Ind-AS migration to raise banks' capital need by 30%: SS Mundra

Reserve Bank deputy governor SS Mundra today said migration to Ind-AS accounting is likely to increase banks' provisioning requirements by a hefty 30 per cent, putting additional pressure on the already fund-starved banks to raise growth capital.

Banks will have to comply with the Indian Accounting Standards (Ind-AS) for financial statements for accounting periods beginning from April 2018.

"The migration to expected loss from the current practice of incurred loss would most likely raise the provisioning requirements on loan losses in the medium-term, in line with similar experiences in the globe where they have migrated to.

"Generally, it is found that the first migration on an average translates into a 30 per cent increase in the provisioning requirements of the credit portfolio," Mundra said while addressing the ET-organised BFSI seminar here this evening.

He asked banks to be opportunistic in raising capital to meet the additional capital requirements arising form the new accounting norms.

"Banks should be proactive in capital raising and need to take steps like arranging funds from majority share-holders, accession markets, selling off non-core assets and also realign the asset base to stay away from riskier assets," said the central banker.

Talking about the trillions of stressed assets that banks are saddled with, Mundra said bad loans have proved to be a tremendous drain on the economy and have constrained the ability of banks to intermediate.

"While steps are currently afoot to resolve the stressed assets issue, it is important for each stake-holder to learn the right lessons. Banks must also improve their risk management capabilities as it is critical to their survival," the former commercial banker said.

Advising lenders to be mindful on green finance, the deputy governor said, "Going forward, banks would need to be increasingly sensitive in their lending to industries that might create a bigger carbon footprint, to the extent of bearing further exposure and reducing current exposure to these companies".

There is a likelihood of asset quality pressures emerging in some accounts which are high carbon emitters, owing to demand of slowdown for their products, he warned.

Mundra said banks are concentrating on lending to the manufacturing sector but needs to focus services sector also.

He said the infrastructure sector, which will require over $43 trillion over the next five years, provides lenders a big opportunity but asked them to be cautious. On the increasing automation in the banking sector and elsewhere, he said this will lead to a deep job cuts.

"The World Bank has said in a report that proportion of jobs threatened in the country due to automation over the next few years at 69 per cent," he warned.