RBI Deputy Governor Expresses Worries Over the Calibre of Certain NBFCs’ Disclosures

Deputy governor of the Reserve Bank of India (RBI), M Rajeshwar Rao, has expressed concerns over the calibre of disclosures provided by certain non-banking financial corporations (NBFCs). His point was that the auditing community plays a critical role in making sure that companies give depositors and other stakeholders the right kind of qualitative information.

At Tuesday’s Conference of Statutory Auditors and Chief Financial Officers of Commercial Banks and All India Financial Institutions (AIFIs), Rao emphasised the role that statutory auditors play in preserving stakeholder trust in audited financial statements. Because confidence is the cornerstone of the banking sector and depositors, the main external stakeholders, are frequently dispersed and disorganised, this is particularly important.

In order to improve market discipline, Rao said that the RBI is dedicated to advancing high-quality accounting and disclosure standards in the banking and financial sector. Transparent and comparable financial statements are the goal. He mentioned that in order to give regulated firms greater latitude in their business decision-making, the RBI has been enhancing rule-based regulations with principle-based regulations.

“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.

In order to close the information gap between management’s understanding and what outside users can deduce from financial statements, he emphasised that disclosures are crucial for transparency. Although striking a balance between comprehensiveness and conciseness can be difficult, transparent and thorough disclosures promote confidence in the market.

Rao discussed the RBI’s findings about certain NBFCs’ disclosure policies, especially in light of the anticipated credit loss (ECL) framework. The central bank discovered that many disclosures were just textual repetitions of accounting standards, devoid of particular information about the methods and assumptions used to measure ECL, common characteristics of credit risk, and qualitative standards for identifying material increases in credit risk (SICR).

The RBI is urging regulated firms to raise the calibre of their disclosures in order to solve this problem. In order to make sure disclosure techniques satisfy end-user requirements and accounting standards, Rao advised the auditing community to rigorously assess these practices.

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

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.