What does banking customers want?

2008 financial crisis has shattered customer’s confidence in banks. These organizations are perceived to be greedy and care for none except their profits. However, times heal all wounds. While the world moved on post financial crisis customers are slowly coming back towards banks, but with caution this time. There are several surveys conducted to understand what a banking customer wants. This write up is based on one of such survey conducted by E&Y in 2014 (EY Global Consumer Banking Survey 2014 – Winning through customer experience). This survey was conducted using 31 parameters to understand the customer behavior and his expectations. Here are highlights,

bigdata1

 

Hidden costs                 

Banks need to come out with transparency in rules and regulations related to penalty and charges.  This has been the perennial problem faced by customers. Unless a bank realizes and revises its processes and procedures, it is working towards its own peril.

More channels or touch points

Today’s banking is not just about customers walking into bank branches to transact. It’s more about Omni presence through Omni channels. Technology has come a long way and it has switched from marathon to sprint post 2008 crisis. This has thrown open several new channels for banking deviating from the traditional branch banking. It is more about virtual banking. The new channels that are open up are mobile banking, Facebook banking, e mail banking, SMS banking in addition to the internet banking. Customers are comfortable transacting via these given the security offered by the new security technologies.

Customer centric advisory and products

All this while banks have developed products following their resources and forced products on to the customers. Today’s banking customer is wise and he would want to take his own decision. Banks now need to listen to customers and devise holistic approach. As the transaction banking is out of the way and processed through the new digital channels, banks have quality time and resources to invest in quality processes and designing customer centric processes. We can take IVR channel as a case study to understand what a banking customer wants. There are several questions that can be posed as prelude to understand if your IVR system is robust enough and is there scope of improvement to understand customer’s requirement better. Some of them are, 1. Are customer service agents properly trained and understand bank’s products, 2. Are their soft skills good enough to understand customer grief, 3. Are the customer suggestion properly recorded, 4. Are there any analytics available with the bank to analyze data from customer grievances? 5. Does a bank has proper product strategy team which can devise products suited for customers.

Stable and secured systems

Banks always need to check and upgrades continuously to make sure it’s systems are stable and secured. This is after all carries regulatory and reputation risk.

While there are n number of issues that were pointed out during these surveys, the focal point for customer is “how am I treated by this bank”. Unless banks understand this, gaining confidence of customer is an uphill task.

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Margin Lending Operations

Margin lending is a kind of secured loan extended to customers by pledging financial assets such as securities, fund, bonds cash etc. There are different facilities that a bank provides to a customer under margin lending. To name a few customers can obtain term loan, credit line, cash against securities and leverage lending to by new basket of securities using the existing portfolio. From operations point of view margin loan creation and is closure through front office while contacting customer to creation of loan, middle office while determining the ratios to compute loanable amount, haircuts, margin call thresholds, etc and back office while servicing the loan and its closure. For reader’s easy understanding we will discuss the life of margin lending loan in three different phases.

marginlendingII

The three different phases in margin lending operations are,

  1. Margin Lending Loan creation phase
  2. Loan servicing Phase
  3. Loan closure phase

Margin Lending Loan creation phase

Different channels through which a customer can initiate margin lending loan application are phone banking, internet, branch and mobile banking. Once loan application is presented client boarding process is initiated along with KYC process unless he is an existing customer.  Customer onboarding process is completed once credit line facility or term loan facility accounts are also open. We have till now discussed the general account opening or onboarding process of a customer. We will now discuss the detailed process and eligibility criteria, computation of loanable amount, pledging of securities etc.,

Loan eligibility and loanable amount

The loan eligibility of customer depends on the value of collateral that a customer’s brings to the table. Collateral value is the market value of the financial assets or the portfolio that a customer has. Let us take Shantanu’s portfolio to arrive at his eligibility.

marginlendingIII

Collateral value in this case will be $ 83,543 if Shantanu agrees to pledge his entire portfolio to obtain facilities under margin lending.

If Shantanu avails credit line or tem loan, his eligibility is computed using the following formula,

marginlendingIV

*eligible criteria include haircuts if any

So $83,543 * 70% = $58,480.

In the case of leverage lending bank applies gearing ratios to collateral value or marginal value to enhance the limit three or four times allowing him to buy new securities. However, the new securities that are bought will be automatically pledged and Shantanu will be denied to sell them until he pays off the loan availed along with interest agreed. Let us see the formula for leverage lending product,

marginlendingV

Gearing ratio is the ratio of owners’ equity compared to that of borrowed funds. Gearing ratios 60% means customer need to have 60% equity against 100% debt. Let us see Shantanu’s eligibility under leverage lending by plugging in numbers in the above formula considering 60% gearing ratio.

$ 83,543 x 0.6   =  $ 125,314

(1 – 0.6)

Pledge of securities and loan disbursal

Once the Shantanu agrees with the eligibility and loanable amount and confirms to avail the loan all his securities including cash will be earmarked and loan amount is disbursed. Pledge on securities will remain until the loan amount repaid or bank forcefully sells in case customer defaults.

Loan Servicing

 Loan servicing in the home or personal or auto loans include activities such as collecting of the equated monthly installments, sending alerts customers, processing part payment as repayment is equated may for month or quarters. However, once a loan is processed with certain date as repayment there will not be any repayments in equated installments. A customer repays the loan with agreed interest rate at the end of the loan. Then why does one need to service these loans? Can I bank afford to forget and wait for customer to payback loan? Before answering these questions we need answer another question. Does the collateral value of these financial assets remain constant by end of the loan tenor? Certainly not. If so how should a bank keep watch on these assets?

 Let’s look at Shantanu’s portfolio and different asset classes. He has all his assets in cash and cash equivalents, equities and debt instruments listed on stock exchange. As long as cash and cash equivalents are concerned there will be no problem as these are not subject to market risks. But equities and debt instruments are subject to these risks and a constant watch on these instruments is unavoidable. Hence, banks have devised mark to market mechanism and certain financial ratios around this mechanism. Banks will continuously take in market data from market data vendors such as BBG, Reuter, Telekurs and keep checking the market value of the financial assets under pledge to check if the collateral value has not gone down. For instance for some reason market value of the equities in Shantanu’s portfolio goes down by 20% his entire portfolio will go down to $ 74,341 from $83,543 which puts bank at risk. Banks as part of risk management practices will use financial ratios to check health of the collateral value to the loan availed by the customer. Banks will start margin calls to the customer if the collateral value drops by certain percentage. Banks use following formula,

marginlendingVI

Banks will have thresholds when to margin calls. Pre margin call, margin call and forced sell are the three different calls banks make. Customer will have choices of pledging more cash or part pay loan or try enhancing the limit with extra collateral only in the case of first two calls. However in the last call banks have full right to sell the securities and set off with loan.

Closure of the loan

 Closure of the margin lending loan happens in two ways. One we have already discussed in the above where on the last margin call customer’s portfolio is sold and loan is squared off. Or in the normal due course customer pays off the entire loan amount, margin loan is closed and pledge is removed on all the securities.

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Have you heard about margin lending or wealth lending?

Margin Lending or Wealth Lending is relatively new term in Indian context, though one of the sub product margin trading is quite prevalent in the Indian financial instruments trading community. But, this contingent is too small when you compare with country’s population which is 1.2 billon and plus. However, margin lending is quite common in wealth clients of banks in developed markets. Margin lending is all about extending credit line to customer by pledging his/her financial assets for financial needs. Customers leverage their savings or investments to obtain a secured credit line for future investments or needs. Let us take an example, Mr. Desai runs a steel trading company in northern India and he is the sole proprietor for his company. Mr. Desai owns portfolio (basket of instruments such as equities, funds, bonds, fixed deposits etc.) worth $2 million with ABC bank. Sighting an opportunity in eastern part of India, he would want to set up a branch in Odisha around steel manufacturing plants. Usually, banks will extend loans by mortgaging fixed assets such as plant & machinery, land etc, while providing the secured loans. However, small trading companies like what Mr. Desai runs does not have fixed assets to pledge. Hence, for customers like these banks have introduced products under margin lending, which helps in leveraging customer’s financial products to obtain the credit line. Mr. Desai by pledging his portfolio worth 2$ with ABC bank and can obtain credit line may be about $1.4 million for his expansion. We will talk about how we have arrived $1.4 million in the later paragraph.

Mr. Desai example in the above paragraph talks about only one product where he obtains credit line to drawdown cash for his immediate needs. There are also other products under margin lending where in a customer is allowed to by financial products such as bonds, equities, mutual funds using the existing portfolio. Irrespective of whatever names banks call margin is lending is a loan product where in customers can obtain credit facility or line by pledging their financial assets for their financial needs.

marginlending

Now that we have done with introduction let us focus on nitty-gritties of the margin lending and answer certain questions such as what kind of customers can avail this facility, how much amount of facility will be sanctioned by banks, instruments that can be pledged etc.

To what type of customers margin lending products suit?

Usually margin lending or wealth lending products suit to private or premium banking customers who has decent or sizeable portfolio. These loan products suit to those customers who,

  1. Would want to leverage existing portfolio to create or expand their portfolio and those who believe that the rate of return on new investments will be more than cost of the loan.
  2. Would want to diversify their investments or use cash withdrawn under this facility for other business needs.
  3. Would be involving very actively in capital markets or who would trade frequently. Margin trading product suits them.

What type of instruments that are allowed to pledge to obtain facility?

All approved (by respective bank or financial institution) financial assets are allowed to be pledged to obtain the credit facility. Some of them include,

  1. Equities that are listed on a stock exchange and are liquid (frequently traded)
  2. Sovereign bonds or bonds issued by corporates which are having good credit rating
  3. Mutual Funds of repute or exchange traded funds
  4. Fixed deposits and other premium deposits
  5. Sometimes cash in CASA (Current Account and Savings Account)

Does a customer get credit facility which is equal to full value of customer portfolio?

Banks or financial institutions follow certain steps to obtain credit facility for particular customer.

Step I: Once application for credit facility is received from customer, bank computes the market value of the portfolio. As this collateral value defines the exposure of a customer and maximum loss a customer can tolerate.

Step II: Banks/financial institutions have predefined points based on the risk parameters and percentages at which each security is rated. And this will define how much of exposure can be extended to customer on that security.

Step III: Once collateral value of all the securities in portfolio is obtained, banks will arrive at collateral value of the customer portfolio.

Step IV: Usually a small haircut is applied to cover for any market shocks.

Step V: Credit facility is determined and customer is informed. Once customer agrees with this facility extended to him/her loan availed amount is disbursed after marking the pledge on customer securities.

 What if market value of customer portfolios goes below the facility extended?

If the market value of the customer portfolio goes below the credit facility granted, customer need to top up with cash or pledge more securities after banks make margin calls.

What are the benefits to customers?

  1. Increase in capital at customer’s disposal: Customers will have excess money or capital at their disposal for other investments without liquidating existing portfolio
  2. Diversify portfolio: By leveraging existing portfolio, the existing portfolio itself can be enlarged if customer feels cost of leverage is less than rate of return on extended portfolio
  3. Credit facility: Very flexible facility with liquid funds in hand

 What are the risks involved?

Though there are quite a few benefits a customer can avail, there are also certain risks he should note before availing this facility,

  1. Change in market value of customer portfolio: If for some reason market value of the customer portfolio goes down, he need to either top up with cash by pledge more securities which is burden on the customer
  2. Cost of credit facility is more than rate of return. Customer is in disadvantage if cost of availing facility is higher than the rate of return on the enhanced portfolio

Margin lending products are very good loan products as long a customer takes well informed decisions after understanding risks and benefits.

 

Disclaimer: This write up is only for academic consumption and author neither solicits not recommends availing margin lending products. Customers need to exercise their discretion in subscribing for these products.

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Basel III necessitates integrated technology landscape to comply?

Ever since Committee on Banking Supervision (BCBS) has been formed, there has been a thrust on devising scientific methodologies in making banking more robust and sustainable.  Though Basel II norms made banks capital adequate and risk averse, these norms could not prevent 2008 turmoil.  BCBS after lot of deliberations and research has come out with more hawkish regulations namely Basel III norms to pave way for resilient banking more than just risk averse banking. Basel III has increased the capital adequacy ratios to 4.5 % which mandates bank to go to street to fetch more capital. Apart from this, the liquidity ratios were also introduced will putting pressure on the quality of assets. Some of the strategies banks have adopted in complying Basel III norms are, 1. exiting specific markets or products, 2.mitigating risk, 3. changes in operations, 4. mergers & acquisitions etc. Public sector banks in India need to get into very aggressive mode to get rid of NPA (non-performing assets), which are insurmountable and unserviceable. This write up focuses only on impact to technical landscape of an organization.

To comply with Basel III, banks need to overhaul their IT infrastructure. Managements will need scientific, continuous, reliable and meaningful data to make strategic decisions. Banks cannot afford to work in silos anymore and need to integrate to provide structured data. Apart from this Risk management systems and reporting tools have gained more importance like never before. These systems need constant quality data from different systems such as core banking, trading, treasury, loans, wealth management, settlement systems etc to derive liquid, credit risk, market risk, operational risk ratios and risk weighed assets. Following are certain areas where an organization need to focus to implement Basel III norms.

  1. Quality and consistent data

The existing data models and repositories need to be revisited to make data more robust, consistent, reliable and instant. This will help risk management teams to arrive at market risk, operational risk, and liquidity risk ratios.

 2. Treasury and Liquidity

Treasury and Liquidity monitoring systems should change to include new liquidity ratios. Treasury teams need first hand and real time reporting to maintain adequate liquidity within the bank to meet the immediate requirements. Also these systems need to demarcate different liquid assets to meet up the definition given by Basel for liquid assets.

3. Loan and collateral management systems

 Collateral management systems need to change new set of guidelines to define quality of the customer collateral. Loan systems need to have enhanced customer assessment and credibility.

 4. Reporting

MIS and reporting systems need to be enhanced to include new ratios and to provide instant and real time reports to management on risk weighed assets and other risk ratios.

These regulations though are putting more pressure on revenues by increasing the capital adequacy requirements and by increasing the implementation expenditure, there is no doubt that banking as such is moving in right direction to gain more stability resilience.

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BASEL norms

Prudence only after catastrophe, proved again. The prudent Basel Committee has origins in the financial market catastrophe that was struck in 1973 when Benton Woods system failed. This system was formulated in 1944 allowing central banks to manage the exchange rates of its currencies by tying its currency price to gold available in the country. In response to this collapse central banks of G-10 countries have formed a Committee on Banking Regulations and Supervisory Practices at the end of 1974. Later renamed as Basel Committee on Banking Supervision (BCBS) with an aim for providing prudent guidelines to improve the financial stability and better supervision of banks worldwide. Since the year 1973 Basel Committee has come a long way formulating regulatory framework from Basel I norms to Basel III norms. Let’s us has a glance through the Basel Committee I and II norms before getting into the details of Basel III norms.

Basel I norms

Basel I norms have introduced Capital Adequacy ratio (CRAR) to protect customer deposits against risky assets. Prima facie these norms have covered credit risk in the case of defaults. These norms were widely accepted, which introduced greater discipline in managing the capital. However, these norms did not care about other risks that usually a bank is exposed such as market risk, operational risk, systematic risk etc., Hence there was need to further enhance regulatory framework.

Basel II norms

In addition to credit risk Basel II has included operational risk while enhancing the Basel I norms. Following are three areas that Basel II focused on,

  1. Minimum Capital requirement,
  2. Review of adequacy ratios and internal assessment processes of a bank by respective central bank, and
  3. Effective disclosure to encourage and safe and sound banking practices

Basel committee has proposed 8% as minimum CRAR and central banks can impose higher levels if they deem necessary.

Total CRAR = [Eligible Total Capital Funds]/ [Credit RWA + Market RWA + Operational RWA]

Tier I CRAR = [Eligible Tier I Capital Funds]/ [Credit RWA + Market RWA + Operational RWA]

Though as CRAR ratios go by the same formula as per Basel I, the approach towards calculating the weighted risk weighted is changed. The weights used in this calculation is more realistic and these range from 0 to 150%. A simple example is unrated loans are weighed 100% and rated loans have lesser weights. Basel II formulated more scientific approaches and methods in calculating these ratios to depict the real risk of a bank.

Basel II norms though seem to be making inroads into building strong pillars into banking system, it could not stop Lehman from collapsing and 2008 debacle. The ramifications were felt across globe as the capital of a bank is not adequate to cover the toxic assets owned by banks even after Basel II. Basel norms are still evolving to provide even more realistic and robust regulatory frame work.

 Basel III norms

BCBS published the Basel III documents “Basel III: A global regulatory framework for more resilient banks and banking systems” (a revised version was published in June 2011) and “Basel III: International framework for liquidity risk measurement, standards and Monitoring.” Major focus is on four parameters capital, Liquidity, Leverage , Funding to stregthen the resilisnce of banking. During 2007-2008 the banks leverage was 3 to 4 times higher than the capital they posses which makes a bank more vulnarable for market risk and other risks associated. Following are the saleint features of Basel III norms setting ratios against wighted assets,

A.  Capital requirements

Tiered capital to be brought upto 10.5% by 2019

  1. Tier I capital (going concern capital): 6.0%
    1. Common equity capital (Equity and retained earnings)
    2. Additional Tier I capital
  1. Tier II capital (going concern capital)
  2. Capital Conservation Buffer (to take care of future shocks if any) : 2.55%

Counter Cyclical buffer

This buffer ranges from 0 – 2.5 %. This is an additional capital requirement a central bank can impose on local banks if the credit in the country is growing is my ore than GDP.

B.  Liquidity Requirements

  1. Liquidity Coverage raio (LCR): This ratio was introudced to make sure that a bank maintains quality liquid assets that can be liquidated in 30 days in case of any eventuality. This is expected be at 100% equal to the weighted average of risk assets
  2. Net Funding Stability ratio (NFSR): It is computed by deviding “available amount of stable funding”with “required amont of stable funding”

C.  Corporate governance requirements

 Basel III provides directions towards govenance and disclsoeure norms. Some of these are,

  1. Increased cimmitment of the board members
  2. Diversification of the board
  3. Improve risk management sytthzems and process.
  4. Time to reporting to the board on risks

D.  Enhanced dislosure requirements

Basel III also  recommends enhanced dislosure requirements.

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Courtesy: http://www.bis.org/bcbs/basel3/b3summarytable.pdf

Implementation

The implementation of Basel III starts from January 2015 and will be ending by 2019 with sole objective making more resilient and foolproof banking system.

Reference:

http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Basel-III-Handbook.pdf

https://apps.aima.in/ejournal_new/articlesPDF/Dr.BindyaKohli.pdf

 

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Change your systems to implement FATCA

As an organization to comply with FATCA (Foreign Account Tax Compliance Act), there is a need to change your processes and systems. The implementation has to be completed by end of 2016 and from 1st January 2017 you need to withhold 30% of withholdable payments or pass through transactions and report to IRS. The implementation plan should have been laid down and started hitting the ground as this is already January 2015. This write up lays out a bird’s eye view on the implementation of FATCA in your organization.

Who are your stake holders?

FATCA is all about identification of US Person, US Owner, FFE or NFFE and segregate related transactions so as to withhold certain portion of withholdable gross. Though it looks quite simple going by the previous sentence, the impact is felt across processes, documentation and systems across your organization. It’s is always right to gather appropriate stakeholders before even drafting the implementation plan. Different stakeholders that are needed to be involved are,

  1. Head of Legal or Responsible Officer (as under FATCA): Every FATCA compliant organization need to appoint a Responsible officer as defined under FATCA who is a liaison officer or the one point of contact with IRS. Usually head of legal.
  2. Head of Taxation: Head of taxation is responsible for withholding the 30% of withholdable payments.
  3. Head of Operations or COO: Implantation of FATCA will change an organization and you need commitment of Chief Operating Officer as he/she is responsible to oversee the change in operations and handhold related people including front office.
  4. Head of Products: As discussed before the impact is felt across products and hence you need to take head of products into confidence.
  5. Head of Private Banking: The objective of FATCA itself sf to catch hold of the revenues that are generated in offshore accounts and usually these transactions are performed by high profile clients who are serviced by private banking customers servicing teams.
  6. Head of IT: Last but not least head of IT to oversee the implementation of FATCA related changes across systems.

What are the impacted systems?

Usually an organization running financial services will have tens of systems if not a hundred. Below is crude way of representing the functional architecture useful in implementing FATCA.

 12

Broadly, following are the list of the systems that are getting impacted and this list is not exhaustive,

  1. Corebanking application
  2. Fund systems handling mutual funds, funds of funds, exchange traded funds etc.
  3. Depository and custodian systems as these systems hold customer’s financial assets
  4. Treasury systems as these deal money market products and their derivatives
  5. CRM and customer onboarding systems to identify US persons while onboarding a customer
  6. Portfolio and customer account aggregating systems as these systems will help in accumulating customer accounts and identifying customer net worth to compute thresholds for reporting
  7. Anti-Money laundering system
  8. Analytics engine to see the number of US persons, quantum of assets compared to other customers in your organization.
  9. Payment system will have to identify US persons, participating FFIs and NFFEs. Also to identify non-participating FFIs and NFFEs
  10. Reporting systems, as they have to include new reports for management and to annually report IRS under FATCA

What are the high level requirements?

Analytics Requirements

  1. Analytics engine should be able to fetch data related to US person in the organization. This will help in evaluating whether an organization need to comply with FATCA or not. If an organization has very few US persons compared to non US person, it can as well close US person accounts.

User should be able to generate reports such as US persons, their aggregated accounts and threshold breach.

Identification requirements

  1. Customer data should have following fields for user to update,
    1. citizenship or residency in US;
    2. place of birth in US;
    3. US residency address or mailing address;
    4. US telephone number on customer’s name;
    5. Flag if he/she has given standing instructions to transfer funds to a US account;
    6. he has bestowed any power of attorney or other signatory authority to any person with a US address; or
    7. customer’s “in-care” or “hold mail” address with the US

User should be able to check US flag even if customer has one out of the above list.

  1. System should be able to identify recalcitrant account holders and be able to stop payment processing to US persons, non-participating FFIs and NFFEs.
  2. User should be able check and uncheck “Excepted flag” if there is a specific exemption letter from local government which entered IGA with US.
  3. Need participating FFI and NFFE flags in identifying organizations
  4. Need nonparticipating FFI and NFFE flag in identifying organizations

Portfolio management

  1. Portfolio management system should be able to aggregate all the accounts of a customer within the bank
  2. User should be able to see US person flag if there is one and user should not be able to modify.
  3. User should be able to generate consolidated statements of a US person

Tax Computation

  1. Tax systems should be compute the withholdable transactions and its gross.
  2. System should also be able to withhold 30% of the withholdable gross.

Payment systems

  1. Payment systems should always be connected with core banking systems and keep updated with US person flag
  2. Unless core banking allow, payment system should not trigger payment outside the organization

 Reporting

  1. User should be able to generate reports as specified under FATCA and XBRL format

What is the hard stop for FATCA implementation?

FATCA should be implemented by end of December 2016 and FATCA compliant organization should start withhold 30% of pass though payments.

Disclaimer: Above write up is author’s view on FATCA implementation after gathering information from various sources and author does not provide any consulting services.

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Comply with FATCA if you have US Person in your organization

Chapter 4 of US Revenue Code talks about FATCA Act (Foreign Account Tax Compliance Act), which was promulgated in 2010 to catch hold of US persons transacting though offshore accounts (banking or investment accounts opened outside US) and are responsible for revenue seepage. This legislation enforces compliance on almost every organization on this planet and almost every individual unless you are excepted from it. IRS (Internal Revenue Services) is the US government body which not only enforces internal revenue matters of US but also makes sure that every organization or individual comply with FATCA regulations across the globe directly or indirectly.

FFEs, NFFEs and IGAs

All non-US Foreign Financial Institutions (FFIs) and Non-Financial Financial Entities (NFFEs) should get registered with IRS and obtain GIIN (Global Intermediary Identification number). These institutions are obliged to identify US accounts and report US account holders information (holders, investors, customers) to IRS. This is direct channel through which IRS holds control information of US persons. In countries where US Government cannot have direct control it will enforce FATCA by entering into Inter Governmental Agreements (IGAs). These countries shall make amendments to their local statutes or enact new one to accommodate FATCA. There are two different models within IGAs. In model number 1, reporting to IRS happens through local governments of countries with whom US Government is able to enter into IGAs. Model number 2 is more or less similar to FFIs directly reporting to IRS as US government is not in position to enter into IGAs (Switzerland, Japan). Apart from few countries IGA1 model is more prevalent.

What are FFEs and NFFEs?

FATCA classifies organizations into FFIs and NFFEs. These organizations act as intermediate agents in identifying US persons in their origination. FFI is a non-US foreign financial institutions falling under one of the five categories,

  1. Depository institution: Institution accepting deposits in its ordinary course. These include commercial banks such as SBI, ICICI Bank, Standard Chartered, HDFC bank etc.,
  1. Custodial services: An organization performing custodial services such as holding financial assets of customers such as Kotak Mahindra, DBS, Standard Chartered, HDFC Bank, BNP Paribas etc.,
  1. Investment entities: Whose,
  1. business (50% and more) is trading in market instruments, portfolio management, or otherwise investing, administering, or managing funds, for or on behalf of a customer such as ICICI securities, Kotak Securities, IIFL etc., or
  1. gross income is primarily (at least 50%) is from investing, reinvesting or trading in financial assets, and those FFIs that manage depository institution, custodial institution, specified insurance company etc., or
  1. business is to act as a fund . The definition of fund wide and vat and engulfs every fund such as collective, mutual fund, private equity fund, hedge fund, or similar investment vehicle with an investment strategy of investing, reinvesting or tading in financial assets.
  1. Specified Insurance Companies: issues or obliged to make payments of certain cash value of insurance or annuity contracts.
  1. Holding company of a financial group

NFFE is a non-US foreign entity which is not FFI. Unless you are excepted FFI or NFFE, you are expected to keep identifying US persons in your organization and report to IRS. US persons will be termed as recalcitrant account holders and subject 30% withholding on certain transactions (which as US source as income) if not reported.

What FFE or NFFEs is expected to do?

All participating FFEs and NFFEs (FATCA complying organization are referred this way) unless excepted need to comply with FATCA. These organizations need to,

  1. Perform due diligence checks to find out US persons and US owned entities (based on different thresholds laid out) from the existing customer base and change customer onboarding processes.
  2. Annually report US account holders information to IRS in prescribed forms.
  3. Withhold 30% on the withholdable payments of US persons and as of 2017 on certain pass-through payment to recalcitrant accounts and non-participating FFIS and NFFEs
  4. Appoint a Responsible Officer (RO) who needs to make sure and certify that all documentation and reporting needs under FTACA are met.

Implementation

Implementation is spread across two and half years with various several timelines to end by 01 January 2017.

Date Implementation Schedule
31 December 2013 QI Agreement. Extended automatically only till 30 June 2014.
01 January 2014 FFI Registration with IRS
05 May 2014 Deadline to register to be on the first published FFI list of IRS.
01 July 2014

Identification of US Persons, Withholding on US source payments.

22 December 2014 FFIs resided in IGA countries are recommended to register by 22 December 2014 to obtain a GIIN
31 December 2014

Documentation of Prima Facie FFIs and high value individual account holders by December 31, 2014, and other account holders by June 2016

31 March 2015

The first reporting year is 2014. The deadline for information reporting on US accounts for FY 2014 is March 31, 2015, while for Reporting FI in IGA countries the deadline for such reporting is September 30, 2015.

01 January 2017

Withholding on foreign pass-through payments or on gross proceeds starts January 1, 2017

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