A chal­lenge, but ben­e­fits are many

Banking Frontiers - - Indas 109 - Mo­han@bank­ingfron­tiers.com

John Foulle, di­rec­tor, Or­a­cle Fi­nan­cial Ser­vices Global Busi­ness Unit, Asia Pa­cific & Ja­pan, dis­cusses the chal­lenges posed by In­dian banks while im­ple­ment­ing IndAS 109

N. Mo­han: Can you guess the stage at which In­dian banks are placed in im­ple­ment­ing IndAS 109?

John Foulle: In­dian banks have in most cases al­ready started their im­ple­men­ta­tions of IndAS 109. These banks are re­al­iz­ing the ex­ten­sive re­quire­ments and in most cases the dif­fi­cul­ties in im­ple­ment­ing and de­sign­ing credit mod­els, Prob­a­bil­ity of De­fault (PD) and Loss Given De­fault (LGD). Many banks have only ven­tured as far as com­pli­ance to reg­u­la­tory cap­i­tal un­der the Re­serve Bank of In­dia’s stan­dard­ized ap­proach and are there­fore fac­ing these mod­el­ling re­quire­ments for the first time.

In­dian banks are at the mo­ment grap­pling with is­sues re­lat­ing to im­ple­men­ta­tion of GST as also the other dig­i­tal ini­tia­tives. How do you view the sce­nario where they are com­pelled to adopt IndAS as well?

There is never a per­fect time to launch any com­pli­ance ini­tia­tive and it is im­por­tant to un­der­stand that there will never be a time when the banks’ pri­or­i­ties are un­di­vided, fo­cus­ing solely on one reg­u­la­tory com­pli­ance ini­tia­tive. Rec­og­niz­ing that this is a crit­i­cal project that im­pacts the banks’ pro­vi­sion­ing pol­icy and their prof­itabil­ity, the fi­nance and risk teams need to work to­gether to achieve the goal of com­pli­ance.

I see 4 main is­sues in the roll­out and im­ple­men­ta­tion of IndAS:

• Data and Pro­cesses: Banks mainly work in siloes and im­por­tant data el­e­ments and func­tions are run in­de­pen­dently. For ex­am­ple, the cal­cu­la­tion of Ef­fec­tive In­ter­est Rate (EIR) re­quires a cash-flow en­gine, which would typ­i­cally be de­ployed in the ALM and Trea­sury (FTP) func­tion. The as­sets of the bank, which would have been sourced for the pur­pose of reg­u­la­tory cap­i­tal, would typ­i­cally be with the risk man­age­ment team. Banks that have al­ready de­ployed a sin­gle plat­form for their risk and fi­nance an­a­lyt­ics are in a bet­ter po­si­tion to ad­dress this chal­lenge. Credit Mod­el­ling: Many banks have com­plied with the stan­dard­ized ap­proach to Basel com­pli­ance and do not have PD or LGD mod­els. Fur­ther­more, the banks that have made the in­vest­ments in mod­els might only be main­tain­ing them in ex­cel spread­sheets or in black block ap­pli­ca­tions that do not pro­vide the level of trans­parency that the reg­u­la­tor would re­quire. In most in­stances the best ap­proach is a ‘start from scratch’, take stock of what you have and de­sign a plan that lever­ages the com­po­nents and data you al­ready have in place.

GL: Cen­tralised Ac­count Re­pos­i­to­ries. Few banks have im­ple­mented an en­ter­prise GL. As the data needed is con­cerned with the en­tire as­set base of the bank, some banks might find it dif­fi­cult to have a con­sis­tent ap­proach to the post­ing, ad­just­ment and con­sol­i­da­tion across mul­ti­ple ledgers. Peo­ple, pro­cesses: When banks have not had the chance to build the ex­per­tise in credit mod­el­ling, you find your­self grap­pling with the dif­fi­culty of ac­quir­ing tech­nol­ogy and ex­per­tise, peo­ple.

Can you speak about your ex­pe­ri­ence in im­ple­ment­ing the sys­tem in the two In­dian banks? How pre­pared were these banks to adopt the sys­tem?

Our cus­tomers have made ex­cel­lent progress in the adop­tion of the IndAS 109. Some were helped by the fact that they had been us­ing our so­lu­tion for ei­ther As­set Li­a­bil­ity Man­age­ment, re­duc­ing the need for the im­ple­men­ta­tion, test­ing of a cash­flow en­gine, others had im­ple­mented our reg­u­la­tory cap­i­tal so­lu­tion and had al­ready pro­vi­sioned most of the data of in­ter­est to the cal­cu­la­tion of loan loss fore­cast­ing and pro­vi­sion­ing, there­fore re­duc­ing the data sourc­ing project of the ini­tia­tive very sig­nif­i­cantly.

While it is pre­dicted that in the short-term, the im­ple­men­ta­tion will be very ad­verse for the in­dus­try, in the long term, it will be ben­e­fi­cial. Can you dis­cuss this as­pect?

Yes, for banks and in­vestors, hav­ing a sin­gle yard­stick to mea­sure the level of per­for­mance and make ad­just­ments ac­cord­ingly will lead to greater trans­parency. We can ex­pect this to im­part greater dis­ci­pline to the banks in their credit orig­i­na­tion pol­icy, there­fore re­duc­ing the level of NPA. Ob­vi­ously, this is a longterm ben­e­fit as the NPA cur­rently in the bal­ance sheet will not be af­fected.

In­dian banks can over­come these chal­lenges by lever­ag­ing as­sets and data that they cur­rently have in place. Treat any ini­tia­tive con­sid­er­ing the im­pact to the over­all ar­chi­tec­ture. Banks should take the op­por­tu­nity to re­view and ac­cel­er­ate the im­ple­men­ta­tion of a sin­gle source of data and trans­for­ma­tion layer for their risk and fi­nance ini­tia­tives.

John Foulle be­lieves IndAS 109 will im­part greater dis­ci­pline to banks and lead to greater trans­parency

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