Are NBFCs not disclosing data properly? RBI Dy Gov raised concerns over disclosures made by NBFCs

Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao recently addressed the Conference of Statutory Auditors and Chief Financial Officers of Commercial Banks and All India Financial Institutions (AIFIs) to highlight concerns over the quality of disclosures made by some Non-Banking Financial Companies (NBFCs). He emphasized the importance of qualitative information for depositors and other stakeholders and urged the auditing community to ensure appropriate disclosures. Here are the key points from his address:
Role of Auditors in Maintaining Stakeholder Confidence:
Rao stressed the significant role of statutory auditors in maintaining stakeholder confidence in audited financial statements, particularly in the banking industry where trust is paramount. He highlighted the fragmented and unorganized nature of the biggest external stakeholders, i.e., depositors, and the need for auditors to foster trust through robust audit practices.
Promoting Sound and High-Quality Accounting and Disclosure Standards:
Rao emphasized the RBI’s strong interest in promoting sound and high-quality accounting and disclosure standards for the banking and financial industry. He highlighted the importance of transparent and comparable financial statements that strengthen market discipline.
Principle-Based Regulations and Management Judgement:
The deputy governor mentioned the RBI’s shift towards principle-based regulations to provide regulated entities with flexibility in their business decision-making. He noted that the application of principle-based standards requires significant use of management judgment.
Importance of Disclosures and Transparency:
Rao emphasized that disclosures are the cornerstone of transparency, bridging the gap between what management knows and what external users can infer from financial statements. He highlighted the challenge of striking a balance between comprehensive disclosure and conciseness, noting that clear and comprehensive disclosures foster trust in the market.
Nudging Regulated Entities to Enhance Disclosure Quality:
To address the issue, Rao mentioned that the RBI is nudging regulated entities to enhance the quality of their disclosures. He urged the auditor community to critically evaluate disclosure practices to ensure they meet the needs of accounting standards and end-users,.
Harmonized Approach for Financial Stability:
Rao emphasized the importance of a harmonized approach by regulators and auditors to remove blind spots in risk identification and mitigation, ultimately contributing to financial stability and the robustness of individual institutions.
In summary, Deputy Governor M Rajeshwar Rao’s address highlighted the critical role of auditors in maintaining stakeholder confidence, promoting sound accounting and disclosure standards, and fostering transparency in the banking and financial industry.