FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in India

Main regulator for banks in India:

• The Reserve Bank of India (RBI)

Additional Regulators:

• Ministry of Finance/Income Tax Department
• Foreign Exchange Dealers Association of India (FEDAI)
• Deposit Insurance and Credit Guarantee Corporation
• Fixed Income Money Market and Derivatives Association of India (FIMMDA)
• Clearing Corporation of India Ltd (CCIL)

FRSGlobal in India

India is developing into an open-market economy, yet traces of its past policies still remain. Economic liberalisation, including reduced controls on foreign trade and investment has accelerated the country's growth, which has averaged more than 7% per year since 1997. However, following the global financial crisis in early 2008, an industrial slowdown led to a reduction in GDP to 6.5% in 2009.

As this is still the second highest GDP growth rate in the world compared to other major economies, it looked like India escaped the brunt of the global financial crisis. However, the country was still affected by the wider economic slowdown and falling commodity prices, which had a knock-on effect on the Indian economy.

To manage the impact of the crisis, the Reserve Bank of India (RBI) took a number of monetary easing and liquidity enhancing measures, whilst the government launched two fiscal stimulus packages to boost aggregate demand. Most of the public sector banks, several private sector banks and some foreign banks also reduced their deposit and lending rates. Thereby, in sharp contrast to their international counterparts the financial system in India has shown resilience and stability.

As leaders in the field of risk and regulatory solutions FRSGlobal understands your business needs, our heritage in and in-depth knowledge of the financial market enables the development of our solutions to be so flexible that they meets the needs of ALL firms whatever the size or complexity.

FRSGlobal leads the way in risk and regulatory compliance solutions and can provide full coverage to all banks legally bound to report to RBI as well as all of the additional regulators.

Regulatory Environment — India

Our reporting solution for India is designed to satisfy the reporting requirements of the Reserve Bank of India (RBI) for Indian banks with overseas presence and foreign banks in India.

Statutory

DSB Reporting
DSB reporting is done either monthly or quarterly based on the requirements of RBI. These reports cover information on assets and liabilities, and impaired assets, asset quality, large credits bank profile, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), structural liquidity, FOREX and operating performance etc.

Financial Reporting
Includes in depth coverage of the main areas of banking supervision and all financial products/modules handled by banks. This is an annual report on financial information on balance sheet, earnings and profit and loss statements.

DSB Return — Balance Sheet Analysis
Balance sheet analysis is an annual report, which covers the detailed description of the components of each item under the balance sheet and the profit and loss account. It also provides analysis of asset quality, Non Performing Advances (NPA), dividends and equity issued during the period which is also included within the report.

DSB II
This quarterly report covers computations of total capital base and core Capital to Risk (Weighted) Assets Ratio (CRAR). The report contains information on Total risk weighted assets and exposures (TRWA) under various assets heads, exposures on contracts and derivatives and trading book from domestic and overseas operations.

Prudential

Consolidated Prudential returns
The prudential framework of RBI is centred around risk reporting and has annual reports that are covered under each head with banks and non-banking financial company’s (NBFC’s) asset and liability. FRSGlobal provides consolidated prudential reports with detailed information on asset quality, exposures, capital adequacy and risk exposures.

Basel II reporting
Capital Adequacy Reporting module is based on the generic Basel II module and enables banks to comply with the standards specified in the Basel II accord. The FRSGlobal solution covers a number of risk management scenarios such as credit risk, market risk and calculation of basic capital charge for operational risk.

Statistical

Special fortnightly returns reporting
The solution provides fortnightly reports on lending rates charged on advances under export or non-export credit, interest rate charged on term deposits, certificate of deposits, investments in commercial papers, balances and loans in foreign currency and money market operations.

International Banking Statistics
The solution provides quarterly reports collected by the Bank of International Settlements (BIS) from banks around the world. The statistics include total volume and currency circulation etc. This quarterly report covers all forex transactions entered by the bank and shows details as to parties involved (bank or others), currency type, MTM balances, amount of transaction etc.

NBFC Reporting
The NBFC reporting solution provides weekly, monthly and yearly reports with detailed information on interest rate sensitivity, returns, capital assets, balance sheets, asset quality, exposures, structural liquidity, and risk ratios for NBFCs.

Risk and large exposure reporting
The reports include large exposures (credit risk, market risk, interest rate risk, and concentration risk), exposures to capital market, unsecured guarantees and unsecured advances, and structural liquidity position (consolidated bank and subsidiaries).

Additional reporting
The solution provides additional statistical reports which include: basic statistical reports required annually, quarterly returns on SME finance, monthly returns on credit and debit cards, fortnightly returns on foreign exchange transactions (R-Returns) etc.

Transactional

Operational reporting
The reporting solution meets the reporting requirements that exist on transactional level through its reports based on fortnightly positions of forward rate agreements and interest rate swaps, it covers daily foreign exchange turnover, weekly transactions of options, monthly position of derivatives with interest rate sensitivity and half yearly review of securities covering the transactions done in specified period of time.

What’s coming up: India

Reserve Bank of India (RBI)

Automation of reports submissions

The Reserve Bank of India, released an approach paper on automated data flow (a straight through process) from the core banking solution (CBS) or other IT systems of commercial banks to the Reserve Bank.

With the view to ensure the accuracy and integrity the approach paper discusses the methodology to be adopted by banks towards technology and process dimensions in submission of reports.

The timelines will be defined after consultations with banks. Meanwhile, banks are being advised to conduct a self-assessment and furnish the estimated timelines for completing the first phase of the two phase project.

According to the approach paper, banks would be required, in the first phase, to ensure seamless flow of data from their transaction server to their Management Information System (MIS) server and automatically generate all returns from the MIS server, without any manual intervention.

In the second phase, the Reserve Bank would introduce a system for the flow of data from the MIS server of banks in a straight through process.

The Paper was prepared by a Core Group consisting of experts from banks, the Reserve Bank of India, the Institute for Development and Research in Banking Technology (IDRBT) and the Indian Banks’ Association (IBA).

Basel II – Approach for operational risk capital charge

The RBI has released the draft guidelines for the calculation of capital charge for operational risk.

Detailed guidelines can found in the Annex.

The Basel II framework provides three approaches for calculation of operational risk capital charge.

• Basic Indicator Approach (BIA)
• The Standardised Approach (TSA)
• Advanced Measurement Approach (AMA)

Currently, banks are calculating operational risk capital charge using the Basic Indicator Approach.

The guidelines for calculating operational risk capital charge under TSA have been issued separately (c.f. DBOD.No.BP.BC.84/21.06.001/2009-10 dated March 31, 2010).

The timelines for the banks as advised by the RBI to migrate to the Advanced Measurement Approach (AMA) for Operational risk is expected April 1, 2012 onward.

Asset & Liability Management (ALM)

ALM is being embraced as more than just a tool to monitor and manage interest rate risk in banking books. It is a process for managing balance sheets against other risks that affect earnings and portfolio valuations of banks, shifts in customer behaviour, future balance sheet growth and impact of business strategies (pricing, hedging, growth and planning).

In light of the recent financial crisis, firms of all shapes and sizes are re-evaluating their ALM model. In order to earn an adequate return, the need to assess and mitigate the adverse value and income impact of changes in the market has become even more vital.

So how do different types of financial institutions manage their ALM requirements today?

Large, tier 1 firms typically develop their ALM systems in-house; a luxury few smaller firms can’t afford. These systems typically include sophisticated and finely tuned functionality for Value exposure, Value at risk, Dynamic simulation, Earnings at risk and Treasury view.

In the past, smaller firms have found solutions for meeting ALM requirements to be over-complicated, difficult to integrate with incumbent systems, resource-dependent and cost-prohibitive. For these reasons they have resorted to using alternative methods such as spreadsheets or independent consultants, neither of which is ideal.

Until now the sheer cost of developing and supporting an in-house ALM system has been prohibitive to smaller firms but the need to have accurate visibility into the future position of the firm is critical.

Our heritage and in-depth knowledge of market have enabled the configuration of our solution to be so flexible that it meets the needs of ALL firms; from those with highly complex derivatives to those with a vanilla approach.

Our ALM solution provides a comprehensive range of capabilities that cover the following areas:

• Value exposure / market risk (static)
  For a consistent and comprehensive assessment of the adverse value impact of changes in market risk factors based on common pricing models using gap analysis and analytical/numerical stress testing analysis
• Value at risk / market risk (static)
  To calculate the loss potential of a specific portfolio or the total balance sheet over a given time horizon and confidence level
• Dynamic simulation (“what if” NII analysis)
  To assess and manage income, using a dynamically modelled balance sheet and market environment
• Earnings at risk (interest rate models)
  To calculate the potential to lose income, and to value it in a dynamically modelled balance sheet and market environment
• Treasury view
  To assess the exposure and risk position of Treasury, using the risk management techniques applied by the firm

And for the smaller firm

Our rich ALM solution offers a functionally that require immediate return on investment by taking a ‘compact’ approach with risk management features that absorb complexity. Along with evaluating a mismatch between assets and liabilities, our ALM solution also manages risks arising due to liquidity and interest rate in banking books.

With our ALM solution firms can:

• Quantify the value impact of interest rate changes over the total balance sheet based on regulatory requirements
• Conduct stress testing / value impact of any risk factor change over the total balance sheet
• Benefit from robust processes with audit ability and traceability, reverse processing from results to initial input using modelling (strategies & scenarios)
• Meet processing times / frequency of analysis and reduce manual work
• View Balance Sheet value impacts from interest rate moves in terms of sensitivity, liquidity and margin
• Utilise a simple financial analysis framework
• Make use of a flexible reporting tool and standard export to standard formats (Excel, PDF, HTML, XML)

FRSGlobal 6-step process for ALM

Basel II

To strengthen the financial stability framework, the Reserve Bank of India (RBI) initiated several steps which included enhanced focus on systemic stability issues. The implementation of advanced approaches for computation of regulatory capital under the Basel II framework was announced by RBI in July 2009.

To strengthen the global capital and liquidity regulations, the Basel Committee on Banking Supervision (BCBS) presented a complete package in December 2009. A Quantitative Impact Study (QIS) was been conducted by the committee to analyse two proposals:

• To raise quality, consistency and transparency of the capital base, risk coverage, leverage ratio and pro-cyclicality
• To further elevate the resilience of internationally active banks to liquidity stress across the globe as well as increase international harmonisation of liquidity risk supervision

Based on the test results, the committee reached a broad agreement on the overall design of the capital and liquidity reform package. It includes the definition of capital, the treatment of counterparty credit risk, the leverage ratio and the global liquidity standards.

The Financial Stability Board (FSB) released a report which announced the timeframe for implementation of advanced approaches to capital adequacy and supervisory review process under Pillar 2 of Basel II.

The Internal Rating Based (IRB) approach can be implemented by banks from April 1, 2012 onwards.

Our solution provides a sophisticated Basel II module with the ability to calculate the capital charge for credit risk, market risk and operational risk. It can be used as an independent stand alone solution or in combination with our other reporting and risk management solutions assisting banks to meet regulatory requirements and improve their performance over risk.

IFRS

Several Asian Countries such as Malaysia, Indonesia, Thailand and South Korea have introduced adoption plans for member banks to comply with international accounting treatments (or slight variations of them).

The International Accounting Standard (IAS) board has proposed a mandatory effective date of on or after January 1 , 2015 for submitting reports as per IFRS 9 requirements instead of January 1 ,2013. Early application of the set standards would continue to be permitted.

The delays in implementation of IFRS 9 from mandatory effective date of January 1, 2013 are:

1. The impairment phase of the project to replace IAS 39 made such a delay necessary or
2. The new standards in insurance contracts were possible after a effective date of 2013 and the insurer’s will have two amend the changes twice

All the reporting entities need to replace IAS 39 at the same time and implement the new reporting standards.

The Indian banking system needs to address certain issues before implementing IFRS.

• IFRS 9 is in evolving phase and the final standard is unlikely to be available in the near term.
• The Institute for Chartered Accountants of India (ICAI) will need to promulgate the converged standard for India

The standards would present challenges in terms of considerable skill up gradation and modifications in the IT system of banks.

Our IFRS solution enables classification of financial instruments and calculation of valuations using appropriate fair values or amortised costs. It also supports several methods for testing and estimating impairment as required by IAS 39.

Read more about the FRSGlobal IFRS solution here.

Liquidity Risk Management

Banks are interested in going beyond simple static financial ratios and gap reports as the measures of their liquidity risk. Since the Basel Committee on Banking Supervision issued its final paper on ‘Principles for Sound Liquidity Risk Management and Supervision’ banks have been adopting liquidity stress testing scenarios to simulate bank-specific and system risks to their balance sheet. By modelling their liquidity contingency plans against such scenarios, a measure of the bank’s cash-flow survival horizon can be derived, giving a statement of the effectiveness of the bank’s plan against such crisis.