INSTRUCTION No. 002/2023-CSBF on the Liquidity Ratios of Banks and Financial Institutions

BANKY FOIBEN'I MADAGASIKARA COMMISSION DE SUPERVISION BANCAIRE ET FINANCIERE

INSTRUCTION N° 002/2023-CSBF ON THE LIQUIDITY RATIOS OF BANKS AND FINANCIAL INSTITUTIONS

The Banking and Financial Supervision Commission (CSBF), Having regard to Law No. 2020-011 of September 1, 2020 on banking law, Having regard to Instruction No. 002/2022-CSBF of December 20, 2022 on the regulatory capital of credit institutions, Having regard to Instruction No. 003/2022-CSBF of December 20, 2022 on the capital requirements of credit institutions, Having regard to the opinion formulated by the Professional Association of Banks (APB) and financial institutions,

DECIDES

Section 1. General Provisions

Article 1: Purpose This instruction aims to establish the provisions regarding the liquidity ratios applicable to banks and financial institutions, namely:

• a short-term liquidity ratio (LCR) defined in Section 2 of this instruction;
• a long-term liquidity ratio (NSFR) defined in Section 3 of this instruction.

Article 2: Definitions For the purposes of this instruction, the following terms shall mean:

• banking service provider: any credit institution and other banking service provider referred to in Title III of the banking law;
• other banking service provider: any entity referred to in Article 23 of the banking law;
• insurance service provider: any entity referred to in Article 192 of Law No. 2020-005 of September 1, 2020 on insurance;
• credit institution, abbreviated as CI: any entity referred to in Article 14 of the banking law;
• other financial institution: any Malagasy financial entity other than Banky Foiben'i Madagasikara (BFM), the Public Treasury, banking service providers, and insurance service providers;
• available asset or holding: any asset usable as-is for payments, such as cash, coins, demand bank accounts;
• operational deposit: any sum deposited with a bank to more easily access payment and settlement systems and, more generally, to make payments;
• available stable funding: portion of equity and liabilities expected to be stable over one year;
• required stable funding: stable funding needs over one year, assessed by applying weights determined based on the degree of liquidity and remaining maturity of given on-balance sheet assets and off-balance sheet commitments;
• regulatory capital: equity as defined by the aforementioned Instruction No. 002/2022-CSBF;
• days: calendar days;
• significant currency: currency representing at least 5% of the bank's or financial institution's liabilities;
• micro-enterprise: any enterprise employing fewer than 5 employees and having a total balance sheet of less than 60 million Ariary;
• small and medium-sized enterprise (SME): any enterprise employing between 5 and 100 employees and having a total balance sheet between 60 and 600 million Ariary.

Section 2 – Short-term Liquidity Ratio

Article 3: Calculation of the Short-term Liquidity Ratio Banks and financial institutions must at all times maintain a short-term liquidity ratio (LCR) of 100%, represented by the ratio between their high-quality liquid assets (HQLA) and expected net cash outflows over the next 30 days, under a liquidity stress scenario. The LCR is calculated according to the following formula:

LCR =	High-quality liquid assets	≥ 100 %
	Net cash outflows over 30 days

The LCR does not apply to intra-day transactions.

Sub-section 2.1. High-quality liquid assets

Article 4: Characteristics of high-quality liquid assets 4.1. High-quality liquid assets (HQLA) consist of assets that remain liquid during periods of liquidity stress. These are available assets and other assets that can be easily and immediately converted into available cash without losing, or losing very little, their value, to cover the liquidity needs of a credit institution, in the event of a crisis lasting 30 days. 4.2. Securities eligible for HQLA are solely securities from well-rated issuers and are tradable on organized, active, and deep markets, where conversion to liquidity can be done through outright sale or repurchase agreements. Tradable securities are valued at their market value. 4.3. The assets in question must be free from any legal, regulatory, or contractual encumbrance that would hinder their free disposal by the holding institution. Security deposits held with foreign correspondents for documentary credit operations are excluded from HQLA.

Article 5: Composition of high-quality liquid assets 5.1. HQLA are composed of the following elements, weighted at 100%:

• cash and coins in vault;
• credit balance of the current account opened on BFM's books;
• overnight loans and placements at BFM;
• securities mobilizable at BFM issued by the Malagasy State;
• available balances at foreign correspondents rated AA- or higher in their jurisdiction;
• negotiable debt securities from foreign sovereign and quasi-sovereign issuers subject to a 0% weight for capital requirement calculations, as set by the aforementioned Instruction No. 003/2022-CSBF. 5.2. The following elements may also be included in HQLA within the following limits:
• available balances at foreign correspondents rated between A+ and BBB- in their jurisdiction, or classified in the A tranche for capital requirement calculations, if unrated, admissible up to 80% of their amount;
• negotiable debt securities from foreign sovereign and quasi-sovereign issuers, admissible up to 80% of their value if the issuer's rating is A- or higher, and up to 50% if the rating is between BBB+ and BBB-. 5.3. Updated external ratings justifying the inclusion of HQLA elements must be provided to the CSBF General Secretariat with each monthly report.

Sub-section 2.2. Net cash outflows

Article 6: Calculation of net cash outflows Net cash outflows are calculated as the difference between expected cash outflows defined in Article 7 of this instruction and expected cash inflows during the following 30 days defined in Article 8 of this instruction.

The total amount of expected cash inflows taken into account in the calculation of net cash outflows is limited to 75% of the total expected cash outflows, applying the following formula:

Net cash outflows = expected cash outflows – expected cash inflows limited to 75% of expected cash outflows

Article 7: Expected cash outflows Expected cash outflows are anticipated withdrawals or disbursements of funds over a 30-day horizon under a liquidity stress scenario. They are calculated by multiplying the balances of different types or categories of liabilities and off-balance sheet commitments by their presumed withdrawal or disbursement rates. They include the following elements with their respective weights: 7.1. Interbank resources on demand or with a remaining maturity of 30 days or less:

• BFM: 100%;
• Other central banks and multilateral development banks: 40%;
• Credit institutions: 100%;
• Other banking service providers: 40%;
• Insurance service providers: 25%; 7.2. Customer deposits:
• Demand deposits, term deposits, treasury bills, and other sums due to customers with a remaining maturity of 30 days or less:
  • State, Public Treasury, and other administrative public bodies: 40%;
  • Individuals, micro-enterprises, SMEs: 10%;
  • Other enterprises: 40%;
  • Others (other private law legal entities, ...): 15%;
  • Operational deposits from electronic payment institutions and other banking service providers: 25%;
• Special regime savings accounts: 0%;
• Customer security deposits with a remaining maturity of 30 days or less:
  • Security deposits covering documentary credit operations provisioned with foreign correspondents: 0%;
  • Security deposits covering documentary credit operations unprovisioned with foreign correspondents: 50%;
  • Other security deposits: 50%; 7.3. Collection accounts to be credited to customers within 30 days: 20%; 7.4. For banks issuing electronic money, balances of customers' electronic money accounts: 100%; 7.5. Payments due within 30 days related to the following liabilities, weighted at 100%:
• Sums to be repaid on public and private earmarked fund operations;
• Net credit balances of branch and agency accounts;
• Other creditors;
• Credit entries to be reconciled;
• Payments to be made on unpaid securities;
• Subordinated loans and securities; 7.6. Confirmed but undrawn credit or liquidity facilities granted to:
• Individuals, micro-enterprises, and SMEs: 5%;
• Enterprises, excluding micro-enterprises and SMEs: 15%;
• Other private law legal entities: 10%;
• States, central banks, multilateral development banks, and public bodies: 10%;
• Banking service providers: 40%;
• Insurance service providers: 10%;
• Other financial institutions and other banking service providers: 10%; 7.7. Other conditional financing commitments (guarantees, letters of credit, revocable credit and liquidity facilities, etc.): 5%; 7.8. Payables due within 30 days, to be taken into account according to the rate applicable to the relevant resource.

Article 8: Expected cash inflows 8.1. Expected cash inflows are available liquidity and anticipated collections on other assets, both over a 30-day horizon, excluding elements admitted in HQLA. Only perfectly performing exposures are taken into account, for which there is no reason to fear a payment default within the 30-day period, except for financing contracts containing a tacit renewal clause. Expected inflows are calculated by multiplying the balances of different asset categories by their presumed availability or collection rates in the considered scenario. 8.2. Expected cash inflows include the following elements, taken into account according to the 30-day horizon collection assumptions indicated:

• Contractual cash inflows due within 30 days weighted at 100%:
  • Loans, demand deposits, and term deposits at banking service providers approved by the CSBF;
  • Term deposits at BFM;
  • Placements and loans at foreign correspondents rated BB- or higher in their jurisdiction, subject to transmission of their updated external rating to the CSBF General Secretariat at the end of each month;
  • Loans to (or claims on) insurance service providers and other financial institutions not governed by the banking law;
  • Receivables from banking service providers;
  • Claims on various debtors;
  • Collection accounts to be collected;
  • Maturities on investment securities to be collected;
  • Maturities on subordinated loans to be collected;
• Operational deposits held at banking service providers: 0%;
• Global accounts opened at other banks, for banks issuing electronic money: 100%;
• Repayments of performing loans, in principal and interest, from customers receivable within 30 days:
  • Overdrafts: 20%;
  • Loans and other receivables due: 50%;
• Sums receivable within 30 days from public and private earmarked fund operations: 100%;
• Confirmed financing commitments received from parent companies: 40%.

Section 3 – Long-term Liquidity Ratio

Article 9: Calculation of the long-term liquidity ratio Banks and financial institutions must at all times maintain a long-term liquidity ratio (NSFR) of at least 100%, represented by the ratio between their available stable funding and required stable funding, according to the following formula:

NSFR =	Available stable funding	≥ 100 %
	Required stable funding

Article 10: Available stable funding 10.1. Available stable funding (ASF) consists of the following elements, weighted by their respective coefficients below:

• ASF at a coefficient of 100%
  • Regulatory capital;
  • All liabilities with an effective remaining maturity of one year or more and not subject to early repayment before one year, under contractual commitments:
    • call money loans;
    • deposits of any kind except special regime savings accounts;
    • public and private earmarked fund operations;
    • other creditors;
    • deferred income and expenses;
    • guarantee funds;
    • subordinated loans and securities not included in regulatory capital;
    • provisions for charges;
    • other capital elements not included in regulatory capital.
• ASF at a coefficient of 90%
  • Demand deposits, term deposits, and treasury bills with a remaining maturity of less than 1 year, held by individual customers, micro-enterprises, and SMEs;
  • Special regime savings accounts;
• ASF at a coefficient of 50%
  • Demand deposits, term deposits, and treasury bills with a remaining maturity of less than 1 year, held by the following entities:
    • State and other Malagasy administrative public bodies;
    • multilateral and national development banks;
    • bilateral or private public development aid agencies;
    • other financial institutions;
    • enterprises excluding micro-enterprises and SMEs;
    • others (other private law legal entities such as NGOs, associations, diplomatic representations, ...);
  • Other financings with a remaining maturity between 6 months and 1 year, not included in the above categories, including financings provided by central banks and banking service providers;
  • Liabilities with a remaining maturity of one year or more subject to early repayment under contractual commitments; 10.2. All liability elements with a remaining maturity of less than one year, other than those mentioned above, are excluded from the calculation of available stable funding, unless otherwise agreed by the CSBF General Secretariat.

Article 11: Required stable funding 11.1. Required stable funding (RSF) consists of the following elements, weighted by the coefficients below:

• RSF at a coefficient of 100%
  • Fixed assets excluding establishment costs and intangible fixed assets deducted from equity;
  • Loans and placements of any nature to credit institutions, other financial institutions, and customers, with a remaining maturity of one year or more;
  • Fixed claims;
  • Litigious, doubtful, or contentious claims net of provisions;
  • Public and private earmarked fund operations with a remaining maturity of one year or more;
  • Claims on various debtors with a remaining maturity of one year or more;
  • Trading securities in the form of sovereign and quasi-sovereign issuer securities rated 6 or 7 under the OECD Export Credit Arrangement or non-negotiable, with a remaining maturity of more than 1 year;
  • Trading securities in the form of non-negotiable debt securities from issuers other than sovereign and quasi-sovereign, with a remaining maturity of one year or more;
  • Trading securities in the form of negotiable securities from issuers other than sovereign and quasi-sovereign, rated below BBB-;
  • Trading securities in the form of unlisted shares on organized, active, and liquid markets;
  • Investment securities in the form of debt securities with a remaining maturity of one year or more;
  • Investment securities in the form of equity instruments;
  • Subordinated loans with a remaining maturity of one year or more;
• RSF at a coefficient of 50%
  • Operational deposits held at banking service providers;
  • Trading securities in the form of negotiable securities from sovereign and quasi-sovereign issuers rated 4 or 5 under the OECD Export Credit Arrangement;
  • Trading securities in the form of non-negotiable debt securities from issuers other than sovereign and quasi-sovereign, with a remaining maturity of less than 1 year;
  • Trading securities in the form of negotiable securities from issuers other than sovereign and quasi-sovereign, rated between BBB+ and BBB-;
• RSF at a coefficient of 25%
  • Customer credit in the form of overdrafts;
• RSF at a coefficient of 15%
  • Loans and placements of any nature to credit institutions, other financial institutions, and customers, with a remaining maturity of less than 1 year;
  • Share of more than one year in credit repayment guarantees distributed by other institutions;
• RSF at a coefficient of 5%
  • Undrawn portion of irrevocable or conditional revocable credit lines. 11.2. Updated external ratings justifying the inclusion of RSF elements must be provided to the CSBF General Secretariat with each quarterly report. 11.3. All assets other than those mentioned above are excluded from the calculation of required stable funding. However, the CSBF General Secretariat may request the inclusion of certain asset elements due to their actual characteristics.

Section 4 – Liquidity Risk Monitoring

Article 12: Liquidity monitoring tools 12.1. Banks and financial institutions are required to monitor their liquidity using the following tools:

• contractual assets and liabilities maturity ladder;
• monitoring statement of deposit concentration and other liabilities;
• monitoring statement of the short-term liquidity ratio (LCR) by significant currency. 12.2. The contractual assets and liabilities maturity ladder allocates assets, liabilities, and off-balance sheet commitments by time bucket, based on their remaining maturity and assuming non-renewal, according to their contractual maturities, and determines the gaps between forecasted inflows and outflows, according to the model defined by circular of the CSBF President. 12.3. The monitoring statement of deposit concentration and other liabilities records the total amount of resources originating from the same client or a group of related counterparties representing 1% or more of the institution's total liabilities. 12.4. The monitoring statement of the short-term liquidity ratio (LCR) by significant currency is prepared according to the rules defined in Section 2 of this instruction.

Section 5 - Reporting Obligations

Article 13: Periodic declarations 13.1. Banks and financial institutions shall submit a monthly declaration of the short-term liquidity ratio (LCR) within the first fifteen days of the month in question. 13.2. Banks and financial institutions shall submit a quarterly declaration of the long-term liquidity ratio (NSFR) within the first fifteen days following the quarter in question. 13.3. The following statements shall be attached to quarterly declarations:

• contractual assets and liabilities maturity ladder,
• resource concentration statement,
• LCR calculation statement by significant currency. 13.4. The reporting statements are defined by circular signed by the CSBF President.

Article 14: Additional requirements The CSBF General Secretariat may at any time request a bank or financial institution to submit a declaration of the short-term and/or long-term liquidity ratio, calculated at a specific date and within a timeframe set by it. The CSBF may request a bank or financial institution to maintain a liquidity ratio level higher than the minimum standard, based on its risk profile.

Section 6 – Final Provisions

Article 15: Corrective measures and sanctions In the event of a breach of the provisions of this instruction, the institution in question shall, without prejudice to a CSBF injunction within a deadline that may be set, take appropriate measures to regularize its situation, notably the production of a recovery plan, and submit them to the CSBF General Secretariat. Failing regularization of the situation, the CSBF may impose one or more disciplinary sanctions and/or pecuniary sanctions provided for by the banking law.

Article 16: Transitional provisions The liquidity ratio requirements shall be implemented progressively as follows, for banks and financial institutions: 16.1. Required level of the short-term liquidity ratio (LCR):

• on June 1, 2024: ≥ 75%;
• on January 1, 2025: ≥ 85%;
• on June 1, 2025: ≥ 100%. 16.2. Required level of the long-term liquidity ratio (NSFR):
• on June 1, 2024: ≥ 75%;
• on January 1, 2025: ≥ 85%;
• on June 1, 2025: ≥ 100%.

Article 17: Entry into force This instruction shall enter into force upon its notification to the Professional Association of Banks and financial institutions and its publication on the Banky Foiben'i Madagasikara website.

Done in Antananarivo, on OCT 23, 2023

For the Commission, THE PRESIDENT Aivo H. ANDRIANARIVELO