BASEL III FRAMEWORK: NET STABLE FUNDING RATIO

For RBI Grade B 2018 and NABARD Grade A and Grade B 2018

RBI NOTIFICATION 17 MAY 2018

NET STABLE
FUNDING
RATIO (NSFR)

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 Relevance of this Topic

With Regard to NABARD:

• Reforms in Banking/Financial sector
• Current Economic and Social Issues

With Regard to RBI:

• Risk Management in Banking Sector
• Recent Developments in Financial Sector

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First Let us Discuss the Basics !

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 BASEL NORMS
• Basel guidelines refer to broad supervisory standards formulated
by Basel Committee on Banking Supervision (BCBS).
• The set of the agreement by the BCBS, which mainly focuses on risks
to banks and the financial system is called Basel accords/Basel
Norms.
• The purpose of the accord is to ensure that financial institutions have
enough capital on account to meet obligations and absorbs
unexpected losses.
• India has accepted Basel Norms for Banking. In fact, on a few
parameters, the RBI has prescribed stringent norms as compared to
the norms prescribed by BCBS.

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 • Introduced in 1988
BASEL I • It focused almost entirely on credit risk.
• It defined capital and structure of risk weights for banks.

• Introduced in 2004
• They are considered to be the refined and reformed versions
BASEL II of Basel I accord.
• Based on three parameters: Quantitative Requirements,
Supervisory Review and Disclosure Requirements

• Introduced in 2010 in response to the financial crisis of

2008.
• These accords deal with risk management aspects for the
BASEL III banking sector.
• Pillars: Enhanced Minimum Capital & Liquidity
Requirements, Enhanced Supervisory Review and Enhanced
Disclosure Requirements

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 BASEL III NORMS
• In the backdrop of the global financial crisis that started in 2007, the
Basel Committee on Banking Supervision (BCBS) proposed certain
reforms;
• to strengthen global capital and liquidity regulations with the
objective of promoting a more resilient banking sector.
• In this regard, the Basel III rules text on liquidity – “Basel III:
International framework for liquidity risk measurement, standards
and monitoring” was issued in December 2010;
• which presented the details of global regulatory standards on
liquidity.
• Two minimum standards, viz., Liquidity Coverage Ratio (LCR) and Net
Stable Funding Ratio (NSFR) for funding liquidity were prescribed.
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 CONCEPT OF LIQUIDITY

• Liquidity describes the degree to which an asset or security can be

quickly bought or sold in the market without affecting the asset's
price.
• Cash is considered the most liquid asset, while real estate, fine art
and collectibles are all relatively illiquid.
• A bank's liquidity is determined by its ability to meet all its
anticipated expenses, such as funding loans or making payments on
debt, using only liquid assets.
• Ideally, a bank should maintain a level of liquidity that also allows it to
meet any unexpected expenses without having to liquidate other
assets.

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 Liquidity Coverage Ratio (LCR) vs. Net Stable Funding Ratio (NSFR)

• LCR promotes short-term resilience of banks to potential liquidity

disruptions;
• by ensuring that they have sufficient high quality liquid assets
(HQLAs) to survive an acute stress scenario lasting for 30 days.

• NSFR guidelines on the other hand ensure reduction in funding risk

over a longer time horizon;
• by requiring banks to fund their activities with sufficiently stable
sources of funding in order to mitigate the risk of future funding
stress.

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 WHAT DOES THE NOTIFICATION SAY ?
• The Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) are
significant components of the Basel III reforms.
• LCR guidelines which promote short term resilience of a bank’s liquidity
profile have been issued vide circular dated June 9, 2014.
• NSFR promotes resilience over a longer-term time horizon by requiring
banks to fund their activities with more stable sources of funding on an
ongoing basis.
• The draft guidelines on the NSFR for banks in India were issued on May 28,
2015 for comments.
• The final guidelines, after considering comments received from various
stakeholders, are given hereby for implementation from a date to be
communicated in due course.

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 OBJECTIVE OF NSFR
• The objective of NSFR is to ensure that banks maintain a stable
funding profile in relation to the composition of their assets and off-
balance sheet activities.

• A sustainable funding structure is intended to reduce the probability

of erosion of a bank’s liquidity position due to disruptions in a
bank’s regular sources of funding that would increase the risk of its
failure and potentially lead to broader systemic stress.

• The NSFR limits overreliance on short-term wholesale funding,

encourages better assessment of funding risk across all on- and off-
balance sheet items, and promotes funding stability.
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 SCOPE / APPLICABILITY

• The NSFR would be applicable for Indian banks at the solo as well as
consolidated level.
• For foreign banks operating as branches in India, the framework
would be applicable on stand-alone basis (i.e., for Indian operations
only).

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 DEFINING NSFR

NSFR is defined as the amount of available stable funding (ASF) relative to the
amount of required stable funding (RSF).

Available
It is defined as the portion of capital and liabilities expected to be reliable over the
stable funding
time horizon considered by the NSFR, which extends to one year.
(ASF)

The amount of stable funding required ("Required stable funding") (RSF) of a specific
Required institution is a function of the liquidity characteristics and residual maturities of the
stable funding various assets held by that institution as well as those of its off-balance sheet (OBS)
(RSF)
exposures.

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 COMPLIANCE REQUIRMENTS

• NSFR ratio should be equal to at least 100% on an ongoing basis.

• NSFR would be supplemented by supervisory assessment of the
stable funding and liquidity risk profile of a bank.
• NSFR would be binding on banks with effect from a date which will
be communicated in due course.

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 Computing ASF

• The amount of ASF is measured, based on the broad characteristics

of the relative stability of an institution’s funding sources.

• The amount of ASF is calculated by first assigning the carrying value

of an institution’s capital and liabilities.

• Carrying value represents the amount at which a liability or equity

instrument is recorded before the application of any regulatory
deductions, filters or other adjustments.

• The amount assigned to each category is then multiplied by an ASF

factor, and the total ASF is the sum of the weighted amounts.

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 Computing RSF
• The amount of required stable funding is measured based on the
broad characteristics of the liquidity risk profile of an institution’s
assets and OBS exposures.

• The amount of required stable funding is calculated by first assigning

the carrying value of an institution’s assets to the categories.

• The amount assigned to each category is then multiplied by its

associated required stable funding (RSF) factor, and the total RSF is
the sum of the weighted amounts added to the amount of OBS
activity (or potential liquidity exposure) multiplied by its associated
RSF factor.
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 NSFR DISCLOSURE NORMS

• To promote the consistency and usability of disclosures related to the

NSFR, and to enhance market discipline, banks will be required to
publish their NSFRs according to a common template.

• Banks must publish this disclosure along with the publication of their
financial statements (i.e. typically quarterly or semi-annually),
irrespective of whether the financial statements are audited.

• The NSFR information must be calculated on a consolidated basis

and presented in Indian Rupee.

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 MCQ’s

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1. Which of the following Basel Norms were introduced in response to Global Financial Crisis of
2008?
a) Basel I
b) Basel II
c) Basel III
d) None of the above
2. Which of the following is the most liquid asset?
a) Cash
b) Gold
c) Real Estate
d) Fine Art and Collectibles

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3. Which of the following is/are correct regarding Liquidity Coverage Ratio?
a) It promotes short-term resilience of banks to potential liquidity disruptions
b) It seeks to ensure that banks have sufficient high quality liquid assets (HQLAs) to survive an acute
stress scenario lasting for 30 days
c) Both a and b
d) None of the above
4. ___________ ratio promotes resilience over a longer-term time horizon by requiring banks to
fund their activities with more stable sources of funding on an ongoing basis.
a) Net Stable Funding Ratio
b) Liquidity Coverage Ratio
c) Cash Reserve Ratio
d) None of the above
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5. Required Stable Funding (RSF) an important constituent of Net Stable Funding Ratio is function of
which of the following:
a) Liquidity characteristics and residual maturities of the various assets held by institution
b) Off-balance sheet (OBS) exposures of the institution
c) Both a and b
d) None of the above
6. As per recently introduced RBI guidelines w.r.t. Basel III Framework on Net Stable Funding Ratio
(NSFR), banks are required to ensure that NSFR should be equal to or atleast ____% on ongoing basis.
a) 10%
b) 50%
c) 75%
d) 100%

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 ANSWERS
1. C
2. A
3. C
4. A
5. C
6. D

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RBI NOTIFICATION – BASEL III NSFR

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Thank You! Happy Learning!

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