RBI/2013-14/58
DBOD.BP.BC No. 7/21.04.018/2013-14

July 1, 2013

The Chairmen/Chief Executives of
All Commercial Banks
(excluding RRBs)

Dear Sir,

Master Circular - Disclosure in Financial Statements - Notes to Accounts

Please refer to the Master Circular DBOD.BP.BC.No.14/21.04.018/2012-13 dated July2,2012 consolidating all operative instructions issued to banks till June 30, 2012 on matters relating to disclosures in the ‘Notes to Accounts’ to the Financial Statements. The Master Circular has now been suitably updated by incorporating instructions issued upto June 30, 2013. The Master Circular has also been placed on the RBI web-site (http://www.rbi.org.in).

2. It may be noted that all relevant instructions on the above subject contained in the circulars listed in the Annex have been consolidated. In addition, disclosure requirements contained in "Master Circular on Basel III Capital Regulations" will be applicable.

Yours faithfully,

(Chandan Sinha)
Principal Chief General Manager

Purpose

To provide a detailed guidance to banks in the matter of disclosures in the ‘Notes to Accounts’ to the Financial Statements.

Classification

A statutory guideline issued by the Reserve Bank of India under Section 35A of the Banking Regulation Act 1949.

Previous Guidelines superseded

Master Circular on ‘Disclosure in Financial Statements – Notes to Accounts’ issued vide DBOD.BP.BC No.14/21.04.018/2012-13 dated July 2, 2012.

Scope of application

To all scheduled commercial banks (excluding RRBs).

Structure

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. The use of notes and supplementary information provides the means to explain and document certain items, which are either presented in the financial statements or otherwise affect the financial position and performance of the reporting enterprise. 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. Market discipline has been given due importance under Basel II framework on capital adequacy by recognizing it as one of its three Pillars.

2.1 Presentation

Summary of Significant Accounting Policies’ and ‘Notes to Accounts’ may be shown under Schedule 17 and Schedule 18 respectively, to maintain uniformity.

2.2 Minimum Disclosures

At a minimum, the items listed in the circular should be disclosed in the ‘Notes to Accounts’. Banks are also encouraged to make more comprehensive disclosures than the minimum required under the circular if they become significant and aid in the understanding of the financial position and performance of the bank. The disclosure listed is intended only to supplement, and not to replace, other disclosure requirements under relevant legislation or accounting and financial reporting standards. Where relevant, a bank should comply with such other disclosure requirements as applicable.

2.3 Summary of Significant Accounting Policies

Banks should disclose the accounting policies regarding key areas of operations at one place (under Schedule 17) along with Notes to Accounts in their financial statements. A suggestive list includes - Basis of Accounting, Transactions involving Foreign Exchange, Investments – Classification, Valuation, etc, Advances and Provisions thereon, Fixed Assets and Depreciation, Revenue Recognition, Employee Benefits, Provision for Taxation, Net Profit, etc.

2.4 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 1 (AS 1) 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 to Accounts”. In addition to the 16 detailed prescribed schedules to the balance sheet, banks are required to furnish the following information in the “Notes to Accounts”:

3.1 Capital

3.2 Investments

3.2.1 Repo Transactions (in face value terms)

3.2.2. Non-SLR Investment Portfolio

i) Issuer composition of Non SLR investments

ii) Non performing Non-SLR investments

3.2.3 Sale and Transfers to/ from 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, bank 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 banks’ audited Annual Financial Statements. The 5 per cent threshold referred to above will exclude the one - time transfer of securities to / from HTM category with the approval of Board of Directors permitted to be undertaken by banks at the beginning of the accounting year and sales to the Reserve Bank of India under pre-announced OMO auctions.

3.3 Derivatives

3.3.1 Forward Rate Agreement/ Interest Rate Swap

3.3.2 Exchange Traded Interest Rate Derivatives

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

3.4 Asset Quality

3.4.1 Non-Performing Assets

3.4.2 Particulars of Accounts Restructured

For the purpose of disclosure in the above Format, the following instructions are required to be followed:

(i) Advances restructured under CDR Mechanism, SME Debt Restructuring Mechanism and other categories of restructuring should be shown separately.

(ii) Under each of the above categories, restructured advances under their present asset classification, i.e. standard, sub-standard, doubtful and loss should be shown separately.

(iii) Under the 'standard' restructured accounts; accounts, which have objective evidence of no longer having inherent credit weakness, need not be disclosed. For this purpose, an objective criteria for accounts not having inherent credit weakness is discussed below :

(a) As regards restructured accounts classified as standard advances, in view of the inherent credit weakness in such accounts, banks are required to make a general provision higher than what is required for otherwise standard accounts in the first two years from the date of restructuring. In case of moratorium on payment of interest / principal after restructuring, such advances attract the higher general provision for the period covering moratorium and two years thereafter.

(b) Further, restructured standard unrated corporate exposures and housing loans are also subjected to an additional risk weight of 25 percentage point with a view to reflect the higher element of inherent risk which may be latent in such entities (cf. paragraph 5.8.3 of circular DBOD.No.BP.BC.90/20.06.001/2006-07 dated April 27, 2007 on 'Prudential Guidelines on Capital Adequacy and Market Discipline - Implementation of the New Capital Adequacy Framework' and paragraph 4 of circular DBOD.No.BP.BC.76/21.04.0132/2008-09 dated November 3, 2008 on 'Prudential Guidelines on Restructuring of Advances by Banks' respectively).

(c) The aforementioned [(a) and (b)] additional / higher provision and risk weight cease to be applicable after the prescribed period if the performance is as per the rescheduled programme. However, the diminution in the fair value will have to be assessed on each balance sheet date and provision should be made as required.

(d) Restructured accounts classified as sub-standard and doubtful (non-performing) advances, when upgraded to standard category also attract a general provision higher than what is required for otherwise standard accounts for the first year from the date of up-gradation, in terms of extant guidelines on provisioning requirement of restructured accounts. This higher provision ceases to be applicable after one year from the date of upgradation if the performance of the account is as per the rescheduled programme. However, the diminution in the fair value will have to be assessed on each balance sheet date and provision made as required.

(e) Once the higher provisions and / or risk weights (if applicable and as prescribed from time to time by RBI) on restructured standard advances revert to the normal level on account of satisfactory performance during the prescribed periods as indicated above, such advances, henceforth, would no longer be required to be disclosed by banks as restructured standard accounts in the "Notes on Accounts" in their Annual Balance Sheets. However, banks should keep an internal record of such restructured accounts till the provisions for diminution in fair value of such accounts are maintained.

(iv) Disclosures should also indicate the intra category movements both on upgradation of restructured NPA accounts as well as on slippage. These disclosures would show the movement in restructured accounts during the financial year on account of addition, upgradation, downgradation, write off, etc.

(v) While disclosing the position of restructured accounts, banks must disclose the total amount outstanding in all the accounts / facilities of borrowers whose accounts have been restructured along with the restructured part or facility. This means that even if only one of the facilities / accounts of a borrower has been restructured, the bank should also disclose the entire outstanding amount pertaining to all the facilities / accounts of that particular borrower.

(vi) Upgradation during the year (Sl No. 3 in the Disclosure Format) means movement of 'restructured NPA' accounts to 'standard asset classification from substandard or doubtful category' as the case may be. These will attract higher provisioning and / or risk weight' during the 'prescribed period' as prescribed from time to time. Movement from one category into another will be indicated by a (-) and a (+) sign respectively in the relevant category.

(vii) Movement of Restructured standard advances (Sr. No. 4 in the Disclosure Format) out of the category into normal standard advances will be indicated by a (-) sign in the column "Standard".

(viii) Downgradation from one category to another would be indicated by (-) ve and (+) ve sign in the relevant categories.

(ix) Upgradation, downgradation and write-offs are from their existing asset classifications.

(x) All disclosures are on the basis of current asset classification and not 'pre-restructuring' asset classification.

(xi) Additional/fresh sanctions made to an existing restructured account can be shown under Sr. No. 2 ‘Fresh Restructuring during the year’ with a footnote stating that the figures under Sr. No.2 include Rs. xxx crore of fresh/additional sanction (number of accounts and provision thereto also) to existing restructured accounts. Similarly, reductions in the quantity of restructured accounts can be shown under Sr.No.6 ‘write-offs of restructured accounts during the year’ with a footnote stating that that it includes Rs. xxx crore (no. of accounts and provision thereto also) of reduction from existing restructured accounts by way of sale / recovery.

(xii) Closing balance as on March 31st of a FY should tally arithmetically with opening balance as on April 1st of the FY + Fresh Restructuring during the year including additional /fresh sanctions to existing restructured accounts + Adjustments for movement across asset categories – Restructured standard advances which cease to attract higher risk weight and/or provision – reductions due to write-offs/sale/recovery, etc. However, if due to some unforeseen/ any other reason, arithmetical accuracy is not achieved, then the difference should be reconciled and explained by way of a foot-note.

3.4.3 Details of financial assets sold to Securitisation/ Reconstruction Company for Asset Reconstruction

3.4.4 Details of non-performing financial assets purchased/sold

Banks which purchase non-performing financial assets from other banks shall be required to make the following disclosures in the Notes to Accounts to their Balance sheets:

A. Details of non-performing financial assets purchased:

B. Details of non-performing financial assets sold:

3.4.5 Provisions on Standard Assets

3.5. Business Ratios

3.6 Asset Liability Management
Maturity pattern of certain items of assets and liabilities

3.7 Exposures

3.7.1 Exposure to Real Estate Sector

3.7.2 Exposure to Capital Market

3.7.3 Risk Category wise Country Exposure

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 to 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 limit or entire outstanding, whichever is high, shall be reckoned for arriving at exposure limit and for disclosure purpose.

3.7.5 Unsecured Advances

In order to enhance transparency and ensure correct reflection of the unsecured advances in Schedule 9 of the banks’ balance sheet, it is advised as under:

a) For determining the amount of unsecured advances for reflecting in Schedule 9 of the published balance sheet, the rights, licenses, authorisations, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security. Hence such advances shall be reckoned as unsecured.

b) Banks should also disclose the total amount of advances for which intangible securities such as charge over the rights, licenses, authority, etc. has been taken as also the estimated value of such intangible collateral. The disclosure may be made under a separate head in “Notes to Accounts”. This would differentiate such loans from other entirely unsecured loans.

3.8 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, placing the details of the levy of penalty on a bank in public domain will be in the interests of the investors and depositors. Further, strictures or directions on the basis of inspection reports or other adverse findings should also be placed in the public domain. The penalty should also be disclosed in the "Notes to Accounts" to the Balance Sheet.

4. Disclosure Requirements as per Accounting Standards where RBI has issued guidelines in respect of disclosure items for ‘Notes to 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 account 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 to 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 – Employee Benefits

Banks may follow the disclosure requirements prescribed under AS 15 (revised) on ‘Employees Benefits’ issued by ICAI.

4.4 Accounting Standard 17 – Segment Reporting

While complying with the above Accounting Standard, banks are required to adopt the following:

1. The business segment should ordinarily be considered as the primary reporting format and geographical segment would be the secondary reporting format.

2. The business segments will be ‘Treasury’, ‘Corporate/Wholesale Banking’, ‘Retail Banking’ and ‘Other banking operations’.

3. ‘Domestic’ and ‘International’ segments will be the geographic segments for disclosure.

4. 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

Part B: Geographic segments

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 18 is furnished below:

Accounting Standard 18 - Format for Related Party Disclosures

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.

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
3. Associates P Ltd, Q Ltd and R Ltd
4. Jointly controlled entity L Ltd
5. Key Management Personnel Mr.M and Mr.N
6. Relatives of Key Management Personnel Mr.D and Mr.E

4.6 Accounting Standard 21 – Consolidated Financial Statements (CFS)

As regards disclosures in the ‘Notes to 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 company, 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 "Auditors Report".

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:

• DTL created by debit to opening balance of Revenue Reserves on the first day of application of the Accounting Standards 22 or to Profit and Loss account for the current year should be included under item (vi) ‘others (including provisions)’ of Schedule 5 - ‘Other Liabilities and Provisions’ in the balance sheet. The balance in DTL account will not be eligible for inclusion in Tier I or Tier II capital for capital adequacy purpose as it is not an eligible item of capital.

• DTA created by credit to opening balance of Revenue Reserves on the first day of application of Accounting Standards 22 or to Profit and Loss account for the current year should be included under item (vi) ‘others’ of Schedule 11 ‘Other Assets’ in the balance sheet.

• The DTA computed as under should be deducted from Tier I capital:

i) DTA associated with accumulated losses; and

ii) The DTA (excluding DTA associated with accumulated losses), net of DTL. Where DTL is in excess of the DTA (excluding DTA associated with accumulated losses), the excess shall neither be adjusted against item (i) nor added to Tier I capital.

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 also refer to circulars DBS.ARS.No.BC.4/08.91.001/2001-02 dated October 25, 2001 and DBS.ARS.No.BC.17/08.91.001/2002-03 dated June 5, 2003 and 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.

5. Additional Disclosures

5.1 Provisions and Contingencies

To facilitate easy reading of the financial statements and to make the information on all Provisions and Contingencies available at one place, banks are required to disclose in the ‘Notes to Accounts’ the following information:

5.2 Floating Provisions

Banks should make comprehensive disclosures on floating provisions in the “Notes to Accounts” to the balance sheet as follows:

5.3 Draw Down from Reserves

Suitable disclosures are to be made regarding any draw down of reserves in the ‘Notes to Accounts’ to the Balance Sheet.

5.4 Disclosure of complaints

Banks are also advised to disclose the following brief details along with their financial results:

A. Customer Complaints

B. Awards passed by the Banking Ombudsman

5.5 Disclosure of Letters of Comfort (LoCs) issued by banks

Banks should disclose full particulars of all the Letters of Comfort (LoCs) issued by them during the year, including their assessed financial impact, as also their assessed cumulative financial obligations under the LoCs issued by them in the past and outstanding, in its published financial statements, as part of the ‘Notes to Accounts”.

5.6 Provisioning Coverage Ratio (PCR)

The PCR (ratio of provisioning to gross non-performing assets) should be disclosed in the Notes to Accounts to the Balance Sheet.

5.7 Bancassurance Business

Banks should disclose in the ‘Notes to Accounts’, from the year ending March 31, 2010, the details of fees/remuneration received in respect of the bancassurance business undertaken by them.

5.8 Concentration of Deposits, Advances, Exposures and NPAs

5.8.1 Concentration of Deposits

5.8.2 Concentration of Advances*

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

5.8.3 Concentration of Exposures**

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

5.8.4 Concentration of NPAs

5.9 Sector-wise NPAs

5.10 Movement of NPAs

5.11 Overseas Assets, NPAs and Revenue

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

5.13 Unamortised Pension and Gratuity Liabilities

5.14 Disclosures on Remuneration

In terms of Compensation Guidelines, private sector banks and foreign banks (to the extent applicable), are advised to disclose the following information in their notes to accounts.

5.15 Disclosures relating to Securitisation

The Notes to Accounts of the originating banks should indicate the outstanding amount of securitised assets as per books of the SPVs sponsored by the bank and total amount of exposures retained by the bank as on the date of balance sheet to comply with the Minimum Retention Requirements (MRR). These figures should be based on the information duly certified by the SPV's auditors obtained by the originating bank from the SPV. These disclosures should be made in the format given below.

5.16 Credit Default Swaps

Banks using a proprietary model for pricing CDS, shall disclose both the proprietary model price and the standard model price in terms of extant guidelines in the Notes to the Accounts and should also include an explanation of the rationale behind using a particular model over another.

Annex

List of Circulars consolidated by the Master Circular