RBI deputy governor raises concerns over quality of NBFC disclosures

Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao has raised concerns regarding the quality of disclosures made by some non-banking financial companies (NBFCs). He highlighted the crucial role of the auditing community in ensuring that entities provide appropriate qualitative information to depositors and other stakeholders.

Speaking at the Conference of Statutory Auditors and Chief Financial Officers of Commercial Banks and All India Financial Institutions (AIFIs) on Tuesday, Rao stressed on the importance of statutory auditors in maintaining stakeholder confidence in audited financial statements. This is especially critical in the banking industry, where trust is the foundation and depositors, the major external stakeholders, are often fragmented and unorganized.

Rao stated that the RBI is committed to promoting high-quality accounting and disclosure standards in the banking and financial industry, aiming for transparent and comparable financial statements to strengthen market discipline. He noted that the RBI has been supplementing rule-based regulations with principle-based regulations to offer regulated entities more flexibility in their business decision-making.

"The principle-based approach to regulations is based on the belief that financial reporting reflects the economic reality of a transaction. However, applying principle-based standards requires significant management judgement," Rao explained.

He stressed that disclosures are essential for transparency, bridging the gap between management's knowledge and what external users can infer from financial statements. Clear and comprehensive disclosures foster trust in the market, despite the challenge of balancing comprehensiveness and conciseness.

Rao shared the RBI's observations regarding the disclosure practices of some NBFCs, particularly in the context of the expected credit loss (ECL) framework. The central bank found that many disclosures were merely repetitions of accounting standards' text, lacking specific insights into the assumptions and methods used in measuring ECL, shared credit risk characteristics, and qualitative criteria for determining significant increases in credit risk (SICR).

To address this issue, the RBI is encouraging regulated entities to improve the quality of their disclosures. Rao urged the auditing community to critically evaluate disclosure practices and ensure they meet accounting standards and end-user needs.

"Auditors also have the responsibility of ensuring that entities provide appropriate qualitative information related to governance and control mechanisms," he added.

Rao concluded by stating that a harmonized approach by regulators and auditors can eliminate blind spots in risk identification and mitigation, ultimately achieving financial stability and ensuring the robustness of individual institutions.

(With PTI inputs)