Fitch Says Transition to IFRS 9 Accounting Manageable For Indian Banks

India's phased transition to IFRS 9 accounting standards will be manageable for domestic banks as they have sufficient buffers, Fitch Ratings said in a report on Wednesday.

IFRS 9 stands for International Financial Reporting Standards, which is published by the International Accounting Standards Board. Initially, it was issued in 2014, with amendments implemented in the following years.

IFRS 9 introduced new ways for the classification and measurement of financial instruments, with banks being requested to build up provisions based on subsequent changes in credit risk and not wait for actual losses to occur so that they are stronger and better prepared for crises and economic downturns.

With the adoption of these accounting standards, the global rating agency has estimated a near 55-basis-point impact from expected credit losses on the banking system's average common equity Tier-I ratio for the current financial year. The common Tier-I capital ratio is a measurement of a bank's core equity capital, compared with its total risk-weighted assets, and signifies a bank's financial strength.

Provided that the IFRS framework is implemented in the next financial year, the impact on CET1 will gradually increase to about 100 bps by 2027–28, Fitch said. "The absence of a phased transition would result in a one-time CET1 impact of around USD 26 billion, or 140bp of the sector's risk-weighted assets."

For the financial year ended March 31, the banking sector's average common equity Tier-I ratio was 13.8%. Currently, the Indian banks use the Indian Accounting Standard.

Fitch said private sector banks are better positioned to handle the impact than state-owned banks because of their higher core capital, pre-impairment profitability and better recovery track record.

State-owned banks should maintain capital ratios above the regulatory minimum under a phased transition. However, some state-owned banks may need to raise fresh capital in order to support loan growth.

The rating agency is also of the view that domestic banks' pre-impairment profit should also be sufficient to absorb the higher credit costs after the expected credit loss implementation. Fitch has predicted a 40 bps fall in the banking sector's average operating profit due to a rise in loan impairment charges.

Fitch does not expect any rating changes due to the adoption of IFRS 9 accounting standards but believes that banks' risk profiles could benefit from effective implementation as it enhances underwriting and risk controls.