Page 45 - Banking Finance December 2020

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marking to market) where the contract has a positive value. common template as stipulated by RBI. Banks must publish
When an eligible bilateral netting contract is in place, the this disclosure along with the publication of their financial
replacement cost for the set of derivative exposures covered statements, irrespective of whether the financial statements
by the contract will be the net replacement cost. are audited. The NSFR information must be calculated on a
consolidated basis and presented in Indian Rupee.
In calculating NSFR derivative assets, collateral received in
connection with derivative contracts may not offset the positive Banks must also make available on their websites, or through
replacement cost amount, regardless of whether or not netting publicly available regulatory reports, an archive of all
is permitted under the bank's operative accounting or risk-based templates relating to prior reporting periods. Both un-
framework, unless it is received in the form of cash variation weighted and weighted values of the NSFR components
margin of the Revised Framework for Leverage Ratio . Any must be disclosed unless otherwise indicated. Weighted
remaining balance sheet liability associated with (a) variation values are calculated as the values after ASF or RSF factors
margin received that does not meet the criteria above or (b) are applied. In addition to the prescribed common template,
initial margin received may not offset derivative assets and banks should provide a sufficient qualitative discussion
should be assigned a 0% ASF factor. around the NSFR to facilitate an understanding of the results
and the accompanying data.
If an on-balance sheet asset is associated with collateral
posted as initial margin to the extent that the bank's Conclusion
accounting framework reflects on balance sheet, for NSFR is to ensure that banks maintain a stable funding profile
purposes of the NSFR, that asset should not be counted as in relation to the composition of their assets and off-balance
an encumbered asset in the calculation of a bank's RSF to sheet activities. A sustainable funding structure is intended
avoid any double-counting. to reduce the probability of erosion of a bank's liquidity
position due to disruptions in a bank's regular sources of
Derivative transactions with central banks arising from the funding that would increase the risk of its failure and
latter's short-term monetary policy and liquidity operations potentially lead to broader systemic stress. The NSFR limits
to be excluded from the reporting bank's NSFR computation overreliance on short-term wholesale funding, encourages
and to offset unrealized capital gains and losses related to better assessment of funding risk across all on- and off-
these derivative transactions from ASF. These transactions balance sheet items, and promotes funding stability.
include foreign exchange derivatives such as foreign
exchange swaps, and should have a maturity of less than Note:-
*Level 1: these assets is the stock of liquid assets without any
six months at inception. As such, the bank's NSFR would not
limit as also without applying any haircut:i. Cash including cash
change due to entering a short-term derivative transaction reserves in excess of required CRR. ii. Government securities in
with its central bank for the purpose of short-term monetary
excess of the minimum SLR requirement etc.
policy and liquidity operations.
Level 2 assets (comprising Level 2A assets and Level 2B assets),
Frequency of calculation and reporting the Stock of liquid assets, subject to the requirement that they
comprise not more than 40% of the overall stock of HQLAs after
Banks are required to meet the NSFR requirement on an haircuts have been applied.
ongoing basis and they should have the required systems in
(a) **Level 2A Assets: A minimum 15% haircut should be
place for such calculation and monitoring. The NSFR as at the applied to the current market value. Level 2A assets are
end of each quarter (starting date will be announced in due limited i. Marketable securities representing claims on or
course) should be reported to the RBI (Department of Banking claims guaranteed by sovereigns, Public Sector Entities
Supervision, CO) in the prescribed format (Base-III Liquidity (PSEs) or multilateral development banks that are assigned
Returns-BL R 7) within 15 days from the end of the quarter. a 20% risk weight.
(b) *** Level 2B Assets: Corporate debt securities (including
NSFR Disclosure Standards commercial paper) in this respect include only plain-vanilla
To promote the consistency and usability of disclosures assets whose valuation is readily available. A minimum 50%
related to the NSFR, and to enhance market discipline, banks haircut should be applied to the current market value of
will be required to publish their NSFRs according to a each Level 2B asset held in the stock. T

BANKING FINANCE | DECEMBER | 2020 | 45