Full Form of NSFR

The full form of NSFR is Net Stable Funding Ratio. It is one of the crucial elements of Basel III reforms. The working guidelines of NSFR ensure a deduction in funding risk. It requires banks to fund their activities with sufficient stable sources of funding. This will ultimately help to reduce the risk of future funding stress.

In the times of the global financial crisis that started in 2007. Net Stable Funding Ratio (NSFR) for funding liquidity was prescribed by the Basel Committee on Banking Supervision (BCBS). The main objective was to strengthen global capital and liquidity regulations and promote a more resilient banking sector.

The NSFR promotes resilience over a longer-term time horizon by requiring banks to fund their projects with more stable sources of funding on an ongoing basis. The Basel Committee in December 2010 document reviewed the standard and its implications for financial markets and reviewed the development of the NSFR over an observation period.

The aim of this assessment was to eliminate any unintended consequences for financial market functioning and the economy. On improving its design with respect to several key factors, particularly:

•  the impact on retail business activities;
•  the treatment of short-term funding of assets and liabilities; and 
•  Search for sub-one-year buckets for both assets and liabilities.

Definition of NSFR

The NSFR is defined as the ratio of available stable funding relative to the amount of required stable funding. The portion of capital and liabilities expected to be reliable over is called “Available stable funding” (ASF) 

the time period estimated by the NSFR, which stretches to one year. 

The amount of stable funding required (Required stable funding or RSF) of a specific institution is a parameter of the liquidity characteristics and residual maturities of the numerous assets held by the institution as well as of its off-balance sheet (OBS).

(Available stable funds (ASF)) / (Required stable funds (RSF)) 100%

The above ratio should be equal to at least 100% on a current basis. However, the NSFR will provide a supervisory assessment of the stable funding and liquidity risk profile of a bank. 

On the basis of such an assessment. The Reserve Bank may require an individual bank to adopt more stringent standards to reflect its funding risk profile and its compliance. The NSFR would be binding on banks with effect from a date that will be released in the future.

Objective of NSFR

The objective of NSFR is to protect banks and help them maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. 

A sustainable funding structure will help in reducing the probability of erosion of a bank’s liquidity position due to disruptions in a bank’s regular sources of funding that would increase the risk of its failure and potentially lead to extensive systemic stress. 

The NSFR limits overreliance on short-term wholesale funding. It incentivises better assessment of funding risk across all on- and off-balance sheet ideas, and encourage funding stability.

The NSFR would be applicable for Indian banks at the solitary as well as confined level. For foreign banks operating as branches in India, the framework would be relevant on stand-alone basis (i.e., for Indian operations only).

Work Operation of NSFR

Banks will be publishing the NSFRs according to a common template to promote the consistency, enhance discipline and usability of disclosures related to the NSFR. The consolidation basis helps calculate the NSFR and present it in the Indian rupee. Banks must upload their acknowledgement along with the publication of their financial statements.

Banks must either include the disclosures required for this document in their published financial reports or, at a minimum, provide a direct and accessible link to the complete disclosure on their websites or in publicly available regulatory reports.

Banks must also be available on the websites, or via publicly available regulatory reports, an archive of all templates relating to prior reporting periods. The minimum disclosure requirements of this document must be in the format, irrespective of the location of the disclosure.

We present data as a quarter-end observation. For banks reporting on a semi-annual basis, each of the two preceding quarters must report the NSFR. For banks reporting on an annual basis, the preceding four quarters must report to the NSFR. 

Both unweighted and weighted values of the NSFR documents must be disclosed. Weighted values are calculated as the values after ASF or RSF are estimated.

In addition as per the prescribed common template, banks must facilitate a sufficient qualitative discussion around the NSFR to ease an understanding of the results and the including data. For example, with significance to the NSFR, banks could discuss the process of their NSFR results and the reasons for intra-period changes as well as the changes over time.

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