepared to enable banks to have all current instructions on presentation and disclosure in financial statements at one place for reference," it said on August 30. "However, it may be noted that in addition to these disclosures, Commercial Banks shall comply with the disclosures specified under the applicable regulatory capital framework," it added.


Why has RBI issued this document? Under certain sections (Section 35A and 56) of the Banking Regulation Acto, 1949, the Reserve Bank of India has the power to issue direction to the banks, as deemed fit or required from time to time. 


No Window Dressing


One of the key directions includes instructions to banks to ensure that the balance sheet and the profit and loss account reflects the 'true and fair' picture of its financial position. It is titled 'Window Dressing'.  


"Instances of window dressing of financials, short provisioning, misclassification of NPAs, under-reporting/ incorrect computation of exposure/risk weight, incorrect capitalization of expenses, capitalization of interest on NPAs, deliberate inflation of asset and liabilities at the end of the financial year and subsequent reversal immediately in next financial year, etc. shall be viewed seriously and appropriate penal action in terms of the provisions of the Banking Regulation Act, 1949 shall be considered," it said. This is an important step in order to lend in more transparency to the book of accounts particularly after the recent events of banks suddenly not being able to discharge their functions leading to chaos and panic amongst its customers, depositors, shareholders and other stakeholders. 


These directions, as per RBI, shall be applicable to all banking companies, corresponding new banks, regional rural banks (‘RRBs’), and State Bank of India (collectively referred to as ‘Commercial Banks’). The definition of 'all banks' includes banks incorporated outside India but licensed to operate in India (‘Foreign Banks’), Local Area Banks (LABs), Small Finance Banks (SFBs), Payment Banks (PBs) and primary co-operative banks (referred to as Urban Cooperative Banks).


In addition to standalone financial statements prepared as per the formats prescribed under section 29 of Banking Regulation Act, 1949, Commercial Banks (other than RRBs), whether listed or unlisted, shall prepare and disclose Consolidated Financial Statements (CFS) in their Annual Reports, in the formats prescribed. The CFS shall normally include a consolidated balance sheet, consolidated statement of profit and loss, principal accounting policies, and notes to accounts. The CFS shall also be submitted to the Department of Supervision (DOS), Reserve Bank of India within one month from the publication of the bank’s annual accounts.


For the purpose of financial reporting, the terms 'parent', 'subsidiary', ‘associate’, ‘joint venture’, 'control', and 'group' shall have the same meaning as ascribed to them in the applicable accounting standards, it said. "A parent presenting CFS shall consolidate all subsidiaries - domestic as well as foreign, except those specifically permitted to be excluded under the applicable accounting standards. However, the reasons for not consolidating a subsidiary shall be disclosed in the CFS," it added. The responsibility of determining whether a particular entity shall be included or not for consolidation would be that of the Management of the parent entity. The Statutory Auditors shall mention in their audit report if they are of the opinion that an entity that ought to have been consolidated has been omitted.


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