8.2.3.3 New Business

The new business assumption accounts for both the initial outflows as well as corresponding inflows occurring due to growth in the business represented by Leg 1 and Leg 2. This assumption also accounts for both the outflows and corresponding inflows occurring due to the growth in business represented by Leg 1 and Leg 2.

The New Business assumption category supports the following assumptions:

• Deposit Balance Growth (when Based on = Cash Flows)
• Asset Book Growth (when Based on = Cash Flows)
• Liability Book Growth (when Based on = Cash Flows)
• EOP Balance Growth of Assets (when Based on = EOP Balance)
• EOP Balance Growth of Liabilities (when Based on = EOP Balance)

The change is the earlier deposit balance growth assumption is now the new business assumption. In case you select the assumption type as Deposit Balance Growth, select Based On is selected as Cash Flows under this assumption.

The following five assumptions have been merged into a single assumption and this is how you can cater to each assumption:

• Deposit Balance Growth (Based on = Cash Flows) - Deposits balance refers to the cash in hand and the deposits maintained by the bank with other institutions including the central bank. Increase in deposit balance results in an increased cash inflow in the maturing time bucket.

  Note:

  Deposits Balance Growth can either be positive or negative.
• Asset Book Growth (Based on = Cash Flows) - Asset book refers to the balances of loans and advances given by the bank. Increase in the asset balance results in an increased cash outflow in the selected time bucket and corresponding inflows in future time buckets. This assumption accounts for both the initial outflows as well as corresponding inflows occurring due to growth in the business represented by Leg 1 and Leg 2.
• Liability Book Growth (Based on = Cash Flows) - Liability Book Growth refers to the growth in the value of deposits which are maintained by the bank’s customers or borrowings that have been taken by the bank. The growth in the value of deposits results in an additional cash outflow in the maturing time bucket. This assumption also accounts for both the outflows and corresponding inflows occurring due to the growth in business represented by Leg 1 and Leg 2.
• EOP Balance Growth of Assets (Based on = EOP Balance) - EOP Asset Balance of Growth assumption estimates new businesses based on the EOP balance of assets. It accounts for both legs of the transactions, that is, inflows as well as outflows.
• EOP Balance Growth of Liabilities (Based on = EOP Balance) - EOP Liability Balance Growth assumption estimates new businesses based on the EOP balance of liabilities. It accounts for both legs of the transactions, that is, inflows and outflows.

See Defining a New Business Assumption, for information on the steps involved in specifying this assumption.

The steps involved in applying the delay in cash flow timing assumption to cash flows are as follows:

1. Identify the original time bucket and calculate the cash outflow occurring in it due to the assumption
2. Identify the corresponding revised time buckets and the cash inflow occurring in it, including penalties, if any.
3. If time specific or critical obligation, record the delay and indicate a breach.

   Various options for cash flow assignment are available. Refer section Cash Flows.

   An illustration for Asset Book Growth is as follows:

   Table 7-19 Incremental Cash Flow – New Business Example 1

   Business Assumption Definition						Cash Flow Assignment
   Product Type	Legal Entity	Primary Bucket	Off-set Bucket	Growth	Off-set value	Contractual Cash flow (Primary Bucket)	Revised Contractual Cash flow (Primary bucket)	Contractual Cash flow (Off-set Bucket)	Revised Contractual Cash flow (Off-set Bucket)
   Loans	LE1	3-3 Days	60-60 Days	15%	60%	20000	17000 [=20000-(20000*15%)]	25000	26800 [= (20000*15%*60%)+25000]
   			90-90 Days		20%			27000	27600 [=(20000*15%*20%)+27000]
   			120-120 Days		20%			32000	32600 [=(20000*15%*20%)+32000]

   Here,
   
   

   An example for Liability Book Growth is as follows:

   Table 7-20 Incremental Cash Flow – New Business Example 2

   Business Assumption Definition						Computation
   Product Type	Legal Entity	Primary Bucket	Off-set Bucket	Growth	Off-set value	Contractual Cash flow (Primary Bucket)	Revised Contractual Cash flow (Primary bucket)	Contractual Cash flow (Off-set Bucket)	Revised Contractual Cash flow (Off-set Bucket)
   Deposits	LE1	3-3 Days	4-4 Days	25%	60%	20000	25000 [= 20000+ (20000*25%)]	25000	22000 [=25000- (20000*25%*60%)]
   			5-5 Days		40%			32000	30000 [=32000- (20000*25%*40%)]

   Here,
   
   

   Note:

   1. With reference to columns titled “Cash Flow”, if the value is positive, it is a cash inflow. If the value is negative, it will be a cash outflow.
   2. ‘Contractual cash flow- Primary' and 'Contractual cash flow- Secondary' refers to cash flows which are already present in the respective buckets. Similarly, revised column represents cash flows after application of this business assumption.
   3. The cash flow signage explanation provided before holds good for both asset growth and liability growth.
   4. In case of a liability growth, i.e. deposits, a growth from the bank's perspective means that there will be an inflow of funds first (bank receives deposits from customer first) and then there will be a corresponding outflow later (Bank returns deposit proceeds on maturity to customer). The converse holds good for asset growth. Note that the first transaction bucket is always the primary bucket. In the example above on deposits, 3-3 days is defined as a primary bucket i.e. the first bucket where in this case, since it is a liability would result in an inflow in this bucket. The offset bucket will have an outflow.
   5. The growth amount (delta) in the primary buckets and the offset buckets would be the same. For example: In the example on deposits above, growth amount in primary bucket is 5000 (25% of 20000). The offset buckets have an amount of 5000 which is the sum of 3000 and 2000.