This study brings to light the essential need for implementing the International Financial Reporting Standards (IFRS) in Indian Banking Sector to create a robust banking leading to an enhanced economy. While it is estimated that for creating 5 trillion economy which is the target of the Government of India, an economic growth rate of 8 percent is considered necessary. Implementation of IFRS in the Banking Sector of India can empower the commercial banks through greater transparency and reduced Non-Performing Assets. This in turn can help expand commercial banking in India. While trust in the banking sector is essential and is encouraged by the authorities of the Reserve Bank of India, the recent judgment of the High Courts in India made it clear that the money deposited by the Depositors is completely returnable by the banks through the contract of business. This will turn on pressure on the commercial banks to run the banking business effectively and efficiently, and adopting and implementing the IFRS will be in their interests to run the business transparently.

This research has pointed out the necessary parameters and variables to be considered as important by the commercial banks. These variables have been identified as important for a Group Recommender System by calculating the Principal Component Analysis (A Group Recommender System can also use the Singular Value Decomposition (SVD), which is a classical method derived from linear algebra, in this research, it was preferred to work out the PCA, the Principal Component Analysis). Thus, this research is a forerunner for further focused studies that can be expanded in the Indian economy for better and greater insights for the project preparedness of the implementation of IFRS.

Excerpt

Acknowledgements

Table of Contents

List of Tables

List of Charts

List of Figures

Abstract

1 INTRODUCTORY
1.1 Proem
1.2 A Brief Legal Background Of IFRS In India
1.3 The NPA And IFRS
1.4 Need And Significance
1.5 Statement Of The Problem
1.6 Objectives Of The Study
1.6 (i) Hypotheses of the Study
1.7 Research Methodology
1.8 Sources Of Data
1.9 Population And Sampling
1.10 Limitations Of The Study
1.11 Future Research
1.12 Denouement

2 OVERVIEW OF LITERATURE
2.1 Proem
2.2 Previous Studies Based On Secondary Sources
2.3 Previous Studies Based On Empirical Work
2.4 Denouement

3 IFRS (International Financial Reporting Standards) - A REVIEW
3.1 Proem
3.2 The Opportunities Arising Out of IFRS
3.3 Challenges of the Transitional Phase
3.4 Denouement

4 BENEFITS AND CHALLENGES OF IMPLEMENTATION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS
4.1 Proem
4.2 A Brief Overview Of Literature
4.3 IFRS : Its Conceptual And Perceived Benefits
4.4 IFRS : The Challenges Involved
4.5 IFRS Makes Easier Internal Audit Which Is Cost Effective
4.6 IFRS Makes Business Risk Management Easier
4.7 Denouement

5 GROUP RECOMMENDER SYSTEMS AND THE BANKING SECTOR- A BRIEF REVIEW
5.1 Proem
5.2 Information Overload And Fraudulent Informatio
5.3 Strategies For Group Recommender Systems
5.4 Application Of Group Recommender System In The Banking Sector- Data Analysis From An Empirical Study Of The Banking Sector In Dumka
5.5 Denouement

6 FINDINGS OF THE STUDY AND FUTURE RSEARCH WORK
6.1 Proem
6.2 Perceptions of Bank Employee Respondents
6.3 Perceptions of Bank Depositor Respondents
6.4 Perceptions of Bank Investor Respondents
6.5 Findings of Data Analysis in Brief
6.6 Future Research Areas Identified

7 CONCLUSION
7.1 Proem
7.2 A nutshell
7.3 A Conceptual Model
7.4 Denouement
7.4 (i) Benefits Arising Out Of The Study For Dumka

BIBLIOGRAPHY

APPENDICES

Appendix A1 : Published Papers

Appendix A2 : Questionnaires

Appendix A3 : Pre-Test Questionnaire

Appendix A4 : Maps

Appendix A5 : RBI Reports

Appendix A6 : Letter to RBI

Appendix A7 : Letter to MCA

GLOSSARY

Glossary G1 : IFRS and IND AS

Glossary G2 : Banking Terminology

Glossary G3 : Group Recommender System

LIST OF TABLES

1.1 Employee Respondents From Different Banks In Dumka

1.2 Depositor Respondents From Different Banks In Dumka

1.3 Investor Respondents From Different Banks In Dumka.

4.1 Benefits of IFRS Implementation in India

4.2 Challenges of IFRS Implementation in India

4.3 Descriptive Statistics Of The Respondents

4.4 Readiness Towards IFRS Adoption

4.5 Reliability statistics(Cronbach's Alpha test)

4.6 Computed Variables

4.7 Multiple Comparisons Dependent Variable

4.8 Table showing ANOVA Analysis

4.9 Multiple Comparisons Dependent Variable

4.10 ANOVA Test Analysis

4.11 Multiple Comparisons Dependent Variable

5.1 Ratings for 10 items by Banks X, Y and Z

5.2 Reliability Estimates and Factor Loadings of the Total Bank Employees Respondents

5.3 Reliability Estimates and Factor Loadings of the Total Bank Depositor Respondents

5.4 Reliability Estimates and Factor Loadings of the Total Bank Investor Respondents

6.1 Number of Bank Employees Sector wise

6.2 Demographic profile of the Total Bank Employee Respondents

6.3 Correlations of the Demographic Profile of the Employee Respondents

6.4 Descriptive Statistics of the Employee Respondents

6.5 Descriptive Statistics of Public Sector Bank Employee Respondents

6.6 Reliability Estimates and Factor Loadings of the TotalBank Employees Respondents

6.7 Reliability Statistics of Variables

6.8 Total Statistics of Items under Staff Adequacy

6.9 t-Test for Sector-wise Analysis of the bank Employees

6.10 t-Test results for Locality -wise Analysis

6.11 Total Count And percentage age Of Variables As Recorded By Employee Respondents of the Public Sector Banks

6.12 Total Count And percentage Of Variables As Recorded By Employee Respondents of the Private Sector Banks

6.13 Financial Year and Value of Deposits

6.14 Demographic profile of the Total Bank Depositor Respondents

6.15 Correlations of the Demographic Profile of the Depositor Respondents

6.16 Descriptive Statistics of the Employee Respondents

6.17 Descriptive Statistics of the Public Sector Bank Depositor Respondents

6.18 Reliability Estimates and Factor Loadings of the Total Bank Depositor Respondents

6.19 Reliability Statistics of Variables

6.20 Total Statistics of Items under Staff Adequacy

6.21 t-Test for Sector-wise Analysis of the bank Employees

6.22 t-Test results for Locality -wise Analysis

6.23 Total Count And Percentage Of Variables As Recorded By Depositor Respondents

6.24 Demographic profile of the Total Bank Investor

6.25 Correlations of the Demographic Profile of the Investor Respondents

6.26 Descriptive Statistics of the Investor Respondents

6.27 Descriptive Statistics of the Public Sector Bank Employee Respondents

6.28 Reliability Estimates and Factor Loadings of the Total Investor Respondents

6.29 Reliability Statistics of Variables

6.30 Total Statistics of Items under Staff Adequacy

6.31 t-Test for Sector-wise Analysis of the bank Employees

6.32 t-Test results for Locality -wise Analysis

6.33 The Total Count And Percentage Of Variables As Recorded By Investor Respondents

LIST OF CHARTS

4.1 Awareness about IFRS

4.2 Time Limit for the adoption of IFRS

6.1 Number of Bank employees in Public and Private bank

6.2 Number of Bank Employees in %age for the year 2018

6.3 Number of bank employees in percentage for the year2017

6.4 Percentage of Public and Private Banks

6.5 Age of employees in Public Sector Banks

6.6 Age of employees in Private Sector Banks

6.7 Percentage of Gender in Public Sector Banks

6.8 Percentage of Gender in Private Sector Banks

6.9 Percentage of Educational Qualification in Public Sector banks

6.10 Percent of Educational Qualification in Private Sector banks

6.11 Percentage of Designation in Public Sector banks

6.12 Percentage of Designation in Private Sector banks

6.13 Percentage of Public and Private banks

6.14 Age of employees in Public Sector banks

6.15 Age of employees in Private Sector Banks

6.16 Percentage of Gender in Public Sector banks

6.17 Percentage of Gender in Private Sector Banks

6.18 Percentage of Educational Qualification in Public Sector Banks

6.19 Percentage of Educational Qualification in Private Sector Banks

6.20 Percentage of Designation in Public Sector Banks

6.21 Percentage of Designation in Private Sector Banks

6.22 Number of Public and Private banks

6.23 Age of employees in Public Sector Banks

6.24 Age of employees in Private Sector Banks

6.25 Percent of Gender in Public Sector Banks

6.26 Percentage of Gender in Private Sector Banks

6.27 Percentage of Educational Qualification in Public Sector Banks

6.28 Percentage of Educational Qualification in Private Sector Banks

6.29 Percentage of Designation in Public Sector Banks

LIST OF FIGURES

1.1 Why NPAs Occur

5.1 The Various Types of Group Recommender Systems.

5.2 The Recommender Approaches

5.3 The User Preferences and Group Recommendations

5.4 The Pattern Of Input Recommender To Combiner Recommendation

5.5 A Conceptual Model

6.1 The Employees Demographic Details.

ABSTRACT

Globalization has brought several aspects of interconnectedness. Banking is one such area where from several international monetary transactions and fund transfers are made. The strength of a business organization-whether banking or non-banking- depends on the trust of the stakeholders for which the organizations have to necessarily maintain the financial and accounting systems with accuracy and as per the laws and rules of the regulatory authorities. Therefore, some common sets of rules are required which can be understood internationally with equal trust of the individual customers or group of the business units. As such, today the organizations around the globe are expected to apply the regulations of the International Financial Reporting Standards (IFRS). “International Financial Reporting Standards (IFRS) set common rules so that financial statements can be consistent, transparent, and comparable around the world. They specify how companies must maintain and report their accounts, defining types of transactions, and other events with financial impact”. They are formulated to bring consistency to “accounting language, practices and statements and to help businesses and investors make educated financial analyses and decisions.” The IFRS Foundation has laid down standards to “bring transparency, accountability and efficiency to financial markets around the world. fostering trust, growth and longterm financial stability in the global economy.” Companies benefit from the IFRS because investors are more likely to put money into a company if the company's business practices are transparent and trustworthy as also globally acceptable.

“IFRS covers a wide range of accounting activities. There are certain aspects of business practice for which IFRS set mandatory rules.

- Statement of Financial Position: This is also known as a balance sheet. IFRS influences the ways in which the components of a balance sheet are reported.
- Statement of Comprehensive Income: This can take the form of one statement, or it can be separated into a profit and loss statement and a statement of other income, including property and equipment.
- Statement of Changes in Equity: Also known as a statement of retained earnings, which documents the company's change in earnings or profit for the given financial period.
- Statement of Cash Flow: This report summarizes the company's financial transactions in the given period, separating cash flow into Operations, Investing, and Financing.

In addition to these basic reports, a company must also give a summary of its accounting policies. The full report is often seen side by side with the previous report, to show the changes in profit and loss. A parent company must create separate account reports for each of its subsidiary companies.” With this in view, many countries have adopted an international standards for the financial statements. While some countries have adopted fully, some have adopted partially. Even India has adopted IFRS partially. The need for adopting IFRS in the banking sector was considered seriously by the Reserve Bank of India. As per the circular of Reserve Bank of India of 2016, Ind As was implemented in the Non-Banking Finance Companies which are part of the banking sector of India. However, the commercial banking sector was retained excluded seeking the banking sector to prepare the grounds for the implementation of the IFRS project in the banking sector. Later in 2019, the Reserve Bank of India issued another circular stating that the implementation is kept in abeyance until further notice as the Ministry of Corporate Affairs is preparing the regulations regarding the implementation by the commercial banking sector. As ground level preparedness is suggested by the RBI and any time the regulations may be announced, it is essential to know the preparedness of the banking sector of India for the Ind AS implementation. Therefore, it was deemed necessary to launch a survey research on the commercial banks in India by taking a multi stage convenient sampling and the data so collected is scientifically analyzed using appropriate scientific tools and software package like SPSS. The results of the investigation so carried out and the unique methodology of using Group Recommender System is reported in this thesis. The study was focused on the following objectives:

a) To examine the process of implementing IFRS in selected banks in India with a focus on the banks in Dumka City limits.
b) To examine the perceived benefits and challenges of implementing IFRS.
c) To understand the issues those affect the stakeholders, especially the depositors, investors and employees.
d) To understand the extend of usage of the IFRS in the system of the select banks under study.
e) To examine the benefits accrued to the regulators facing decisions regarding individual accounts and unlisted company groups.
f) To design an appropriate Model of reflecting trust-distrust of the depositors in the systems of the selected banks.
g) To test the following hypotheses:

As the research is exploratory in nature the following hypotheses are formulated based on secondary data for testing the group differences.

a. H1: Demographic variables (like age, gender, experience, designation, and type of organization) have causal effect on the way stakeholders perceive IFRS accounting norms will impact Indian banking sector.

Hypothesis H1 can be further broken down into sub-hypotheses specifying each demographic variable separately vis-a-vis its relationship with dependent variable viz. IFRS

H1a: Age of employees has causal effect on the way employees perceive IFRS accounting norms will impact Indian banking sector.

H1b: Gender of employees has causal effect on the way employees perceive IFRS accounting norms will impact Indian banking sector.

H1c: Years of work experience of employees has causal effect on the way employees perceive IFRS accounting norms will impact Indian banking sector.

H1d: Designation of employees has causal effect on the way employees perceive IFRS accounting norms will impact Indian banking sector.

H1e: Type of bank/organization has causal effect on the way employees perceive IFRS accounting norms will impact Indian banking sector.

The data for the study have been obtained from both secondary sources and primary sources. The published balance sheets, profit and loss accounts statements, annual reports of the banks and other published research papers, articles, periodical literature, circulars, reports, internet website materials, links and documents have been perused for secondary data collection and analysis. Primary data was collected initially through a pre-test using an interview schedule as detailed in the methodology section and subsequently administering three questionnaires to the stakeholders like the employees, investors and depositors of the banks in the Nagarpalika limits of Dumka of the Jharkhand State. In the case of pre-test, it was a census as the number of banks is limited. In the case of the survey, it was through emails sent out to the respondents who were a quota sample of 450 each from each category of the stakeholders. To make good the quota number, where the email responses were not available or possible, personal contacts have been made. All the three stake holder groups were administered with similar questionnaires of statements for rating using the Likert Scale. 9 parameters were developed based on the RBI Circular and the secondary data and each of the parameters was given 5 or 6 statements for the respondents to select. The data so collected were subjected to analytical manipulation.

The population was the banking organizations in the selected geographical area - in this case, Dumka Municipal Town area. The selection of the area and the organizations were based on logistic reasons and time constraints. The sample was based on quota sampling and purposive convenient sampling.

The study is limited by the quality of the data collected, sample biases, computational glitches, and logistic consideration of a PhD Scholar. Yet all reasonable and diligent measures were used to make the study as scientific as possible so as to enable policy suggestions.

The entire thesis is organized into seven chapters as approved by the Doctoral Research Committee and as per the approved synopsis. Chapter I is an Introductory, Chapter II presents an overview of the literature on IFRS and related issues based on secondary research and primary research., Chapter III discusses IFRS (International Financial Reporting Standards)-A Brief Review , Chapter IV gives a brief view of Benefits and Challenges of implementation of IFRS, Chapter V provides a presentation of the Group Recommender System, Chapter Six is all about the findings and the future research work that can be undertaken. Finally Chapter Seven gives the conclusion of the study. The thesis gives a select bibliography, a note on the tools used for analysis of the study, appendices inclusive of the questionnaires used in English and their Hindi translations, glossary of terms in the areas within which this research falls, the relevant circulars of the Reserve Bank of India, the communications of the researchers with officials of the Reserve Bank of India and the Ministry of Corporate Affairs, and Maps of the areas in which the research was conducted as well as the maps of the countries where IFRS is adopted.

From the Reserve Bank of India Circular dated RBI/2016- 17/DBR.FID.No.1/01.02.000/2016-17 August04, 2016 for the purpose of this study 10 parameters were identified. These parameters are as under:

I. Staff Adequacy (F1)
II. Internal Staff for implementation(F2)
III. Comprehensive Training Strategy(F3)
IV. Salaries and wages including bonus(F4)
V. Post-Employment Benefits(F5)
VI. Employee Share Based Payments(F6)
VII. Other Employee Benefits(F7)
VIII. Awareness and Efficiency (F8)
IX. Trust - Distrust Syndrome(F9)
X. Transparency of the Banks (F10)

For the measurement of these parameters, a Likert Scale was used. Each parameter was further split into statements to be evaluated by the respondents on a Likert Scale of 1 to 5. Thus, the scaling was intended to be asunder:

1. Strongly Disagree -1,
2. Disagree -2,
3. Neither Agree nor Disagree -3,
4. Agree -4,
5. Strongly Agree - 5,
6. Not Applicable.

The respondents were asked to round off the number against the statement.

Section I of the questionnaire collected the data on the demographic profile of the respondents. Data based on the profile nature of employees, investors and depositors were gathered for analysis.

The data collected through this research instrument were analyzed using the computer software Statistical Packages for Social Sciences. Different tools of analysis were used to arrive at the appropriate measurement of the parameters and the statement. Through an analysis of the Principal Components, the Group Recommender was worked out. The heavy factor loaded statements were selected to use in a fit for the conceptual model designed for the purpose of this study.

The analysis of the data for each of the stake holder groups is analyzed and presented in the tables given in the thesis and discussed accordingly. Diagrammatic representation of the tables are also provided.

It is pertinent observe that a Factor Analysis was run and the Rotated Varimax output was generated. This helped the research to identify the Principal Components which could become the major variables for the Group Recommender System that this research is able to throw light on. This has results into the development of a model which is further reproduced here:

GROUT RECOMMENDER SYSTEM INDEPENDENT VARIABLES STAFFADEQUACY INTERN AL STAFF FOR IMPLEMENTATION COMPREHENSIVE TRAINING STRATEGY SALARIES AND WAGES INCLUDING BONUS POST EMPLOYMENT BENEFITS EMPLOYEE SHARED BASED PAYMENTS OTHER EMPLOYEE BENEFITS AWARENESS AND EFFICIENCY TRLST-DISTRLST SYNDROME TRANSPARENCY OF THE BANKS

Abbildung in dieser Leseprobe nicht enthalten

The independent variables for the Group Recommender System were conceptualized as Staff Adequacy, Internal Staff for Implementation, Comprehensive Training Strategy, Salaries, Wages including Bonus, Post-Employment Benefits, Employee Shared Based Payments, Other Employee Benefits, Awareness and Efficiency, Trust-Distrust Syndrome and Transparency of the Banks. With these variables in place, IFRS as a concept becomes strong for the adoption and implementation. A strong IFRS implemented Banking System will have established Trust of the stakeholders that will lead to a robust banking sector. Banking being the source of finance for the corporate development, the corporate sector including the banking sector will thrive under such circumstances. It is well known that where the corporate development is sound and surging, such economic parameters like employment, income, productivity and quality of life index will become many fold and the economic development will march ahead at rapid speed. This study has brought out the measurements relating to these aspects.

This study brings to light the essential need for implementing the International Financial Reporting Standards in Indian Banking Sector to create a robust banking leading to an enhanced economy. While it is estimated that for creating a five trillion economy which is the target of the Government of India, an economic growth rate of 8 percent is considered necessary. Implementation of IFRS in the Banking Sector of India can empower the commercial banks through greater transparency and reduced Non-Performing Assets. This in turn can help expand commercial banking in India. While trust in the banking sector is essential and is encouraged by the authorities of the Reserve Bank of India, the recent judgment of the High Courts in India made it clear that the money deposited by the Depositors is completely returnable by the banks through the contract of business. This will turn on pressure on the commercial banks to run the banking business effectively and efficiently and adopting and implementing the IFRS will be in their interests to run the business transparently. This research has pointed out the necessary parameters and variables to be considered as important by the commercial banks. These variables have been identified as important for a Group Recommender System by calculating the Principal Component Analysis. (A Group Recommender System can also use the Singular Value Decomposition (SVD), which is a classical method derived from linear algebra, in this research, it was preferred to work out the PCA, the Principal Component Analysis). Thus, this research is a forerunner for further focused studies that can be expanded in the Indian economy for better and greater insights for the project preparedness of the implementation of IFRS. The Reserve Bank of India has deferred the implementation until further notice as the Ministry of Corporate Affairs of the Government of India is at work to formulate the laws and regulations through appropriate legislative Acts in the Indian Parliament. “The Reserve Bank of India could push the implementation of Ind-AS — the Indian version of global accounting standards — to fiscal 2023, seeing poor preparedness of banks to make the transition. The new rules are expected to add to the burden of higher capital requirement for banks, especially loan loss provisions. It is estimated that PSU banks would require an additional Rs 1.1 lakh crore to immediately adhere to the accounting rules if implemented.”(Saloni Shukla and Sachin Dave, the Economic Times, February 19, 2020) As the law may be passed at any time, the commercial banks should plan to prepare the project work in advance and the research results of this study may be useful for appropriate actions at the level of the Banking Sector of India. Thus, this study has paved the way for a unique proposition for not only the growth of the banking sector of India, but also for the faster growth of the economy. The Conceptual Model developed and provided by this research will be of great use to the banking sector of India.

Chapter - 1 Introduction

1.1. PROEM

Globalization has brought several aspects of interconnectedness. Banking is one such area where from several international monetary transactions and fund transfers are made. The strength of a business organization-whether banking or non-banking- depends on the trust of the stakeholders for which the organizations have to necessarily maintain the financial and accounting systems with accuracy and as per the laws and rules of the regulatory authorities. Therefore, some common sets of rules are required which can be understood internationally with equal trust of the individual customers or group of the business units. As such, today the organizations around the globe are expected to apply the regulations of the International Financial Reporting Standards (IFRS). “International Financial Reporting Standards ( TFRS J set common rules so that financial statements can be consistent, transparent, and comparable around the world. They specify how companies must maintain and report their accounts, defining types of transactions, and other events with financial impact”. They are formulated to bring consistency to “accounting language, practices and statements and to help businesses and investors make educated financial analyses and decisions.” The IFRS Foundation has laid down standards to “bring transparency, accountability and efficiency to financial markets around the world... fostering trust, growth and long-term financial stability in the global economy.” Companies benefit from the IFRS because investors are more likely to put money into a company if the company's business practices are transparent and trustworthy as also globally acceptable.

“IFRS covers a wide range of accounting activities. There are certain aspects of business practice for which IFRS set mandatory rules.

Banking organizations are also established under the relevant laws and legislations and are expected to perform with financial prudence and extreme trust. This is especially so under situations of liberalizations and the ease of doing business. The IFRS are applicable to the banking organizations also and it is necessary to investigate the extent to which such organizations are adopting and implementing the IFRS. A study of the situation as exists in India will help to bring to light the importance given to IFRS by the banking organizations and the significance assigned to IFRS.

According to a study “International Financial Reporting Standards (IFRS) are a single set of high-quality, understandable, enforceable and globally accepted financial reporting standards based upon clearly articulated principles. These standards enable the investors and other users of the financial statements to compare the financial statements on a like-for -like basis with their international peers.”(Raj S Shankar, Barnali Chaklader, Amit Gupta, 2018).

In India, Accounting Standards are formulated by the Council of the ICAI (Institute of Chartered Accountants of India) through its Accounting Standards Board. Thereafter, those Accounting Standards are considered by the National Advisory Committee on Accounting Standards (NACAS) of the Ministry of Corporate Affairs constituted under the Indian Companies Act, 1956 (as amended in 2013), which recommends the Standards to the Central Government for notifying under the Act. The Government, on accepting the recommendation of the Committee, notifies the Standards under the Act by publishing them in the Official Gazette.

At present, 28 Accounting Standards, which are based on old Indian Accounting Standards, have been notified under the Companies Act, 1956. In a move towards convergence with IFRSs, in 2007, the ICAI commenced the process of developing a complete set of Accounting Standards that are ‘converged with' IFRSs - to be known as Indian Accounting Standards or Ind ASs. India has decided to converge its accounting standards with IFRSs issued by IASB instead of adoption of IFRSs. Thirty-five Ind ASs corresponding to IFRS in force on 1April, 2011 (with the exception of IFRS 9 Financial Instruments, IAS 26 Accounting and Reporting by Retirement Benefit Plans, and IAS 41 Agriculture) were placed on the website of the Ministry of Corporate Affairs. However, they have not been notified under the Companies Act, 1956.

Ministry of Corporate Affairs, Government of India issued a press release on January 18, 2016, wherein a roadmap for adopting IFRS/Ind AS was announced for the scheduled commercial banks (excluding regional rural banks), insurers/insurance companies and nonbanking finance companies. Thus, now, it has become mandatory to implement IFRS/Ind AS for accounting period beginning from April 1, 2018 onwards for the followings:

1) Scheduled commercial banks (excluding regional rural banks).
2) All India term lending refinancing institutions (i.e. EXIM Bank, NABARD, NHB and SIDBI).
3) Insurers/insurance companies.”

Thus, the importance of applying the IFRS in the banking and non-banking financial sector and in their organizations cannot be undermined and investigations in respect of different aspects of the implementation of IFRS in Indian organizations are valid, essential and relevant.

In this context, it is necessary to recall the changed circumstances in the adoption and implementation of IFRS in the banking organizations in India. It is also to be noted that the banking organizations like the Punjab National Bank, Laxmi Vilas Bank, Punjab and Maharashtra Cooperative Bank have undergone great stress and the depositors have suffered untold miseries. The trust of the depositors of the banking system is thoroughly shaken even affecting the economy and causing further damage in the context of deceleration. Currently, the knowledge society is undergoing an information overload as well. The internet connectivity has provided opportunities to the customers to evaluate the organizations and develop trust and distrust in them based on the information circulation. A study of this phenomenon reported asunder:

“Along with increasing applications of the Internet, explosive growth of various information brings about severe information overload problem. As a consequence, users are usually sunk into ocean of information, and cannot acquire the contents they require. Recommender system (RS) viewed as a popular solution for this issue, suggests items for users through establishing their profiles according to preference feedbacks. Although the past decade has witnessed great progress of recommender system with respect to many fields like shopping, current RSs were mostly designed for individual users. Accompanied with more and more closer ties among people in contemporary world, suggesting items to groups of users has also been a general demand. For example, when friends gather to have dinner, it is expected to suggest a table of dishes for them with consideration of their different tastes” (ZhiweiGuo; Wenru Zeng; Heng Wang; Yu Shen, (2019). Yet another study confirms that “the efficiency of trust-distrust enhanced GRSs is compared with traditional techniques and the outcomes of computational experiments confirm the supremacy of our proposed models over baseline GRSs techniques ”(Sonajharia Minz et.al. 2020). Development of Group Recommender System (GRS) for the stake holders on user-user or content-content basis will go a long way in empowering the stake holders and the banking system as well through efficient and competent implementation of the accounting system of the banks which will lead to the strong growth of the economy.

1.2. A BRIEF LEGAL BACKGROUND OF IFRS IN INDIA

In India, the basic requirements relating to financial reporting of the companies incorporated under law are provided by the Companies Act, 1956 as amended in 2013 wherein every profit and loss account and balance sheet have to comply with the accounting standards as provided in the legislative provisions of the Companies Act. Further, the Institute of Chartered Accountants of India (ICAI) issue the accounting standards while the Securities and Exchange Board of India safeguards the investors by regulating the securities market. Similarly, the financial reporting of the Insurance companies are controlled by the Insurance Regulatory and Development Authority as per the regulations of 2002.

When it comes to the banking sector, as the Central Bank of India, the Reserve Bank of India is the nodal authority controlling the banks. The Banking Regulations Act, 1949 gives the powers to the Reserve Bank of India to regulate the financial reporting of the various units in the banking sector like the commercial banks, non-banking financial institutions, and other institutions. The RBI has issued circulars requiring banks to comply with the accounting standards issued by ICAI. Thus it is evident that the accounting standards issued by ICAI need to be complied with when preparing financial reporting statements of incorporated companies, banks, insurance companies, etc. In 1973, ICAI became one of the associate members of the International Accounting Standards Committee (IASC). Subsequently, the Accounting Standards Board (ASB) was set up by the ICAI in 1977 to prepare accounting standards. Since its inception in October 1977, ICAI also became a member of the International Federation of Accountants (IFAC). While formulating accounting standards in India, the ASB considers International Financial Reporting Standards (IFRS) and tries to incorporate them in the accounting standards issued by it to the extent relevant, in the light of laws, customs, practices, business environment prevalent in India. The IFRS has a direct relation with the overall business environment and hence, the situation prevailing in the business environment has to be evaluated while studying the IFRS and its adoption.

Analysing the legal source of IFRS in India, it is pertinent to note that “The Ministry of Corporate Affairs notified these standards on February 25, 2011. The Press note issued in this regard indicated “In pursuance of G-20 commitment given by India, the process of convergence of Indian Accounting Standards with IFRS has been carried out in Ministry of Corporate Affairs through the wide-ranging consultative exercise with all the stakeholders. Thirty-five Indian Accounting Standards converged with the International Financial Reporting Standards (henceforth called IND-AS) are being notified by the Ministry and placed on the website. These are: IND ASs 1, 2, 7, 8, 10, 11, 12, 16, 17, 18, 19, 20, 21, 23, 24, 27, 28, 29, 31, 32, 33, 34, 36, 37, 38, 39, 40, 101, 102, 103, 104, 105, 106, 107 and 108. The Ministry of Corporate Affairs will implement the IFRS converged Indian Accounting Standards in a phased manner after various issues including tax related issues are resolved with the concerned Departments. It would be ensured that the implementation of the converged standards in a phased manner is smooth for the stakeholders. The Ministry will notify the date of implementation of the IND AS at a later date”. 2013 saw the Indian government adopting a new Companies Act to facilitate the various new provisions convergence to IFRS required. To resolve issues of tax, the Ministry of Finance drafted Tax Accounting Standards to account for the conflicts between accounting and taxation.

Central Government through notification dated 16 February 2015, in exercise of the powers conferred by Section 133 read with section 469 of the Companies Act, 2013 and sub-section (1) of Section 210A of the Companies Act, 1956, in consultation with the National Advisory Committee on Accounting Standards, has issued the Companies (Indian Accounting Standards) Rules, 2015 which lay down a roadmap for companies other than insurance companies, banking companies and non-banking finance companies (NBFC) for implementation of IND-AS converged with IFRS. The Rules would come into force from the 1st day of April 2015”. (Rebecca Furtado, “Legal Source of IFRS in India”, 2016).

Thus, it can be seen that the banking sector of India is regulated by the Reserve Bank of India Act 1934 (RBI Act) and the Banking Regulation Act 1949 (BR Act). The Reserve Bank of India (RBI), India's central bank, issues various guidelines, notifications and policies from time to time as the controller of the banking sector. Besides, the International transactions by the banks and other financial organizations are monitored by the Foreign Exchange Management Act 1999 (FEMA).

It can be seen that in India, there are both private sector banks (which include branches and subsidiaries of foreign banks) and public-sector banks (i.e., banks in which the government directly or indirectly holds ownership interest). These Banks of India are classified as scheduled commercial banks (i.e. commercial banks performing all banking functions), cooperative banks (set up by cooperative societies for providing financing to small borrowers) and the regional rural banks (RRBs) (for providing credit to rural and agricultural areas).

RBI, of late has also introduced specialised banks such as payments banks and small finance banks that perform part banking functions.

The important legislations that govern the banking industry in India and particularly the scheduled commercial banks can be mentioned as given below:

i. The Reserve Bank of India Act, 1934.
The RBI Act was legislated to establish and set out functions of the RBI. It empowers the RBI to regulate the monetary policy of India and provides for the constitution, incorporation, capital, management, business and other supplementary functions of the RBI.
ii. The Banking Regulation Act, 1949
The Banking Regulation Act gives the appropriate framework for the supervision and regulation of all the banks. It also has the provision for empowering the RBI to grant licences to banks and regulate their business operations within India or outside.
iii. Foreign Exchange Management Act, 1999
Under this FEMA, foreign exchange operations are controlled. FEMA and the rules and regulations decided by the government under its control the international activities of banks. These are in turn monitored by the RBI.

Some other relevant laws which have impact on the banking activities in India can be mentioned as follow:

a. the Negotiable Instruments Act 1881;
b. the Recovery of Debts Due to Banks and Financial Institutions Act 1993;
c. the Bankers Books Evidence Act 1891;
d. the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002;
e. the Banking Ombudsman Scheme 2006 and
f. the Payment and Settlement Systems Act 2007

The public sector banks are regulated by the Banking Regulation Act, 1949 and the other laws because of which they have been nationalised and constituted. Such laws are the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 or the Banking Companies (Acquisition and Transfer of Undertaking Act) 1980. The State Bank of India and subsidiaries and affiliates of the State Bank of India constituted and regulated by the State Bank of India Act 1955 and the State Bank of India (Subsidiary Banks) Act, 1959.

Similarly, the deposits placed with various banks are insured by the Deposits Insurance and Credit Guarantee Corporation (DICGC). This is a subsidiary of the Reserve Bank of India. It is separately governed by the Deposits Insurance and Credit Guarantee Corporation Act 1961. The DICGC insures all deposits such as savings, fixed, current, recurring, etc. However, some deposits are out of the purview of this. They are:

- deposits of foreign governments;
- deposits of central and state governments;
- inter-bank deposits;
- deposits of the state land development banks with state cooperative banks;
- any amount due on account of any deposit received outside India; and
- Any amount that is specifically exempted with prior RBI approval.

Currently, each depositor of a bank is insured up to a maximum amount of 500,000 rupees. The premium for such deposit insurance is borne by the relevant bank.

Nationalisation of Indian banking was a landmark step by which several private banks have been taken over by the Government of India. As a result, now, there are currently 19 commercial banks that were nationalised in the 1960s and 1980s. While the GOI has not made any moves for further nationalisation of banks, the BR Act gives the GOI the power to acquire undertakings of an Indian bank in certain situations, such as breach of banking policy by the bank. In addition, the GOI also establishes RRBs (which are primarily controlled by the GOI, directly or indirectly) in different states from time to time, as it considers necessary.

Since the early 1990s, the government has generally liberalised regulations and encouraged private sector involvement in the banking sector. Measures taken include:

- providing banking licenses to private banks;
- granting licenses to set up different types of banks such as payments banks, small sector banks and universal banks; and
- Encouraging foreign banks to convert to wholly owned subsidiaries (WOS) with consequential liberalization of branch licensing restrictions.

At present, the foreign direct investment (FDI) limit in private sector banks is 74 per cent. At all times, at least 26 per cent of the paid-up capital will have to be held by residents, except in regard to a WOS of a foreign bank. In public sector banks, the FDI limit is 20 per cent. The RBI is currently in discussions with various stakeholders for liberalising the sector and permitting 100 per cent foreign direct investment in private banks, which is likely through the government route.

Another feature is that the transactions with affiliates (referred to as related-party transactions (RPTs)) are mainly regulated by the Companies Act 2013 (CA 2013). However, if the bank is a listed company, it will also need to comply with the norms set out for RPTs in the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (the Listing Regulations). These related parties are mostly asunder:

- directors (or their relatives);
- key managerial personnel (or their relatives);
- subsidiaries;
- holding companies; and
- Associate companies.

According to laws, there are separate thresholds and approval requirements (usually approval from board of directors or shareholders, or both) for entering into an RPT. The Companies Act, 2013 and the Listing Regulations also provide exemptions to certain types of transactions from such compliance (egg, a transaction between a company and its wholly owned subsidiaries are exempted from the requirement of obtaining board or shareholder approval under Companies Act, 2013 and the Listing Regulations)..

Related Party Transactions by a bank must be disclosed in the bank's annual accounts in accordance with Indian generally accepted accounting principles (GAAP). In addition, banks are prohibited from entering into certain Related Party Transactions under the Banking Regulation Act, 1949. For example, a bank cannot give loans or advances to, or on behalf of, or remit any amounts due to it by:

- any of its directors (or spouse or minor children of such a director);
- any partnership firm in which any of its directors is interested as a partner, manager, employee or guarantor;
- any company or subsidiary or holding company of a company in which any of its directors is interested as a director, managing agent, manager, employee or guarantor, or in which a director (together with its spouse and minor children) holds interest of more than 500,000 rupees or 10 per cent of the paid-up capital of the company, whichever is lower; and
- Any individual in respect to whom a director is a partner or a guarantor.

An approval from the board of the bank will be required for any loans given to relatives of any directors of that bank or directors or relatives of directors of any other bank.

Further, all transactions between a bank and a subsidiary or mutual fund sponsored by it should be on an arm's-length basis. The bank will need to evolve appropriate strategies and undertake regular review of the working of the subsidiary or mutual fund to ensure this.

The banks have certain challenges to face under the various regulations. Such regulations can be detailed asunder:

Indian banks are required to fully comply with the Basel III Capital Regulations (Basel Regulations) by 31 March 2019. Most of the public-sector banks will need additional capital infusion to meet the higher capital requirements, which will consequently reduce the return on equity. As a result, government support will be required, which may exert significant pressure on the government's fiscal position.

Similarly, there are some specialised banking. The RBI has currently granted approximately 10 small finance bank licenses and approximately seven payments of bank licences. While the RBI has set up the mechanism for the use of these licences, the current provision of these services seems to be falling short of catering to the unbanked sectors that include rural areas and other underdeveloped and unorganised sectors. Further reorientation of regulatory and supervisory resources is likely needed to widen access to these systems, in light of the wider objective of financial inclusion.

The quantity of net non-performing assets (NPAs) of Indian banks has been increasing significantly. The RBI has, over the years, taken significant measures, both regulatory and structural, in order to tackle this issue. However, the rise in NPAs continues to be one of the most fundamental threats to the banking sector as a result of the poor Asset Quality maintained.

The RBI requires banks to provide mandatory credit to certain weaker sections of society and sets out targets for the same. In the past, banks have struggled to meet these targets. These sectors often yield low profits, and they adversely impact banks' profitability. These are considered as the priority sector non-performing assets.

Separately, the agricultural sector (one of the main sectors for priority lending) has a high level of NPAs. The new measures introduced by the RBI to reduce stressed assets, as mentioned above, do not take into account agricultural NPAs.

It is also argued that the shift to a cashless economy has brought with it a specific set of issues, which primarily revolve around access. The RBI has taken concerted measures such as setting up an e-wallet linked to the unique identification number system (AADHAAR) set up (akin to the social security number structure in the United States) and encouraging retailers, as well as other local businesses, to provide discounts and cash-back schemes for using electronic means of payment. There is a severe lack of infrastructure in most parts of the country for such payment systems to be used regularly, ranging from a functional internet connection to the sophistication of its users. Recently, privacy concerns, and legal challenges on this basis, have been raised.

The Insolvency and Bankruptcy Code, 2016 has been in operation for a year and a notable shift has been seen in the approach of the Reserve Bank of India, as well as creditors, in bringing action against defaulters. The National Company Law Tribunal and the National Company Law Appellate Tribunal have provided judgments that have helped clarify some points that were unclear in the IBC itself. While the jurisprudence is gradually developing, the Ministry of Finance has been quick to identify the challenges and update the IBC with regulations aimed to make the process more efficient. It remains to be seen if the IBC process actually keeps pace with increasing NPAs, therefore improving the status of banks as creditors within the Indian financial system.

It should also be borne in mind that Banks in India are subject to Consumer Protection Act which is an alternative and speedy remedy to approaching courts, a process that can be expensive and time-consuming.

The relationship between a bank and its customer is regarded as that of a consumer and service provider, therefore bringing them under the ambit of the Consumer Protection Act, 1986.

In addition, banks are also subject to the Banking Ombudsman Scheme for the purpose of adjudication of disputes between a bank and its customers. The scheme provides for a grievance redressal mechanism enabling speedy resolution of customer complaints in relation to services rendered by banks. The banking ombudsman is a quasi-judicial authority appointed by the Reserve Bank of India to deal with banking customer complaints relating to deficiency of services by a bank and facilitate resolution through mediation or passing an award. A complaint under the scheme has to be filed within one year of the cause of action having arisen.

In spite of several attempts and bills prepared since 2017 to 2020, the Financial Resolution and Deposit Insurance Bill could not assure any full and cent percent guarantee for the depositors' money in banks where the banks have gone for high risk and reckless behaviour. However, the Deposit Insurance and Credit Guarantee Corporation Amendment Bill 2021 was passed by Parliament on August 10, 2021 and the deposits are ensured up to five lakhs for their deposits.

Over recent years, the government has taken several measures to liberalise FDI into India, with a view to promoting the ease of doing business.

The banks are currently controlled by the reserve bank of India and it conducts periodic audits and also acts as a consumer disputes ombudsman for retail banking. Based on its findings, and sometimes suo moto, the RBI also supervises the Indian banking system through various methods such as on-site inspection, surveillance and reviewing regulatory filings made by the banks. Further, quarterly discussions with the banks' executives on issues arising from analysis of off-site surveillance, status of compliance with annual inspection findings and new products introduced by banks are carried out.

In order to enforce the regulations of the RBI, it issues directions from time to time to ensure compliance with the banking statutes and rectify non-compliance, if any. In the case of non-compliance with regulatory requirements, the RBI may impose a variety of sanctions, including fines, orders for the suspension of a bank's business and cancellation of the bank's banking licence. In spite of these, there are problems in the enforcement of the regulations. Some of them are as under: Deterioration of asset quality of the banking system: Deteriorating asset quality is often attributable to poor underwriting by bank staff while undertaking credit appraisal of the projects. The RBI conducts ad hoc asset quality reviews of banks' assets. Based on this review, the RBI issues directions to banks for them to comply with capital adequacy norms. Additionally, the RBI has directed banks to take other corrective measures such as conversion of debt into equity and has permitted longer repayment schedules for long-term projects. In light of the demonetisation measures, there is speculation that the asset quality review that is generally conducted at the end of the financial year will be post posed to the next financial quarter.

- Deficiencies in compliance with know-your-customer (KYC) anti-money laundering (AML) norms by banks: In 2013, investigations carried out by the Cobra post media portal exposed serious violation of KYC and AML norms leading to imposition of a total fine of 500 million rupees by the RBI on 22 banks. To combat such a breach, the RBI is also considering imposing operational curbs on banks in addition to the monetary fines. The RBI has advised banks to undertake employee training programmes on KYC and AML policy as violations have often been attributable to the staff's lack of familiarity with, and ability to monitor compliance with, the KYC and AML policy.

- Mis-selling of financial and structured products: A wide range of complex structured financial products were being sold by banks to unsophisticated customers (such as retail and individual customers) without providing sufficient information. In 2011, the RBI imposed a total fine of 19.5 million rupees on 19 banks for mis-selling derivative products to clients and failing to match the complexity of products to clients with appropriate risk profiles and determining whether clients have appropriate risk management policies prior to investing in these products. The RBI has framed a Charter of Customer Rights as overarching principles to protect customers, pursuant to which banks must formulate board- approved customer rights policies and conduct periodic reviews.

- Internal fraud: In 2015, investigations revealed a sum of 60,000 million rupees being routed to Hong Kong for non-existent imports through Bank of Baroda, leading to the arrest of certain bank employees. To combat fraud, the RBI has issued instructions for banks to take corrective measures, such as investing in data analytics and intelligence, gathering and maintaining internal vigilance and undertaking employee background checks. Further, a central fraud registry has been established, which acts as a centralized database to detect such fraud. Some

banks have set up internal investigation teams to probe fraud allegations and implement anti-fraud controls.

- Financial inclusion: For meeting financial inclusion targets, the RBI observed that banks were incorrectly classifying their contingent liabilities and off-balance sheet items (such as letters of credit, bank guarantees, and derivative instruments). The RBI asked banks to immediately declassify such credit facilities with retrospective effect. Failure to meet the priority sector lending targets results in penalties and can hamper regulatory approvals in the future.

This does not mean that Reserve Bank of India can be a silent spectator to the activities of the banks. It can take such actions like compulsory amalgamations in public interest and in the interest of the depositors of the bank. Similarly, the RBI can take actions in the larger interest of the banking system and ensure appropriate managements for the individual banks. For this purpose, the RBI, after declaring a moratorium in relation to the distressed bank, prepares a draft scheme of amalgamation, which is sent to the depositors, shareholders and creditors of the bank for comments. This scheme, among others, may provide for a change in the management of the bank and a reduction of rights of members, depositors and creditors. Additionally, the RBI has wide powers in appropriate cases to require banks to make changes in their management as the RBI considers necessary, remove any chairman, director, chief executive officer or other employee of a bank, appoint additional directors to the board of directors of a bank, supersede the board of directors of a bank for a maximum period of 12 months and instead appoint an administrator. Most amalgamations following the last wave of the nationalization era were undertaken for the purpose of merging financially distressed banks with healthy public-sector banks. In the case of failures of the banking organizations, there are other provisions as well. The liquidation of the banks is also possible. The RBI can make an application to the High Court for the winding-up of the bank where:

- the bank has failed to comply with statutory requirements;
- has been prohibited from accepting fresh deposits;
- if, in the opinion of the RBI, the continuance of the bank is prejudicial to the interests of its depositors or the bank is unable to pay its debts;
- a compromise sanctioned by a court cannot be worked satisfactorily; or
- The High Court had earlier issued a moratorium in respect of the bank.

Managers and directors may be held personally liable if a bank fails, but only in certain circumstances, namely, where there has been a breach by the bank of the provisions of the Banking Regulation Act, 1949 leading to a failure of the bank, or where a director fails to meet the duties imposed on him or her in his or her capacity as a director under the law.

If a bank contravenes the Banking Regulation Act, 1949, all persons who at the time of the contravention were in charge of, and responsible to, the bank, for the conduct of the business of the bank, are deemed to be guilty unless they prove that the contravention occurred without their knowledge or that they exercised due diligence to prevent the same. Where it is proved that the bank committed a contravention with the consent or connivance of, or it is attributable to any gross negligence by, a director or a manager, such director or manager is also deemed guilty of such contravention.

Companies Act 2013 considers an ‘officer who is in default' as liable for any penalty whether by way of imprisonment, fine or otherwise. The definition includes the manager, full-time directors and directors who are aware of contraventions (through participation in board meetings or upon receiving proceedings of the board) but fail to object to the same or through whose consent or connivance the contravention has taken place.

Companies Act 2013 codifies the duties of the directors and imposes higher standards of governance on independent directors. Therefore, where directors or managers have not performed their duties as set out above, they can be held personally liable and be punished with fines.

Where a bank is being wound up or is undergoing a restructuring scheme, the court can:

- publicly examine a person whom the official liquidator has reported as having caused a loss to the bank;
- (in the case of winding-up) summarily try an offence committed under CA 2013 or the BR Act by a director or a manager; and
- Require a manager or director to repay or restore any property of the bank that the director has retained or misapplied or in respect of which the director has committed a breach of trust.

On 2 May 2012, the RBI laid down guidelines for Indian banks as recommended under the Basel III Capital Accord of the Basel Committee on Banking Supervision (BCBS) and introduced the Basel Regulations. The Basel Regulations have been implemented with effect from 1 April 2013 and are going through a transitional period that lasts until 31 March 2019. The capital adequacy framework is based on three mutually reinforcing pillars: minimum capital requirements (Pillar 1), supervisory review of capital adequacy (Pillar 2) and market discipline (Pillar 3).

The minimum capitalisation requirements under Pillar 1 require banks in India to maintain a minimum capital to risk-weighted assets ratio (CRAR) of 13 per cent for the first three years of commencing operations (subject to a higher ratio specified by the RBI) and 9 per cent on an ongoing basis (against the 8 per cent requirement under the Basel II accord). CRAR is the ratio of a bank's capital in relation to its risk-weighted assets. The requirement under Pillar 1 includes the total regulatory capital (comprising of Tier 1 and Tier 2 capital) and the different approaches for risk-weighting the assets in terms of their credit, operational and market risk (comprising of the standardised framework and basic indicator framework). Tier 1 capital, among others, consists of paid-up capital, stock surplus, statutory reserves and Tier 2 capital, among others, comprises debt capital instruments, preference share capital and revaluation reserves, etc.

The Basel III framework applies to all scheduled commercial banks (except regional rural banks) and such banks are required to comply with the Basel Regulations on a ‘solo and consolidated basis'.

Every year commencing from April 2015, the RBI categorises some systematically important financial institutions as D-SIBs under different buckets, who are then required to maintain certain additional capital. At present, three banks, namely State Bank of India, ICICI Bank Limited and HDFC Bank Limited have been declared as D-SIBs maintaining an additional current ratio of 0.6 per cent and 0.2 per cent respectively. The RBI requires the D-SIBs to maintain an additional common equity Tier 1 capital ratio ranging from 0.2 per cent to 0.8 per cent.

The capital adequacy requirements are enforced under Pillar 2 and Pillar 3 of the Basel III Regulations.

Pillar 2 provides for supervision at the bank level and at the supervisory authority level.

Supervision at the bank level includes assessment of capital adequacy of banks in relation to their risk profiles by implementing an internal process called the Internal Capital Adequacy Assessment Process (ICAAP). Every bank is required to have an ICAAP, which is the bank's procedure for identification and measurement of risks, maintaining appropriate level of internal capital in relation to the bank's risk profile and application of suitable risk management systems. Banks are required to annually submit the ICAAP report to the RBI.

Supervision at the supervisory authority level (i.e., by the RBI) makes all banks subject to an evaluation process called the Supervisory Review and Evaluation Process (SREP). Pursuant to the SREP, the RBI reviews and evaluates a bank's ICAAP, indirectly evaluates a bank's compliance with the regulatory capital ratios and takes remedial action if such a ratio is not maintained. The RBI may consider prescribing a higher level of minimum capital ratio for each bank under the Pillar 2 framework on the basis of their respective risk profiles and risk management systems. Failure to comply with the minimum regulatory capital requirements, may subject the bank to fines that may extend to 10 million rupees and a further penalty of 100,000 rupees for every day of default. The relevant bank may also be subject to prompt corrective action by the RBI.

Pillar III implements market discipline through extensive disclosures by banks that allow market participants to assess risk exposure, risk assessment process and capital adequacy of a bank. Every bank should have an internal disclosure policy that is approved by the board of directors and assessed periodically. The disclosures are to be made on a half- yearly basis and should either be published in the bank's financial statements or displayed on the bank's website.

The RBI has a stringent control mechanism for monitoring the financial health and soundness of Indian banks. To this effect, the RBI has initiated a prompt corrective action plan as a measure to ensure adequacy of a bank's internal control system in terms of three parameters: CRAR, net NPA and return on assets (ROA). The RBI has put in place certain trigger points to assess, control and take corrective action on banks that are weak and troubled. The trigger points for CRAR are:

- CRAR less than 9 per cent but equal to or more than 6 per cent;
- CRAR less than 6 per cent but equal to or more than 3 per cent; and
- CRAR less than 3 per cent.

Similar trigger points have also been provided with respect to NPAs and ROAs.

Upon hitting any of the trigger points, the banks are required to immediately report to the RBI and simultaneously implement internal measures to regularise the relevant trigger point. The RBI also has the powers to initiate certain structured and discretionary actions, which, among others, include implementation of a capital restoration plan, prohibition on entering into a new line of business, imposing stringent credit and investment strategy controls and merger or amalgamation of the bank. The RBI also has the ability to impose a moratorium on the bank in the event the CRAR does not improve beyond 3 per cent, within one year or such extended period as the RBI deems fit.

The Banking Regulations Act, 1949 deals with the provisions relating to insolvency (referred to as ‘winding-up') of banking companies (including branches of foreign banks operating in India).

Winding-up (whereby all the affairs of the banking company are wound up, assets are realised, liabilities are paid and the balance, if any, is distributed to its shareholders in proportion of their holding in the company) can either be voluntary (by members or creditors of a solvent banking company) or compulsory (by the High Court under whose jurisdiction the bank operates).

The RBI has the power of winding-up of a banking company. An order for the winding-up of a banking company can be passed by a High Court:

- if it is unable to pay its debts;
- if an application has been made by the RBI; or
- On request of the GOI.

For winding-up, every High Court appoints a liquidator (as an officer of the court) to manage the assets and liabilities of a banking company and supervise the liquidation process. The liquidator is required to submit a preliminary report to the High Court in relation to the assets and liabilities of a banking company and also make a just estimate of the liabilities of the bank. For this purpose, creditors or depositors are required to provide evidence of the debt owed to them. Secured creditors are not required to prove their debt. They may choose to stay out of the winding-up proceedings and claim the amounts owed to them from the secured assets. The secured creditors also have the option to relinquish their security and to prove their debt in the same manner as an unsecured creditor.

The law relating to the winding-up of a banking company does not apply to government banks (i.e., banks largely owned by the government and classified as government banks under different statutes). A government bank can only be placed under liquidation by an order and in the manner provided by the GOI. At present, there is also some ambiguity around the competent forum for filing and prosecuting any insolvency matters covering financial services providers, including the private banks. Theoretically, it may not be possible to apply for the liquidation of a bank at the moment without a special notification from the central government.

However, if the inability to pay its debts is temporary, the banking company may apply to the relevant High Court (accompanied by a report from the RBI declaring its ability to meet its obligations and pay all debts during such moratorium period) requesting an order of moratorium for staying the commencement or continuation of all actions and proceedings against it for a period not exceeding six months.

During the moratorium period, if the RBI is of the opinion that the affairs of the banking company are being conducted in a manner detrimental to the interests of the depositors or if in the opinion of the High Court, the inability of the banking company to meet its obligations or to pay its debt is not temporary, the court may call for the winding-up of the company. Note that the RBI would invariably intervene and declare a moratorium on payments rather than allow the winding-up of banks.

In addition, if the RBI is concerned about the financial health of a banking company, it may make a recommendation to the GOI in relation to its reconstruction and amalgamation with another banking company (generally a government bank) and prepare a scheme for the same. The RBI has wide powers and can provide in such a scheme for the reduction of the interest or rights that the members, depositors and other creditors have in, or against, the banking company before its reconstruction to the extent as the RBI considers necessary in the public interest or in the interest of the members. The RBI can also issue a direction to the banking company preventing it from entering into an agreement or honouring its obligations under any agreement. On sanction by the GOI, the banking company can be amalgamated under the provisions of the BR Act. In the past few decades, the RBI has been reconstructing or amalgamating weaker banks with stronger counterparts to avoid winding-up situations.

The Bill is expected to establish clear processes to respond to a bank failure. Among other things, the Bill would require banks with potential risks to their viability to have recovery and resolution plans. The resolution plan is proposed to include details of all assets, liabilities, specifics of operations, and possible strategies, etc. As per the Bill, the resolution corporation will be the administrator of the insolvent bank who will take all the necessary steps to ensure an orderly and safe resolution and will enjoy wide powers to achieve such objectives.

India adopted the Basel I accord in April 1992. The RBI later announced the implementation of Basel II norms for internationally active banks from March 2008 and domestic commercial banks from March 2009 by way of the Prudential Guidelines on Capital Adequacy and Market Discipline - New Capital Adequacy Framework (NCAF Circular). With effect from April 2013, banks in India are now regulated by the Basel Regulations, which are still in the implementation phase so the NCAF Circular will have limited relevance for the purpose of transitional arrangements up to 31 March 2017. Since the Basel Regulations are in the implementation phase, no significant changes are currently expected in the capital adequacy guidelines. Recently, the RBI has introduced minimum capital requirement ratios to be maintained by a payments bank. It is envisaged that the RBI may impose similar requirements for small finance banks.

The RBI had also issued draft guidelines on net stable funding ratio (NSFR) in May 2015 and the final guidelines are expected by March 2018. The draft NSFR guidelines provide guidance on the calculation of the available and required stable funding. The time frame to be considered was one year. It is possible that the final rules may prescribe the required NSFR ratio to be more than 100 per cent to ensure greater resilience in the system.

All banks in India, whether domestic or foreign, need to obtain a banking licence from the RBI in order to commence operations. Licensing of universal banks in India is primarily governed by the Banking Regulation Act, 1949 and the ‘Guidelines Issued for ‘on tap' Licensing of Banks in the Private Sector' (also referred to as universal banks) (on-tap guidelines). The on-tap guidelines mark a shift from the previously adopted ‘stop and go' licensing approach (under which the RBI would notify the licensing window during which a private entity could apply for a banking licence), to a continuous or ‘on tap' licensing regime.

While the Banking Regulation Act, 1949 lists the requirements of a banking company to obtain a banking licence, the on-tap guidelines, in addition to other procedural requirements for eligible promoters to promote a bank through a non-operative financial holding company (NOFHC) model. Eligible promoters are defined as persons having a successful record in banking and finance for at least 10 years, who are:

- individuals resident in India;
- entities in the private sector that are owned and controlled by residents of India provided that if such entity has total assets of 50 billion rupees or more, its nonfinancial business should not account for 40 per cent or more of assets or gross income; or
- Existing non-banking financial companies (NBFCs) that are ‘controlled by residents' and compliant with specified income and asset tests.

It is not mandatory for the bank to be set up through a NOHFC in case the promoters are individuals or standalone promoters who do not have other group entities.

This NOFHC is to be registered with the RBI as an NBFC and is required to hold the bank as well as other financial service companies of the promoter group. The capital structure of the NOFHC is required to consist of:

- Voting equity shares of 51 per cent held by promoters or companies forming part of the promoter group. If such shareholding is held by various individuals of the promoter group, each individual, together with his or her relatives and entities in which they collectively hold 50 per cent voting equity shares, can hold only up to 15 per cent of the voting equity shares of the NOFHC;
- voting equity shares of 49 per cent must be held by public shareholders, where each individual, together with his or her relatives and entities in which they collectively hold 50 per cent voting equity shares, can hold only up to 10 per cent of the voting equity shares of the NOHFC; and
- Shareholding of the promoter group in the NOFHC should be only by individuals, non-financial service and core investment companies or investment companies in the promoter group (i.e., no financial services entity is an eligible shareholder in the NOFHC).

The bank is mandatorily required to be listed on a stock exchange within six years of commencement of business.

Financial service entities whose shares are held by the NOFHC are not permitted to hold shares in the NOFHC.

The promoter and the promoter group or NOFHC are also required to hold a minimum of 40 per cent of the paid-up voting equity capital of the bank that shall be locked in for a period of five years. Any shareholding beyond this limit is required to be bought down to 40 per cent within five years of the date of commencement of business of the bank.

Additionally, no shareholder of a bank can exercise more than 10 per cent of the total voting rights in a bank irrespective of its actual shareholding. This may be raised at a later date to 26 per cent by the RBI. The 10 per cent voting limit applies to each person holding shares of the bank and affiliates, related parties and persons belonging to a common group are considered separate persons for this purpose.

In the event a shareholder acquires 5 per cent or more of the voting capital of the bank, prior approval from the RBI will be required (see question 26).

The RBI is likely to issue separate guidelines for small sector banks in relation to entities having a controlling interest.

Foreign investments in India are subject to restrictions and conditions imposed by the FDI policy.

A foreign company can carry out banking activities in India through:

- a branch;
- a Wholly Owned Subsidiary ; or
- A subsidiary with aggregate foreign investment up to a maximum of 74 per cent in a private bank (49 per cent through the automatic route and up to 74 per cent on approval by the government).

Indian residents are required to hold at least 26 per cent of the paid-up capital of the bank at all times (except in case of a Wholly Owned Subsidiary). However, the aggregate nonresident shareholding from FDI, non-resident Indians and foreign institutional investors in the new banks cannot exceed 49 per cent for the first five years from the date of licensing of the new bank.

Foreign investment of up to 20 per cent of the paid-up capital of a public-sector bank is permitted on obtaining government approval.

Investments by foreign banking entities above 10 per cent requires approval. The RBI can permit a higher holding for a single entity under exceptional circumstances such as the restructuring of problem or weak banks or in the interest of consolidation of the banking sector.

While a foreign bank is allowed to operate in India and carry out banking activities through a branch, the RBI encourages banks to follow the WOS structure and provides near national treatment in respect of branch expansion. Foreign banks that commenced operations in India after 2010 and fulfil the prescribed criteria laid down by the RBI are required to mandatorily adopt the WOS structure. Such criteria, among others, include banks declared as being systematically important by the RBI, banks with complex structures, banks that are not widely held, banks not providing adequate disclosures in their home country and likewise. Foreign banks in India operating prior to 2010 have the option to continue their banking business through the branch mode or convert into a WOS.

As per the on-tap guidelines, eligible promoters and promoter groups are required to satisfy the ‘fit and proper' criteria in order to establish a bank. The eligibility criteria vary depending on the nature of the entity. These criteria, among others, include having sound credentials and a successful track record of at least 10 years. In respect of structures using the NOFHC model, ownership and management will have to be separate and distinct in the promoter and promoter group entities that own or control the NOFHC. In addition, the major shareholders (i.e., shareholders holding 5 per cent or more) have to continue to maintain ‘fit and proper' status, during the tenure of their holding.

The NOFHC is required to hold the bank as well as other regulated financial service entities of the group. The regulated financial services entities of the group including the bank must be ring-fenced from other activities of the group (such as commercial and financial activities not regulated by financial sector regulators) and also that the bank should be ring fenced from other regulated financial activities of the group.

Only those regulated financial sector entities in which the individual promoter or group have significant influence or control will be held under the NOFHC. Apart from setting up the bank, the NOFHC shall not be permitted to set up any new financial services entity for at least three years from the date of commencement of business of the NOFHC. However, this would not preclude the bank from having a subsidiary or joint venture or associate, where it is legally required or specially permitted by the RBI.

The activities not permitted to the bank would also not be permitted to the group (i.e., entities under the NOFHC would not be permitted to engage in activities that the bank is not permitted to engage in).

The promoters, their group entities, the NOFHC and the bank are subject to consolidated supervision. The RBI will have to be satisfied that the corporate structure does not impede the financial services under the NOFHC from being ring-fenced, and that it will be able to obtain all required information from the group as relevant for this purpose smoothly and promptly. To date, most foreign banks continue to operate as branches in India.

The shareholders have to continue to meet these criteria for the duration of the holding and the bank must furnish an annual certificate to this effect.

Shareholders also have to comply with the share acquisition and transfer provisions. Any acquisition or transfer above the prescribed threshold will require RBI approval. As part of the approval process, the shareholder is required to furnish the details of the source of funds to the RBI.

No specific implications have been prescribed for a controlling shareholder and hence the treatment will be the same as any other shareholder. In the general order of priority of payments in winding-up, the shareholders are the last to recover their investment.

In the event that the RBI chooses to carry out a reconstruction or amalgamation procedure, it has the power to severely compromise or alter the rights and interests of the shareholders (without their consent).

As per the Bill, the controlling entity or individuals (including the board of directors) would cease to have any management control over an insolvent bank or its assets. The resolution corporation would be empowered to resolve the institution as it deems fit. The controlling entities or individuals may ultimately recover their investment, depending upon the legal nature of their investment and where they stand in the hierarchy of claims.

In the event that a shareholder (directly or indirectly) acquires 5 per cent or more of the voting equity capital of a bank, prior approval of the RBI is required. On obtaining such approval, the stake can subsequently be increased to 10 per cent (without obtaining an additional approval). However, any change in shareholding beyond 10 per cent will require fresh approval. As discussed in question 21, while the minimum voting limit by a single individual or entity is 10 per cent, this limit can be extended up to 26 per cent by the RBI. The RBI also assesses whether the shareholder is ‘fit and proper' to be a major shareholder.

In the event a shareholder acquires 5 per cent or more of the voting capital of a NOFHC, prior approval from the RBI will be required. The shares of a NOFHC cannot be transferred to an entity outside the promoter group.

As per the FDI policy, control has been defined to include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of shareholding or management rights, or shareholders' or voting agreements.

Regulatory authorities in India are generally receptive to foreign acquirers and the approval requirements apply equally to acquisition by residents and foreigners. As a part of this approval, the RBI is allowed to impose conditions as it may deem appropriate. Acquisition in excess of 25 per cent would, if the target bank is a listed entity, trigger the Indian takeover regulations and the acquirer would then have to make an open offer for at least a further 26 per cent of the shares in that bank.

If the applicant is a foreign entity, it must obtain prior approval of the regulator or supervisor of its country of incorporation. The RBI will grant a licence to such banks only if it is satisfied that the government or law of the country of incorporation does not discriminate in any way against Indian banks. The RBI also considers the economic, political relations and reciprocity with the home country of the parent bank, and the international ranking, international presence, home country ranking and the rating of the parent bank by a rating agency of international repute. The applicant bank should also ensure that it is subject to adequate prudential supervision as per internationally accepted standards, which includes consolidated supervision in its home country.

While generally welcoming, the RBI discourages acquisitions made for the purpose of circumventing the restrictions in place for the licensing of physical branches of foreign banks. Any acquirer will have to separately apply for new branch licences and cannot rely on simply taking over existing branches of the seller or opening new branches near the existing branches of the seller.

The RBI will undertake a detailed due diligence on the applicant to assess his or her ‘fit and proper' status to be a major shareholder. The criteria for compliance with ‘fit and proper' status vary depending on the percentage of stake acquired.

Acquisition of 5 per cent or more of shares or the voting rights of the bank

The RBI, among other things, will evaluate:

- the applicant's integrity, reputation and track record in financial matters (including any financial misconduct);
- the applicant's source of making such acquisition;
- the applicant's compliance with tax laws; and
- In cases where such an applicant is a body corporate, in addition to the above, the entity's financial strength and consistency with standards of good corporate governance are also assessed.

Acquisition in excess of 10 per cent of shares or voting rights of the bank

In addition to the factors listed above, the RBI, among other things, will closely evaluate:

- details in relation to the conglomerate group (if any);
- whether such an entity is a widely held, publicly listed and a well-established regulated financial entity with a good standing in the financial community;
- whether it has stability of funds for such an acquisition including any past experience in business acquisitions;
- the desirability of diversified ownership of banks; and
- Whether such an acquisition is in the public interest.

It is to be noted that the ‘fit and proper' criteria set out above are just an illustrative list, and the RBI may evaluate the applicant on such other parameters it considers necessary.

The filings required for acquiring control in a bank vary according to the type of acquisition.

Acquisition of major shareholding in a bank

Every such entity must make an application to the RBI along with the prescribed declarations. The RBI will seek recommendations from the board of directors of the bank concerned.

Inward remittance for subscription to shares must be reported to the authorised dealer by the issuing company within 30 days of the receipt of remittance in the Advance Reporting Form along with the Foreign Inward Remittance Certificate. Upon the issuance of shares, the same must be reported by the issuing company within 30 days of issuance as perform FC-GPR. Sale of such securities held by a non-resident to an Indian resident must be reported by the Indian resident as perform FC-TRS within 60 days of the receipt of remittance.

Any application made for an acquisition in a private sector bank between 49 per cent and 74 per cent of the stake of the banking company will require prior approval. Such application in relation to foreign investment should be approved within eight to 12 weeks from the date of application. If the proposed foreign investment exceeds 20 billion rupees, additional approval will need to be obtained from the Cabinet Committee on Economic Affairs, which may take another two to three weeks.

The RBI approval required to acquire a major shareholding, including a change of control, takes 90 days from the date of the application. In practice, however, it is likely that an acquisition of a majority or controlling stake in a private bank will be treated as if a fresh licence has been applied for. This process takes a significant amount of time, possibly greater than five years, although it is hoped that recent activity in this sector and the stringent guidelines for resolving applications set by the RBI itself will result in this time frame reducing considerably.

Additionally:

- The Bill, is one of the most closely watched developments in India. This law is expected to bring sweeping reforms for the entire financial sector in India.
- Banks and NBFCs are required to switch to Ind AS, India's new accounting rules modeled after the IFRS. Aside from operational challenges likely to arise in implementation, these rules are likely to cause an increase in capital requirements as well.
- The central government is seeking to infuse capital into 20 banks that are majority- owned by it to improve their financial health and to also enable them to comply with Basel III norms. This capitalization would be in tranches and comprises bonds and other instruments.
- The RBI is now empowered to compel banks to resolve specific non-performing assets by pursuing insolvency and other remedies. In exercise of these powers, the RBI has directed various lenders to initiate action against some of the biggest defaulters across the board and many borrowers have now been taken by the banks to the insolvency tribunals. Such pro-active regulatory initiatives are expected to continue as long as the pressures on banks' balance sheets remain.

1.3. The NPA and IFRS

COVID-19 has sent the Indian economy spiralling. With close to 74% of small industries and start-ups scaling or shutting down, and more than 2 crore jobs cut back since April 2020, the economy is stopping just short of freefall. With even their most reliable borrowers succumbing to the economic devastation of COVID-19, financial institutions need to heighten diligence to protect themselves against the risks of bad loans and NPAs. IND AS 109 and its highlight - the expected credit loss approach to provisioning - have been heralded as the silver bullet to counter the collapse of India's banking sector.

Abbildung in dieser Leseprobe nicht enthalten

Figure No. 1.1 :- Showing why NPAs occur

Source: Drishti IAS (hiips:w\vw^drishiiias.com daily-updaiesdaily-news-analysis bad-bank-1)

The global financial crisis (GFC) of 2008 changed our perception of risk management in a profound manner. The excessive pro-risk mentality of financial institutions (FIs) was replaced with concerns founded on increasing market volatility and rising risk exposure levels. One of the key outcomes of the crisis was how it highlighted systemic flaws that resulted in the late recognition of credit losses. This was later attributed to inadequate provisioning for unexpected losses caused by unpleasant economic events, credit downturns, change in the market value of the asset, and so on.

In order to enhance predictability and credit health, reduce risks and ensure better preparedness for contingencies, global accounting standard boards, such as IASB (International Accounting Standards Board) and FASB (The Financial Accounting Standards Board - US) published new forward-looking standards for loan loss provisioning, which would come into effect between 2018 and 2021. The new models rely on ECL (Expected Credit Losses) and CECL (Current Expected Credit Losses) standards that, rather than look for red flags or distress signals as traditionally done, accommodate probable credit losses in the future, irrespective of the current state of the asset or the lending market.

The main similarity is that both of the standards recognize and promote a forward-looking stance in calculating lifetime losses. The differences are many, but the primary variation is in terms of the degree to which the credit losses are recognized over an asset life. CECL calculates lifetime ECL for all financial assets, going back to the beginning. Meanwhile, ECL measures loss allowance at either a) a 12-month ECL for stage 1 financial assets, or b) the lifetime ECL for stage 2 and 3 assets (those that are classified under high or impaired risk).

When compared with its global counterparts like the IFRS 9, IND AS 109 is superficially similar. The underlying principle and objective are the same; they are forward-looking and highly effective. Many countries in the European Union and across South-East Asia have adopted IFRS 9 and are in the transition period. India too will join this league with IND AS 109 coming into effect in future - but the wait is far from over.

Nearly an immediate offshoot of the financial crisis, regulators began to rethink the way banks measure and account for credit risk. The erstwhile Incurred Loss Model warranted a close re-examination. The model works on the assumption that all loans will be repaid, unless evidence to the contrary - a trigger event. It records credit losses as of the balance sheet date when loss is triggered by an observable event, like past-due, decrease in collateral value, and so on. The application of diverse and inconsistent provisions in the case of loss incurred but not reported is a particular challenge to overcome.

One of the biggest arguments against this approach is that - as illustrated during the Lehman Brothers crisis - its backward-looking nature can result in underestimation of losses and higher provisions during a recession. On the other hand, ECL calculates the expected present value (PV) of credit losses that are expected to arise if the borrower defaults during the life of the financial asset. Key components of ECL are Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD). This methodology requires measuring provision based on the deterioration of credit risk and expected events in a more systematic manner to mitigate risk impact, making its adoption more justifiable in the current scheme of things.

Further complications arose by the recent changes in global economics as well as the COVID pandemic. Early reports show that the fallouts of COVID- 1 9 have had a challenging effect on ECL computation, at least in most instances. ECL is calculated taking into effect historical losses as well as current and future economic scenarios and predictions. With COVID coming into the picture, future predictions are complex, to say the least. Any default assumptions regarding the current and future scenarios, too, are no longer valid.

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Details

Title: International Financial Reporting Standards: An Empirical Study in India
Grade: 100
Author: Dr. Sonika Suman (Author)
Publication Year: 2022
Pages: 338
Catalog Number: V1315686
ISBN (PDF): 9783346794048
ISBN (Book): 9783346794055
Language: English
Tags: IFRS BANKING GROUP RECOMMENDER SYSTEM INDIAN BANKING SYSTEM BAD BANK IND AS FINANCIAL ACCOUNTING

Quote paper: Dr. Sonika Suman (Author), 2022, International Financial Reporting Standards: An Empirical Study in India, Munich, GRIN Verlag, https://www.grin.com/document/1315686

International Financial Reporting Standards: An Empirical Study in India