RBI/2011-12/68
DBOD. No. FID. FIC.2 /01.02.00/2011-12

01 July, 2011
10 Aashadha 1933 (Saka)

The CEOs of the All-India Term-lending and Refinancing Institutions
(Exim Bank, NABARD, NHB and SIDBI)

Dear Sir,

Master Circular - Disclosure Norms for Financial Institutions

Please refer to the Master Circular DBOD No.FID.FIC.2 /01.02.00/2010-11 dated July 01, 2010 on the above subject. The enclosed Master Circular consolidates and updates all the instructions/ guidelines on the subject up to June 30, 2011. The Master Circular has also been placed on the web-site of RBI (http://www.rbi.org.in).

2. It may be noted that the instructions contained in the Annex 4 have been consolidated in this master circular.

Yours faithfully,

(Deepak Singhal)
Chief General Manager-In-Charge

Encls : As above

Master Circular – Disclosures in Financial Statements of
Financial Institutions – Notes to Accounts

Purpose

To provide a detailed guidance to all-India term-lending and refinancing institutions in the matter of disclosures in the ‘Notes to Accounts’ to the Financial Statements.

Previous instructions

This master circular consolidates and updates the instructions on the above subject contained in the circulars listed in the Annex 4.

Application

To all the all India Financial Institutions viz. Exim Bank, NABARD, NHB and SIDBI.

Structure

1 Introduction

Recognising considerable divergence amongst the financial institutions in the nature and manner of disclosures made by them in their published financial statements the disclosure norms were introduced by Reserve Bank of India for the financial institutions in March 2001 with a view to bringing about uniformity in the disclosure practices adopted by them and improving the degree of transparency in their affairs.  Such disclosures, which came into effect from the financial year 2000-2001 and were subsequently enhanced, are required to be made as part of the "Notes to Accounts" to enable the auditors to authenticate the information and notwithstanding the fact that the same information might be contained elsewhere in the published financial statements. These disclosures constitute only minima and if an FI desires to make any additional disclosures, it would be well advised to do so.

2 Guidelines on Disclosure requirements

The various disclosure requirements are as under:

2.1 Capital

(a) CRAR,  core CRAR and supplementary CRAR

(b) The amount of subordinated debt raised and outstanding as Tier–II capital

(c) Risk weighted assets –  separately for on- and off-balance sheet items

(d) The share holding pattern as on the date of the balance sheet

2.2 Asset quality and credit concentration

(e) Percentage of net NPAs to net loans and advances

(f)  Amount and percentage of net NPAs under the prescribed asset classification categories

(g) Amount of provisions made during the year towards Standard assets,  NPAs, investments (other than those in the nature of an advance), income tax

(h) Movement in net NPAs

(i) Credit exposure as percentage to capital funds  and as percentage to total assets, in respect of:

• The largest single borrower;
• The largest borrower group;
• The 10 largest single borrowers;
• The 10 largest borrower groups;

(Names of the borrowers / borrower groups need not be disclosed).

(j) Credit exposure to the five largest industrial sectors (if applicable) as percentage to total loan assets

2.3 Liquidity

(k) Maturity pattern of rupee assets and liabilities; and

(l) Maturity pattern of foreign currency assets and liabilities, in the following format:

2.4 Operating results

(m) Interest income as a percentage to average working funds

(n) Non-interest income as a percentage to average working funds

(o) Operating profit as a percentage to average working funds

(p) Return on average assets

(q) Net Profit per employee

2.5 Movement in the provisions

The movement in the provisions held towards Non Performing Assets and depreciation in investment portfolio should be disclosed as per the following format:

I. Provisions for Non Performing Assets (comprising loans, bonds and debentures in the nature of advance and inter-corporate deposits)
(excluding provision for standard assets)

a) Opening balance as at the beginning of the financial year

Add: Provisions made during the year

Less: Write off, write back of excess provision

b) Closing balance at the close of the financial year

II. Provisions for depreciation in investments

c) Opening balance as at the beginning of the financial year

Add:

i. Provisions made during the year

ii. Appropriation, if any, from Investment Fluctuation Reserve Account during the year

Less:

i. Write off during the year

ii. Transfer, if any, to Investment Fluctuation Reserve Account

d) Closing balance as at the close of the financial year

2.6 Restructured Accounts

The total amount of loan assets as also of the sub standard assets/ doubtful assets separately, which have been subjected to restructuring, etc should be disclosed.

2.7 Assets Sold to Securitisation Company/ Reconstruction Company

FIs which sell their financial assets to an SC/ RC, shall be required to make the following diclosures :

a) Number of Accounts

b) Aggregate value (net of provisions) of accounts sold to SC /RC

c) Aggregate consideration

d) Additional consideration realised in respect of accounts transferred in earlier years

e) Aggregate gain / loss over net book value.

2.8 Forward Rate Agreements and Interest Rate Swaps

The following disclosures should be made in the note to the balance sheet:

• The notional principal of swap agreements;
• Nature and terms of the swaps including information on credit and market risk and the accounting policies adopted for recording the swaps;
• Quantification of the losses which would be incurred if the counter parties failed to fulfil their obligations under the agreements;
• Collateral required by the entity upon entering into swaps;
• Any concentration of credit risk arising from the swaps. Examples of concentration could be exposures to particular industries or swaps with highly geared companies; and
• The "fair" value of the total swaps book. If the swaps are linked to specific assets, liabilities or commitments, the fair value would be the estimated amount that the entity would receive or pay to terminate the swap agreements at balance sheet date. For a trading swap, the fair value would be its mark to market value.

2.9 Interest Rate Derivatives

The FIs dealing in interest rate derivatives on exchanges should disclose as a part of the 'notes on accounts' to balance sheets the following details:

2.10 Investments in Non Government Debt Securities:

The FIs should disclose the details of the issuer composition of investments made through private placement and the non-performing investments in the ‘Notes on Accounts’ of the balance sheet in the format furnished in the Annex 1.

2.11 Consolidated Financial Statements (CFS)

2.11.1 Extent of Consolidation:

A parent, presenting the CFS, should consolidate the financial statements of all subsidiaries – domestic as well as foreign, except those specifically permitted to be excluded under the AS-21 the ICAI. The reasons for not consolidating a subsidiary should be disclosed in the CFS. The responsibility of determining whether a particular entity should be included or not for consolidation would be that of the Management of the parent entity. In case, its Statutory Auditors are of the opinion that an entity, which ought to have been consolidated, has been omitted, they should incorporate their comments in this regard in the "Notes to Account".

2.11.2 Accounting Policies:

CFS should be prepared using uniform accounting policies for like transactions and other events in similar circumstances. (For the purpose, the FIs should rely on a Statement of Adjustments for non-uniform accounting policies furnished by the statutory auditors of the subsidiaries.) If it is not practicable to do so, that fact should be disclosed together with the proportions of the items in the consolidated financial statements to which the different accounting policies have been applied.

2.12 Disclosures on Risk Exposures in Derivatives

Best international practices require meaningful and appropriate disclosures of FIs' exposures to risk and their strategy towards managing the risk. FIs should make meaningful disclosures of their derivatives portfolio.  A minimum framework for disclosures by FIs on their risk exposures in derivatives is furnished in Annex 2.  The disclosure format includes both qualitative and quantitative aspects and has been devised to provide a clear picture of the exposure to risks in derivatives, risk management systems, objectives and policies. FIs should make these disclosures as a part of the 'Notes on Accounts' to the Balance Sheet with effect from March 31, 2005 (June 30, 2005 in the case of National Housing Bank).

2.13 Exposures where the FI had exceeded the prudential exposure limits during the year

The FI should make appropriate disclosures in the ‘Notes on account’ to the annual   financial statements in respect of the exposures where the FI had exceeded the prudential exposure limits during the year.

2.14 Corporate Debt Restructuring (CDR)

FIs should also disclose in their published Annual Accounts, under the "Notes on Accounts", the following information in respect of CDR undertaken during the year :

• Total amount of loan assets subjected to restructuring under CDR
• The amount of standard assets subjected to CDR.
• The amount of sub-standard assets subjected to CDR.

2.15 Additional Disclosures by FIs in Notes to Accounts

Reserve Bank has been taking several steps from time to time to enhance the transparency in the operations of banks by stipulating comprehensive disclosures in tune with the international best practices.

On a review of the existing disclosures, it has been decided to prescribe the following additional disclosures in the ‘Notes to Accounts’ in the FIs’ balance sheets, from the year ending March/June 2010:

1. Concentration of Deposits, Advances, Exposures   and  NPAs
2. Sector-wise NPAs
3. Movement of NPAs (For calculation of gross NPA, please refer to circular DBOD No. FID.FIC.9/01.02.00/2009-10 dated 26.03.2010)  
4. Overseas assets, NPAs and revenue
5. Off-balance sheet SPVs sponsored by banks

2.16  Sale of Investments held under Held to Maturity (HTM) Category

If the value of sales and transfers of securities to/from HTM category exceeds 5 per cent of the book value of investments held in HTM category at the beginning of the year, FI should disclose the market value of the investments held in the HTM category and indicate the excess of book value over market value for which provision is not made. This disclosure is required to be made in ‘Notes to Accounts’ in FI’s audited Annual Financial Statements.

Notes:

(I) The CRAR and other parameters

The CRAR and other related parameters, determined as per the extant capital adequacy norms for the FIs, should be disclosed.

(II) The Asset quality and credit concentration

For the purpose of asset quality and credit concentration, the following  should also be reckoned for determining the amount of loans and advances and the NPAs and included in the disclosures:

(i) Bonds and Debentures : The bonds and debentures should be treated in the nature of advance when :

• The debenture / bond is issued as part of the proposal for project finance and the tenor of the bond / debenture is for three years and above.

and

• The FI has a significant stake (i.e. 10% or more) in the issue.

and

• The issue is a part of private placement i.e. the borrower has approached the FI, and not part of a public issue where the FI has subscribed in response to an invitation.

(ii) Preference Shares : The preference shares, other than convertible preference shares, acquired as part of project financing and meeting the criteria as at (i) above.

(iii) Deposits : The deposits placed with the corporate sector.

(III) The Credit Exposure

The   “credit   exposure” shall   include funded    and   non-funded   credit limits, underwriting and other similar commitments. The sanctioned limits or outstandings whichever is higher shall be reckoned for arriving at exposure limit. In case of term loans, however the exposure limit should be reckoned on the basis of actual outstandings plus undisbursed or undrawn commitments.

However, in cases where disbursements are yet to commence, exposure limit should be reckoned on the basis of the sanctioned limit or the extent upto which the FI has entered into commitments with the borrowing companies in terms of the agreement.

FIs should include in the non-funded credit limit, the forward contracts in foreign exchange and other derivative products like currency swaps, options, etc as per the extant exposure norms.

(IV) Capital Funds

Capital funds for the purpose of credit concentration, would be the total regulatory capital as defined under capital adequacy standards ( i.e.Tier I and Tier II Capital ).

(V) The definition of Borrower Group

The definition of ' borrower group' would be the same as applied by the FIs in complying with group exposure norms.

(VI) The maturity pattern of Assets and Liabilities
 
For the maturity pattern of  assets and  liabilities,  the  bucketing of various items of assets and liabilities in the specified time buckets should be done in accordance with the RBI Guidelines on Asset Liability Management System, issued to FIs.

(VII) Operating results

For operating results, the working funds and total assets should be taken as the average of the figures as at the end of the previous accounting year, the end of the succeeding half year and the end of the accounting year under report. (The “working funds” refer to the total assets of the FI.)

(VIII) Computing per employee net profit

Annex 1

Format For Disclosure Of Issuer Composition For Investment In Debt Securities

A. Issuer categories in respect of investments made
    (As on the date of the balance sheet)

*  NOTES:

1. Total under column 3 should tally with the total of investments included under the following categories in the balance sheet:

1. Shares
2. Debentures & Bonds
3. Subsidiaries/ joint ventures
4. Others

2. Amounts reported under columns 4, 5, 6 and 7 above might not be mutually exclusive.

B. Non performing investments

Annex 2

Disclosures on risk exposure in derivatives

Qualitative Disclosure

FIs shall discuss their risk management policies pertaining to derivatives with particular reference to the extent to which derivatives are used, the associated risks and business purposes served. The discussion shall also include:

• the structure and organization for management of risk in derivatives trading,

• the scope and nature of  risk measurement , risk reporting and risk monitoring systems,

• policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants, and

• accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts;  provisioning, collateral and credit risk mitigation.

Quantitative Disclosures

Notes:

1. The net position should be shown either under asset or liability, as the case should be, for each type of derivatives.

2. FIs should adopt the Current Exposure Method prescribed by RBI on Measurement of Credit Exposure of Derivative Products which is described in brief as follows:

In order to calculate the credit exposure equivalent of off-balance sheet interest rate and exchange rate instruments under current exposure method, a FI would sum:

• the total replacement cost (obtained by “marking to market”) of all its contracts with positive value (i.e., when the FI has to receive money from the counterparty), and

• an amount for potential future changes in credit exposure calculated on the basis of the total notional principal amount of the contract multiplied by the following credit conversion factors according to the residual maturity  of the contract :

3. Bilateral netting of mark-to-market (MTM)values arising on account of counterparty credit exposures in derivatives contracts cannot be permitted. Accordingly, FIs should count their gross positive MTM value of such contracts for the purposes of capital adequacy as well as for exposure norms.

Annex 3

Additional Disclosures

I. Concentration of Deposits, Advances,  Exposures   and  NPAs
Concentration of Deposits

Concentration of Advances*

*Advances should be computed as per definition of Credit Exposure including derivatives furnished in our Master Circular on Exposure Norms dated July 1, 2010.

Concentration of Exposures**

**Exposures should be computed based on credit and investment exposure as prescribed in our Master Circular on Exposure Norms dated July 1, 2010.

Concentration of NPAs

II: Sector-wise NPAs

III.  Movement of NPAs

*Gross NPAs as per item 2 of Annex to DBOD Circular DBOD.FID.FIC.9/01.02.00/2009-10 dated March 26, 2010

IV. Overseas Assets, NPAs and Revenue

V. Off-balance Sheet SPVs sponsored (which are required to be consolidated as per accounting norms)

Annex 4

Part A: List of instructions and circulars superseded

Part B: List of other circulars containing Instructions/Guidelines/Directives related to Disclosure Norms