PwC's Financial RegTech Insights: May 2018

NSFR disclosure standards defined by RBI

• NSFR information to be calculated on a consolidated basis and presented in Indian Rupee on an ongoing basis.
• Banks are required to maintain required systems for calculating and monitoring NSFR
• NSFR data is required to be published to RBI within 15 days from the end of quarter in a prescribed BLR7 report. However, RBI is yet to announce the start date for reporting NSFR.
• NSFR disclosure is required to be published in a common template to promote consistency and market discipline. For banks following semi-annual reporting, data from preceding 2 quarter are to be reported and for banks following annual reporting, prior 4 quarter data is required

Comparative study of RBI and BIS guidelines

While RBI has largely followed global guidelines, it has also taken Indian conditions into consideration for categorisation of RSF Factor.

Table 1: Summary of differences in asset categories and associated RSF factors

For below off-balance sheet items where BIS had suggested National Supervisor to specify RSF factor, RBI has defined these factors as following:

Table 2: RSF factor definition by RBI

The reporting requirements advised by RBI are in line with BIS recommendations.

Impacts of NSFR

The cost of NSFR in its current form will impact banks that traditionally rely on wholesale banking for funding. This is due to the fact that ASF factor for wholesale deposit is less than retail deposit

The regulation may also cause banks to shift away from assets that require more stable funding to those that require less. This effectively means moving away from long term assets to non-financials firms and households. This would mean change in the business models of foreign banks whose major lending is in form of term loans towards corporates

Cost of derivative business will increases because net derivative liability carries ASF of 0%, net derivative asset requires RSF of 100% and 5% of derivative liabilities require RSF of 100%

Pre termination of term deposit will be charged heavily by banks since the regulator needs to be convinced that long term stable deposit will not be closed before their contractual maturity.

Corporate loans with risk weight greater than 35% will require stable funding of 85%. Whereas corporate loans with risk weight less than 35% will require stable funding of 65%. It is unlikely for corporate loans to have risk weight less than 35% (equivalent to S&P rating of AA- or above) and hence it will increase cost for the bank

Trading commodities for corporate clients will require stable funding of 85% increasing cost for the bank

Off balance sheet exposures such as undrawn portion of revocable and irrevocable facilities will require stable funding.

Technology an enabler in achieving efficient calculation

NSFR regulation impacts the way data is stored in bank’s systems. Quality of data would play an important role as regulators would expect minimum to zero inconsistency between reporting documents. Any such inconsistency could affect bank’s reputation and credibility. This effectively means that banks should emphasize on data integrity and governance.

Data Integrity

• Efficient data quality and traceability

Technology Solutions

• Capable solutions to produce integrated reports seamlessly

IT Architecture

• Flexible IT architecture to adapt to changing regulatory requirements

Data availability

• Most of the data required for automating NSFR calculation would be available with reporting systems

From technological standpoint, banks should have efficient and capable solutions in place to produce integrated reports in most seamless way possible. Automated solutions should be developed to produce reports required by internal management as well as regulators. IT system should be flexible enough to comply with the changing regulatory requirements and should adapt to new regulations and modifications.

Traditionally risk, compliance and finance functions in banks are managed through separate silo applications. This makes it difficult to get a holistic view of data. Consolidating risk, compliance and finance function would speed up the process of becoming compliant with NSFR guidelines. In the final guideline RBI has not advised start date of reporting of NSFR and currently the frequency is set to be quarterly, however banks should scale up their IT architecture so that they are able calculate and report NSFR on daily basis.

One advantage for banks in India is that they have already been mandated by RBI to automate their regulatory reports. Given this, from data perspective, most of data required for NSFR reporting would be already available in reporting systems. New data requirements would come mostly around determining encumbrance of assets, operational deposits and undrawn portion of credit and liquidity facilities. Banks would need to identify the sources of incremental data and plan on using them for NSFR reporting through automated system.

Business Benefits

NSFR provides an opportunity for the banks to enhance stability in the system by migrating to asset and liability structures that are more stable and less pro-cyclical. It also provides an accurate picture on the liquidity of the bank and will be useful in indicating the liquidity requirements if all cash outflows occurred at the earliest possible date

The regulation would push banks to upgrade their financial management system across their balance sheets and groups, helping improve more timely risk identification.

Easy access to bank wide view of the amount of unencumbered assets a bank has which could potentially be used as collateral for secured funding

NSFR requirements presents a strong case to the banks to leverage the existing technology for not only timely reporting but also effective monitoring

Conclusion

NSFR regulation aims at ensuring that banks are able to meet their long term liquidity requirements in both normal and stressed conditions. It has potential to alter the nature of assets and liabilities held by a bank. Also, in order to monitor their positions across the globe consistent reporting solutions should be used. Regulatory bodies and banking consortiums should look forward to introducing such standardized tools and applications to measure liquidity.