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Master Circular - Disclosure in Balance Sheets
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RBI. No/ 2005-06/290 January 30, 2006 The Chairmen/Chief Executives of
Dear Sir, Master Circular – Disclosure in Balance Sheets The Reserve Bank of India has from time to time, issued circulars to banks on disclosure in the ‘Notes on Account’ to their Balance Sheets. To facilitate the banks have access to current instructions on the subject at one place, this master circular has been prepared incorporating all operative instructions issued by RBI upto 30 June 2005. The Master Circular has also been placed on the RBI web-site (http://www.rbi.org.in).
Yours faithfully,
S/d. Master Circular - Disclosures in Balance Sheet 1. Introduction The users of the financial statements need information about the financial position and performance of the bank in making economic decisions. They are interested in its liquidity and solvency and the risks related to the assets and liabilities recognised on its balance sheet and to its off balance sheet items. In the interest of full and complete disclosure, some very useful information is better provided, or can only be provided, by notes to the financial statements. Recently, a lot of attention has been paid to the issue of market discipline in the banking sector. Market discipline, however, works only if market participants have access to timely and reliable information, which enables them to assess banks’ activities and the risks inherent in these activities. Enabling market discipline may have several benefits. First, it may mitigate the moral hazard and excessive risk taking. Second, the presence of market discipline may contribute to increased bank efficiency. And third, enhancing market discipline may help to reduce the social cost of supervision and regulation. Market discipline has been given due importance under Basel II by recognizing it as one of its three Pillars.
2. Disclosure Requirements In order to encourage market discipline, Reserve Bank has over the years developed a set of disclosure requirements which allow the market participants to assess key pieces of information on capital adequacy, risk exposures, risk assessment processes and key business parameters which provide a consistent and understandable disclosure framework that enhances comparability. Banks are also required to comply with the Accounting Standard (AS I) on Disclosure of Accounting Policies issued by the Institute of Chartered Accountants of India (ICAI). The enhanced disclosures have been achieved through revision of Balance Sheet and Profit & Loss Account of banks and enlarging the scope of disclosures to be made in "Notes on Accounts". In addition to the 16 detailed schedules to the balance sheets, banks are required to furnish the following information in the "Notes on Accounts":
3.1 Capital
*The total amount of subordinated debt through borrowings from Head Office for inclusion in Tier II capital may be disclosed in the balance sheet under the head 'Subordinated loan in the nature of long term borrowings in foreign currency from Head Office'.
3.2 Investments (Rs. In crore)
3.2.1 Repo Transactions (Rs. In crore)
3.2.2. Non-SLR Investment Portfolio i) Issuer composition of Non SLR investments (Rs. in crore)
Note: (1) *Total under column 3 should tally with the total of Investments included under the following categories in Schedule 8 to the balance sheet: a. Shares
b. Debentures & Bonds
c. Subsidiaries/joint ventures
d. Others
(2) Amounts reported under columns 4, 5, 6 and 7 above may not be mutually exclusive.
ii) Non performing Non-SLR investments (Rs. in crore)
3.3 Derivatives
3.3.1 Forward Rate Agreement/ Interest Rate Swap
Note: Nature and terms of the swaps including information on credit and market risk and the accounting policies adopted for recording the swaps should also be disclosed. $ Examples of concentration could be exposures to particular industries or swaps with highly geared companies @ If the swaps are linked to specific assets, liabilities, or commitments, the fair value would be the estimated amount that the bank would receive or pay to terminate the swap agreements as on the balance sheet date. For a trading swap the fair value would be its mark to market value.
3.3.2 Exchange Traded Interest Rate Derivatives: (Rs. Crore)
3.3.3 Disclosures on risk exposure in derivatives Qualitative Disclosure Banks 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: a. the structure and organization for management of risk in derivatives trading,
b. the scope and nature of risk measurement, risk reporting and risk monitoring systems,
c. policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants, and
d. 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 (Rs. in Crore)
3.4 Asset Quality
3.4.1 Non-Performing Asset (Rs. in Crore)
3.4.2 Details of Loan Assets subjected to Restructuring (Rs. in crore)
3.4.3 Details of financial assets sold to Securitisation / Reconstruction Company for Asset Reconstruction
3.4.4 Provisions on Standard Asset
Provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets', under 'Other Liabilities and Provisions - Others' in Schedule No. 5 of the balance sheet. 3.5. Business Ratio
$ Working funds to be reckoned as average of total assets (excluding accumulated losses, if any) as reported to Reserve Bank of India in Form X under Section 27 of the Banking Regulation Act, 1949, during the 12 months of the financial year. @ 'Return on Assets would be with reference to average working funds (i.e. total of assets excluding accumulated losses, if any).
# For the purpose of computation of business per employee (deposits plus advances) inter bank deposits may be excluded. 3.6 Asset Liability Management Maturity pattern of certain items of assets and liabilities (Rs. in crore)
3.7 Lending to Sensitive Sector 3.7.1 Exposure to Real Estate Sector
3.7.2 Exposure to Capital Market
3.7.3 Risk Category wise Country Exposure
Till such time, as banks move over to internal rating systems, banks may use the seven category classification followed by Export Credit Guarantee Corporation of India Ltd. (ECGC) for the purpose of classification and making provisions for country risk exposures. ECGC shall provide to banks, on request, quarterly updates of their country classifications and shall also inform all banks in case of any sudden major changes in country classification in the interim period.
3.7.4 Details of Single Borrower Limit (SGL), Group Borrower Limit (GBL) exceeded by the bank. The bank should make appropriate disclosure in the ‘Notes on account’ to the annual financial statements in respect of the exposures where the bank had exceeded the prudential exposure limits during the year. The sanctioned limits or entire outstandings, whichever are higher, shall be reckoned for arriving at exposure limit and for disclosure purpose.
3.8 Miscellaneous 3.8.1 Amount of Provisions made for Income-tax during the year;
3.8.2 Disclosure of Penalties imposed by RBI At present, Reserve Bank is empowered to impose penalties on a commercial bank under the provision of Section 46 (4) of the Banking Regulation Act, 1949, for contraventions of any of the provisions of the Act or non-compliance with any other requirements of the Banking Regulation Act, 1949; order, rule or condition specified by Reserve Bank under the Act. Consistent with the international best practices in disclosure of penalties imposed by the regulator, it has been decided that the details of the levy of penalty on a bank in public domain will be in the interests of the investors and depositors. It has also been decided that strictures or directions on the basis of inspection reports or other adverse findings should be placed in the public domain. The penalty should also be disclosed in the 'Notes on Accounts' to the Balance Sheet.
4. Disclosure Requirements as per Accounting Standards where RBI has issued guidelines in respect of disclosure items for ‘Notes on Accounts: 4.1 Accounting Standard 5 – Net Profit or Loss for the period, prior period items and changes in accounting policies. Since the format of the profit and loss accounts of banks prescribed in Form B under Third Schedule to the Banking Regulation Act 1949 does not specifically provide for disclosure of the impact of prior period items on the current year’s profit and loss, such disclosures, wherever warranted, may be made in the Notes on Accounts to the balance sheet of banks. 4.2 Accounting Standard 9 – Revenue Recognition This Standard requires that in addition to the disclosures required by Accounting Standard 1 on ‘Disclosure of Accounting Policies’ (AS 1), an enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties. 4.3 Accounting standard 15 – Accounting for Retirement Benefits in the Financial Statements of Employers Banks may disclose the change in accounting policy in the appropriate schedule relating to ‘Significant changes in Accounting Policies’ / ‘Principal Accounting Policies’. The Board of Directors of a bank must disclose the accounting policies followed in respect of VRS expenditure. If VRS applications were accepted subsequent to the closure of the accounting year, the Board of Directors would be required to make a disclosure in the Board Report of that fact and of the likely impact of the VRS. 4.4 Accounting Standard 17 – Segment Reporting While complying with the Accounting Standard, banks are required to adopt the following: a. The business segment should ordinarily be considered as the primary reporting format and geographical segment would be the secondary reporting format.
b. The business segments will be ‘Treasury’, ‘Other banking operations’ and ‘Residual operations’.
c. ‘Domestic’ and ‘International’ segments will be the geographic segments for disclosure.
d. Banks may adopt their own methods, on a reasonable and consistent basis, for allocation of expenditure among the segments.
Accounting Standard 17 - Format for disclosure under segment reporting Part A: Business segments (Rs. in crore)
Note: No disclosure need be made in the shaded portion Part B: Geographic segments (Rs. in crore)
4.5 Accounting Standard 18 – Related Party disclosures This Standard is applied in reporting related party relationships and transactions between a reporting enterprise and its related parties. The illustrative disclosure format recommended by the ICAI as a part of General Clarification (GC) 2/2002 has been suitably modified to suit banks. The illustrative format of disclosure by banks for the AS is furnished below.
Format for Related Party Disclosures as per Accounting Standard 18 The manner of disclosures required by paragraphs 23 and 26 of AS 18 is illustrated below. It may be noted that the format is merely illustrative and is not exhaustive. (Rs. in crore)
Note: Where there is only one entity in any category of related party, banks need not disclose any details pertaining to that related party other than the relationship with that related party [c.f. Para 8.3.1 of the Guidelines]
* Contract services etc. and not services like remittance facilities, locker facilities etc. @ Whole time directors of the Board and CEOs of the branches of foreign banks in India. # The outstanding at the year-end and the maximum during the year are to be disclosed. Illustrative disclosure of names of the related parties and their relationship with the bank 1. Parent A Ltd 2. Subsidiaries B Ltd and C Ltd 4. Associates P Ltd, Q Ltd and R Ltd 5. Jointly controlled entity L Ltd 6. Key Management Personnel Mr.M and Mr.N 7. Relatives of Key Management Personnel Mr.D and Mr.E 4.6 Accounting Standard 21, Consolidated Financial Statements As regards disclosures in the ‘Notes on Accounts’ to the Consolidated Financial Statements, banks may be guided by general clarifications issued by Institute of Chartered Accountants of India from time to time. 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 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'. 4.7 Accounting Standard 22 – Accounting for Taxes on Income This Standard is applied in accounting for taxes on income. This includes the determination of the amount of the expense or saving related to taxes on income in respect of an accounting period and the disclosure of such an amount in the financial statements. Adoption of AS 22 may give rise to creation of either a deferred tax asset (DTA) or a deferred tax liability (DTL) in the books of accounts of banks and creation of DTA or DTL would give rise to certain issues which have a bearing on the computation of capital adequacy ratio and banks’ ability to declare dividends. In this regard it is clarified as under:
4.8 Accounting Standard 23 – Accounting for Investments in Associates in Consolidated Financial Statements This Accounting Standard sets out principles and procedures for recognising, in the consolidated financial statements, the effects of the investments in associates on the financial position and operating results of a group. A bank may acquire more than 20% of voting power in the borrower entity in satisfaction of its advances and it may be able to demonstrate that it does not have the power to exercise significant influence since the rights exercised by it are protective in nature and not participative. In such a circumstance, such investment may not be treated as investment in associate under this Accounting Standard. Hence the test should not be merely the proportion of investment but the intention to acquire the power to exercise significant influence.
4.9 Accounting Standard 24 - Discontinuing operations Merger/ closure of branches of banks by transferring the assets/ liabilities to the other branches of the same bank may not be deemed as a discontinuing operation and hence this Accounting Standard will not be applicable to merger / closure of branches of banks by transferring the assets/ liabilities to the other branches of the same bank. Disclosures would be required under the Standard only when: a. discontinuing of the operation has resulted in shedding of liability and realisation of the assets by the bank or decision to discontinue an operation which will have the above effect has been finalised by the bank and b. the discontinued operation is substantial in its entirety.
4.10 Accounting Standard 25 – Interim Financial Reporting The half yearly review prescribed by RBI for public sector banks, in consultation with SEBI, vide circular DBS. ARS. No. BC 13/ 08.91.001/ 2000-01 dated 17th May 2001 is extended to all banks (both listed and unlisted) with a view to ensure uniformity in disclosures. Banks may adopt the format prescribed by the RBI for the purpose. 4.11 Other Accounting Standards Banks are required to comply with the disclosure norms stipulated under the various Accounting Standards issued by the Institute of Chartered Accountants of India.
Annex 1
List of Circular consolidated by the Master Circular
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