XBRL Implementation at Reserve Bank of India Dr

XBRL Implementation at Reserve Bank of India Dr. A. S. Ramasastri, Adviser & P. R. Ravi Mohan, General Manager

Agenda Reporting System at RBI - ORFS Basel II Implementation by RBI XBRL Implementation at RBI n n n Issues Approach Basel II Return Process Flow Potential Benefits Status XBRL in India What RBI Looks Forward. . .

Reporting System at RBI

Reporting System Multiple Banks Multiple Departments of RBI Multiple Formats (CSV, Excel Based, XML etc) Multiple Modes (Paper based, E-mail, Online) Multiple Backend Systems 4

Obvious Problems Data Entry at Multiple Levels – Quality Suffers & Delays Increase Changing Formats Difficult Cross-Departmental View of Data Not Easy Lack of Standard Definitions of Data Elements Both Banks and RBI Maintain Multiple Systems 5

Solution – First Step RBI introduces on-line returns filing system (ORFS) for important statutory returns Banks file returns through secured channels All concerned departments receive data Straight-through Processing implemented Banks developed XML-based reporting systems from their core banking solutions RBI interacts with other stakeholders on XBRL Attempt for rationalisation of returns 6

Basel II Implementation by RBI

INDIAN BANKING SYSTEM • • Public sector banks - 27 Private sector banks – 22 Foreign banks -30 Local area banks – 4 Regional rural banks -91 Urban co-operative banks – 1770 Co-operative credit institutions –over 100 thousand

Basel 1 Implementation Capital charge for credit risk introduced since 1992 -93 on the lines of Basel 1 Surrogates for market risk introduced since 1998 n n 2. 5% RW on entire investment portfolio 100% RW for gold and forex open positions Capital charge for market risks on par with Basel 1 introduced from the 2004 -05 n n n Interest rate risk Equity risk Foreign exchange risk

Basel I Implementation. (contd. ) Capital charge for market risks extended to AFS portfolio from 2005 -06 Indian banking system can be considered to be more than fully compliant with Basel 1 as on March 31, 2006 Banking regulation & supervision in India assessed as largely compliant with the Basel Core Principles for Effective Banking Supervision in 1999 – since then the level of compliance has improved significantly

Indian Scenario • In tune with RBI’s objective to have consistency and harmony with international standards, Standardised Approach for Credit Risk and Basic Indicator Approach for Operational Risk has been prescribed • Minimum CRAR would be 9% • but banks expected to operate above the minimum level • higher level of CRAR possible under Pillar II • on the basis of risk profile and risk management systems • Tier 1 CRAR to be at least 6% - before March 31, 2010 • All Scheduled commercial banks to comply • at solo level on their global position • as well as at the consolidated level

Basel II Pillar 1 Minimum Capital Requirement Capital for Credit Risk (SA; FIRB; AIRB) Pillar 2 Pillar 3 Supervisory Review Market Discipline Capital for Market Risk (SMA; SDA; IMA) Capital for Operational Risk (BIA; SA; AMA)

Why Minimum Approaches ? Indian banking system not ready for adoption of Advanced approaches which n rely largely on internal methodologies and therefore on corporate governance in banks n are highly data intensive – lack of appropriate data n are likely to increase the cost of compliance n place significant demands on skills in both banks and the RBI Hence, decision to migrate to minimum approaches available in Basel II

Three-track Approach Basel 2 applicable to all commercial banks (except Regional Rural Banks and Local Area Banks) Urban Cooperative Banks and Local Area Banks on Basel I Regional Rural Banks on minimum capital basis

Implementation Schedule Foreign banks operating in India and Indian banks having presence outside India by March 31, 2008 All other Scheduled Commercial Banks to migrate to Basel II in alignment with them but not later than March 31, 2009.

RBI Initiatives Required for Implementation Strengthen banks’ risk management systems Capacity building at RBI and Banks Ensure data submission by banks are reliable, accurate and timely XBRL reporting becomes significant in this context Especially since submission of information by banks to regulator is very important in view of special status enjoyed by banks

XBRL Implementation at RBI

Issues Varying technology maturity levels across banks Lack of Awareness Skill Set Requirement Local XBRL jurisdiction yet to be formed n Creation or Extension of Taxonomies Protection of existing technology investments 18

Approach - Commitment Top Level Commitment The Governor set up a High-level XBRL steering committee headed by the Deputy Governor incharge of Regulation, Supervision and Technology Members from RBI, Commercial Banks, Technology Firms, Institute of Chartered Accountants of India (ICAI) A core group comprising relevant technical and functional expertise representing different departments within RBI 19

Approach – Phased Pilot project for studying a few banks’ and RBI’s existing systems and demonstration of the new technology and tools for a few returns. Based on this pilot project, preparation of approach paper and a roadmap for bank reporting using XBRL A calibrated and phased approach to full XBRL implementation for reporting purposes The first report is the Basel II reporting return, which is being newly introduced 20

Approach - Cooperation Work with vendors having XBRL skills Discuss with XII and European Central Banks Specialist training to core group on XBRL Study the process at Bank of Belgium and Bank of Spain Coordinate with other Indian stake holders like ICAI Work towards formation of Indian jurisdiction 21

Approach – Extension of ORFS, which has been developed on XML, is being extended to adopt XBRL standards Investment at RBI and banks is reasonably protected Both RBI and banks are familiar with the system Training through workshops, seminars and demonstrations Conversion software made available to banks – with an option for banks work on their own solutions 22

Approach - Development of taxonomies – a project within project Both development of taxonomies and system outsourced – the vendor works closely with the core group of RBI Taxonomies vetted by experts in RBI, experts in India and also experts from other countries User Acceptance Tests to involve the concerned departments of RBI and also a few banks Training to banks and departments 23

Approach - Constraints § Formula linkbase, which would have provided extensive validation capabilities, is not yet released Decided to use the calculation linkbase for basic data validation. However, extensive validations will be taken care of through the application presently § Versioning of taxonomy is a work in progress and not finalised Alternative methodology for ensuring versioning of taxonomy and compatibility of unchanged elements with older versions of taxonomy. Automated as well as manual version checking of taxonomy to ensure correct version is used 24

Basel II Return - Basis Based on Guidelines on the revised capital adequacy framework issued by RBI in April, 2007 and a few amendments in March, 2008 n n Nature and components of capital and deductions to capital specified Approaches currently prescribed by RBI: Standardized Duration Approach for market risk Standardized Approach for credit risk Basic Indicator Approach for operational risk A single spreadsheet based return file consisting of several templates for various individual risks and components Various individual risk weighted assets feed into the Capital calculation template Return frequency - Quarterly 25

Basel II Return – Elements & Dimensions Detailed templates for Credit Risk– on and off BS items, securitization, Market and non-market related off BS, failed transactions, counterparty credit risk n Market Risk – AFS, HFT, aggregate n Operational Risk – BIA template Data Model – Primary items and dimensional information Examples of Dimensional items include counterparty groups, risk weights, ratings etc. Around 400 unique elements including about 25 dimensions Granular details elicited when required. However, no attempt to reproduce detailed calculations carried out at bank’s end. References to RBI capital adequacy guidelines/other relevant RBI circulars for each data element incorporated in the return through reference linkbase n 26

Basel II Return- Process flow 27

Basel II Return- Architecture 28

Implementation Status Taxonomies for Basel II developed System developed and being used by selected banks To be formally launched on October 6, 2008 An international seminar organized to coincide with the launch Several other returns to be taken up over next 3 to 6 months

Potential Benefits to Banks (1) Efficiency gains in external reporting processes Savings in cost/resources for redundant data related work XBRL ensures data re-usability When providing XBRL data for capital markets, potential for decrease in capital costs for relevant firms since better assimilation of data by investors/market Sharing/Using XBRL data with / of other banks/borrowers can help quicker and better assessment/monitoring of credit risk / counterparty credit risk and also management of moral hazard issue Can enable more frequent review/updation of internal credit rating system Due to better credit risk assessment, can enable enhancement and diversification of credit to sections like SMEs, 30 microfinance institutions etc.

Potential Benefits to Banks (2) In the event of pulling/pushing data across disparate systems, say for risk management information systems, XBRL can help in technology independent seamless movement of information Exchange of fraud details / caution advices with Frauds Monitoring Cell of RBI can enable banks further implement fraud control measures expeditiously Reporting/exchanging XBRL enabled information to/with Credit information Bureau/s can lead to better credit assessment process and better management of adverse selection problem In the event of mergers / acquisitions or for consolidation of MIS/accounts, XBRL can be of help in integrating different systems and provide for easier generation of complete, consolidated and centralized information 31

Potential Benefits to Banks (3) Enhanced internal controls/audit processes if XBRL is extensively leveraged Can facilitate rural initiatives since can XBRL can link disparate applications/systems Since both quantitative and qualitative information can be represented in XBRL, over a period of time potential for enhancing “market discipline” through use of automated tools for crunching XBRL data n A taxonomy for incorporating market discipline Pillar 3 requirements would prove very beneficial Incorporating XBRL capability in core banking and other important systems – can enable direct mapping of taxonomy elements to elements in the specific system and generation of required XBRL instance document as output 32

Potential Benefits to RBI n n n n Generating standard and ad-hoc reports as required Maximum possible automation of processes More analysis facilitated since less of data related issues expected Ease of incorporating data for various analytical studies and periodic reports Quicker access to bank analysts and inspection officials Provision for automated signalling of “red flags” in submitted data which would need further analysis Access of the centralized data repository by other departments like banking policy department, monetary policy department, financial markets department etc. as required Use of business intelligence tool for advanced analytics and drill-down/roll up facility 33

XBRL in India The XBRL implementation catching up in India In addition to RBI, initiatives by other bodies like ICAI XBRL-India jurisdiction is being formed; a steering committee formed For more widespread use, taxonomies usable for specific purposes need to be developed: requires cooperation and collaboration between relevant stakeholders – Interoperability is key for success of XBRL More training/awareness of benefits of XBRL need to percolate across to all entities – seminars of this nature would be needed Scope for more products around XBRL by Indian software industry 34

What RBI Looks Forward. . . RBI can be involved in sharing of best practices and collaboration in international projects RBI can share its experience and practices regarding XBRL implementation for the benefit of other countries, particularly developing countries India’s software proficiency can turbo-charge XBRL by participating in various committees/forums for advancing XBRL specifications, taxonomies etc. for enabling innovative use of XBRL 35

asramasastri@rbi. org. in prravimohan@rbi. org. in 36