The Reserve Bank of India (RBI) governs the presentation of financial statements by Banks through their guidelines and directives. In this regard, they have issued the “Master Direction on Financial Statements - Presentation and Disclosures” (“Master Directions”) dated August 30, 2021. Further, based on the feedback received, they continue to update the Master Directions from time to time regarding clarification on compliance with accounting standards and disclosures.
The purpose is to have all current instructions on presentation and disclosure in financial statements in one place for reference. Part A of Annexure II of the Master Directions contains the general guidelines/instructions regarding the compilation of the Balance Sheet and the Profit and Loss Account which form the two most important financial statements. It applies to all Banking Companies, including the State Bank of India, Foreign Banks, Regional Rural Banks, Small Finance Banks, Payments Banks, etc.
Chapter IV or Clause 6 introduces us to “notes to accounts” which is specified in Annexure III of the Master Directions. It clearly states that these disclosures are in addition to and intended to supplement and not replace the disclosure requirements that are mandated by other laws, regulations, accounting and financial standards. It encourages Banks to make more comprehensive disclosures than the minimum threshold required under the Master Directions, especially if such disclosures significantly aid in the understanding of the financial position and performance of Banks.
On 13 December 2022, the RBI issued a notification in reference to the Master Directions clarifying the disclosure requirements regarding material items to bring in a greater degree of transparency. It refers to schedule 14 “other income” which has various categories of income such as “commission, exchangeand brokerage” which includes all remuneration on services such as commission on collections, commission/exchange on remittances and transfers, commission on letters of creditand bank guarantees, letting out of lockers, etc.
; “Profit on sale or revaluation of investments and profit on sale of land” which includes profit/loss on sale of securities, furniture, vehicles, land, buildings and other assets, etc.; “income earned by way of dividends from subsidiaries” and “miscellaneous income” which includes income from bank’s properties, security charges, insurance etc.
The notification clarifies that if any item under “miscellaneous income” exceeds one percent of the total income, then the Bank must include its particulars in the notes to accounts. Similarly, if any item included in “other expenditure” under Schedule 16 “Operating Expenses” exceeds one percent of the total income, particulars regarding the same must be given in the notes to accounts.
The notification also specifically clarifies that Payments Banks shall disclose the particulars of all such items in the notes to accounts, wherever any item under Schedule 14 (I) – Other Income – “Commission, Exchange, and Brokerage” exceeds one percent of the total income. It is also clarified in the Master Directions that, income from foreign exchange should not be included under “Commission, Exchange and Brokerage” to avoid confusion.
Further, the notification also clarifies that when items included under Schedule 5 “Other Liabilities and Provisions”, IV “Others”, which exceeds one percent of the total assets, particulars with respect to all such items shall be disclosed in the notes to accounts.
The notification clarifies that these changes will come into effect for disclosures in the notes to the annual financial statements for the year ending March 31, 2023, and onwards. The Master Directions as available on the Reserve Bank of India website have also been updated accordingly to reflect these changes, in order to avoid confusion.