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Background
Banks in India submit a set of 222 regulatory reports at varied frequency to the Reserve Bank of India (RBI).1 These reports can broadly be classied into 12 categories:
Statutory returns analysis. Delinquency and collections. Financial statements analysis. Risk management.
Treasury. Reconciliation. Foreign exchange and international operations. Fraud. Advances. Deposits.
These reports are prepared manually by various operations teams in the banks, which increases the potential for inaccuracies in the data reported. In its approach paper on ADF dated November 2010, RBI had asked all the banks in India to automate the process of regulatory reporting. As a part of the ADF project, RBI asked banks to build a central data repository (CDR) that would act as a data warehouse for information owing in automatically from all the core systems of a bank. This automation exercise is to ensure that the information required for RBI reports ows seamlessly from all core systems to a central data warehouse and from this data warehouse into RBI reports, thereby eliminating manual intervention. Almost three years into the ADF exercise, most banks are at an advanced stage of achieving ADF compliance. This is a good time for the banks and RBI to evaluate whether ADF compliance will by itself solve the data quality issues around regulatory reporting.
ADF Approach
In its paper of November 2010, RBI suggested two approaches to the ADF project. The standard approach was for banks with little or no infrastructure for automation of regulatory returns. Such banks would adopt an end-to-end roadmap for the automation of all four layers data acquisition, data integration and storage, data conversion and data submission required for report generation and submission. The variation approach was for banks with some automation already in place. They would need to implement only some customization to the existing architecture. The RBI envisaged implementation of ADF in two phases: Phase 1 requires banks to ensure the seamless ow of data from the core systems to their MIS server. Phase 2 requires banks to begin submitting data from this MIS server (CDR) to RBI software using straight-through processing (STP) to do away with manual intervention. The RBI has advised banks to undertake a selfassessment of the maturity proles of their technology and processes and place themselves in one of six clusters (see Figure 2, next page). RBI has suggested that banks classify by complexity their 222 regulatory reports into ve categories, namely: simple, medium, complex I, complex II and others. Depending upon the cluster to which it belongs, the bank must decide the
CBS 1
Data Movement
Data Integration
Data Validation
CBS 2
Messages
Data Validation
Data Converter
Messages
Treasury
Other Systems
Bank
RBI
Figure 1
High
Cluster 3
Cluster 2
Cluster 1
Low
Cluster 6 Low
Cluster 4 High
Figure 2
timeframe for automation of a report (between six months and 24 months). Based on a preliminary study conducted by RBI on eight banks, the maximum timelines for achieving automation for different clusters of the banks for each category of reports was estimated (see Figure 3). Different banks have adopted different approaches to achieve the end state. A few banks have been able to automate some returns from their existing infrastructure/systems available while others are adopting a holistic approach and looking for third-party solutions. Banks such as Dhanlaxmi Bank, IndusInd Bank, HDFC Bank, DCB and a few others have adopted the Biz$core solution,3 developed by iCreate, as the regulatory reporting tool. Some banks such as IndusInd and Bank of Baroda are in the process of implementing an enterprise-wide data warehouse
(EDW) that can support business intelligence and analytics besides ADF requirements. Around 10 global banking and nancial services institutions have chosen the Wolters Kluwer Financial Services ADF solution to meet the regulatory requirements.4 Product vendors such as Ramco Systems5 and D2k Technologies6 have also come up with product suites built especially for ADF implementation. Our discussions with industry experts in ADF indicate that some banks have decided to enhance their core banking solutions or build their own technology platforms to meet the ADF requirements. IT enablement of ADF has been following three patterns: proprietary software, pre-built solutions and custom-built solutions.7 Proprietary software solutions are those that the banks are themselves building. Pre-built solutions are third-party product suites. Custom-built solutions require banks to enhance the capabilities of their own CBS to meet the regulatory reporting requirements.
Timelines for Achieving the End State of Automated Data Flow from Banks
Sl. No. Category of Report
Simple Medium Complex I Complex II Others
Bank Cluster 2
7-9 10-12 13-15 16-18 NA
Bank Cluster 3
7-9 13-15 16-18 19-21 NA
Bank Cluster 4
5-7 9-11 12-14 15-17 NA
Bank Cluster 5
8-10 12-14 15-17 18-20 NA
Bank Cluster 6
10-12 15-17 18-21 21-23 NA
1 2 3 4 5 Figure 3
in their effort to reduce cost and be ADF-compliant at the earliest have gone for too many customizations to the ADF product instead of enhancing the CBS. This approach does not comply completely with the regulatory reporting automation using CBS capabilities and functionalities. Lack of Initiatives to Reengineer Existing Process Ideally, banks should use the automation process as an opportunity to reengineer their existing reporting processes and identify any loopholes that lead to erroneous reporting. However, due to the complexity of the processes involved and the ADF-compliancy deadline, some banks have adopted automation without any change in the underlying as-is process. Hence, the accuracy of the post-automation data remains questionable. Too Many Assumptions The ADF has many inherent assumptions, including the following:
Minimal
operations inefciencies while doing manual data entry in the source systems. integration of the multiple source systems and the CDR for data sharing. load (ETL) procedures at pre-dened frequencies. jobs scheduling.
Seamless
Cross validation business rules across reports Timely report generation and transmission to
The success of the ADF project is dependent upon each individual function working seamlessly. A glitch in any of the functions mentioned above can lead to issues that might result in incorrect data being reported to the regulator. A recent example of this breach is the monetary ne imposed by RBI on 22 banks in India that included prominent banks such as Axis, HDFC,
ICICI, SBI, Bank of Baroda, Citibank, etc. These banks were found to have violated know your customer (KYC) and anti-money laundering (AML) guidelines. It was observed that the banks did not le cash transaction reports for some deals. Certain gold transactions done via cash beyond a prescribed limit were not reported. The source of non-resident ordinary (NRO) accounts was not ascertained in a few cases. KYC norms were not followed for walk-in customers for sale of thirdparty products, etc.9 Such incidents would have led to incorrect reporting to RBI as there are regulatory returns that require information on cash transactions, NRO accounts and liberalized remittance schemes. Clearly, the issue of incorrect reporting of information will not be resolved by automation.
By Reserve Bank of India RBI should issue clear and exhaustive guidelines on all the regulatory reports to prevent any subjective interpretation by the reporting banks. A dened communication channel and process should be established with the member banks to address any queries related to reporting. RBI should be more exible in terms of the timeframe for automation of regulatory lings based on the technology and process maturity prole of the member banks. The reporting process in the existing scenario is complex and most banks need time to smoothen this process. RBI should tighten the screws on the auditing process in banks and should impose strict penalties for banks that fail to comply with it.
Change Management Another area on which both technology and consulting rms should focus is change management. Every year, RBI comes out with revised master circulars/guidelines for the regulatory reports. Based on this, some customizations would be required in the ADF or some enhancements would be required for the CBS. Even RBI, in its approach paper on ADF, has emphasized the need for a dened change management process to manage and maintain the automated data ow architecture. Firms that have already established a relationship with banks for the ADF engagement can expect a stream of revenue from change management also. Consulting Using BPM Tools Most banks are currently at an advanced stage of automation. After the automation phase, the operations team will need a dened process workow to follow for data validation of the generated report. Consulting rms can offer their
expertise in documenting to-be processes using BPM tools for each of the 222 regulatory reports.
Conclusion
Regulatory reporting is a very useful tool for RBI to understand the nancial health of the banking sector in India. Information presented via regulatory reporting serves as a key input for certain macroeconomics decisions taken by RBI. It is therefore imperative that correct and accurate information is reported by all the member banks. The ADF project is a necessary step toward achieving the end state of accurate regulatory reporting. As highlighted in this paper, there are several challenges underlying the regulatory reporting process and the ADF project. Hence, ADF compliance alone is not sufcient and certain additional measures need to be taken by the regulator as well as participating banks to ensure that the objective of accurate regulatory reporting is achieved.
Footnotes
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http://rbidocs.rbi.org.in/rdocs/content/docs/86427.xls. http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/APSDS101110.pdf. http://www.bizscorebi.com/customers.html. http://www.wolterskluwer.com/Press/Latest-News/Pages/Press%20Releases/2012/pr13Dec2012a.aspx. http://www.ramco.com/industries/bfsi/adf-solution.aspx. http://www.d2kindia.com/left_menu_content.php?page_id=83. http://www.ciol.com/ciol/news/28572/banks-automated-ow. http://www.icreate.in/pdf/iCreate.%20Banking%20Frontiers.%20May%20Issue.pdf. http://www.thehindubusinessline.com/industry-and-economy/banking/rbi-nes-22-banks-for-violatingantimoney-laundering-norms/article4917197.ece. http://articles.economictimes.indiatimes.com/2013-07-03/news/40352228_1_new-bank-licence-userdevelopment-central-bank. http://www.rstpost.com/business/full-list-these-26-companies-have-applied-for-new-banking-licences-920031.html. http://www.business-standard.com/article/nance/rbi-s-automated-data-reporting-norms-to-create-rs500-cr-mkt-for-it-rms-111101200064_1.html.
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