Applicability of IND-AS on NBFCs- Effect on NBFC sector and Regulatory Implications

Abstract

After banks, Non-Banking Financial Companies (NBFCs) play an important role in the growth of the financial sector of the economy. As for semi urban and rural areas procuring funds from banks can sometimes become difficult, at this point NBFCs come to their rescue. NBFCs serve MSME sector that are Micro, Small and Medium Enterprises and secondly they help the common man to achieve their dreams like having their own house, cars, etc. by granting loans repayable through monthly EMIs. Other services provided by these NBFCs include two wheeler loans, personal loans, gold loans, asset financing, etc. NBFCs aim to provide innovative financial services when compared with traditional banking services and leverage technology in order to cater to people in more effective way by reducing their own operating expenses thereby working more effectively and efficiently. The regulation of NBFCs comes under the purview of the Reserve Bank of India within the framework of the Reserve Bank of India Act, 1934 (Chapter III-B). Further, the NBFCs while presenting their financial statements have to comply with the standards laid down by the ICAI. Earlier the companies needed to comply with IGAAP but there was a change in the standards and the ICAI and MCA laid down new accounting standards called IND-AS. The applicability of IND-AS to NBFC was to be done in the two phases. Under Phase 1 the companies having net worth of more than Rs. 500.00 crore had to comply with IND-AS for financial year 2018-19. Thus, these NBFCs for the financial year 2018-19 prepared their financial statements in accordance with the new accounting standards IND-AS. Due to change in the accounting standard NBFCs needed to train their manpower accordingly. Thus, adoption of IND-AS had considerable impact on NBFCs due to change in their processes and systems. Subsequently, the situation created due to the nationwide lockdown on account of COVID 19 further worsened the situation for these NBFCs. All these factors along with the overall recession in financial sector because of the lockdown have also adversely affected the economy of the nation, which is evident from the falling Gross Domestic Product (GDP). As seen from the data for the Q4, the growth of GDP was about 3.1%, the lowest for the year 2019-20 when compared to earlier three quarters of the year. The Government and the Central Bank came out with various measures to help / revive the economy affected by Covid19 pandemic.