Query:
Discuss RBI Accounting guidance issued to Banks in India in detail ?
Answer:
RBI Accounting Guidance for Banks in India
1. Introduction
The Reserve Bank of India (RBI) has issued comprehensive accounting guidance for
banks operating in India to ensure consistency, transparency, and prudence in financial
reporting. This guidance covers various aspects of accounting practices, including income
recognition, asset classification, provisioning, and disclosure requirements.
2. Relevant Standard/Law References
a. The primary sources of accounting guidance for banks in India are:
i. RBI Master Circulars and Directions on Prudential Norms Master Circular – Prudential
Norms on Capital Adequacy – Basel I Framework, page 91, Master Circular – Basel III
Capital Regulations, page 1
ii. Indian Accounting Standards (Ind AS) issued by the Institute of Chartered Accountants
of India (ICAI) Ind AS Disclosure Checklist 2024, page 4
iii. Companies Act, 2013 and related rules
b. Banks are required to comply with both RBI guidelines and applicable accounting
standards. In case of any conflict, RBI guidelines take precedence Master Circular – Basel
III Capital Regulations, page 1
c. The RBI periodically issues updates and amendments to these guidelines to align with
international best practices and address emerging issues in the banking sector Master
Circular – Prudential Norms on Capital Adequacy – Basel I Framework, page 92
3. Detailed Explanations
3.1 Income Recognition
a. Banks must follow the accrual system of accounting for recognition of income, but
income in respect of non-performing assets (NPAs) is to be recognized only on realization
basis RBL Bank Limited Annual Report 2020, page 187
b. Interest income on advances should be recognized on a time proportion basis, taking
into account the amount outstanding and the applicable interest rate RBL Bank Limited
Annual Report 2020, page 187
c. Fees and commission income should be recognized when due, except in cases where
the bank is uncertain of its ultimate collection RBL Bank Limited Annual Report 2020, page
187
3.2 Asset Classification
a. Banks are required to classify their assets into four categories:
i. Standard Assets ii. Sub-standard Assets iii. Doubtful Assets iv. Loss Assets
b. The classification is based on the period for which the asset has remained
non-performing and the realizability of the dues RBL Bank Limited Annual Report 2020,
page 187
c. An asset becomes non-performing when it ceases to generate income for the bank RBL
Bank Limited Annual Report 2020, page 187
3.3 Provisioning Requirements
a. Banks are required to make provisions for standard assets, non-performing assets, and
investments as per RBI guidelines RBL Bank Limited Annual Report 2020, page 187
b. Specific provisions for non-performing and restructured advances are made based on
management’s assessment of the degree of impairment, subject to minimum provisioning
levels prescribed by RBI RBL Bank Limited Annual Report 2020, page 187
c. Provisions on standard assets are maintained to cover potential credit losses inherent in
any loan portfolio RBL Bank Limited Annual Report 2020, page 187
3.4 Investments
a. Banks are required to classify their investment portfolio into three categories:
i. Held to Maturity (HTM) ii. Available for Sale (AFS) iii. Held for Trading (HFT)
b. Valuation of investments is done in accordance with RBI guidelines, with different
valuation methodologies applied to each category Master Direction – Reserve Bank of India
(Prudential Regulations), page 7
3.5 Disclosure Requirements
a. Banks are required to make extensive disclosures in their financial statements as per
RBI guidelines and applicable accounting standards Ind AS Disclosure Checklist 2024,
page 102
b. These disclosures include details on asset quality, capital adequacy, risk management,
and various other aspects of banking operations Ind AS Disclosure Checklist 2024, page
102
3.6 Compliance and Reporting
a. Banks are required to submit various returns and reports to RBI on a periodic basis,
covering aspects such as asset quality, capital adequacy, and liquidity IDBI Bank Ltd
Annual Report 2021, page 361
b. Internal and external audits are conducted to ensure compliance with RBI guidelines and
accounting standards IDBI Bank Ltd Annual Report 2021, page 361
4. Used Cases/Interpretations & Disclosures by the listed entities
Bank of India – 2022: The bank’s Directors’ Responsibility Statement confirms that the
accounting policies framed in accordance with RBI guidelines were consistently applied.
Reasonable and prudent judgments and estimates were made to give a true and fair view
of the bank’s state of affairs and profit/loss. The bank maintains proper accounting records
in accordance with applicable laws and prepares annual accounts on a going concern
basis. Internal financial controls are in place and operating effectively Bank of India Annual
Report 2021-22, page 17
IDBI Bank Ltd – 2021: The bank’s auditors highlighted that compliance with RBI’s prudential
norms for income recognition, asset classification, and provisioning for advances and
investments is a key audit matter. They examined the bank’s systems and controls, loan
documentation, impairment indicators, and provisioning calculations to ensure compliance
with RBI guidelines IDBI Bank Ltd Annual Report 2021, page 241
RBL Bank Limited – 2020: The bank’s significant accounting policies disclose that advances
are classified as Performing and Non-Performing based on RBI guidelines. Specific
provisions for non-performing and restructured advances are made based on
management’s assessment, subject to RBI’s minimum provisioning requirements. The
bank also maintains provisions on standard assets as per RBI guidelines RBL Bank
Limited Annual Report 2020, page 187
5. Summary
RBI’s accounting guidance for banks in India provides a comprehensive framework for
financial reporting, ensuring consistency and prudence across the banking sector. Key
aspects include:
1. Strict guidelines on income recognition, particularly for non-performing assets.
2. Clear asset classification norms to identify and address problematic assets early.
3. Prudent provisioning requirements to maintain adequate buffers against potential
losses.
4. Detailed investment classification and valuation norms.
5. Extensive disclosure requirements to enhance transparency.
6. Regular compliance reporting and auditing to ensure adherence to guidelines.
Banks are required to balance compliance with RBI guidelines and applicable accounting
standards, with RBI norms taking precedence in case of conflicts. The guidance is
periodically updated to address emerging issues and align with international best practices,
reflecting the dynamic nature of the banking industry and regulatory environment in India.
6. Attribution
The information provided in this response is based on the Reserve Bank of India’s Master
Circulars and Directions on Prudential Norms, Indian Accounting Standards (Ind AS), and
the Companies Act, 2013. The specific regulations referenced are the Master Circular on
Basel III Capital Regulations and the Master Circular on Prudential Norms on Capital
Adequacy – Basel I Framework. For complete and authoritative guidance, please refer to
the full RBI guidelines available through the official RBI website (https://www.rbi.org.in).
Accounting Guidance by RBI for Banks in India
