Fussy auditors may ask banks to provide more
, ET Bureau|
Updated: Oct 02, 2017, 01.12 AM IST
MUMBAI: A subtle tension is brewing between bankers, struggling with failed borrowers, and auditors, having come under closer scrutiny. Till now auditors who signed the financial statements of banks have rarely questioned the real worth of assets and securities that banks hold to lend. But, this is about to change with auditors coming under the glare of regulators and many Indian defaulting companies headed for a change of ownership and control.
As they begin to scan banks’ numbers for the quarter ended September 30, auditors will, for the first time, take a hard look at the actual ‘realisable value’— as against the `book value’ — of assets and securities pledged with banks. If auditors suspect that the realisable value of a borrower’s land, factory, buildings, and shares pledged with the lender is significantly less than the declared stated in the books, it could either lead to a higher provisioning — thus, lower profits — for banks or a qualifying statement from the auditor. About 29 companies are in different stages of the insolvency proceedings.
Banks have to provide 50% of secured outstanding advance and 100% of unsecured advance to companies which are admitted by the National Company Law Tribunal (NCLT) under the insolvency and bankruptcy code. According to RBI rules, banks have to fully provide for the entire loan outstanding if a company is liquidated in the absence of a revival plan within 270 days. Any possible provisioning of secured loan — following an assessment that the true value of pledged assets is less than the declared value — would be over and above the level stipulated by RBI.
“There will be significant judgemental considerations that will decide the provisioning, like the value of secured portion in case of promoter pledged shares as well as fixed assets.
Of course, this would be on a case to case basis..Some guidelines would possibly ensure consistency in provisioning during the period leading up to March 2018,” said Mitil Chokshi, Senior Partner at Chokshi and Chokshi LLP, which audits one of the large banks. According to Kalpesh J Mehta, FSI (financial services industry) Leader at Deloitte India, “Auditors would look for persuasive evidence — e.g. minutes of committee of creditors, information in public domain, reports of other experts used in the resolution process to perform review procedures on the assessment as at end of each quarter.” Earlier banks were making similar assessment when a borrower was taken to CDR, SDR or S4 type of restructuring.
“Now that additional legal process is used through Bankruptcy resolution, there will be a need to review progress to record estimated credit loss or provision,” said Mehta. For instance, a bank auditor is likely to consider the remarks (if any) of the auditor of an insolvent borrower to assess a possible decline in the value of assets pledged with banks. Such scrutiny would be more intense next year when the full-year financial numbers are compiled.
Banks may also suffer as higher provisioning (due to insolvency or dip in asset value) will not be allowed as deduction in computing the taxable income as this is not ‘ascertained liability’, said senior chartered accountant Dilip Lakhani. “So, tax liability for banks may go up even when profits go down... On unlisted securities, determining the fair value will be aproblem,” he said.
RESOLUTION TO PUSH UP PROVISIONING?
Two senior bankers ET spoke to said lenders find themselves in unenviable position as there could be extra provisioning on loans where the insolvency resolution is either complete or on the verge of finalisation.
“After the completion of bidding (by investors keen to acquire a company), a bank may have to do more provisioning as the value of assets would then be determined by the size and nature of bids. Bidders are bargain hunters. They are likely to end up lowering the valuation,” said one of them.
Indeed, the banker said that neither RBI nor the government realises that referring a case to NCLT inevitably depresses the commercial value of the assets.
As they begin to scan banks’ numbers for the quarter ended September 30, auditors will, for the first time, take a hard look at the actual ‘realisable value’— as against the `book value’ — of assets and securities pledged with banks. If auditors suspect that the realisable value of a borrower’s land, factory, buildings, and shares pledged with the lender is significantly less than the declared stated in the books, it could either lead to a higher provisioning — thus, lower profits — for banks or a qualifying statement from the auditor. About 29 companies are in different stages of the insolvency proceedings.
Banks have to provide 50% of secured outstanding advance and 100% of unsecured advance to companies which are admitted by the National Company Law Tribunal (NCLT) under the insolvency and bankruptcy code. According to RBI rules, banks have to fully provide for the entire loan outstanding if a company is liquidated in the absence of a revival plan within 270 days. Any possible provisioning of secured loan — following an assessment that the true value of pledged assets is less than the declared value — would be over and above the level stipulated by RBI.
“There will be significant judgemental considerations that will decide the provisioning, like the value of secured portion in case of promoter pledged shares as well as fixed assets.
Of course, this would be on a case to case basis..Some guidelines would possibly ensure consistency in provisioning during the period leading up to March 2018,” said Mitil Chokshi, Senior Partner at Chokshi and Chokshi LLP, which audits one of the large banks. According to Kalpesh J Mehta, FSI (financial services industry) Leader at Deloitte India, “Auditors would look for persuasive evidence — e.g. minutes of committee of creditors, information in public domain, reports of other experts used in the resolution process to perform review procedures on the assessment as at end of each quarter.” Earlier banks were making similar assessment when a borrower was taken to CDR, SDR or S4 type of restructuring.
“Now that additional legal process is used through Bankruptcy resolution, there will be a need to review progress to record estimated credit loss or provision,” said Mehta. For instance, a bank auditor is likely to consider the remarks (if any) of the auditor of an insolvent borrower to assess a possible decline in the value of assets pledged with banks. Such scrutiny would be more intense next year when the full-year financial numbers are compiled.
Banks may also suffer as higher provisioning (due to insolvency or dip in asset value) will not be allowed as deduction in computing the taxable income as this is not ‘ascertained liability’, said senior chartered accountant Dilip Lakhani. “So, tax liability for banks may go up even when profits go down... On unlisted securities, determining the fair value will be aproblem,” he said.
RESOLUTION TO PUSH UP PROVISIONING?
Two senior bankers ET spoke to said lenders find themselves in unenviable position as there could be extra provisioning on loans where the insolvency resolution is either complete or on the verge of finalisation.
“After the completion of bidding (by investors keen to acquire a company), a bank may have to do more provisioning as the value of assets would then be determined by the size and nature of bids. Bidders are bargain hunters. They are likely to end up lowering the valuation,” said one of them.
Indeed, the banker said that neither RBI nor the government realises that referring a case to NCLT inevitably depresses the commercial value of the assets.
