Mohan R. Lavi(The author is a Bangalore-based chartered accountant.)
It is stated that in the US, it is ironical that the person who made $50 billion disappear (Madoff) is being investigated by those who made $1.5 trillion disappear (Congress and SEC).
The concept of “too big to fail” (TBTF) emanated, which postulated that there are certain entities that are so large and central to a nation's economy that allowing them to fail will have disastrous consequences on the economy. Government bailouts are critical to such companies.
In India, the Government and the Reserve Bank of India (RBI) have been keeping a watchful eye on banks and have always merged weaker banks with healthier ones. When Nedungadi Bank and Global Trust Bank were tempted by the lures of the stock market, overexposed themselves and failed, the Government and the RBI quickly got other banks to absorb them in their fold.
Bank of Rajasthan was quickly given to ICICI Bank when the RBI observed that it was not being run the way it should be. Even if there is an alarm at a big bank in India, past records vouch that the Government/RBI would announce that it is “too big to let fail”.
Role of RBI
The RBI has been playing a pivotal role over the years in regulating banks. Apart from its primary functions of formulating monetary and credit policies, it has also been active in working with the Institute of Chartered Accountants of India (ICAI) to ensure that adequate and appropriate accounting standards are followed by banks in India.
A few years ago, it came out with its own version of which accounting standards prescribed by the ICAI and blessed by the National Committee of Accounting Standards (NACAS) would apply to banks.
As per the roadmap issued by the Ministry of Corporate Affairs (MCA), all scheduled commercial banks and those with a net worth as on March 31, 2011, in excess of Rs 300 crore would need to shift to International Financial Reporting Standards (IFRS) on April 1, 2013, though technically most banks would be covered by the first deadline of April 1, 2011, in view of their net worth being in excess of Rs 1,000 crore and voluntary adoption of IFRS is permitted.
Being major players in financial instruments, the impact of Accounting Standard 30 with its emphasis on mark-to-market valuation would be significant on banks and financial institutions. The present prudential norms on asset classification of the RBI are best described by their definition — prudential.
Even with its penchant for living year-to-year and fair value, IFRS at present permits loans and advances to be valued at amortised cost. Though it is expected that there may not be a very significant impact on provisioning norms (which the RBI could make more aggressive), the RBI could be expected to bring out its own guidelines for banks to move over to IFRS since MTM and disclosure norms could vary and the RBI is in the best position to elaborate on this.
The RBI is keen that the provisions on class-action suits envisioned in the Companies Bill be exempted for banks in view of the existence of redress mechanisms such as the banking ombudsman and a fairly good history of governance.
They could have a case here since being a sensitive sector, frivolous suits cannot be ruled out as against a company where there could be specific allegations in the suit.
The MCA may want to keep this as an additional redress mechanism. We could end up with a via-media wherein it could be stated that a class-action suit can be filed only if there is a delay or denial of justice by the ombudsman.