MUMBAI: The benefits of Indian banks' switching to the International Financial Reporting Standards (IFRS) accounting rules will outweigh any short-term impact on capital levels and is unlikely to drive rating changes, said credit rating agency Fitch.
While the Reserve Bank of India has not yet set a deadline to shift from the Generally Accepted Accounting Principles (GAAP) standard, Fitch said lenders have been expecting the move and should be able to recalibrate to final guidelines quickly.
"The transition will probably negatively affect banks' capital levels as more impairment charges are front-loaded but should bring qualitative benefits in credit risk management over the longer term," Fitch said in a note on Friday (Jan 20).
However, it warned that specific banks' capital and risk management responses could have an impact on their standalone viability ratings.
The RBI introduced a discussion paper last week that suggested banks make provisions for bad loans using the expected credit loss (ECL) method.
Fitch believes the transition to ECL provisioning is the most important aspect, from a credit perspective, of adopting IFRS and shows the RBI's intent to switch accounting standards.
"The ECL framework primarily addresses the problem of procyclical provisions as banks are required to estimate ECL ahead of adverse credit events, instead of making provisions after loans have become impaired, as is the current norm," it said.
The rating agency believes the RBI will smoothen the process of adopting ECL provisioning over up to five years.
It noted banks would have little room to absorb unexpected stress if they increased provisioning requirements by running down capital ratios closer to regulatory thresholds.
While state-owned banks may be more vulnerable than their private peers, Fitch said they had a lifeline.
"State banks' issuer default ratings are driven by our expectations that they would receive extraordinary support from the government if needed, so would not be affected."