The IFSCA Banking Handbook- Prudential Directions

The IFSCA Banking Handbook: Prudential Directions 1 The IFSCA Banking Handbook Prudential Directions (PRU) The IFSCA Banking Handbook: Prudential Directions 1 Contents MODULE NO. 1 General principles (GENP) 4 - 6 1. Introduction and Applicability……………………………………………………………5 2. Capital for IBUs…………………………………………………………………………..5 3. Requirement for policy…………………………………………………………………..6 4. Responsibility for principles……………………………………………………………..6 5. Stress-testing……………………………………………………………………………..6 MODULE NO. 2 Principles relating to Banking business (PRBB) 7-9 1. Principle 1—Capital adequacy…………………………………………………………..8 2. Principle 2—Credit risk and problem assets…………………………………………..8 3. Principle 3—Transactions with related parties………………………………………...8 4. Principle 4—Concentration risk…………………………………………………………8 5. Principle 5—Market risk………………………………………………………………….8 6. Principle 6—Operational risk…………………………………………………………….8 7. Principle 7— Interest rate risk in the banking book……………………………………8 8. Principle 8—Liquidity risk…………………………………………………………………8 9. Principle 9—Group risk…………………………………………………………………...9 MODULE NO. 3 Prudential Reporting, Disclosures and Supervision 10-16 (PRDS) 1. Prudential Reporting Requirements…………………………………………………….11 2. Public Disclosure requirements…………………………………………………………13 The IFSCA Banking Handbook: Prudential Directions 2 3. Supervision of prudential requirements…………………………………………………13 MODULE NO. 4 Capital Adequacy (CAR) 17-19 1. Introduction………………………………………………………………………………….18 2. Capital for IBUs……………………………………………………………………………..18 MODULE NO. 5 Credit Risk (CERS) 20-23 1. Application……………………………………………………………………………………21 2. General requirements……………………………………………………………………....21 3. The Credit Risk Management Policy……………………………………………………...21 4. Credit Risk Assessment Process………………………………………………………….22 5. An IBU must………………………………………………………………………………….23 MODULE NO. 6 Market Risk (MARS) 24-26 1. Application……………………………………………………………………………………25 2. General requirements……………………………………………………………………….25 MODULE NO. 7 Liquidity risk (LQRS) 27-32 1. Application……………………………………………………………………………………28 2. General Principles for Liquidity Risk Management………………………………………28 3. The Liquidity Risk Management framework………………………………………………29 4. Liquidity ratios………………………………………………………………………………..29 5. Liquidity management strategy………………………………………………………….....30 6. Liquidity risk management—Processes……………………………………………………30 7. Funding strategy……………………………………………………………………………...31 8. Liquidity related stress testing………………………………………………………………32 9. Independent oversight of Liquidity Risk Management……………………………………32 The IFSCA Banking Handbook: Prudential Directions 3 MODULE NO. 8 Operational risk (OPRS) 33-35 1. Application…………………………………………………………………………………...34 2. General requirements………………………………………………………………………34 3. Business continuity………………………………………………………………………….35 4. Outsourcing risk- Policies………………………………………………………………….35 Annexure: Annex I – List of Certificate/ Reports/ Returns .………………………………..…………36 The IFSCA Banking Handbook: Prudential Directions 4 MODULE NO. 1 GENERAL PRINCIPLES (GENP) The IFSCA Banking Handbook: Prudential Directions 5 1. Introduction and Applicability i. These prudential rules apply to IBUs established and operating in IFSC as branches, of Banking Companies1 regulated by their respective Home Regulators. ii. Under the extant IFSCA Banking Regulations, an IBU can be set up and operate only as a branch of a Banking Company that is regulated by its Home Regulator. iii. In practical terms, the operations of an IBU shall be in accordance with the prudential guidelines applicable on those of the Banking Company, as a whole. An IBU as a branch of the Banking Company is a part of the same legal entity and uses the capital held by the Banking Company including for the operations of the IBU. Accordingly, the IFSCA Banking Regulations provide, as part of licensing requirements, that the minimum initial / regulatory capital for the IBU shall be maintained at the parent bank as per the Home Regulations. The Regulations also provide, as part of prudential requirements, that the IBUs shall continue to comply with the directions and instructions issued by their Home Regulators, unless otherwise specified by the Authority. iv. The robustness of prudential guidelines applicable on the Banking Company under the respective Home Regulations shall be one of the most important considerations while deciding on the application for a licence for setting up an IBU in IFSC. Such prudential guidelines of the Home Regulators of the Banking Companies as applicable also on the IBUs set up as branches – unless otherwise specified by the Authority, must be based on the updated Basel framework including the Basel III reforms comprising of all the current and forthcoming standards issued by the Basel Committee on Banking Supervision (BCBS) that are applicable on internationally active banks. Also, the supervisory framework of the Home Regulators / Supervisors of the Banking Companies must be broadly compliant with the Basel Core Principles for Effective Banking Supervision issued by the BCBS. v. The directions under these PRU modules are aimed at establishing certain minimum non-quantitative prudential requirements that shall be applicable for the IBUs set up as branches in IFSC, in addition to those applicable on them as a branch of the Banking Company under the respective Home Regulations. The PRU modules cover the qualitative aspects of prudential requirements in respect of governance, governing board responsibilities, policies, systems and controls to be made applicable on IBUs. 2. Capital for IBUs i. The minimum regulatory capital for the IBUs may be held by the Banking Companies as per the capital adequacy and capital requirements applicable under the Home Regulations subject to meeting the minimum initial / regulatory capital set out under the IFSCA Banking Regulations. ii. However, the Authority may require an IBU set up as a branch to have capital resources or to comply with any other capital requirement if the Authority considers it necessary or desirable to do so in the interest of effective supervision of the IBU, in coordination with the Home Regulator. 3. Requirement for policy 1 Banking company has the same meaning as the ‘Parent Bank’, defined under Regulation 2 (j) of the IFSCA (Banking) Regulations 2020, updated as on 6.7.2021. The IFSCA Banking Handbook: Prudential Directions 6 i. In these rules, a requirement for an IBU to have a policy in respect of managing various risks or on other aspects shall also imply a requirement for such an IBU to have suitable procedures, systems, processes, controls and limits needed to give effect to the policy. ii. An IBU may choose to adopt the policy followed by its Banking Company or may use a different policy, duly approved by the Board or the Governing Body. In either case the policy followed by the IBU must be able to ensure compliance with the prudential requirements – both quantitative as well as non-quantitative, prescribed under the Home Regulations as well as the IFSCA Regulations and Rules, wherever applicable. 4. Responsibility for principles i. The Governing Body of the IBU shall be responsible for the IBU’s compliance with the principles and requirements set out in these rules and other prudential requirements – both quantitative as well as non-quantitative, prescribed under the Home Regulations. ii. The Governing Body must ensure that the IBU’s senior management establishes and implements policies to give effect to these rules. The Governing Body must approve significant policies and any material changes to them and must ensure that the policies are fully integrated with each other. iii. The Governing Body must review the IBU’s significant policies from time to time, taking into account changed operating circumstances, activities and risks of the IBU. iv. An IBU’s Governing Body must evaluate the suitability and effectiveness of the information and reports that it and the IBU’s senior management receive under these rules. 5. Stress-testing The IBUs must consider the Basel Committee’s recommended standards for stress-testing while carrying out stress-testing and developing its stress-testing scenarios. The IFSCA Banking Handbook: Prudential Directions 7 MODULE NO. 2 PRINCIPLES RELATING TO BANKING BUSINESS (PRBB) The IFSCA Banking Handbook: Prudential Directions 8 1. Principle 1—Capital adequacy i. The Banking Company must maintain capital, of adequate amount and appropriate quality, nature, scale and complexity of its business and for its risk profile, including for the operations of the IBU, in accordance with the Home Regulations subject to meeting the minimum initial / regulatory capital set out under the IFSCA Banking Regulations. 2. Principle 2—Credit risk and problem assets i. An IBU must have an adequate credit risk management policy that takes into account its risk tolerance, risk profile and the market and macroeconomic conditions. ii. The IBU must have adequate policies for the early identification and management of problem assets, and the maintenance of adequate provisions and reserves. 3. Principle 3—Transactions with related parties i. An IBU must enter into transactions with related parties on an arm’s-length basis in order to avoid conflicts of interest. 4. Principle 4—Concentration risk i. An IBU must have adequate policies to identify, measure, evaluate, manage and control or mitigate concentrations of risk in a timely manner. 5. Principle 5—Market risk i. An IBU must have an adequate market risk management policy that takes into account the its risk tolerance, its risk profile, the market and macroeconomic conditions and the risk of a significant deterioration in market liquidity. The IBU must have adequate policies to identify, measure, evaluate, manage and control or mitigate market risk in a timely manner. 6. Principle 6—Operational risk i. An IBU must have an adequate operational risk management policy that takes into account its risk tolerance, its risk profile and market and macroeconomic conditions. The IBU must have adequate policies to identify, measure, evaluate, manage and control or mitigate operational risk in a timely manner. 7. Principle 7— Interest rate risk in the banking book i. An IBU must have an adequate management policy for interest rate risk in the banking book that takes into account its risk tolerance, its risk profile and the market and macroeconomic conditions. The IBU must have adequate policies to identify, measure, evaluate, manage and control or mitigate interest rate risk in the banking book in a timely manner. 8. Principle 8—Liquidity risk i. An IBU must have prudent and appropriate quantitative and qualitative liquidity requirements. The IBU must have policies that enable the firm to comply with those requirements and to manage liquidity risk prudently. ii. An IBU shall maintain, on stand-alone basis,