RBI s revised framework for resolving stressed assets: Building transparency and accuracy PwC s Banking Insights

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1 RBI s revised framework for resolving stressed assets: Building transparency and accuracy PwC s Banking Insights May 2018

2 Table of contents Preface p3 Impact assessment of regulatory changes in May 2018 p4 Other notifications in May 2018 p14 Special article p15 Aadhaar-based e-kyc p26 2 PwC PwC s Banking Insights

3 Preface After almost four and a half years, the Reserve Bank of India s (RBI) Monetary Policy Committee (MPC) raised the key repo rate by 25 basis points for the first time since January 2014 to 6.25%. This decision of the MPC is consistent with the neutral stance of the monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2% and supporting growth. The MPC, while carefully reviewing evolving global and domestic macro developments, noted that global economic activity and trade had continued to expand and inflationary pressures had emerged in key advanced and emerging economies driven by rising commodity prices, especially those of crude oil and petroleum. Members of the MPC members had raised concerns over rising household inflationary expectations, which along with robust growth momentum could add to price pressure going forward. Inflation was a key factor and a major concern for the MPC. Despite moderation in food and fuel inflation, the concerns on rising crude and commodity prices seemed to weigh more in their voting decision. Growth has been raised to 7.4% in fiscal 2019 and inflation in the second half of the year is currently at 4.7%, up from 4.4%, which was forecast earlier. Improving growth and soaring inflationary expectations warranted an increase in interest rates though uncertainties in global financial markets and trade wars warranted that the stance remain neutral, giving it elbow room to act depending on the situation. The hike in the repo rate led to a 7.96% sprint in India s 10-year benchmark yield. The economy may now not witness any great triggers for yields to ease due to which the economy could expect the yields to remain at elevated levels This issue covers an impact analysis of key regulations issued in the month of May 2018, including the regulations around investment by foreign portfolio investors (FPIs) in debt, stripping/ reconstitution of government securities, monitoring of foreign investment limits in Indian companies, guidelines on lending to priority sector by primary UCBs, as well as other notifications around data sharing with the Directorate of Revenue Intelligence. 3 PwC PwC s Banking Insights

4 Impact assessment of regulatory changes in May 2018 Investment by Foreign Portfolio Investors (FPI) in Debt - Review 1 Circular reference: RBI/ /170 A.P. (DIR Series) Circular No. 26 Dated 1 May 2018 Applicability: All Authorized Persons Background and objective: The Reserve Bank of India (RBI) has undertaken a detailed review of the current regulations governing debt investment by foreign portfolio investors (FPIs) with the objective of simplifying the process of investments in debt instruments by FPIs in India. In this context, the RBI, in consultation with the Securities Exchange Board of India (SEBI), revised the limits of debt investments by FPIs at the end of April 2018 by issuing two notifications: one on 27 April 2018 and the other on 1 May Extract from the regulation: The FPIs were only permitted to invest in corporate bonds with minimum residual maturity of above one year, however, in order to bring consistency across debt categories, it is stipulated that investments by an FPI in corporate bonds with residual maturity below one year shall not exceed, at any point in time, 20% of the total investment of that FPI in corporate bonds. In addition, the following clarifications are issued with respect to the provisions in the AP (DIR Series) Circular No. 24 dated April 27, 2018: 1. FPIs are permitted to invest in treasury bills issued by the Central Government. 2. The requirement that investment in securities of any category (G-secs, SDLs or, corporate bonds) with residual maturity below one year shall not exceed 20% of total investment by an FPI in that category applies, on a continuous basis. At any point in time, all securities with residual maturity of less than one year will be reckoned for the 20% limit, regardless of the maturity of the security at the time of purchase by the FPI PwC PwC s Banking Insights

5 Impact assessment of regulatory changes in May In case investments in securities with less than one year residual maturity, as on 02 May 2018 (beginning of day), is more than 20% of total investment in any category, the FPI shall bring such share below 20%. The RBI has provided a six months window to FPIs to comply with this condition. However, the FPI shall ensure that no further additions are made to the portfolio of securities with residual maturity of less than one year as on 02 May 2018 (beginning of day), either through fresh purchases or through roll-down of investments with current tenor of more than one year, until the share of such portfolio of securities falls below 20% of the total investment in that category. 4. The term related FPIs refers to all FPIs registered by a non-resident entity. For example, if a non-resident entity has set up five funds, each registered as an FPI for investment in debt, total investment by the five FPIs will be considered for application of concentration and other limits. Impact assessment: The increase in limits on FPI investments along with the easing of minimum residual maturity from three years to one year should encourage FPI investment into India s corporate debt markets, assuming the stability of the rupee or the ability to effectively hedge commercially acceptable rates. However, the potential impact of the exposure and concentration limits on the bond market, which is facing lower demand and rising yields, remains to be seen. Additionally, introducing exposure limits could potentially impact the entry of new FPIs into the market, as this limit might not be practical or feasible for certain FPI entrants in the short term, and it remains to be seen how existing FPIs will have to re-balance their portfolios in order to achieve this requirement. 5. As regards the concentration limit for an FPI for its corporate bond portfolio to a single corporate, the following clarifications may be noted: 5.1 The term related entities shall have the same meaning as defined in section 2(76) of the Companies Act, A newly registered FPI would mean FPIs registered after April 27, The implementation date of online monitoring of utilization of G-sec limits has been set as June 1, PwC PwC s Banking Insights

6 Impact assessment of regulatory changes in May 2018 Guidelines on Stripping/Reconstitution of Government Securities 2 Circular reference: RBI/ /171 IDMD.GBD.2783/ / Dated 3 May 2018 Applicability: All Market Participants Background: The RBI introduced the Separate Trading of Registered Interest and Principal Securities (STRIPS) in government securities in April 2010; however, the product did not find much favour in the government securities market. With a view to encouraging trading in STRIPS, a review of this guideline was proposed. Extract from the regulation: 2. With a view to meeting the diverse needs of investors and making Separate Trading of Registered Interest and Principal of Securities (STRIPS) more aligned with market requirements, it has been decided to revise the existing guidelines. Accordingly, it is proposed to remove the restrictions on the securities eligible for Stripping/Reconstitution as well as the requirement of authorization of all requests for Stripping/Reconstitution by Primary Dealers (PDs). 3. In view of the above, in partial modification of the existing instructions issued vide our Notification IDMD.1762/ dated October 16, 2009 read with our circular IDMD. DOD.07/ / dated March 25, 2010, it is specified as under: Eligible Securities (a) All fixed coupon securities issued by Government of India, irrespective of the year of maturity, are eligible for Stripping/ Reconstitution, provided that: (i) The securities are reckoned as eligible investment for the purpose of Statutory Liquidity Ratio (SLR). (ii) The securities are transferable PwC PwC s Banking Insights

7 Impact assessment of regulatory changes in May 2018 Placing of Requests (b) Market participants, having an SGL account with RBI can place requests directly in e-kuber for stripping/reconstitution. (c) Requests for stripping/reconstitution by Gilt Account Holders (GAH) shall be placed with the respective Custodian maintaining the CSGL account, who in turn, will place the requests on behalf of its constituents in e-kuber. Impact assessment: 1. The review of this guideline shall make STRIPS more attractive as a product and might boost trading in STRIPS. 2. These changes will also ensure that STRIPS as a product is more aligned with market requirements. 7 PwC PwC s Banking Insights

8 Impact assessment of regulatory changes in May 2018 Monitoring of foreign investment limits in listed Indian companies 3 Circular reference: RBI/ /172 A.P. (DIR Series) Circular No. 27 [(1)/20(R)] Dated 3 May 2018 Applicability: All Category I Authorized Dealer Banks Background and objective: The Foreign Exchange Management Act (FEMA), 1999, prescribes various foreign investment limits in listed companies. These include the aggregate FPI limit, the aggregate NRI limit and sectoral cap. As per FEMA, the onus of compliance with the various foreign investment limits rests on the Indian company. In order to facilitate the listed Indian companies to ensure compliance with the various foreign investment limits, the RBI, in consultation with SEBI, has decided to put in place a new system for monitoring the foreign investment limits. Extract from the regulation: Currently, Reserve Bank of India receives data on investment made by Foreign Portfolio Investors (FPI) and Non-resident Indians (NRI) on stock exchanges from the custodian banks and Authorised Dealer Banks for their respective clients, based on which restrictions beyond a threshold limit is imposed on FPI/ NRI investment in listed Indian companies. In order to enable listed Indian companies to ensure compliance with the various foreign investment limits, Reserve Bank in consultation with Securities and Exchange Board of India (SEBI), has decided to put in place a new system for monitoring foreign investment limits, for which the necessary infrastructure and systems for operationalizing the monitoring mechanism, shall be made available by the depositories. The same has been notified by SEBI vide Circular-IMD/FPIC/ CIR/P/2018/61 dated April 05, 2018 read with Circular- IMD/ FPIC/CIR/P/2018/74 dated April 27, In terms of para 6 of Annexure A of the circular dated April 05, 2018, all listed Indian companies are required to provide the specified data/ information on foreign investment to the depositories. The requisite information may be provided PwC PwC s Banking Insights

9 Impact assessment of regulatory changes in May 2018 before May 15, The listed Indian companies, in noncompliance with the above instructions will not be able to receive foreign investment and will be non-compliant with Foreign Exchange Management Act, 1999 (FEMA) and regulations made thereunder. All Authorised Dealer Banks are advised to instruct their clients and respective Indian companies, about the system requirement at para 4 of this circular. Further, upon implementation of the new monitoring system, all Authorised Dealer banks would be required to provide the details of investment made by their respective NRI clients to the depositories in the format as provided by the depositories/ SEBI. In addition, the reporting to Reserve Bank in the existing system, viz., LEC (NRI) and LEC (FII), would continue. AD Category-I banks may bring the contents of this circular to the notice of their customers / constituents concerned. Impact assessment: 1. The listed Indian companies, in non-compliance with the above instructions, will not be able to receive foreign investment and will be non-compliant with FEMA and the regulations made thereunder. 2. A red flag will be activated in case total foreign investment in a company is under 3% or less than 3% of the sectoral cap. 3. If a breach of the investment limits has taken place by FPIs, the foreign investors need to divest their excess holding within five trading days from the date of settlement of the trades by selling shares only to domestic investors. 4. The designated depository will levy a reasonable fee/charge on the company towards development, ongoing maintenance and monitoring costs at an agreed upon frequency. 9 PwC PwC s Banking Insights

10 Impact assessment of regulatory changes in May 2018 Revised guidelines on lending to Priority Sector for Primary (Urban) Co-operative Banks (UCBs) 4 Circular reference: RBI/ /175 DCBR.BPD (PCB).Cir.No.07/ / Dated 10 May 2018 Applicability: All Primary (Urban) Co-operative Banks Background: Priority sector lending (PSL) focuses on the idea of aiming the lending of banks towards few specified sectors and activities in the economy. The term priority sector relates to sectors of national importance such as agriculture and small industries. Furthermore, PSL focuses on making credit accessible. This means that even the sectors which are neglected are considered to be at priority for providing credit. The scope and extent of PSL has undergone a significant change in the recent period, with several new areas and being brought within the ambit of the priority sector. Extract from the regulation: 2. Salient features of the revised guidelines are as under: i. Target for lending to total priority sector and weaker section will continue as 40 per cent and 10 per cent, respectively, of Adjusted Net Bank Credit (ANBC) or credit equivalent of off-balance sheet exposure, whichever is higher, as hitherto. ii. Agriculture: Distinction between direct and indirect agriculture is dispensed with. iii. Bank loans to food and agro processing units will form part of Agriculture. iv. Medium Enterprises, Social Infrastructure and Renewable Energy will form part of priority sector. v. A target of 7.5 per cent of ANBC or credit equivalent of off-balance sheet exposure, whichever is higher, has been prescribed for Micro Enterprises. vi. Education: Distinction between loans for education in India and abroad is dispensed with. vii. Micro credit ceases to be a separate category under priority sector PwC PwC s Banking Insights

11 Impact assessment of regulatory changes in May 2018 viii. Loan limits for housing loans qualifying under priority sector have been revised. ix. Priority Sector assessment will be monitored through quarterly and annual statements. 3. The revised guidelines will be operational with effect from the date of this circular. Priority sector loans sanctioned under the guidelines issued prior to the date of this circular will continue to be classified under priority sector till maturity / renewal. 4. Achievement of Priority Sector targets Achievement of priority sector targets will be taken into account while granting regulatory clearances / approvals for various purposes. With effect from April 1, 2018, achievement of priority sector targets will be included as a criterion for classifying a UCB as Financially Sound and Well Managed (FSWM), in addition to the criteria specified in our circulars UBD.CO.LS.(PCB).Cir.No.20/ / and DCBR. CO.LS.(PCB).Cir.No.4/ / dated October 13, 2014 and January 28, 2015 respectively. For the financial year , shortfall in achieving the priority sector target / sub-target will be assessed based on the position as on March 31, From the financial year onwards, the achievement at the end of the financial year will be arrived at based on the average of priority sector target / sub-target achievement as at the end of each quarter. Impact assessment: 1. The current guidelines aim to treat urban cooperative banks (UCB) at par with the commercial banks by boosting harmonisation in PSL. This allows UCBs to expand by increasing their lending and by achieving PSL targets. 2. Banks are now required to adhere to PSL targets and classification by enhancing their monitoring of priority sector lending compliance on a quarterly basis rather than on an annual basis. Reporting of these targets is to be done to the regional office of the RBI within 15 days from the end of the quarter. 3. UCBs are required to have a robust compliance mechanism in place and must comply with the reporting standards as per the RBI guidelines. The priority sector continues to play a critical role in the Indian economy and UCBs should re-orient their operations in order to facilitate the growth of several sectors through expanding their loan portfolios. 11 PwC PwC s Banking Insights

12 Impact assessment of regulatory changes in May 2018 Setting up of IFSC Banking Units (IBUs) Permissible activities 5 Circular reference: RBI/ /177 DBR.IBD.BC. 105/ / Dated 17 May 2018 Applicability: All Scheduled Commercial Banks (Excluding Regional Rural Banks) Background and objective: In April 2015, the RBI had formulated a scheme for the setting up of International Financial Services Centres (IFSCs) Banking Units (IBUs) by banks in IFSCs. The RBI has now modified regulations with respect to the setting up of IBUs basis suggestions received from stakeholders to consider a minimum prescribed regulatory capital at the parent level rather that at the IBU level. Extract from the regulation: 2. In terms of para 2.3 of the circular, the parent bank will be required to provide a minimum capital of USD 20 million or equivalent in any foreign currency to start their IBU operations and the IBU should maintain the minimum prescribed regulatory capital on an on-going basis as per regulations amended from time to time. 3. In this regard, we have received suggestions from the stakeholders to consider minimum prescribed regulatory capital at the parent level rather than at the IBU level. The issue has been examined and the directions stand modified as follows: 4. The existing paragraph No.2.3 of Annex I of the aforesaid circular dated April 1, 2015 is amended to read as follows: With a view to enabling IBUs to start their operations, the parent bank will be required to provide a minimum capital of USD 20 million or equivalent in any foreign currency to its IBU which should be maintained at all times. However, the minimum prescribed regulatory capital, including for the exposures of the IBU, shall be maintained on an on-going basis at the parent level PwC PwC s Banking Insights

13 Impact assessment of regulatory changes in May The existing paragraph No.2.3 of Annex II of the aforesaid circular dated April 1, 2015 is amended to read as follows: With a view to enabling IBUs to start their operations, the parent bank will be required to provide a minimum capital of USD 20 million or equivalent in any foreign currency to its IBU which should be maintained at all times. However, the minimum prescribed regulatory capital, including for the exposures of the IBU, shall be maintained on an on-going basis at the parent level as per regulations in the home country and the IBU shall submit a certificate to this effect obtained from the parent on a half-yearly basis to RBI (International Banking Division, DBR, CO, RBI). The parent bank will be required to provide a Letter of Comfort for extending financial assistance, as and when required, in the form of capital / liquidity support to IBU. Impact assessment: This notifications is a positive for IBUs since it will provide relaxation to existing IBUs and also encourage new banks to set up IFSC banking units in the Gujarat International Financial Tec-City (GIFT City). The submission of a half yearly certificate will lead to an increase in the compliance requirement for an IBU. 6. All other terms and conditions contained in the aforementioned circular remain unchanged. 13 PwC PwC s Banking Insights

14 Other notifications in May 2018 Circular ref. no. Name of the circular Brief instructions RBI/ /173 dated 3 May Data Sharing with Directorate of Revenue Intelligence Under section 10(4) of FEMA (42 of 1999), all authorised dealer category I banks are advised to share data with the Directorate of Revenue Intelligence, which is the apex agency for intelligence and investigative matters relating to violation of the Customs Act, This is being done to ensure compliance with the provisions contained in section 108 A and 108 B of the Customs Act, 1962, and the Rules notified there under vide GSR 1512 E Notification No. 114/2017-Customs (N.T) dated 14 December 2017, which requires a banking company to furnish all data and information pertaining to foreign exchange transactions done or received by any person to the requisite authority of the Directorate of Revenue Intelligence. Under the new rules, the Directorate of Revenue Intelligence can seek any information relating to the remittee or remitter including the Society for Worldwide Interbank Financial Telecommunication Bank Identifier Code (SWIFT BIC Code), name, address, permanent account number (PAN), Aadhaar number, bank account and IFSC details, GSTIN, etc. This will help ensure fraudulent activities are under vigilant supervision as the DRI can use the information for combating commercial frauds related to international trade and evasion of customs duty PwC PwC s Banking Insights

15 Special article Basel III Framework on Liquidity Standards Net Stable Funding Ratio (NSFR) Final Guidelines What this means for banks in India Introduction Against the backdrop of the global financial crisis that started in 2007, the Basel Committee on Banking Supervision (BCBS) proposed certain reforms to strengthen global capital and liquidity regulations with the objective of promoting a more resilient banking sector. Let s understand the impact of this crisis on the global banking ecosystem in order to understand the events that led to the introduction of the NSFR guidelines. The global financial crisis exposed shortcomings in the management of market liquidity and funding risk in individual banks. Banks asset and liability structures proved to be highly vulnerable to market shocks, investor runs and breakdowns in wholesale funding markets. This, in part, reflected banks increasing reliance on short-term wholesale funding as a means to grow their balance sheets over the past 20 years. The global financial crisis which led to the failure of large financial institutions exposed the havoc liquidity risk can wreak. The widely used practice of funding long-term investments with short-term funding sounded profitable in normal-to-good market circumstances. However, over-reliance on short-term funding requires continuous efforts to refine investments and the quality of collateral posted against raised funding. Under stressed market circumstances, short-term funding opportunities become especially volatile. For a financial institution faced with sudden depreciation in asset quality and market confidence, two challenges will typically emerge. 1. The cost of short-term funding will spike due to the increasing requirement for collateral to be posted under stressed market conditions. 2. Long-term assets, which are still otherwise profitable, become non-viable due to sharp increases in short-term funding costs. 15 PwC PwC s Banking Insights

16 Special article It goes without saying that under such stressed circumstances, the chances of new long-term funding become remote. Hitting the financial world in both depth and breadth, the crisis also revealed the dangers of mixing terms for funding and investments. The higher margin earned by funding short term and investing long term is not really a risk-free arbitrage. There were two hard lessons learnt in 2008 in terms of liquidity risk. 1. The assets held should be liquid and of good quality. Assets with deep market liquidity are more likely to be sold at any time without much discounting or value depreciation as and when funding starts drying up. 2. Higher earning long-term assets should have stable long-term funding sources, as opposed to leveraging only short term and unsecured funding sources. Banks relied less on their own capital raising efforts and traditional monetary liabilities, such as insured and non-insured deposits, while at the same time invested more of these borrowed funds in assets that proved to be less liquid. In response, regulators have stepped up their efforts to rein in banks excess liquidity risk exposures. 16 PwC PwC s Banking Insights

17 Special article Evolution of NSFR Given below is a timeline of events that lead to the introduction of NSFR December 2010 The BCBS released draft guidelines on NSFR. January 2014 The BCBS published a consultative document on NSFR. The committee underwent a rigorous process of reviewing the standard and its implications on the functioning of the financial markets and the economy, concluding with a consultative document on NSFR in January October 2014 BCBS released a final version of NSFR. Following a rigorous review to address any unintended consequences for financial market functioning in the economy and on improving its design with respect to several key issues, notably (i) the impact on retail business activities; (ii) the treatment of short-term matched funding of assets and liabilities; and (iii) analysis of sub-one year buckets for both assets and liabilities, the BCBS published the final rules on NSFR in October May 2015 The Reserve Bank of India (RBI) released draft guidelines on NSFR under the Basel III Framework on liquidity standards for banks and requested comments on the same. May 2018 The RBI released final guidelines on NSFR under the Basel III Framework, taking into account the Indian conditions. Meaning and objective: Liquidity supervision was one of the key considerations behind the introduction of liquidity coverage ratio (LCR) and NSFR, as part of the Basel III Framework. Let s understand what both of these mean: LCR requires banks to hold sufficient high-quality liquid assets to cover their total net cash outflows over 30 days. NSFR will require the available amount of stable funding to exceed the required amount of stable funding for a one-year period of extended stress. While the RBI introduced final guidelines on LCR in the year 2015, it gave banks a timeline to comply with the minimum required level of 100% for LCR till 1 January The RBI has now issued final guidelines 7 on NSFR and the date of implementation, as stated by the Regulator, would be notified in due course. NSFR has primarily been introduced with an objective of establishing a minimum acceptable amount of stable funding based on the liquidity characteristics of an institution s assets and activities over a one-year period. A sustainable funding structure is intended to reduce the probability of erosion of a bank s liquidity position due to disruptions in a bank s regular sources of funding that would increase the risk of its failure and potentially lead to broader systemic stress. NSFR limits over-reliance on short-term wholesale funding, encourages better assessment of funding risk across all on and off balance sheet items PwC PwC s Banking Insights

18 Special article What does NSFR mean? As per the final guidelines, the Regulator has defined NSFR as the amount of available stable funding (ASF) relative to the amount of required stable funding (RSF). The guidelines require banks to maintain the below ratio of NSFR at all times: NSFR = ASF _ 100% RSF (Refer Appendix 1 for ASF and RSF components and factors.) Further, the guidelines also define ASF as the portion of capital and liabilities expected to be reliable over the time horizon considered by NSFR, which extends to one year. The amount of RSF of a specific institution is a function of the liquidity characteristics and residual maturities of the various assets held by that institution as well as those of its off balance sheet exposures. While NSFR should be equal to at least 100% on an ongoing basis, this would be supplemented by supervisory assessment of the stable funding and liquidity risk profile of a bank. On the basis of such assessment, the RBI may require an individual bank to adopt more stringent standards to reflect its funding risk profile and its compliance with the sound principles issued vide circular Liquidity Risk Management by Banks dated 7 November Industry concerns NSFR is designed to encourage and incentivise banks to use stable sources to fund their activities. It helps to reduce dependence on short-term wholesale funding during times of buoyant market liquidity and encourages better assessment of liquidity risk across all on and off balance sheet items. NSFR requires a minimum amount of stable sources of funding at a bank relative to the liquidity profiles of the assets, as well as the potential for contingent liquidity needs arising from off-balance sheet commitments over a one-year period. The implications here would pertain to the type of current shortterm markets available for banks to provide liquidity, the type of long-term markets needed, the cost of deposit and the impact on the profitability of banks. Further, as banks go on increasing the risk weighted asset portfolio to meet the growing economy s credit requirements, they would need additional capital funds under Basel III. The important questions to be asked here are: Can individual banks access the capital market to raise the required capital funds? How do current ownership structures and valuations impact banks capital raising proposals? Should the government retain majority ownership? How should the government capitalise public sector banks? What are the options before the government? 18 PwC PwC s Banking Insights

19 Special article In the context of the Indian economy, growth and financial stability seem to be two conflicting goals. The Indian economy is transforming structurally and moving towards rapid growth, although it is also witnessing some seasonal down trends. The Indian economy is likely to see higher growth in the coming years, which will enhance the demand for credit. Further, the RBI and the government are continuously working on financial inclusion, aiming to bring several millions of the population under the ambit of the organised financial system. This will also enhance the population s credit requirements. What all this means is that banks need to maintain higher capital requirements as per Basel III at a time when credit demand is going to expand rapidly. The concern is that this will raise the cost of credit and hence militate against growth. Way forward Overall, the final guidelines on NSFR would positively impact Indian banks ability to withstand systemic stress and absorb shocks when there is a lack of liquidity and funding in the system. NSFR gives a punitive treatment to funding obtained from financial institutions and, going forward, this may impact the interconnectivity of banks/financial institutions, hence mitigating the risk of stress spreading from one bank to another and ending up with a full-blown crisis. Indian banks would need to significantly invest in their IT infrastructure and processes to generate, monitor and analyse NSFR. With massive amounts of data and multiple metrics (apart from NSFR) and templates required to be populated, banks would look to harmonise their data flows and systems by creating central repositories of all data for the bank from which these metrics can be computed. Banks will need to revisit their balance sheet management strategies, given the differential treatment of assets and liabilities according to the tenor, counterpart type, product type and liquidity. This may lead to banks cleaning up their balance sheets with more liquid assets and stable funding. The asset liability management (ALM) function would need to take into consideration the impact of its strategies on NSFR. Since NSFR rewards longer tenor funding profiles, this would impact the pricing of such funding in the market given the increase in demand. This can have a negative impact on the net interest income of the bank as the cost of funding will go up, given that longer term borrowings are costlier as opposed to shortterm borrowings. 19 PwC PwC s Banking Insights

20 Special article NSFR gives higher weightage to funding received from retail and small businesses in terms of deposits, which may lead to banks aiming to increase the deposit base from these customers and rely less on short-term wholesale funding. Given the punitive treatment of longer term assets, banks may be discouraged to lend for projects which require longer tenures of funding for instance, infrastructure financing. This could impact the availability of funds for such businesses and eventually impact the economy. 20 PwC PwC s Banking Insights

21 Special article Appendix 1 ASF components and factors The amount of ASF is calculated by first assigning the carrying value of an institution s capital and liabilities to one of five categories, as presented below. The amount assigned to each category is then multiplied by an ASF factor, and the total ASF is the sum of the weighted amounts. Carrying value represents the amount at which a liability or equity instrument is recorded before the application of any regulatory deductions, filters or other adjustments. Sr. no. Components of ASF category (liability categories) ASF factor (i) Total regulatory capital (excluding tier 2 instruments with residual maturity of less than one year) Other capital instruments with effective residual maturity of one year or more Other liabilities with effective residual maturity of one year or more 100% (ii) Stable non-maturity (demand) deposits and term deposits with residual maturity of less than one year provided by retail and small business customers 95% (iii) Less stable non-maturity deposits and term deposits with residual maturity of less than one year provided by retail and small business customers 90% (iv) Funding with residual maturity of less than one year provided by non-financial corporate customers Operational deposits Funding with residual maturity of less than one year from sovereigns, public sector enterprises and multilateral and national development banks Other funding with residual maturity between six months and less than one year not included in the above categories, including funding provided by central banks and financial institutions 50% (v) All other liabilities and equity not included in the above categories, including liabilities without a stated maturity (with a specific treatment for deferred tax liabilities and minority interests) NSFR derivative liabilities net of NSFR derivative assets if NSFR derivative liabilities are greater than NSFR derivative assets Trade date payables arising from purchases of financial instruments, foreign currencies and commodities 0% 21 PwC PwC s Banking Insights

22 Special article RSF components and factors Assets should be allocated to maturity buckets according to their contractual residual maturity, unless otherwise stated in the NSFR standard. However, this should take into account embedded optionality, such as put or call options, which may affect the actual maturity date of an institution s assets to the categories listed in the table below. Sr. no. Components of RSF category RSF factor (i) Coins and banknotes Cash reserve ratio (CRR) including excess CRR All claims on RBI with residual maturities of less than six months Trade date receivables arising from sales of financial instruments, foreign currencies and commodities 0% (ii) Unencumbered level 1 assets, excluding coins, banknotes and CRR Unencumbered statutory liquidity ratio (SLR) securities 5% (iii) Unencumbered loans to financial institutions with residual maturities of less than six months, where the loan is secured against level 1 assets as defined in the LCR circular dated 9 June 2014 and updated from time to time, and where the bank has the ability to freely re-hypothecate the received collateral for the life of the loan 10% (iv) All other standard unencumbered loans to financial institutions with residual maturities of less than six months not included in the above categories Unencumbered level 2A assets 15% (v) Unencumbered level 2B assets High quality liquid assets (HQLA) encumbered for a period of six months or more and less than one year Standard loans to financial institutions and central banks with residual maturities between six months and less than one year. Deposits held at other financial institutions for operational purposes All other assets not included in the above categories with residual maturity of less than one year, including standard loans to non-financial corporate clients, to retail and small business customers, and standard loans to sovereigns and PSEs 50% 22 PwC PwC s Banking Insights

23 Special article Sr. no. Components of RSF category RSF factor (vi) Unencumbered standard residential mortgages with a residual maturity of one year or more and with the minimum risk weight permitted under the standardised approach Other unencumbered standard loans not included in the above categories, excluding loans to financial institutions, with a residual maturity of one year or more and with a risk weight of less than or equal to 35% under the standardised approach 65% (vii) Cash, securities or other assets posted as initial margin for derivative contracts and cash or other assets provided to contribute to the default fund of a CCP Other unencumbered performing loans with risk weights greater than 35% under the standardised approach and residual maturities of one year or more, excluding loans to financial institutions Unencumbered securities that are not in default and do not qualify as HQLA/SLR with a remaining maturity of one year or more and exchange-traded equities Physical traded commodities, including gold 85% (viii) All assets that are encumbered for a period of one year or more NSFR derivative assets net of NSFR derivative liabilities if NSFR derivative assets are greater than NSFR derivative liabilities 5% of derivative liabilities as calculated according to para 8.1 All other assets not included in the above categories, including non-performing loans, loans to financial institutions with a residual maturity of one year or more, non-exchange-traded equities, fixed assets, items deducted from regulatory capital, retained interest, insurance assets, subsidiary interests and defaulted securities All restructured standard loans which attract higher risk weight and additional provision 100% 23 PwC PwC s Banking Insights

24 Special article Off balance sheet items and their corresponding RSF factors Sr. no. Off balance sheet items which require stable funding RSF factor (i) Irrevocable and conditionally revocable credit and liquidity facilities to any client 5% of the currently undrawn portion (ii) Other contingent funding obligations, including products and instruments such as: Unconditionally revocable credit and liquidity facilities Non-contractual obligations such as: potential requests for debt repurchases of the bank s own debt or that of related conduits, securities investment vehicles and other such financing facilities structured products where customers anticipate ready marketability, such as adjustable rate notes and variable rate demand notes (VRDNs) managed funds that are marketed with the objective of maintaining a stable value 5% of the currently undrawn portion (iii) Trade finance-related obligations (including guarantees and letters of credit) Guarantees and letters of credit unrelated to trade finance obligations 3% of the currently undrawn portion 24 PwC PwC s Banking Insights

25 Special article Frequency of calculation and reporting: NSFR disclosure standards: Banks are required to meet NSFR requirements on an ongoing basis. They should also have the required systems in place for such calculation and monitoring. NSFR, at the end of each quarter (starting date will be announced in due course), should be reported to the RBI (Department of Banking Supervision, CO) in the prescribed format (BLR 7) within 15 days from the end of the quarter. To promote the consistency and usability of disclosures related to NSFR and to enhance market discipline, banks will be required to publish their NSFRs according to a common template. Banks must publish this disclosure along with the publication of their financial statements (i.e. typically, quarterly or semi-annually), irrespective of whether the financial statements are audited. NSFR information must be calculated on a consolidated basis and presented in Indian rupees. Banks must either include the disclosures required by this document in their published financial reports or, at a minimum, provide a direct and prominent link to the complete disclosure on their websites or in publicly available regulatory reports. Banks must also make available on their websites, or through publicly available regulatory reports, an archive of all templates relating to prior reporting periods. Irrespective of the location of the disclosure, the minimum disclosure requirements must be in the format required by this document. Data must be presented as quarter-end observations. For banks reporting on a semi-annual basis, NSFR must be reported for each of the two preceding quarters. For banks reporting on an annual basis, NSFR must be reported for the preceding four quarters. Both unweighted and weighted values of NSFR components must be disclosed unless otherwise indicated. Weighted values are calculated as the values after ASF or RSF factors are applied. In addition to the prescribed common template, banks should provide a sufficient qualitative discussion around NSFR to facilitate an understanding of the results and the accompanying data. For example, where significant to NSFR, banks could discuss the drivers of their NSFR results and the reasons for intra-period changes, as well as the changes over time. 25 PwC PwC s Banking Insights

26 Aadhaar-based e-kyc Considering the increasing importance and dependence on Aadhaar-based e-kyc, we bring to you a dashboard depicting volumes of daily e-kyc transactions. Daily e-kyc transaction trend 90,00,000 80,00,000 70,00,000 60,00,000 50,00,000 40,00,000 30,00,000 20,00,000 10,00, May May May May May Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun-18 Source: UIDAI 26 PwC PwC s Banking Insights

27 Contacts Vivek Iyer Partner Mobile: Dnyanesh Pandit Director Mobile: Vernon Dcosta Director Mobile: Rajeev Khare Manager Mobile: Dhruv Khandelwal Manager Mobile: Sharon Mathias Experienced Consultant Mobile: View our earlier versions of Banking Insights a monthly newsletter View our other thought leaderships publications and insights 27 PwC PwC s Banking Insights

28 About PwC At PwC, our purpose is to build trust in society and solve important problems. We re a network of firms in 158 countries with more than 2,36,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at In India, PwC has offices in these cities: Ahmedabad, Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune. For more information about PwC India s service offerings, visit PwC refers to the PwC International network and/or one or more of its member firms, each of which is a separate, independent and distinct legal entity. Please see for further details PwC. All rights reserved pwc.in Data Classification: DC0 This document does not constitute professional advice. The information in this document has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take PricewaterhouseCoopers Private Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity. SUB/February