To start operations within a week, reach book size of Rs 700 cr by March 2016.
Rating – Date ICRA Rating – September Dividend Distribution Policy. Archival Policy. Policy for Determination of Materiality of Events and Information. Policy for Determining Material Subsidiary.
Whether 10 yr single security can be used for hedging yr liability and asset Duration adjusted or can be used for investment in other long tenor securities or corporate bonds. Alternatively, whether IRFs can be used holistically for hedging assets and liabilities in dynamic interest rate scenarios within total Balance Sheet amount and within hedging definition?
Hence, NBFCs are permitted to use duration based hedging for managing interest rate risk. Similarly, NBFCs as trading members are permitted to execute their proprietary trades and not to undertake transactions on behalf of clients. In what way it is different from other NBFCs? Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company.
These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors' funds as per Directions. Besides, Prudential Norms Directions are applicable to these companies also.
We understand that there is no ceiling on raising of deposits by RNBCs, then how safe is deposit with them? It is true that there is no ceiling on raising of deposits by RNBCs.
However, every RNBC has to ensure that the amounts deposited with it are fully invested in approved investments. Can RNBC forfeit deposit if deposit instalments are not paid regularly or discontinued?
Residuary Non-Banking Company cannot forfeit any amount deposited by the depositor, or any interest, premium, bonus or other advantage accrued thereon. What is the rate of interest that an RNBC must pay on deposits and what should be maturity period of deposits taken by them?
Interest here includes premium, bonus or any other advantage, that an RNBC promises to the depositor by way of return. An RNBC can accept deposits for a minimum period of 12 months and maximum period of 84 months from the date of receipt of such deposit.
They cannot accept deposits repayable on demand. However, at present, the only RNBCs in existence Peerless has been directed by the Reserve Bank to stop collecting deposits, repay the deposits to the depositor and wind up their RNBC business as their business model is inherently unviable.
Banks, including co-operative banks, can accept deposits. Non-bank finance companies, which have been issued Certificate of Registration by RBI with a specific licence to accept deposits, are entitled to accept public deposit.
In other words, not all NBFCs registered with the Reserve Bank are entitled to accept deposits but only those that hold a deposit accepting Certificate of Registration can accept deposits. They can, however, accept deposits, only to the extent permissible.
Housing Finance Companies, which are again specifically authorized to collect deposits and companies authorized by Ministry of Corporate Affairs under the Companies Acceptance of Deposits Rules framed by Central Government under the Companies Act can also accept deposits also upto a certain limit. Cooperative Credit Societies can accept deposits from their members but not from the general public. It is not legally permissible for other entities to accept public deposits.
Unincorporated bodies like individuals, partnership firms, and other association of individuals are prohibited from carrying on the business of acceptance of deposits as their principal business. Such unincorporated bodies are prohibited from even accepting deposits if they are carrying on financial business. Can all NBFCs accept deposits? Is there any ceiling on acceptance of Public Deposits? What is the rate of interest and period of deposit which NBFCs can accept?
All NBFCs are not entitled to accept public deposits. All existing unrated AFCs that have been allowed to accept deposits shall have to get themselves rated by March 31, Those AFCs that do not get an investment grade rating by March 31, , will not be allowed to renew existing or accept fresh deposits thereafter.
In the intervening period, i. However, as a matter of public policy, Reserve Bank has decided that only banks should be allowed to accept public deposits and as such has since not issued any Certificate of Registration CoR to new NBFCs for acceptance of public deposits. Presently, the maximum rate of interest an NBFC can offer is The interest may be paid or compounded at rests not shorter than monthly rests.
In respect of companies which do not fulfill the criteria but are accepting deposits — do they come under RBI purview? The Reserve Bank's overarching concern while supervising any financial entity is protection of depositors' interest.
Depositors place deposit with any entity on trust unlike an investor who invests in the shares of a company with the intention of sharing the risk as well as return with the promoters. Protection of depositors' interest thus is supreme in financial regulation. Banks are the most regulated financial entities.
At times, some companies are temporarily prohibited from accepting public deposits. The Reserve Bank keeps both these lists updated. Members of the public are advised to check both these lists before placing deposits with NBFCs. However, the existing NRI deposits can be renewed. Co-operative Credit Societies cannot accept deposits from general public. They can accept deposits only from their members within the limit specified in their bye laws. These societies are formed for salaried employees and hence they can accept deposit only from their own members and not from general public.
Yes, nomination facility is available to the depositors of NBFCs. NBFCs are advised to accept nominations made by the depositors in the form similar to one specified under the said rules, viz Form DA 1 for the purpose of nomination, and Form DA2 and DA3 for cancellation of nomination and change of nomination respectively. How does the Reserve Bank come to know about unauthorized acceptance of deposits by companies not registered with it or of NBFCs engaged in lending or investment activities without obtaining the Certificate of Registration from it?
NBFCs that ought to have sought registration from RBI but are functioning without doing so are committing a breach of law. Such companies are liable for action as envisaged under the RBI Act, To identify such entities, RBI has multiple sources of information.
As all the relevant financial sector regulators and enforcement agencies participate in the SLCC, it is possible to quickly share the information and agree on an effective course of action to be taken against entities indulging in unauthorized and suspect businesses involving funds mobilization from public.
Proprietorship and partnership concerns are un-incorporated bodies. Hence they are prohibited under the RBI Act from accepting public deposits. There are many jewellery shops taking money from the public in instalments. Is this amounting to acceptance of deposits? It depends on whether the money is received as advance for delivering jewellery at a future date or whether the money is received with a promise to return the same with interest.
The money accepted by Jewellery shops in instalments for the purpose of delivering jewellery at the end of the period of contract is not deposit. It will amount to acceptance of deposits if in return for the money received, the jewellery shop promises to return the principal amount along with interest. What action can be taken if such unincorporated entities accept public deposits? Such unincorporated entities, if found accepting public deposits, are liable for criminal action.
What is the difference between acceptance of money by Chit Funds and acceptance of deposits? Deposits are defined under the RBI Act as acceptance of money other than that raised by way of share capital, money received from banks and other financial institutions, money received as security deposit, earnest money and advance against goods or services and subscriptions to chits.
All other amounts, received as loan or in any form are treated as deposits. Chit Funds activity involves contributions by members in instalments by way of subscription to the Chit and by rotation each member of the Chit receives the chit amount.
The subscriptions are specifically excluded from the definition of deposits and cannot be termed as deposits. While Chit funds may collect subscriptions as above, they are prohibited by RBI from accepting deposits with effect from August What are the salient features of NBFC regulations which the depositor may note at the time of investment?
The present ceiling is Certain mandatory disclosures are to be made about the company in the Application Form issued by the company soliciting deposits. A depositor wanting to place deposit with an NBFC must take the following precautions before placing deposits:. A list of deposit taking NBFCs entitled to accept deposits is available at www. The depositor should check the list of NBFCs permitted to accept public deposits and also check that it is not appearing in the list of companies prohibited from accepting deposits, which is available at www.
Depositors must scrutinize the certificate to ensure that the NBFC is authorized to accept deposits. The maximum interest rate that an NBFC can pay to a depositor should not exceed The Reserve Bank keeps altering the interest rates depending on the macro-economic environment.
The Reserve Bank publishes the change in the interest rates on www. The depositor must insist on a proper receipt for every amount of deposit placed with the company. The receipt should be duly signed by an officer authorized by the company and should state the date of the deposit, the name of the depositor, the amount in words and figures, rate of interest payable, maturity date and amount.
The depositor must bear in mind that public deposits are unsecured and Deposit Insurance facility is not available to depositors of NBFCs. The Reserve Bank does not guarantee repayment of deposits by NBFCs even though they may be authorized to collect deposits.
As such, investors and depositors should take informed decisions while placing deposit with an NBFC. In case an NBFC defaults in repayment of deposit what course of action can be taken by depositors? If an NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit in a court of law to recover the deposits. NBFCs are also advised to follow a grievance redress procedure as indicated in reply to question 57 below.
Further, at the level of the State Government, the State Legislations on Protection of Interest of Depositors in Financial Establishments empowers the State Governments to take action even before the default takes place or complaints are received from depositors. If there is perpetration of an offence and if the intention is to defraud, the State Government can even attach properties.
What is the role of Company Law Board in protecting the interest of depositors? How can one approach it? When an NBFC fails to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board CLB either on its own motion or on an application from the depositor, directs by order the Non-Banking Financial Company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order.
After making the payment, the company will need to file the compliance with the local office of the Reserve Bank of India. As explained above, the depositor can approach CLB by mailing an application in prescribed form to the appropriate bench of the Company Law Board according to its territorial jurisdiction along with the prescribed fee.
Can you give the addresses of the various benches of the Company Law Board CLB indicating their respective jurisdiction? The details of addresses and territorial jurisdiction of the bench officers of CLB are as under:. What is the procedure adopted by the Official Liquidator? It will not be looking at lending to builders in the first two years.
With around 1, branches across various parts of the country, Hinduja Leyland Finance currently manages assets of around Rs 8, crore. The company has made a profit of Rs crore in FY According to reports, the company is looking at raising Rs crore through an initial public offering.
These securities will attract capital only for credit risk. On completion of 90 days delinquency, these will be treated on par with NPAs for deciding the appropriate risk weights for credit risk. Since banks are required to maintain capital for market risks on an ongoing basis, they are required to mark to market their trading positions on a daily basis.
The current market value will be determined as per extant RBI guidelines on valuation of investments. The specific risk charges for various kinds of exposures would be applied as detailed below:. Investment in other securities where payment of interest and repayment of principal are guaranteed by Central Government. Investments in other securities where payment of interest and repayment of principal are guaranteed by State Government.
Alternative Total Capital Charge for securities issued by Indian and foreign sovereigns. In case, it is not found feasible to compute CRAR on such notional basis, the specific risk capital charge of Alternative Total Capital Charge for bonds issued by banks — Held by banks under AFS category subject to the conditions stipulated in paragraph 8. In case the amount invested is less than the threshold limit prescribed in para 5.
Securitisation exposures SDIs relating to Commercial real estate exposures in per cent. General Market Risk 8. The capital charge is the sum of four components:.
In the case of those currencies in which business is insignificant where the turnover in the respective currency is less than 5 per cent of overall foreign exchange turnover , separate calculations for each currency are not required.
The bank may, instead, slot within each appropriate time-band, the net long or short position for each currency. However, these individual net positions are to be summed within each time-band, irrespective of whether they are long or short positions, to produce a gross position figure. The gross positions in each time-band will be subject to the assumed change in yield set out in Table with no further offsets. As banks in India are still in a nascent stage of developing internal risk management models, it has been decided that, to start with, banks may adopt the standardised method.
Accordingly, banks are required to measure the general market risk charge by calculating the price sensitivity modified duration of each position separately. Under this method, the mechanics are as follows: Sentence added, to ensure more clarity.
Minimum capital requirement to cover the risk of holding or taking positions in equities in the trading book is set out below. This is applied to all instruments that exhibit market behaviour similar to equities but not to non-convertible preference shares which are covered by the interest rate risk requirements described earlier.
The instruments covered include equity shares, whether voting or non-voting, convertible securities that behave like equities, for example: Specific and general market risk. The general market risk charge will also be 9 per cent on the gross equity positions.
Foreign exchange open positions and gold open positions are at present risk-weighted at per cent. Thus, capital charge for market risks in foreign exchange and gold open position is 9 per cent. These open positions, limits or actual whichever is higher, would continue to attract capital charge at 9 per cent. This capital charge is in addition to the capital charge for credit risk on the on-balance sheet and off-balance sheet items pertaining to foreign exchange and gold transactions.
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk. Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements.
However, to begin with, banks in India shall compute the capital requirements for operational risk under the Basic Indicator Approach. Figures for any year in which annual gross income is negative or zero should be excluded from both the numerator and denominator when calculating the average. The charge may be expressed as follows: It is intended that this measure should: In terms of paragraph 2. It is presumed that the banks would have formulated the policy and also undertaken the capital adequacy assessment accordingly.
This in turn would require a well-defined internal assessment process within the banks through which they assure the RBI that adequate capital is indeed held towards the various risks to which they are exposed. Since the capital adequacy ratio prescribed by the RBI under the Pillar 1 of the Framework is only the regulatory minimum level, addressing only the three specified risks viz.
Illustratively , some of the risks that the banks are generally exposed to but which are not captured or not fully captured in the regulatory CRAR would include: It is, therefore, only appropriate that the banks make their own assessment of their various risk exposures, through a well-defined internal process, and maintain an adequate capital cushion for such risks.
The methodologies and techniques are still evolving particularly in regard to measurement of non-quantifiable risks, such as reputational and strategic risks. These guidelines, therefore, seek to provide only broad principles to be followed by the banks in developing their ICAAP.
The document should, inter alia , include the capital adequacy assessment and projections of capital requirement for the ensuing year, along with the plans and strategies for meeting the capital requirement. The first ICAAP document was required to reach the RBI not later than June 30, or March 31, , as applicable, and thereafter, before the end of March every year, covering the capital assessment and projections for the following financial year. Thus, the Basel II framework rests on the following three mutually- reinforcing pillars: Minimum Capital Requirements — which prescribes a risk-sensitive calculation of capital requirements that, for the first time, explicitly includes operational risk in addition to market and credit risk.
Supervisory Review Process SRP — which envisages the establishment of suitable risk management systems in banks and their review by the supervisory authority. Market Discipline — which seeks to achieve increased transparency through expanded disclosure requirements for banks. Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels.
Supervisors should take appropriate supervisory action if they are not satisfied with the result of this process. Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require the banks to hold capital in excess of the minimum.
Supervisors should seek to intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank and should require rapid remedial action if capital is not maintained or restored.
The Pillar 2 also requires the supervisory authorities to subject all banks to an evaluation process, hereafter called Supervisory Review and Evaluation Process SREP , and to initiate such supervisory measures on that basis, as might be considered necessary. An analysis of the foregoing principles indicates that the following broad responsibilities have been cast on the banks and the supervisors:.
Principle2 b Supervisors should take appropriate action if they are not satisfied with the results of this process. Principle 2 d Supervisors should have the ability to require banks to hold capital in excess of the minimum.
Principle 3 e Supervisors should seek to intervene at an early stage to prevent capital from falling below the minimum levels. Principle 4 f Supervisors should require rapid remedial action if capital is not maintained or restored. The SREP consists of a review and evaluation process adopted by the supervisor, which covers all the processes and measures defined in the principles listed above.
However, supervisors need to perform a more comprehensive assessment of capital adequacy that considers risks specific to a bank, conducting analyses that go beyond minimum regulatory capital requirements. Under the SREP, the RBI will assess the overall capital adequacy of a bank through a comprehensive evaluation that takes into account all relevant available information. Such an evaluation of the effectiveness of the ICAAP would help the RBI in understanding the capital management processes and strategies adopted by the banks.
In addition to the periodic reviews, independent external experts may also be commissioned by the RBI, if deemed necessary, to perform ad hoc reviews and comment on specific aspects of the ICAAP process of a bank; the nature and extent of such a review shall be determined by the RBI.
Generally, material increases in risk that are not otherwise mitigated should be accompanied by commensurate increases in capital. Based on such an assessment, the RBI could consider initiating appropriate supervisory measures to address its supervisory concerns. The measures could include requiring a modification or enhancement of the risk management and internal control processes of a bank, a reduction in risk exposures, or any other action as deemed necessary to address the identified supervisory concerns.
These measures could also include the stipulation of a bank-specific minimum CRAR that could potentially be even higher, if so warranted by the facts and circumstances, than the regulatory minimum stipulated under the Pillar 1. In cases where the RBI decides to stipulate a CRAR at a level higher than the regulatory minimum, it would explain the rationale for doing so, to the bank concerned.
However, such an add-on CRAR stipulation, though possible, is not expected to be an automatic or inevitable outcome of the SREP exercise, the prime objective being improvement in the risk management systems of the banks.
This requirement would also apply to the foreign banks which have a branch presence in India and their ICAAP should cover their Indian operations only. Since a sound risk management process provides the basis for ensuring that a bank maintains adequate capital, the board of directors of a bank shall:.
The reports shall be sufficiently detailed to allow the Board of Directors to evaluate the level and trend of material risk exposures, whether the bank maintains adequate capital against the risk exposures and in case of additional capital being needed, the plan for augmenting capital. The board of directors would be expected make timely adjustments to the strategic plan, as necessary.
To begin with, the Document, duly approved by the Board, should be sent to the RBI only once a year, for the year ending March 31, but the frequency of submission could be reviewed in due course. The first such submission was required to be for the year ending March 31, by the banks which migrated to Basel II framework from that date while the remaining banks would submit their first ICAAP Document for the year ending March 31, , the date from which they would switch over to the Basel II framework.
The document should reach the RBI latest by June 30, in respect of the first set of banks and by March 31, in respect of the second set of banks, and thereafter, by end of March every year. The board of directors shall, at least once a year, assess and document whether the processes relating the ICAAP implemented by the bank successfully achieve the objectives envisaged by the board.
In the light of such an assessment, appropriate changes in the ICAAP should be instituted to ensure that the underlying objectives are effectively achieved. This integration could range from using the ICAAP to internally allocate capital to various business units, to having it play a role in the individual credit decision process and pricing of products or more general business decisions such as expansion plans and budgets.
The integration would also mean that ICAAP should enable the bank management to assess, on an ongoing basis, the risks that are inherent in their activities and material to the institution.
The following paragraphs illustratively enumerate the broad approach which could be considered by the banks with varying levels of complexity in their operations, in formulating their ICAAP. A In relation to a bank that defines its activities and risk management practices as simple , in carrying out its ICAAP, that bank could:.
B In relation to a bank that define its activities and risk management practices as moderately complex , in carrying out its ICAAP, that bank could:. Models of the kind referred to above may be linked so as to generate an overall estimate of the amount of capital that a bankconsiders appropriate to hold for its business needs. A bankmay also link such models to generate information on the economic capital considered desirable for that bank.
A model which a bankuses to generate its target amount of economic capital is known as an economic capital model ECM. For example, a bankis likely to use value-at-risk VaR models formarket risk, advanced modelling approaches for credit risk and, possibly, advanced measurement approaches for operational risk.
A bankmight also use economic scenario generators to model stochastically its business forecasts and risks. However, the advanced approaches envisaged in the Basel II Framework are not currently permitted by the RBI and the banks would need prior approval of the RBI for migrating to the advanced approaches.
Such a bank is also likely to be part of a groupand to be operating internationally. There is likely to be centralised control over the models used throughout thegroup, the assumptions made and their overall calibration.
As a minimum, a bank shall conduct periodic reviews of its risk management processes, which should ensure:. Thus, the banks shall have an explicit, Board-approved capital plan which should spell out the institution's objectives in regard to level of capital, the time horizon for achieving those objectives, and in broad terms, the capital planning process and the allocate responsibilities for that process. The plan shall outline:. Banks shall, therefore, set their capital targets which are consistent with their risk profile and operating environment.
As a minimum, a bank shall have in place a sound ICAAP, which shall include all material risk exposures incurred by the bank. There are some types of risks such as reputation risk and strategic risk which are less readily quantifiable; for such risks, the focus of the ICAAP should be more on qualitative assessment, risk management and mitigation than on quantification of such risks. The banks are urged to take necessary measures for implementing an appropriate formal stress testing framework by the date specified which would also meet the stress testing requirements under the ICAAP of the banks.
While the RBI does not expect the banks to use complex and sophisticated econometric models for internal assessment of their capital requirements, and there is no RBI-mandated requirement for adopting such models, the banks, with international presence, were required, in terms of paragraph 17 of our Circular DBOD. However, some of the banks which have relatively complex operations and are adequately equipped in this regard, may like to place reliance on such models as part of their ICAAP.
While there is no single prescribed approach as to how a bank should develop its capital model, a bank adopting a model-based approach to its ICAAP shall be able to, inter alia, demonstrate:. Risks that can be reliably measured and quantified should be treated as rigorously as data and methods allow. The appropriate means and methods to measure and quantify those material risks are likely to vary across banks. Some of the risks to which banks are exposed include credit risk, market risk, operational risk, interest rate risk in the banking book, credit concentration risk and liquidity risk as briefly outlined below.
The RBI has issued guidelines to the banks on asset liability management, management of country risk, credit risk, operational risk, etc. However, certain other risks, such as reputational risk and business or strategic risk, may be equally important for a bank and, in such cases, should be given same consideration as the more formally defined risk types. For example, a bank may be engaged in businesses for which periodic fluctuations in activity levels, combined with relatively high fixed costs, have the potential to create unanticipated losses that must be supported by adequate capital.
Additionally, a bank might be involved in strategic activities such as expanding business lines or engaging in acquisitions that introduce significant elements of risk and for which additional capital would be appropriate. Additionally, if banks employ risk mitigation techniques, they should understand the risk to be mitigated and the potential effects of that mitigation, reckoning its enforceability and effectiveness, on the risk profile of the bank.
A bank should have the ability to assess credit risk at the portfolio level as well as at the exposure or counterparty level. Banks should be particularly attentive to identifying credit risk concentrations and ensuring that their effects are adequately assessed.
This should include consideration of various types of dependence among exposures, incorporating the credit risk effects of extreme outcomes, stress events, and shocks to the assumptions made about the portfolio and exposure behavior. A bank should be able to identify risks in trading activities resulting from a movement in market prices.
Exercises that incorporate extreme events and shocks should also be tailored to capture key portfolio vulnerabilities to the relevant market developments. A bank should be able to assess the potential risks resulting from inadequate or failed internal processes, people, and systems, as well as from events external to the bank.
This assessment should include the effects of extreme events and shocks relating to operational risk. Events could include a sudden increase in failed processes across business units or a significant incidence of failed internal controls. A bank should identify the risks associated with the changing interest rates on its on-balance sheet and off-balance sheet exposures in the banking book from both, a short-term and long-term perspective.
This might include the impact of changes due to parallel shocks, yield curve twists, yield curve inversions, changes in the relationships of rates basis risk , and other relevant scenarios. The bank should be able to support its assumptions about the behavioral characteristics of its non-maturity deposits and other assets and liabilities, especially those exposures characterised by embedded optionality.
Given the uncertainty in such assumptions, stress testing and scenario analysis should be used in the analysis of interest rate risks. Risk concentrations have arguably been the single most important cause of major problems in banks. Concentration risk resulting from concentrated portfolios could be significant for most of the banks. The following qualitative criteria could be adopted by the banks to demonstrate that the credit concentration risk is being adequately addressed:.
In assessing the degree of credit concentration, therefore, a bank shall consider not only the foregoing exposures but also consider the degree of credit concentration in a particular economic sector or geographical area. The banks with operational concentration in a few geographical regions, by virtue of the pattern of their branch network, shall also consider the impact of adverse economic developments in that region, and their impact on the asset quality.
Such a situation could exacerbate the concentration risk because the skills of those individuals, in part, limit the risk arising from a concentrated portfolio. In developing its stress tests and scenario analyses, a bankshall, therefore, also consider the impact of losing key personnel on its ability to operate normally, as well as the direct impact on its revenues. As regards the quantitative criteria to be used to ensure that credit concentration risk is being adequately addressed, the credit concentration risk calculations shall be performed at the counterparty level i.
In this regard, a reference is invited to paragraph 3. The banks would also be well advised to pay special attention to their industry-wise exposures where their exposure to a particular industry exceeds 10 per cent of their aggregate credit exposure including investment exposure to the industrial sector as a whole.
It may please be noted that the HHI as a measure of concentration risk is only one of the possible methods and the banks would be free to adopt any other appropriate method for the purpose, which has objective and transparent criteria for such measurement.
A bank should understand the risks resulting from its inability to meet its obligations as they come due, because of difficulty in liquidating assets market liquidity risk or in obtaining adequate funding funding liquidity risk. This assessment should include analysis of sources and uses of funds, an understanding of the funding markets in which the bank operates, and an assessment of the efficacy of a contingency funding plan for events that could arise.
All relevant factors that present a material source of risk to capital should be incorporated in a well-developed ICAAP. Furthermore, banks should be mindful of the capital adequacy effects of concentrations that may arise within each risk type.
In some cases, quantitative tools can include the use of large historical databases; when data are more scarce, a bank may choose to rely more heavily on the use of stress testing and scenario analyses. Banks should understand when measuring risks that measurement error always exists, and in many cases the error is itself difficult to quantify. In general, an increase in uncertainty related to modeling and business complexity should result in a larger capital cushion. Stress testing and scenario analysis can be effective in gauging the consequences of outcomes that are unlikely but would have a considerable impact on safety and soundness.
Banks should be cognisant that qualitative approaches have their own inherent biases and assumptions that affect risk assessment; accordingly, banks should recognise the biases and assumptions embedded in, and the limitations of, the qualitative approaches used. A bank choosing to conduct risk aggregation among various risk types or business lines should understand the challenges in such aggregation.
In addition, when aggregating risks, banks should be ensure that any potential concentrations across more than one risk dimension are addressed, recognising that losses could arise in several risk dimensions at the same time, stemming from the same event or a common set of factors.
For example, a localised natural disaster could generate losses from credit, market, and operational risks at the same time. Assumptions about diversification should be supported by analysis and evidence. For example, a bank calculating correlations within or among risk types should consider data quality and consistency, and the volatility of correlations over time and under stressed market conditions.
The aim is to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on the scope of application, capital, risk exposures, risk assessment processes, and hence the capital adequacy of the institution. Hence, non-compliance with the prescribed disclosure requirements would attract a penalty, including financial penalty. However, it is not intended that direct additional capital requirements would be a response to non-disclosure, except as indicated below.
It is recognised that the Pillar 3 disclosure framework does not conflict with requirements under accounting standards, which are broader in scope. The BCBS has taken considerable efforts to see that the narrower focus of Pillar 3, which is aimed at disclosure of bank capital adequacy, does not conflict with the broader accounting requirements. The Reserve Bank will consider future modifications to the Market Discipline disclosures as necessary in light of its ongoing monitoring of this area and industry developments.
With a view to enhance the ease of access to the Pillar 3 disclosures, banks may make their annual disclosures both in their annual reports as well as their respective web sites. Banks with capital funds of Rs. Each of these disclosures pertaining to a financial year should be available on the websites until disclosure of the third subsequent annual March end disclosure is made.
The disclosures in this manner should be subjected to adequate validation. For example, since information in the annual financial statements would generally be audited, the additional material published with such statements must be consistent with the audited statements. If material is not published under a validation regime, for instance in a stand alone report or as a section on a website, then management should ensure that appropriate verification of the information takes place, in accordance with the general disclosure principle set out below.
In the light of the above, Pillar 3 disclosures will not be required to be audited by an external auditor, unless specified. A bank should decide which disclosures are relevant for it based on the materiality concept. Information would be regarded as material if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions.
This definition is consistent with International Accounting Standards and with the national accounting framework.
The Reserve Bank recognises the need for a qualitative judgment of whether, in light of the particular circumstances, a user of financial information would consider the item to be material user test. The Reserve Bank does not consider it necessary to set specific thresholds for disclosure as the user test is a useful benchmark for achieving sufficient disclosure. Notwithstanding the above, banks are encouraged to apply the user test to these specific disclosures and where considered necessary make disclosures below the specified thresholds also.
Information about customers is often confidential, in that it is provided under the terms of a legal agreement or counterparty relationship. This has an impact on what banks should reveal in terms of information about their customer base, as well as details on their internal arrangements, for instance methodologies used, parameter estimates, data etc.
The Reserve Bank believes that the requirements set out below strike an appropriate balance between the need for meaningful disclosure and the protection of proprietary and confidential information. In addition, banks should implement a process for assessing the appropriateness of their disclosures, including validation and frequency. Pillar 3 applies at the top consolidated level of the banking group to which the Framework applies as indicated above under paragraph 3 Scope of Application.
Disclosures related to individual banks within the groups would not generally be required to be made by the parent bank. An exception to this arises in the disclosure of Total and Tier 1 Capital Ratios by the top consolidated entity where an analysis of significant bank subsidiaries within the group is appropriate, in order to recognise the need for these subsidiaries to comply with the Framework and other applicable limitations on the transfer of funds or capital within the group. Pillar 3 disclosures will be required to be made by the individual banks on a standalone basis when they are not the top consolidated entity in the banking group.
The first of the disclosures as per these guidelines shall be made as on the effective date viz. March 31, or , as the case may be. Banks are, however, encouraged to make the Pillar 3 disclosures at an earlier date. The following sections set out in tabular form are the disclosure requirements under Pillar 3. Additional definitions and explanations are provided in a series of footnotes.
Quantitative Disclosures c The aggregate amount of capital deficienciesin all subsidiaries not included in the consolidation i. In addition, indicate the quantitative impact on regulatory capital of using this method versus using the deduction. Disclosures for the financial year ending March 31, i. A capital deficiency is the amount by which actual capital is less than the regulatory capital requirement.
Any deficiencies which have been deducted on a group level in addition to the investment in such subsidiaries are not to be included in the aggregate capital deficiency. Table DF — 3: Quantitative disclosures b Capital requirements for credit risk:. In this section, several key banking risks are considered: Also included in this section are disclosures relating to credit risk mitigation and asset securitisation, both of which alter the risk profile of the institution.
Where applicable, separate disclosures are set out for banks using different approaches to the assessment of regulatory capital. Credit risk General disclosures of credit risk provide market participants with a range of information about overall credit exposure and need not necessarily be based on information prepared for regulatory purposes.
Disclosures on the capital assessment techniques give information on the specific nature of the exposures, the means of capital assessment and data to assess the reliability of the information disclosed. Table DF — 4: General Disclosures for All Banks. Qualitative Disclosures a The general qualitative disclosure requirement paragraph Quantitative Disclosures b Total gross credit risk exposures, Fund based and Non-fund based separately.
That is after accounting offsets in accordance with the applicable accounting regime and without taking into account the effects of credit risk mitigation techniques, e. The industries break-up may be provided on the same lines as prescribed for DSB returns.
If the exposure to any particular industry is more than 5 per cent of the gross credit exposure as computed under b above it should be disclosed separately. Qualitative Disclosures a For portfolios under the standardised approach:. Quantitative Disclosures b For disclosed credit risk portfolio under the standardised approach, the total exposurethat is covered by:. At a minimum, banks must give the disclosures in this Table in relation to credit risk mitigation that has been recognised for the purposes of reducing capital requirements under this Framework.
Where relevant, banks are encouraged to give further information about mitigants that have not been recognised for that purpose.
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The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors' funds as per Directions. The mod may unlock it, the mod may make it accessible, but again, going back to the publisher's burden; putting the accountability on the publisher to fully account for the content that they create and they ship — that's all we care about.