Mumbai, Nov 23: The Reserve Bank of India, which is working out fool-proof disclosure standards for non-banking finance companies, will have to seek legal opinion on whether it is empowered to draw up new accounting formats, traditionally a task of the union finance ministry through the department of company affairs.

The issue has come up in the course of consultations with the Institute of Chartered Accountants of India (ICAI), which has been roped in to advise the central bank on new reporting formats for NBFCs.

"At this juncture it is not at all clear whether the Reserve Bank can draw up the balance sheet formats, or whether the central bank has to go back to the department of company affairs on the matter," ICAI president MM Chitale said. DCA, which falls within the ambit of the mininstry of finance, has so long been devising accounting standards for companies through ICAI, its statutory arm. Companies are required to prepare accounts as per ICAI-prescribed Schedule VI, which prescribes detailed formats for presenting financial statements. However, the reporting formats for balance sheets and profit & loss account under the Companies Act, as generally applicable for companies, was found falling short of showcasing the true financials of a non-banking finance company, and the joint exercise was taken up to work out detailed reporting requirements for finance companies.The Reserve Bank of India, it is learnt, is now keen to come out with its own accounting format which will be specifically applicable for the finance companies.

In order to effectively monitor NBFCs, the RBI has already put in place a new RBI (Amendment) Act, 1997 under which finance companies could continue in business only after registering itself with the central bank.

The new accounting format for the non-banking financial sector which will be ready next month, will also require non-banking finance companies to append the long form audit reports, as are currently applicable for commercial banks. The long-form audit reports will require the auditors to check, evaluate and report upon information provided by the company.

According to Chitale, Schedule VI as an accounting format is not right for non-banking finance companies as it fails to assess the quality of assets, which is of utmost importance for evaluating the true worth of finance companies. Besides, it has to be decided whether manufacturing companies who are managing finance business as separate divisions will be governed by the new schedules, or if it will continue to present the financials as per Schedule VI. In an effort to monitor NBFCs more effectively, the RBI has already modified the format of annual statutory returns.

The new format, which has been drawn up in line with the recommendations of the Khanna Committee, is expected to promote greater transparency through effective off-site monitoring.

The new format will help RBI to monitor the sources of funds mobilised, promoter's contribution, deployment of funds and assets generated by NBFCs, as the details will now have to be submitted to the central bank along with the auditor's report. Non-banking finance companies are going through one of their toughest phases, with a primary market dry-up and several runs on deposit bases. A high-profile scandal, involving CRB Capital Markets, rocked the segment, spurring regulatory authorities into a series of steps. Credit rating agencies have en masse downgraded the NBFCs.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.