management of deposit insurance fund : indian experience
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Management of Deposit Insurance Fund : Indian Experience
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Presentation Outline
1. About DICGC Funds
2. Adequacy
3. Management
4. Governance
5. Taxation
6.Conclusion
Indian Experience
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
The Oldest Pay Box in the World
Snapshot - As on 30 September 2009
Fund (Actuarial Liability) 18.17 0.39
Surplus 157.48 3.35
Total 175.65 3.74
Insurable Deposits 40,182.40 854.94
Insured Deposits 22,570.45 480.22
Fund / Reserve Ratio 0.78 % 0.78 %
INR Billion U$D Billion
No. of Insured Banks No. of Deposit A/Cs A/Cs fully Protected
2,287(Commercial 169 + Coops 2118
1.35 billion 1.20 billion
U$D 1= INR 47
About
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
DI Fund Features
A Single DI Fund – Advance funded @ Flat Rate
Covers liquidation, amalgamations, reconstructions, compromise schemes
Explicit back-stop for DIF is insignificant
Actuarially determined liability sequestered as a part of DIF
No dividend pay-out / operating expenditure charges
In case of liquidation of DICGC – DIF Assets: To insured banks in proportion of premium paidOther Assets: To Reserve Bank of India
DICGC
Deposit Insurance Fund
Credit Guarantee Fund
General Fund
Three Balance Sheets
About
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
DIF - Source and Application
Source Application1. By Premium
(including interest / penalty for delayed remittance)1. To Settlement of Insured Deposit Claims
2. By Investment Earnings3. By Share in Recovery by Liquidators
4. By Transfer from Credit Guarantee Fund 2. To Transfer to Credit Guarantee Fund*5. By Advance from CGF / GF* 3. To Repayment of Advance from CGF / GF*
6. By Advance from RBI* 4. To Repayment of Advance from RBI** Scarcely used 5. To Staff and other expenses*
Fund Back up from RBI (India’s Central Bank) pegged at originally fixed INR 50 Million as against currently achieved DIF of INR 175.65 Billion.
About
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
0.00
10.00
20.00
30.00
40.00
50.00OthersRecoveryInvestment ReturnsHalf Yearly Premium
INR Billion
DIF – Contributors to Gross RevenueAbout
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
DIF – Disposal of Gross Revenue
Consolidated for 10 years period 1999-00 to 2008-09 (in INR Billions)
39.24
81.59
5.67
103.9
To Net D I ClaimsTo Accumulated Surplus (DI Fund)
17 %
35 %
3 %
45 %
INR Billion
To Net Income Tax
To Investment Depreciations
About
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Pay Box Trident on Fund
DI Fund
Assessment Deposits understated ?
Claims submitted by liquidators not overstated ?
Is recovery and its sharing with DICGC just ?
Dire
ct a
nd In
dire
ct T
ools
About
Tackled
Tackled
Being Tackled
2.96
26.88 29.84
1.21 2.143.35
Claims PaidRecovered
Since 1962
INR Billion
41 % 8 % 11 %
Comm. Coop All
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Relevance of Reserve RatioFund Adequacy
No Hard / Soft Target Reserve Ratio Prescribed
Numerator Bias
Denominator Bias
Free Surpluses are the major component
The capital not counted – available in case of need.
Actuarial Liability counted as part of Reserve
Year Capital (INR)
1961: 10 Million
1972: 15 Million
1973: 100 Million
1981: 150 Million
1984: 500 Million
Estimation Error – Depositor-wise Aggregation
Reporting Error –Coverage & quality of reporting
Time Lag –Insurable Deposit Vs. Insured Deposit
‘Going Concern’ prejudice – Back Testing Results
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
60657075808590
Reported IDR Observed IDR
Insured Deposit Ratio : Back Testing for Coop Banks
%
Standard Deviation of 12.41
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Actuarial Liability - DIF
Actuarial Liability = PV of Claim Outflows - PV of Earnings Inflows
Broad Assumptions Claims restricted to the current insured deposits till projected maturity.
Year-end deposits go down by 20% each year cumulatively on reducing balance basis.
The ratio of Insured deposits to insurable deposits is basis for projections fund flows.
Premium, Interest and Tax rates are the current rates.
Claim Rates based on historical bank mortality married with forward looking supervisory indicators.
Margin of adverse variation in rates and margin for adverse claim ratio are factored in.
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
13579
111315
Actuarial Fund Net Claims
(INR Billions)
Actuarial Fund Back Testing
Fund Adequacy
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Fund / Reserve Ratio
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
30
50
70
90
110
130
150
170
0.50%
0.55%
0.60%
0.65%
0.70%
0.75%
0.80%
0.85%
0.90%
Fund Size
RR (Actuarially Ad-justed)
Reserve Ratio (RR)
Fund Size(INR billion)
Fund Ratio(Percent)
Fund Adequacy
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Category-wise Loss Distribution
State Bank Group
Public Sector Banks
Regional Rural Banks
Foreign Banks
Local Area Banks
Private Banks
Coop Banks Total0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%DIF > Insured Deposits (Of each bank)Insured Deposit Ratio
93 % of Insurable De-posit
7 % of Insurable Deposits
Historical Mortality Risk
Too Big To Save ?
Fund Adequacy
Residual ‘tail’ risk well-covered
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Deposits Demography
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-095000
100001500020000250003000035000
Insurable DepositInsured Deposit
INR Bil-lionINR Bil-lion
CAGR 16.09 %
CAGR 19.11 %
Deposits Growth
Fund Viability
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-090%
10%20%30%40%50%60%70%80%90%
100%
Insured Deposits RatioFully Protected Accounts Ratio
Fund Adequacy
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Multi-factor Stress Testing
A Member of Financial Stability Unit (FSU) set up by RBI
Deposit Insurance Fund
Increased Bank FailuresIncreased Cover
Premium Hike
Tax Exemption
Recapitalization by RBI
Fund Adequacy
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Recent Topical Initiatives Fund Adequacy
Move to Risk Sensitive Premium (2008)
Making Actuarial Evaluation more forward looking (2009)
RBI panel recommendation for Emergency Fund Facility for Urban Coops under Industry Support Agreement (ISA) for short & medium term (2009) - contributing interest-bearing 0.05 % of assets to a Fund (not DICGC)
Increase in Premium
DICGC assisted merger policy for legacy weak coop banks (2009)
2005 0.10 %
2004 0.08 %
1993 0.05 %
1971 0.04 %
1962 0.05 %
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Risk Management Framework
Liability and Assets Perspective of DICGC
Risk Identification and Measurement
Current Risk and Investment Policy
Risk Management Framework - Review
Interest Rate Risk Management
Choice of Planning Period
Cash Flow Matching & Investment Categorization
Surplus maximization & Return Management
Policy of Rebalancing
Fund Management
Liability Driven Investments (LDI)
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Investment Policy Structure
Purpose / Scope of Policy
Investment Objectives
Investment Processes
Investment Accounting / Valuation
Reporting and Reviewing
Authorized InvestmentsInvestment CommitteeDelegation of AuthorityStandard of PrudencePortfolio StrategiesCounterpartiesDealing through Brokers
Fund Management
ONLY CENTRAL GOVT SECURITIES
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Investment Approach
C. Maximization of Returns
A. Man
aging
Dep
osit
Insur
ance
Fund
B. Maintenance of orderly cash flow
Principal Protection ?
Viability of Fund established ?
Within Acceptable level of Risk
No Target Returns
Meeting liabilities within defined planning period.
An ALM / Structural Liquidity Approach Strategies
Tool Kits
Benchmarks
Reviews
Fund Management
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Tools & Benchmarking Fund Management
Portfolio approach - tracking of an ‘All Sovereign Bond Index’
Duration ± Leeway Targeting
‘Tracking Error’ monitored
Virtual tranching of portfolio in to ‘core’ & ‘current’ dynamically.
‘Market Risk’ - Higher of ‘Standardized Duration Method’ and ‘VaR Method’
Time Weighted Return (TWR)
Close watch on portfolio Duration and corresponding re-balancingMain Constraints
Single asset class held on fully-invested basis Few money market instrument permissible Both cash flow liquidity and market liquidity Well-nigh absence of back –up funding facility
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Total Returns Route
2004-05 2005-06 2006-07 2007-08 2008-09
-5
-3
-1
1
3
5
7
9
11
13
3.493.98 3.91
5.04 5.34
-4.55
3.97
5.17 5.27
13.09
-2.96
2.45 2.77
6.60
10.10
-2.68
4.57
6.01
9.00
12.55T-Bills IndexLiquid Bond IndexAll Sovereign Bond IndexDICGC (DIF) Portfolio
Fund Management
All Index of Clearing Corporation of India (CCIL)
%
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Transparency & DisclosuresFund Governance
Expressly precluded from taking speculative position Day-to-day audit of treasury transactions and procedures by external concurrent auditors
Daily Performance Dash Board before the CEO
Monthly Review by Investment Committee
Quarterly structured review by Audit Committee and Board
Annual Statutory Audit by independent auditors and certification
Face / Book / Market Value of investments disclosed on-balance sheet
Significant Accounting Policy disclosure as per Indian GAAP
Disclosures about Repo / Reverse Repo transactions
Trades on Order Matching System and settlement through CCP.
Direct member of RTGS
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Potential Impact of IFRS on Fund SizeFund Governance
Industry Specific Guidance may need to evolve at country level
Change in value between trade and settlement day to be recognized
Appropriate classification of Investments
Fair Value Measurements
Realized / Unrealized losses / gains in investments
Inventory accounting method may change taxable income
Transaction Costs Accounting
Threshold of Contingent Liabilities
Consolidation of Funds under control
Risk Management Disclosure
Risk Reporting
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Investment Value Buffer
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
30
50
70
90
110
130
150
170Investment Reserve + Investment Fluctuation ResreveDI Fund (Actuarial + Surplus)Investments Book ValueInvestments Market Value
INR Billions INR Billions
Fund Governance
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Jury is Out
Active or Passive Management ?
Trading Portfolio ?
Asset Class Diversification ?
More risk management instruments ?
Best method for credit lines / back-stops ?
Governance Angle – Arms length from the Central Bank
Legal Authority for New products / avenues
Fund Governance
Flexing Fund Muscle in the Market - Risks
Market Signaling Depositors Perception Shallow G-Sec Market Book profit vs. Return
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Canons of Taxation on Fund
Exempt from Income Tax between 1962 and 1987 (25 years)
Now, Among top 10 Corporate Tax Payers in India
Taxed like any mercantile company - no special status for premiums
Demand of Service Tax on par with non-life insurance diffused
Substantial amounts locked up in dispute with Tax Authorities
Premium being tax deductible in the insured bank’s hands, cost impact is less in case of profit making banks compared to loss making banks
Fund build-up during non-crisis time thwarted by higher tax liabilities
Pay Box mandate compounds inability for tax planning
Taxation
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Fund build-up in non-crisis time
Year Gross DI Claims Tax Liabilities provided for
1999-00 6.35
27.36
0.76
12.96
2000-01 5.55 1.69
2001-02 4.45 2.67
2002-03 1.63 5.79
2003-04 9.38 2.03
2004-05 10.01
27.06
3.23
55.56
2005-06 2.94 10.99
2006-07 3.23 13.56
2007-08 1.80 14.92
2008-09 9.09 12.85
Total 54.43 68.51
Taxation
INR Billions
Premium @
0.05 %
0.10%
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Changed financial systems dynamics -revisit of the public policy objectives and mandate for effective DI funding in India.
Weak recoveries with category-wise, region-wise skewedness do not align with core principles and is a major bane to fund recycling.
Reserve Ratio : A necessary but not sufficient measure of DIF adequacy. Both numerator and denominator warrant more country-specific ‘culturing’.
Inadequacy Mitigation - Favourable Credit Deposit (CD) Ratio , good Capital Adequacy, High Provision Coverage Ratio (PCR) etc. In Indian banking system
Litmus Tests -Fund survival of failure of the insured bank with largest liability ; severe scenario of failures, short of systemic failure of the banking system.
Framework for India specific denominator option based on loss distribution is still in search of a model in view of heterogeneity in Indian Banking.
Conclusions (1/2)
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Conclusions (2/2)
The banking consolidation buzz should reckon de-‘tailed’ ’ loss distribution for DIF.
Fund Management still treated as a non-core DI function. Deposit Insurer’s investments need evolution as a body of specialized knowledge.
Market Risk to DIF is a major concern. Optimizing Holding Period Return after addressing the claim liabilities may be way to go regardless of accounting results.
Co-ordination of pay-box with bank supervisors key to LDI and better tax management. Categorization of investments should be tax efficient .
With absolute ‘mutuality’ / ‘Industry Capital ‘ nature of DIF, tax-exempted premium should be logical choice. A pay-box should not be treated as a ‘low hanging fruit’.
IADI ARC Meeting and International Conference, Goa , India : 18-20 January, 2010
Comments or Questions, Please
Thank You for your valued attention
Email: jkdash@rbi.org.inwww.dicgc.org.in
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