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Management of Deposit Insurance Fund : Indian Experience.

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Presentation on theme: "Management of Deposit Insurance Fund : Indian Experience."— Presentation transcript:

1 Management of Deposit Insurance Fund : Indian Experience

2 IADI ARC Meeting and International Conference, Goa, India : January, About DICGC Funds 2. Adequacy 3. Management 4. Governance 5. Taxation 6.Conclusion Indian Experience

3 IADI ARC Meeting and International Conference, Goa, India : January, 2010 Snapshot - As on 30 September 2009 Fund (Actuarial Liability) Surplus Total Insurable Deposits 40, Insured Deposits 22, Fund / Reserve Ratio 0.78 % INR Billion U$D Billion No. of Insured BanksNo. of Deposit A/CsA/Cs fully Protected 2,287 (Commercial Coops billion 1.20 billion U$D 1= INR 47

4 IADI ARC Meeting and International Conference, Goa, India : January, 2010 A Single DI Fund – Advance Flat Rate A Single DI Fund – Advance Flat Rate Covers liquidation, amalgamations, reconstructions, compromise schemes Covers liquidation, amalgamations, reconstructions, compromise schemes Explicit back-stop for DIF is insignificant Explicit back-stop for DIF is insignificant Actuarially determined liability sequestered as a part of DIF Actuarially determined liability sequestered as a part of DIF No dividend pay-out / operating expenditure charges No dividend pay-out / operating expenditure charges In case of liquidation of DICGC – In case of liquidation of DICGC – DIF Assets: To insured banks in proportion of premium paid Other Assets: To Reserve Bank of India DICGC Deposit Insurance Fund Credit Guarantee Fund General Fund Three Balance Sheets

5 IADI ARC Meeting and International Conference, Goa, India : January, 2010 SourceApplication 1.By Premium (including interest / penalty for delayed remittance) 1. To Settlement of Insured Deposit Claims 2. By Investment Earnings 3. By Share in Recovery by Liquidators 4. By Transfer from Credit Guarantee Fund2. 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 Billion.

6 IADI ARC Meeting and International Conference, Goa, India : January, 2010 INR Billion

7 IADI ARC Meeting and International Conference, Goa, India : January, 2010 Consolidated for 10 years period to ( in INR Billions ) To Net Income Tax To Investment Depreciations

8 IADI ARC Meeting and International Conference, Goa, India : January, 2010 DI Fund Assessment Deposits understated ? Claims submitted by liquidators not overstated ? Is recovery and its sharing with DICGC just ?  Direct and Indirect Tools  Tackled Being Tackled Since 1962 INR Billion 41 % 8 % 11 % Comm. Coop All

9 IADI ARC Meeting and International Conference, Goa, India : January, 2010 No Hard / Soft Target Reserve Ratio Prescribed Denominator Bias Free Surpluses are the major component The capital not counted – available in case of need. Actuarial Liability counted as part of Reserve YearCapital ( 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 Insured Deposit Ratio : Back Testing for Coop Banks % Standard Deviation of 12.41

10 IADI ARC Meeting and International Conference, Goa, India : January, 2010 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. (INR Billions) Actuarial Fund Back Testing

11 IADI ARC Meeting and International Conference, Goa, India : January, 2010 Fund Size (INR billion) Fund Ratio (Percent)

12 IADI ARC Meeting and International Conference, Goa, India : January, 2010 Historical Mortality Risk Too Big To Save ?Residual ‘tail’ risk well-covered

13 IADI ARC Meeting and International Conference, Goa, India : January, 2010 CAGR % Deposits Growth Fund Viability

14 IADI ARC Meeting and International Conference, Goa, India : January, 2010 A Member of Financial Stability Unit (FSU) set up by RBI Increased Bank Failures Increased Cover Premium Hike Tax Exemption Recapitalization by RBI

15 IADI ARC Meeting and International Conference, Goa, India : January, 2010 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) % % % % %

16 IADI ARC Meeting and International Conference, Goa, India : January, 2010 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 Liability Driven Investments (LDI)

17 IADI ARC Meeting and International Conference, Goa, India : January, 2010 Purpose / Scope of Policy Investment Objectives Investment Processes Investment Accounting / Valuation Reporting and Reviewing Authorized Investments Investment Committee Delegation of Authority Standard of Prudence Portfolio Strategies Counterparties Dealing through Brokers ONLY CENTRAL GOVT SECURITIES

18 IADI ARC Meeting and International Conference, Goa, India : January, 2010 C. Maximization of Returns A. Managing Deposit Insurance 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

19 IADI ARC Meeting and International Conference, Goa, India : January, 2010 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-balancing Main 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

20 IADI ARC Meeting and International Conference, Goa, India : January, 2010 All Index of Clearing Corporation of India (CCIL) %

21 IADI ARC Meeting and International Conference, Goa, India : January, 2010 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

22 IADI ARC Meeting and International Conference, Goa, India : January, 2010 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

23 IADI ARC Meeting and International Conference, Goa, India : January, 2010 INR Billions

24 IADI ARC Meeting and International Conference, Goa, India : January, 2010 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 Flexing Fund Muscle in the Market - Risks Market Signaling Depositors Perception Shallow G-Sec Market Book profit vs. Return

25 IADI ARC Meeting and International Conference, Goa, India : January, 2010 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

26 IADI ARC Meeting and International Conference, Goa, India : January, 2010 YearGross DI ClaimsTax Liabilities provided for Total INR Billions 0.05 % 0.10%

27 IADI ARC Meeting and International Conference, Goa, India : January, 2010 public policy objectives and mandate Changed financial systems dynamics -revisit of the public policy objectives and mandate for effective DI funding in India. Weak recoveries Weak recoveries with category-wise, region-wise skewedness do not align with core principles and is a major bane to fund recycling. Reserve Ratio Reserve Ratio : A necessary but not sufficient measure of DIF adequacy. Both numerator and denominator warrant more country-specific ‘culturing’. Inadequacy Mitigation Inadequacy Mitigation - Favourable Credit Deposit (CD) Ratio, good Capital Adequacy, High Provision Coverage Ratio (PCR) etc. In Indian banking system Litmus Tests 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. loss distribution Framework for India specific denominator option based on loss distribution is still in search of a model in view of heterogeneity in Indian Banking.

28 IADI ARC Meeting and International Conference, Goa, India : January, 2010 banking consolidation The banking consolidation buzz should reckon de-‘tailed’ ’ loss distribution for DIF. Deposit Insurer’s investments Fund Management still treated as a non-core DI function. Deposit Insurer’s investments need evolution as a body of specialized knowledge. Holding Period Return 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. tax management tax efficient Co-ordination of pay-box with bank supervisors key to LDI and better tax management. Categorization of investments should be tax efficient. tax-exempted premium 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’.

29 IADI ARC Meeting and International Conference, Goa, India : January,


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