A challenge, but benefits are many
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