Indian banks' change to IFRS accounting norms unlikely to hit score -Fitch

The advantages of Indian banks’ switching to the Worldwide Monetary Reporting Requirements (IFRS) accounting guidelines will outweigh any short-term affect on capital ranges and is unlikely to drive score adjustments, mentioned credit standing company Fitch.

Whereas the Reserve Financial institution of India has not but set a deadline to shift from the Typically Accepted Accounting Ideas (GAAP) normal, Fitch mentioned lenders have been anticipating the transfer and will be capable of recalibrate to closing tips rapidly.

“The transition will in all probability negatively have an effect on banks’ capital ranges as extra impairment costs are front-loaded however ought to convey qualitative advantages in credit score danger administration over the long run,” Fitch mentioned in a be aware on Friday.

Nonetheless, it warned that particular banks’ capital and danger administration responses may have an effect on their standalone viability scores.

The RBI launched a dialogue paper final week that prompt banks make provisions for dangerous loans utilizing the anticipated credit score loss (ECL) methodology.

Fitch believes the transition to ECL provisioning is crucial facet, from a credit score perspective, of adopting IFRS and exhibits the RBI’s intent to change accounting requirements.

“The ECL framework primarily addresses the issue of procyclical provisions as banks are required to estimate ECL forward of adversarial credit score occasions, as an alternative of creating provisions after loans have grow to be impaired, as is the present norm,” it mentioned.

The score company believes the RBI will smoothen the method of adopting ECL provisioning over as much as 5 years.

It famous banks would have little room to soak up surprising stress in the event that they elevated provisioning necessities by working down capital ratios nearer to regulatory thresholds.

Whereas state-owned banks could also be extra weak than their non-public friends, Fitch mentioned they’d a lifeline.

“State banks’ issuer default scores are pushed by our expectations that they’d obtain extraordinary help from the federal government if wanted, so wouldn’t be affected.” (Reporting by Nupur Anand; Modifying by Savio D’Souza)