Accountants call on bankers to follow loss models | Daily News


 

Accountants call on bankers to follow loss models

President Chartered Accountants of Sri Lanka (CASL) Manil Jayasinghe said that it was essential that Sri Lanka continued to uphold the best accounting practice through the crisis as this was the best method to reassure investors. Jayasinghe was speaking to the Advocata institute on April 30.

, “My view is that we need accounting standards more than ever now because we are in a crisis. We need to attract investors. You need proper information going out to the market.”

The CASL President focused his comments on the accounts produced by the banks. Sri Lankan banks have chosen to use the incurred loss model as set out by Central Bank circular.

If a loan is in 90 days of arrears you suspend income, 180 days you net off 20 percent against security, 360 days you net off 50 percent against security, and 540 days 100 percent against security.

He said, “incurred loss doesn’t show a true picture of a bank balance sheet or a true picture of a bank. It prevents the banks from providing credit losses which are likely to rise from emerging risks.”

Jayasinghe said the G20 decided to change from an incurred loss model to an expected loss model after the financial crisis. Jayasinghe said that incurred loss models drive pro-cyclicality with credit excesses during booms and credit shortfalls during busts.

In the expected credit loss model you evaluate losses as and when you can see that they are likely to happen.

Jayasinghe said “people misread the CBSL guidelines. They only went into the incurred loss based provisioning. At 180 days if the bank felt that they were losing 100 percent they were expected to provision 100 percent which many banks do not do. I think people cherry-picked what was relevant.”

Managing Director HNB Jonathan Alles said that during the crisis he questioned the need for 25 percent of his branch outlay. Alles said that if all banks reduced branches by 10 percent it would greatly push digitization.

Alles expects banking locations to become more relationship-centric with reduced areas for cash management. Sri Lanka Development Bonds are trading at high discounts on international exchanges.

Alles said that there were issues with profit being measured on an accrual basis while taxes are paid on a cash basis.

 


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