BASEL III CAPITAL REGLULATIONS

Introduction:
The main objective of the Basel III framework issued by the Basel Committee on
Banking Supervision (BCBS) in ec! "#$# is to improve the banking sector%s ability to
absorb shocks arising from financial and economic stress& whatever the source& thus
reducing the risk of spillover from financial sector to real economy! The reform package
will amend certain provisions e'isting under Basel (( framework ()C*+) and introduce
some new concepts and re,uirements! These new global regulatory and supervisory
standards mainly seek to raise the ,uality and level of capital to ensure banks are better
able to absorb losses on both a going concern and a gone concern basis& increase the
risk coverage of the capital framework& introduce leverage ratio to serve as a backstop
to the risk-based capital measure& raise the standards for the supervisory review
process and public disclosures etc! The macro prudential aspects of Basel ((( are largely
enshrined in the capital buffers! Both the buffers i!e! the capital conservation buffer and
the countercyclical buffer are intended to protect the banking sector from periods of
e'cess credit growth!
A. Guidelines on Minimum Capital Reuirement
The Basel ((( capital regulations continue to be based on three-mutually reinforcing
.illars& vi/! minimum capital re,uirements (.illar $)& supervisory review of capital
ade,uacy (.illar ")& and market discipline (.illar 0) of the Basel (( capital ade,uacy
framework! 1nder .illar $& the Basel ((( framework will continue to offer the three distinct
options for computing capital re,uirement for credit risk and three other options for
computing capital re,uirement for operational risk& albeit with certain modifications 2
enhancements! These options for credit and operational risks are based on increasing
risk sensitivity and allow banks to select an approach that is most appropriate to the
stage of development of bank3s operations! The options available for computing capital
for credit risk are:-
a) Standardised *pproach&
b) +oundation (nternal 4ating Based *pproach5 and
c) *dvanced (nternal 4ating Based *pproach!
The options available for computing capital for operational risk are:-
a) Basic (ndicator *pproach (B(*)&
b) The Standardised *pproach (TS*)5 and
c) *dvanced 6easurement *pproach (*6*)!
7eeping in view the 4eserve Bank%s goal to have consistency and harmony with
international standards& as also capital efficiency likely to accrue to the banks by
adoption of the advanced approaches& a time schedule was laid down in "##8 that all
commercial banks in (ndia (e'cluding 9ocal *rea Banks and 4egional 4ural Banks) may
switch over to (nternal 4ating Based *pproach (Both +oundation as well as *dvanced
(nternal 4ating Based *pproach) for credit risk and *dvanced 6easurement *pproach
for operational risk by 0$!#0!"#$:! *ccordingly& banks were advised to undertake an
internal assessment of their preparedness for migration to advanced approaches and
take a decision with the approval of their Boards24B(& whether they would like to migrate
to any of the advanced approaches! Banks may choose a suitable date to apply for
implementation of advanced approach!
The provisions of Basel ((( include:-
a) The Basel ((( capital regulation has been implemented from *pril $& "#$0 in (ndia
in phases!
b) To ensure smooth transition to Basel (((& appropriate transitional arrangements
have been provided for meeting the minimum Basel ((( capital ratios& full
regulatory adjustments to the components of capital etc! Conse,uently& Basel (((
capital regulations would be fully implemented as on 6arch 0$& "#$;!
c) Banks are re,uired to maintain a minimum .illar $ Capital to 4isk-weighted
*ssets 4atio (C4*4) of 8< on an on-going basis (other than capital
conservation buffer and Countercyclical capital buffer etc!)!
d) Capital re,uirements for the implementation of Basel ((( guidelines are lower in
the initial periods and higher in later years!
e) Banks are re,uired to disclose the capital ratios computed under Basel ((( capital
ade,uacy framework from the ,uarter ending 0#!#=!"#$0!
f) The 4B( may consider prescribing a higher level of minimum capital ratio for
each bank under .illar " framework on the basis of their respective risk profiles
and their risk management systems!
g) Banks are re,uired to comply with the capital ade,uacy ratio at two levels vi/!
consolidated (>roup) and standalone (Solo) level! *t consolidated level& the
capital ade,uacy ratio re,uirements of a bank measure the capital ade,uacy of a
bank based on its capital strength and risk profile after consolidating the assets
and liabilities of its subsidiaries2joint ventures2associates& etc! e'cept those
engaged in insurance and any non-financial activities! The standalone level
capital ade,uacy ratio re,uirements measure the capital ade,uacy of a bank
based on its standalone capital strength and risk profile! The overseas
operations of a bank through its branches will be covered in both the above
scenarios! +or the purpose of these guidelines& the subsidiary is an enterprise
that is controlled by another enterprise (known as the parent)& etc!
1nder the Basel (( framework& the total regulatory capital comprises of Tier ( (core
capital) and Tier " capital (supplementary capital)! (n order to improve the ,uality and
,uality of regulatory capital& capital will predominantly consist of Common ?,uity under
Basel (((! )on-e,uity Tier $ and Tier " capital would continue to form part of regulatory
capital subject to eligibility criteria as laid down in Basel (((! Banks have to comply with
the regulatory limits and minima as prescribed under Basel ((( capital regulations& on an
ongoing basis! To ensure smooth transition to Basel (((& appropriate transitional
arrangements have been provided for meeting the minimum Basel ((( capital ratios& full
regulatory adjustments to the components of capital etc! Conse,uently& Basel ((( capital
regulations would be fully implemented as on 6arch 0$& "#$;! (n view of the gradual
phase-in of regulatory adjustments to the Common ?,uity component of Tier $ capital
under Basel (((& certain specific prescriptions of Basel (( capital ade,uacy framework
(e!g! rules relating to deductions from regulatory capital& risk weighting of investments in
other financial entities etc!) will also continue to apply till 6arch 0$& "#$@!
Composi tion of Regulatory Capital
1nder Basel (((& Banks are re,uired to maintain a minimum .illar $ Capital to 4isk-
weighted *ssets 4atio (C4*4) of 8< on an on-going basis (other than capital
conservation buffer and countercyclical capital buffer etc!)! The 4B( will take into
account the relevant risk factors and the internal capital ade,uacy assessments of each
bank to ensure that the capital held by a bank is commensurate with the bank%s overall
risk profile! This would include& among others& the effectiveness of the bank%s risk
management systems in identifying& assessing 2 measuring& monitoring and managing
various risks including interest rate risk in the banking book& li,uidity risk& concentration
risk and residual risk! *ccordingly& 4B( will consider prescribing a higher level of
minimum capital ratio for each bank under the .illar " framework on the basis of their
respective risk profiles and their risk management systems! +urther& in terms of the
.illar " re,uirements& banks are e'pected to operate at a level well above the minimum
re,uirement!
The total regulatory capital fund will consist of the sum of the following categories:-
(i) Tier $ Capital (going-concern capitalA): comprises of:-
(a) Common ?,uity Tier $ capital
(b) *dditional Tier $ capital
(ii) Tier " Capital (gone-concern capitalA)
(A+rom regulatory capital perspective& going-concern capital is the capital which can
absorb losses without triggering bankruptcy of the bank! >one-concern capital is the
capital which will absorb losses only in a situation of li,uidation of the bank)!
Banks are re,uired to compute the Basel ((( capital ratios in the following manner:-
Common ?,uity Tier $
Capital 4atio
Common ?,uity Tier $ Capital
Credit 4isk 4B*A C 6arket 4isk 4B* C Dperational
4isk 4B*
Tier $ Capital 4atio ?ligible Tier $ Capital
Credit 4isk 4B*A C 6arket 4isk 4B* C Dperational
4isk 4B*
Total Capital (C4*4E) ?ligible Total Capital
Credit 4isk 4B* C 6arket 4isk 4B* C Dperational
4isk 4B*
A 4B* F 4isk weighted *ssets5
E Capital to 4isk Beighted *sset 4atio
Elements o! Capital !unds Indian Ban"s
(i) Common Euit# Tier $ capital
i) Common shares (*ll common shares should ideally be the voting shares as
detailed in 4B( 6! Cir!)
ii) Stock surplus (share premium)
iii) Statutory reserves
iv) Capital reserves representing surplus arising out of sale proceeds of assets
v) Dther disclosed free reserves& if any
vi) Balance in .rofit G 9oss *ccount at the end of previous year
vii) .rofit for current year calculated on ,uarterly basis as per the formula given in
4B( Cir! (9ess: 4egulatory adjustments2 deductions)
(ii) Additional Tier $ capital
i) .erpetual )on-cumulative .reference shares (.)C.S)
ii) Stock surplus (share premium)
iii) ebt capital instruments
iv) *ny other type of instruments as notified by 4B( from time to time!
(9ess: 4egulatory adjustments2 deductions)
(iii) Tier % Capital
i) >eneral .rovisions and 9oss 4eserves
ii) ebt capital instruments issued by banks
iii) .reference share capital instruments (.C.S24)C.S24C.S)
iv) Stock surpluses
v) 4evaluation reserves at a discount of HH<
vi) *ny other type of instruments generally notified by 4B( for inclusion under Tier "
capital (9ess: 4egulatory adjustments2deductions)
Elements o! Capital !unds &orei'n Ban"s
Common Euit# Tier I capital
i) (nterest free funds from I!D!
ii) Statutory reserves
iii) 4emittance surplus retained in (ndian Books (non-repatriable)
iv) (nterest free funds remitted from abroad for ac,uisition of property
v) Capital reserves arising out of sale of assets (non-repatriable)& etc!
(9ess: 4egulatory adjustments2 deductions)
Additional Tier $ capital
i) I!D! borrowings for foreign currency
ii) *ny other item as allowed by 4B(
(9ess: 4egulatory adjustments2 deductions)
Tier % Capital
i) >eneral .rovisions and 9oss 4eserves
ii) I!D! borrowings in foreign currency
iii) 4evaluation reserves at a discount of HH<
(9ess: 4egulatory adjustments2deductions)
Capital reuirement
a) *ll scheduled commercial banks (e'cl! 9*Bs G 44Bs) operating in (ndia shall
maintain a 6inimum Total Capital (6TC) of 8< of total 4isk Beighted *ssets
(4B*) i!e! capital to risk weighted assets (C4*4) as against ;< prescribed
under Basel ((( rules!
b) Dut of the 6TC of 8<& Common ?,uity Tier ( (C?T$) capital shall be at least
H!H< of 4B* (i!e! for credit risk C market risk C operational risk) on an ongoing
basis (Basel ((( at least :!H< of 4B*)!
c) Tier $ capital shall be at least @< of 4B* on an ongoing basis! (n other words&
within the Tier $ capital& *dditional Tier $ capital shall be ma'imum $!H< of
4B*s (Basel ((( =<)!
d) Total Capital (Tier $ capital C Tier " capital) shall be at least 8< of 4B*s on an
ongoing basis i!e! within the minimum C4*4 of 8<& Tier " capital can be
admitted ma'imum up to "< (Basel ((( Tier $ C Tier " shall be ;<)!
e) (f a bank has complied with 6inimum Common ?,uity Tier $ and *dditional Tier $
capital ratios& then the e'cess *dditional Tier $ capital can be admitted for
compliance with the minimum C4*4 of 8< of 4B*s!
f) (n addition to the minimum Common ?,uity Tier $ capital of H!H< of 4B*s&
banks are also re,uired to maintain a capital conservation buffer (CCB) of "!H<
of 4B*s (dealt separately) in the form of Common ?,uity Tier $ capital!
Bith the full implementation of capital ratios (+or smooth migration to these capital
ratios& transitional arrangements have been provided) and CCB the capital re,uirements
would be as follows:-
Re'ulator# Capital As ( to
R)As
$! 6inimum Common ?,uity Tier $
4atio
H!H#
"! Capital Conservation Buffer
(comprised of Common ?,uity)
"!H#
0! 6C? Tier $ 4atio C CCB ;!##
:! *dditional Tier $ Capital $!H#
H! 6inimum Tier $ Capital 4atio ($ C :) @!##
=! Tier " Capital "!##
@! 6inimum Total Capital 4atio (6TC) JH
C = K
8!##
;! 6TC C CCB (@ C ") $$!H#
a) +or prudential e'posure limits linked to capital funds& the Lcapital funds% will
e*clude the applicable capital conservation buffer and countercyclical capital
buffer as and when activated& but include *dditional Tier $ capital and Tier "
capital which are supported by proportionate amount of Common ?,uity Tier $
capital! *ccordingly& capital funds will be defined as the sum total of Common
?,uity Tier $ capital& *dditional Tier $ capital& and Tier " capital eligible for
computing and reporting C4*4 of the bank! (t may be noted that the term
LCommon ?,uity Tier $ capital% does not include capital conservation buffer and
countercyclical capital buffer!
b) +or the purpose of reporting Tier $ capital and C4*4& any e'cess *dditional Tier
$ (*T$) capital and Tier " (T") capital will be recognised in the same proportion
as that applicable towards minimum capital re,uirements! (n other words& to
admit any e'cess *T$ and T" capital& the bank should have e'cess C?T$ over
and above ;< (H!H<C"!H<)!
c) (n cases where the a bank does not have minimum Common ?,uity Tier $ C
capital conservation buffer of "!H< of 4B*s as re,uired but& has e'cess
*dditional Tier $ and 2 or Tier " capital& no such e'cess capital can be reckoned
towards computation and reporting of Tier $ capital and Total Capital!
d) * countercyclical capital buffer of #!"#H< of 4B*s in the form of Common ?,uity
or other fully loss absorbing capital is to be created to mitigate2protect the
banking sector from periods of e'cess aggregate credit growth and resultant
system-wide risk being an e'tension of CCB!
Re'ulator# ad+ustments,deductions
The regulatory adjustments 2 deductions which will be applied to regulatory capital both
at solo and consolidated level are as under:-
a) >oodwill and all other intangible assets are re,uired to be deducted from the
Common ?,uity component of Tier $!
b) 1nder Basel (((& eferred Ta' *ssets (T*) which relies on future profitability of
bank& only such T*s are to be deducted from Common ?,uity! Iowever& as per
the 4B( guidelines& banks in (ndia will be re,uired to deduct all T*s irrespective
of their origin from Common ?,uity Tier $ capital as a prudent measure!
*pplication of these rules at consolidated level would mean deduction of T*s
from the consolidated Common ?,uity which is attributed to the subsidiaries& in
addition to deduction of T*s which pertain to the solo bank!
c) The amount of cash flow hedge reserve which relates to hedging of items that
are not fair valued in the balance sheet (including projected cash flows) should
be derecogni/ed in the calculation of Common ?,uity Tier $!
d) Shortfall of stock of provisions to e'pected losses under the (nternal
4atings Based ((4B) approach should be deducted in the calculation of
Common ?,uity Tier $ capital! The full shortfall amount is to be deducted and
should not be reduced by any ta' effects that could be e'pected to occur if
provisions were to rise to the level of e'pected losses!
e) Dther areas such as >ain-on-Sale 4elated to Securitisation Transactions&
defined benefit pension fund liabilities& (nvestment in a bank%s own shares& etc!
are to be deducted appropriately from Common ?,uity Tier $ capital!
f) The investment of banks in the regulatory capital instruments of other financial
entities contributes to the inter-connectedness amongst the financial
institutions and hence it should be deducted from the respective tiers of
regulatory capital so as to avoid double counting of capital in the financial
system!
g) 4eciprocal cross holdings of capital might result in artificially inflating the
capital position of banks and hence such holdings of capital has to be fully
deducted from component of capital (Common ?,uity& *dditional Tier $ and
Tier " capital) for which the capital would ,ualify if it was issued by the bank
itself&
h) Capital instruments which no longer ,ualify as non-common e,uity Tier $
capital or Tier " capital (e!g! (.( and Tier " debt instruments with step-ups)
are to be phased out beginning #$!#$!"#$0& etc!
Transitional Arran'ements
*s per Basel ((( terms& in order to ensure smooth migration without any near stress&
appropriate transitional arrangements for capital ratios have been made which
commenced as on #$!#:!"#$0! Capital ratios and deductions from Common ?,uity
will be fully phased-in and implemented as on 0$!#0!"#$; and accordingly the
phase-in arrangements for SCBs operating in (ndia are drawn as under:-
Transitional Arran'ements -E*cl. LABs and RRBs/
6inimum capital
ratios
#$!#:!$
0
0$!#0!$
:
0$!#0!$
H
0$!#0!$
=
0$!#0!$
@
0$!#0!$
;
C?T $ :!H# H!## H!H# H!H# H!H# H!H#
CCB - - #!="H $!"H $!;@H "!H#
6inimum C?T$ C
CCB
:!H# H!## =!$"H =!@H @!0@H ;!##
6inimum Tier $
capital
=!## =!H# @!## @!## @!## @!##
6inimum Total
capital A
8!## 8!## 8!## 8!## 8!## 8!##
6inimum Total
Capital C CCB
8!## 8!## 8!="H $#!"H $#!;@H $$!H#
.hase-in of all
deductions from
C?T $ (in <) E
"# :# =# ;# $## $##
A The difference between the minimum total capital re,uirement of 8< and the Tier $ re,uirement can
be met with Tier " and higher forms of capital5
E The same transition approach will apply to deductions from *dditional Tier $ and Tier " capital
The regulatory adjustments (i!e! deductions and prudential filters) would be fully
deducted from Common ?,uity Tier $ only by 6arch 0$& "#$@! uring this transition
period& the remainder not deducted from Common ?,uity Tier $ 2 *dditional Tier $ 2
Tier " capital will continue to be subject to treatments given under Basel (( capital
ade,uacy framework!
1. Capital c0ar'e !or Credit Ris"
4B( has identified e'ternal credit rating agencies that meet the eligibility criteria
specified under the revised +ramework! Banks are re,uired to choose the e'ternal
rating agencies identified by 4B( for assigning risk weights for capital ade,uacy
purposes as per the mapping furnished in the Basel ((( guidelines!
Claims on omestic Sovereigns (standard *ssets)
a. Both fund based and non fund based claims on the Central >overnment
including Central >ovt! guaranteed claims carry /ero risk weight!
b. irect 9oans2credit2overdraft e'posure& if any& of banks to State >ovt! and
investment in State >ovt! securities carry /ero risk weight! State >overnment
guaranteed claims will attract "# per cent risk weight%!
c. 4isk weight applicable to Central >ovt! e'posure would also apply to claims on
4B(& C>T6S?& and Credit 4isk >uarantee +und Trust for 9ow (ncome Iousing
(C4>+T9(I)! The claims on ?C>C will attract a risk weight of "#<!
d. L*mount 4eceivable from >D(% under *gricultural ebt Baiver Scheme "##; is to
be treated as claim on >D( and attract /ero risk weight whereas the amount
outstanding in the accounts covered by the ebt 4elief Scheme shall be treated
as a claim on the borrower and risk weighted as per the e'tant norms!
Claims on +oreign Sovereigns
Claims on +oreign Sovereigns in foreign currency would be as per the rating assigned as
detailed in the 4B( circular! (n case of claims dominated in domestic currency of +oreign
Sovereign met out of the resources in the same currency& the /ero risk weight would be
applicable!
Claims on .ublic Sector ?ntities (.S?)
Claims on domestic .S?s and .rimary ealers (.) would be risk weighted in the
same manner that of corporate and foreign .S?s as per the rating assigned by foreign
rating agencies as detailed in the Circular!
Dther claims
Claims on (6+& Bank for (nternational Settlements (B(S)& and eligible 6ultilateral
evelopment Banks (6Bs) evaluated by the BCBS will be treated similar to
claims on scheduled banks at a uniform "#< risk weight! Similarly& claims on
the (nternational +inance +acility for (mmuni/ation ((++(m) will also attract a
twenty per cent risk weight
Claims on Banks incorporated in (ndia and +oreign Banks% branches in (ndia& the
applicable risk weight is detailed in the 4B( 6aster Circular!
Banks% investment in capital instruments of other banks such investments would
not be deducted& but would attract appropriate risk as detailed in the 4B( 6!
Circular!
Claims on corporate

*sset +inance Companies (*+Cs) and )on-Banking
+inance Companies-(nfrastructure +inance Companies ()B+C-(+C)
&
shall be
risk weighted as per the ratings assigned by the rating agencies registered
with the S?B( and accredited by the 4B( (etailed in the Circular)!
The claims on non-resident corporate will be risk weighted as per the ratings
assigned by international rating agencies!
4egulatory 4etail claims (both fund and non-fund based) which meet the
Mualifying criteria& vi/!
a) Orientation Criterion: ?'posure to individual person2s or to a small business
(*verage annual turnover less than 4s! H# crore for last 0 years in case of e'isting
or projected turnover in case of new units)5
b) Product Criterion: ?'posure (both fund-based and non fund-based) in form of
revolving credits and lines of credit (incl! overdrafts)& term loans G leases (e!g!
instalment loans and leases& student and educational loans) and small business
facilities and commitments
c) Granularit# Criterion N Sufficient diversification to reduce the risk portfolio5
and
d) Lo1 2alue o! indi2idual e*posures - The ma'imum aggregated retail
e'posure to one counterpart should not e'ceed the absolute threshold limit of 4s!
H crore!
)ould attract ris" 1ei'0t o! 34( e'cept ).*s! *s part of the
supervisory review process& the 4B( would also consider whether the credit ,uality of
regulatory retail claims held by individual banks should warrant a standard risk weight
higher than @H<!
The 4B* on claims secured by mortgage of residential properties would be as
under:-
Category of 9oan 9TO 4atio (<) 4isk Beight
(<)
(a) (ndividual Iousing 9oans
(i) 1p to 4s! "# lakh 8# H#
(ii) *bove 4s! "# lakh and up to 4s! @H lakh ;# H#
(iii) *bove 4s!@H lakh @H @H
b) Commercial 4eal ?state -
4esidential
Iousing (C4?-4I)
)2* @H
(c) Commercial 4eal ?state (C4?) )2* $##
Note: $! The 9TO ratio should not e'ceed the prescribed ceiling in all fresh cases of
sanction! (n case the 9TO ratio is currently above the ceiling prescribed for any reasons&
efforts shall be made to bring it within limits!
"! Banks% e'posures to t0ird dwelling unit onwards to an individual will also be treated
as C4? e'posures!
4estructured housing loans should be risk weighted with an additional risk weight
of "H< to the risk weights prescribed above!
9oans 2 e'posures to intermediaries for on-lending will not be eligible for inclusion
under claims secured by residential property but will be treated as claims on
corporate or claims included in the regulatory retail portfolio as the case may be!
(nvestments in mortgage backed securities (6BS) backed by e'posures will be
governed by the guidelines pertaining to securitisation e'posures (as detailed in
the 4B( Cir!)
)on-performing *ssets ().*s)
The risk weight in respect of the unsecured portion of ).* (other than a ,ualifying
residential mortgage loan)& net of specific provisions (including partial write-offs)& shall
be:-
Specific .rovisions 4isk Beight
<
9ess than "#< of
outstanding
$H#
*t least "#< of outstanding $##
*t least H#< of outstanding H#
The risk weight applicable for secured ).* is $##<& net of provisions when
provisions reach $H< of the outstanding amount!
).* Iome 9oan claims secured by residential property& the risk weight shall
be $##< net of specific provisions! (n case the specific provisions are at least
"#< but less than H#< of the outstanding& the risk weight shall be @H< (net of
specific provisions) and specific provisions are H#< or more the applicable risk
weight is H#<!
Dther specified categories
Category 4isk Beight
(<)
#$! Oenture capital $H# or
higher
#"! Consumer credit including
personal loans& credit card
receivables& but e'cl!
educational loan
$"H
#0! Capital market e'posure $"H
#:! (nvestment in capital
instruments of )B+C
$"H
#H! The e'posure to e,uity
instruments issued by )B+Cs
"H#
#H! (nvestment in paid up e,uity
of non-financial entities (other
than subsidiaries) where
investment is below $#< of
e,uity of investee entity!
*bove $#<
$"H
$$$$
#=! Staff loans backed fully by
superannuation benefits
and2or mortgage of flat2house
"#
#@! Dther loans and advances to
staff eligible for inclusion
under retail portfolio
@H
#;! *ll other assets $##
#8! Dff balance sheet items
(6arket related and non-
market related items)
*s detailed
in the 4B(
Circular!
$#! Securiti/ation ?'posure *s per Cir!
Based on
rating by
e'ternal
credit
agency
$$! Commercial real estate (6BS
backed)
-do-
5e!initions and 'eneral terminolo'#
Counterpart# Credit Ris" -CCR/
CC4 is the risk that the counterparty to a transaction could default before the final
settlement of the transaction3s cash flows!
Securities &inancin' Transactions -S&Ts/
S+Ts are transactions such as repurchase agreements& reverse repurchase
agreements& security lending and borrowing& collateralised borrowing and lending
(CB9D) and margin lending transactions& where the value of the transactions
depends on market valuations and the transactions are often subject to margin
agreements!
6ed'in' Set
Iedging Set is a group of risk positions from the transactions within a single
netting set for which only their balance is relevant for determining the e'posure
amount or ?* under the CC4 standardised method!
Current E*posure
Current ?'posure is the larger of /ero& or the market value of a transaction or
portfolio of transactions within a netting set with a counterparty that would be lost
upon the default of the counterparty& assuming no recovery on the value of those
transactions in bankruptcy! Current e'posure is often also called 4eplacement
Cost!
Credit 7aluation Ad+ustment
(t is an adjustment to the mid-market valuation of the portfolio of trades with
counterparty! This adjustment reflects the market value of the credit risk due to any
failure to perform on contractual agreements with counterparty! This adjustment
may reflect the market value of the credit risk of the counterparty or the market
value of the credit risk of both the bank and the counterparty!
One8Sided Credit 7aluation Ad+ustment
(t is a credit valuation adjustment that reflects the market value of the credit risk of
the counterparty to the firm& but does not reflect the market value of the credit risk
of the bank to the counterparty!
5e!ault Ris" Capital C0ar'e !or CCR
The e'posure amount for the purpose of computing for default risk capital charge
for counterparty credit risk will be calculated using the Current ?'posure 6ethod
(C?6) as detailed in the Circular!
Capitali9ation o! mar"8to8mar"et counterpart# ris" losses -C7A capital
c0ar'e/
(n addition to the default risk capital re,uirement for counterparty credit risk& banks
are also re,uired to compute an additional capital charge to cover the risk of
mark-to-market losses on the e'pected counterparty risk (such losses being
known as credit value adjustments& CO*) to DTC derivatives! The CO* capital
charge will be calculated in the manner as indicated in the 4B( Circular!
&ailed Transactions
a. Bith regard to unsettled securities and foreign e'change transactions& banks
are e'posed to counterparty credit risk from trade date& irrespective of the
booking or the accounting of the transaction! Banks may develop and
implement suitable systems for tracking and monitoring the credit risk e'posure
arising from unsettled transactions as appropriate for producing management
information that facilitates action on a timely basis!
b. Banks must closely monitor securities and foreign e'change transactions that
have failed& starting from the day they fail for producing management
information that facilitates action on a timely basis
c. +ailure of transactions settled through a delivery-versus-payment system (v.)&
providing simultaneous e'changes of securities for cash& e'pose banks to a risk
of loss on the difference between the transaction valued at the agreed
settlement price and the transaction valued at current market price (i!e! positive
current e'posure)!
d. +or v. Transactions - (f the payments have not yet taken place five business
days after the settlement date& banks are re,uired to calculate a capital charge
by multiplying the positive current e'posure of the transaction by the
appropriate factor as given in the Circular! (n order to capture the information&
banks may upgrade their information systems in order to track the number of
days after the agreed settlement date and calculate the corresponding capital
charge!
e. +or non-v. transactions (free deliveries) after the first contractual payment2
delivery leg& the bank that has made the payment will treat its e'posure as a
loan if the second leg has not been received by the end of the business day!
E*ternal Credit Assessment
4B( has identified various credit agencies whose ratings may be used by banks for
the purposes of risk weighting their claims for capital ade,uacy purposes under the
revised framework as under:-
(a) Brickwork 4atings (ndia .vt! 9imited (Brickwork)5
(b) Credit *nalysis and 4esearch 9imited5
(c) C4(S(9 9imited5
(d) (C4* 9imited5
(e) (ndia 4atings and 4esearch .rivate 9imited ((ndia 4atings)5 and
(f) S6? 4ating *gency of (ndia 9td! (S6?4*)
(nternational *gencies (where specified)
a. +itch
b. 6oodys5 and
c. Standard G .oor%s
Banks are re,uired to use the chosen credit rating agencies and their ratings
consistently for each type of claim& for both risk weighting and risk management
purposes! The revised framework recommends development of a mapping process to
assign the ratings issued by eligible credit rating agencies to the risk weights available
under the Standardised risk weighting framework! 1nder the +ramework& ratings have
been mapped for appropriate risk weights applicable as per Standardised approach!
The risk weight mapping for 9ong Term and Short Term 4atings are given in the
Circular!
Credit Ris" Miti'ation Tec0niues
Banks use a number of techni,ues to mitigate the credit risks to which they are
e'posed! +or e'ample& e'posures may be collateralised in whole or in part by cash or
securities& deposits from the same counterparty& guarantee of a third party& etc! (n order
for banks to obtain capital relief for any use of C46 techni,ues& certain minimum
standards for legal documentation must be met! *ll documentation used in collateralised
transactions and guarantees must be binding on all parties and legally enforceable in all
relevant jurisdictions! Banks must have conducted sufficient legal review& which should
be well documented& to verify this re,uirement! Such verification should have a well-
founded legal basis for reaching the conclusion about the binding nature and
enforceability of the documents
+ew of such C46 techni,ues are given below:-
a) Collaterali9ed transactions N
The credit e'posure is hedged in whole or part by collaterals by a counterparty
(party to whom a bank has an on-or off balance sheet credit e'posure) or by a
third party on behalf of the counterparty and banks have specific lien over the
collaterals
1nder the +ramework& banks are allowed to adopt either Simple *pproach or
Comprehensive *pproach! The former approach substitutes the risk
weighting of the collateral for the risk weighting of the counterparty for the
collateraised portion of the e'posure and under the latter approach which
allows fuller offset of collaterals against e'posures! Comprehensive approach
is being adopted by banks in (ndia!
(n the comprehensive approach& when taking collateral& banks will need to
calculate their adjusted e'posure to a counterparty for capital ade,uacy
purposes in order to take account of the effects of that collateral!
6air Cut
(n the comprehensive approach& Banks are re,uired to adjust both the amount of the
e'posure to the counterparty and the value of any collateral received in support of
that counterparty to take account of possible future fluctuations in the value of either&
occasioned by market movements! These adjustments are referred to as Lhaircuts%!
The application of haircuts will produce volatility adjusted amounts for both e'posure
and collateral! The volatility adjusted amount for the e'posure will be higher than the
e'posure and the volatility adjusted amount for the collateral will be lower than the
collateral& unless either side of the transaction is cash! (n other words& the Lhaircut%
for the e'posure will be a premium factor and the Lhaircut% for the collateral will be a
discount factor!
(t may be noted that the purpose underlying the application of haircut is to capture
the market-related volatility inherent in the value of e'posures as well as of the
eligible financial collaterals! Bhere the volatility-adjusted e'posure amount is greater
than the volatility-adjusted collateral amount (including any further adjustment for
foreign e'change risk)& banks shall calculate their risk-weighted assets as the
difference between the two multiplied by the risk weight of the counterparty!
Banks have two ways of calculating the haircuts vi/! (i) Standard supervisory
haircuts5 using parameters set by the Basel Committee& and (ii) Dwn estimate
haircuts& using banks% own internal estimates of market price volatility! Banks in (ndia
shall use onl# t0e standard super2isor# 0aircuts for both the e'posure as well as
the collateral! The Standard Supervisory Iaircuts (assuming daily mark-to-market&
daily re-margining and a $# business-day holding period)& e'pressed as
percentages& are given in detail in the 4B( Circular!
Eli'i:le &inancial Collateral in Compre0ensi2e approac0
Cash& >old& Securities issued by Central G State >overnments& 7O.& )SC (no lock in
period is operational)& 9(C policies& ebt securities (rated by a chosen rating agency)&
ebt Securities ( not rated by a chosen Credit 4ating *gency in respect of which
banks should be sufficiently confident about the market li,uidity)& 1nits of 6utual +unds&
etc! are eligible financial instruments for recognition in the Comprehensive *pproach!
Calculation o! capital reuirement
+or a collateralised transaction& the e'posure amount after risk mitigation is calculated
as follows:
?A F ma' J#& P? ' ($ C I
e
) - C ' ($ - I
c
- I
f'
)QK
Bhere:
?A F the e'posure value after risk mitigation
? F current value of the e'posure for which the collateral ,ualifies as a risk mitigant
I
e
F haircut appropriate to the e'posure
C F the current value of the collateral received
I
c
F haircut appropriate to the collateral
I
f'
F haircut appropriate for currency mismatch between the collateral and e'posure
The e'posure amount after risk mitigation (i!e!& ?A) will be multiplied by the risk weight of
the counterparty to obtain the risk-weighted asset amount for the collateralised
transaction! ((llustrative e'amples calculating the effect of Credit 4isk 6itigation is
furnished in the 4B( Circular)!
b) On Balance S0eet Nettin' N
Dn-balance sheet netting is confined to loans2advances and deposits! 1nder this
techni,ue& banks have legally enforceable netting arrangements involving specific lien
with proof of documentation! Capital re,uirement is reckoned on the basis of net credit
e'posure! Banks may calculate capital re,uirements on the basis of net credit e'posures
subject to some conditions as listed in the Circular!
c) Guarantees N
?'plicit& irrevocable& and unconditional guarantees may be taken as credit protection in
calculating capital re,uirements! >uarantees issued by entities with lower risk weight as
compared to the counterparty will lead to reduced capital charges since the protected
portion of the counterparty e'posure is assigned the risk weight of the guarantor&
whereas the uncovered portion retains the risk weight of the underlying counterparty!
etailed operational re,uirements for guarantees eligible for being treated as a C46
are given in the 4B( Circular!
2. Capital c0ar'e !or Mar"et Ris"
6arket 4isk relates to risk of losses in on-balance sheet and off-balance sheet positions
arising on account of movement in market prices! The market risk positions subject to
capital charge re,uirement are risks pertaining to interest rate related instruments in
trading books and e,uities and &orei'n E*c0an'e ris" (including gold and other
precious metals) in both trading and banking books!
Trading book for the purpose of capital ade,uacy will include:
a. Securities included under the Ield for Trading (I+T) category
b. Securities included under the *vailable for Sale (*+S) category
c. Dpen gold position limits
d. Dpen foreign e'change position limits
e. Trading positions in derivatives& and
f. erivatives entered into for hedging trading book e'posures!
Banks are re,uired to manage the market risks in their books on an ongoing basis and
ensure that the capital re,uirements for market risks are being maintained on a
continuous basis& i!e! at the close of each business day! Banks are also re,uired to
maintain strict risk management systems to monitor and control intra-day e'posures to
market risks!
Capital for market risk would not be relevant for securities which have already matured
and remain unpaid! These securities will attract capital only for credit risk! Dn
completion of 8# days delin,uency& these will be treated on par with ).*s for
deciding the appropriate risk weights for credit risk!
Measurement o! capital c0ar'e !or Interest Rate Ris"
The capital charge for interest rate related instruments would apply to current market
value of the instruments in bank%s trading book and banks are re,uired to maintain
capital for market risks on an ongoing basis by mark to market their trading positions on
a daily basis!
The minimum capital re,uirement is measured2 e'pressed in two ways vi/! (i)
Specific 4isk charge and (ii) >eneral 6arket 4isk (dealt separately)!
(n view of possible longer holding period and higher risk thereto in respect of debt
securities held under *+S category& banks are re,uired to hold capital charge for
market risk e,ual to or greater of the Specific 4isk Capital charge or *lternative Total
Capital Charge!
i) Specific 6arket 4isk
The capital charge for specific risk is designed to protect against an adverse movement
in the price of an individual security owing to factors related to the individual issuer both
short (short position is not allowed in (ndia e'cept in derivatives) and long positions!
The specific risk charges and *lternative Total Capital Charge for various kinds of
e'posures are detailed in Tabular +orm in the 4B( Circular!
ii) >eneral 6arket 4isk
(t relates to charge towards interest rate risk in the portfolio& where long and short
position (which is not allowed in (ndia e'cept in derivatives G Central >ovt!
securities) in different securities or instruments can be offset! The capital re,uirements
for general market risk are designed to capture the risk of loss arising from changes in
market interest rates!
>eneral 6arket 4isk is the sum of the following four components:-

a) The net short (short position is not allowed in (ndia e'cept in derivatives) or long
position in the whole trading book5
b) a small proportion of the matched positions in each time-band (the Rvertical
disallowanceS)5
c) a larger proportion of the matched positions across different time-bands (the
Rhori/ontal disallowanceS)& and
d) a net charge for positions in options& where appropriate!
The Basel Committee has suggested two broad methodologies for computation of
capital charge for market risks vi/! Standardised 6ethod and (nternal 4isk 6anagement
models method of which banks have been advised to adopt Standardised 6ethod
as banks have not yet developed their (nternal 4isk 6anagement system!
1nder the standardised method there are two principal methods of measuring
market risk vi/! a RmaturityS method and a RdurationS method! (t has been decided to
adopt standardised RdurationS method as the same is more accurate method to arrive
the capital charge! *ccordingly& banks are re,uired to measure the general market risk
charge by calculating the price sensitivity (modified duration) of each position
separately! The mechanics under the method - Time band and assumed changes in
yield are detailed in the Circular for reference!

Measurement !or capital c0ar'e !or Euit# Ris"
The capital charge for e,uities would apply on their current market value in bank%s
trading book! The 6inimum capital re,uirement& to cover the risk of holding or taking
positions in e,uities in the trading book is detailed in the Circular! The instruments
covered include e,uity shares& whether voting or non-voting& convertible securities
that behave like e,uities& for e'ample: units of mutual funds& and commitments to buy or
sell e,uity!
Capital charge for specific risk (akin to credit risk) will be $$!"H< or capital
charge in accordance with the risk warranted by e'ternal rating of the counterparty&
whichever is higher and specific risk is computed on banks3 gross e,uity positions
(i!e! the sum of all long and all short e,uity positions - short e,uity position is&
however& not allowed for banks in (ndia)! (n addition& the general market risk charge
will also be 8< on the gross e,uity positions! These capital charges will also be
applicable to all trading book e'posures& which are e'empted from capital market
e'posure ceilings for direct investments!

Specific 4isk Capital Charge for banks% investment in Security 4eceipts will be $0!H<
(e,uivalent to $H# per cent risk weight)! Since the Security 4eceipts are by and large
illi,uid and not traded in the secondary market& there will be no >eneral 6arket 4isk
Capital Charge on them!
Measurement o! capital c0ar'e !or &orei'n E*c0an'e Ris"
The bank%s net open position in each currency shall be calculated by summing:
a) The net spot position (i!e! all asset items less all liability items& including accrued
interest& denominated in the currency in ,uestion)5
b) The net forward position (i!e! all amounts to be received less all amounts to be
paid under forward foreign e'change transactions& including currency futures and
the principal on currency swaps not included in the spot position)5
c) >uarantees (and similar instruments) that are certain to be called and are likely
to be irrecoverable5
d) )et future income2e'penses not yet accrued but already fully hedged (at the
discretion of the reporting bank)5
e) epending on particular accounting conventions in different countries& any other
item representing a profit or loss in foreign currencies5
f) The net delta-based e,uivalent of the total book of foreign currency options!

The open positions both +oreign e'change and gold are at present risk-weighted at
$##< and the capital charge for market risks in foreign e'change and gold open
position is 8<! These open positions& limits or actual whichever is higher& would continue
to attract capital charge at 8<! This capital charge is in addition to the capital charge for
credit risk on the on-balance sheet and off-balance sheet items pertaining to foreign
e'change and gold transactions!
6easurement of capital charge for Credit efault Swap (CS) in the trading book&
Capital charge for Counterparty Credit 4isk& Capital charge for Counterparty 4isk for
Collaterised Transactions in CS& *ggregation of the capital charge for 6arket 4isks&
Treatment for (lli,uid .ositions& Oaluation 6ethodologies& etc! are detailed in the 4B(
Circular for reference!
3. Capital c0ar'e !or Operational Ris"
Dperational risk is termed as the risk of loss resulting from inade,uate or failed
internal processes& people and systems or from e'ternal events! This includes legal risk&
but e'cludes strategic and reputational risk! 9egal risk includes& but is not limited to&
e'posure to fines& penalties& or punitive damages resulting from supervisory actions&
as well as private settlements!
Measurement Met0odolo'ies
Three methods for calculating operational risk capital charges in continuum of increasing
sophistication and risk sensitivity are provided under )C*+ vi/!
i) The Basic (ndicator *pproach (B(*)
ii) The Standardised *pproach (TS*)& and
iii) *dvanced 6easurement *pproach (*6*)!
Banks are advised& to begin with& to adopt the Basic (ndicator *pproach (B(*) and 4B(
would review the capital re,uirement under B(* for general credibility and in case it is
found any la'ity& appropriate Supervisory action under .illar " will be considered!
1nder B(*& banks are re,uired to hold capital for operational risk e,ual to the average
positive annual gross income over the previous 0 years! (n case the gross income for any
year is negative or /ero& the same should be e'cluded while calculating the average! 4B(
will initiate necessary supervisory action under .illar " in case the negative gross income
distorts banks .illar ( capital charge (the working is illustrated in the 4B( Circular)
B. Super2isor# Re2ie1 and E2aluation Process -SREP/ -Pillar %/
The objective of Supervisory 4eview .rocess (S4.) is to:-
a. ?nsure that banks have ade,uate capital to support all the risks in their
business5 and
b. ?ncourage them to develop and use better risk management techni,ues for
monitoring and managing their risks!
This in turn would re,uire a well-defined internal assessment process within banks through
which they assure the 4B( that ade,uate capital is indeed held towards the various risks to
which they are e'posed! The process of assurance could also involve an active dialogue
between the bank and the 4B( so that& when warranted& appropriate intervention could be
made to reduce the risk e'posure of the bank or augment 2 restore its capital! Thus& (nternal
Capital *de,uacy *ssessment .rocess ((C**.) is an important component of the S4.!
The main aspects to be addressed under S4.2(C**. would include:-
a) The risks that are not fully captured by the minimum capital ratio prescribed under
.illar $5
b) The risks that are not at all taken into account by the .illar $5 and
c) The factors e'ternal to the bank!
The capital ade,uacy ratio prescribed under .illar $ is only the minimum and addresses
only the three risks vi/! credit& market and operation risks& holding of additional capital might
be necessary for banks to take care of the possible under-estimation of risks under the
.illar $ and the actual risk e'posure of a bank vis-T-vis the ,uality of its risk management
architecture! Some of the risks which are generally e'posed to but not fully captured in the
regulatory C4*4 include:-
a) (nterest rate risk in the banking book5
b) Credit concentration risk5
c) 9i,uidity risk5
d) Settlement risk5
e) 4eputational risk5
f) Strategic risk5
g) 4isk of under-estimation of credit risk under the Standardised approach5
h) 6odel risk i!e!& the risk of under-estimation of credit risk under the (4B approaches5
i) 4isk of weakness in the credit-risk mitigants5
j) 4esidual risk of securitisation& etc!
(t is& therefore& only appropriate that the banks make their own assessment of their various
risk e'posures& through a well-defined internal process& and maintain an ade,uate capital
cushion for such risks! Banks were advised to develop and put in place& with the approval
of their Boards& an (C** .& in addition to a bank%s calculation of regulatory capital
re,uirements under .illar $& commensurate with their si/e& level of comple'ity& risk
profile and scope of operations! The (C**. was operationalised w!e!f! 6arch "##; by
foreign banks and 6arch "##8 by (ndian Banks!
Based on the three mutually reinforcing .illars i!e! .illar $& .illar "& and .illar 0& the
Basel Committee lays down four key principles under the S4. as under:-
a) Banks are re,uired to have a process for assessing their overall capital
ade,uacy in relation to their risk profile and a strategy for maintaining their
capital levels!
b) ?valuation of banks% internal capital ade,uacy assessments and strategies
as well as their ability to monitor and ensure their compliance with the
regulatory capital ratios by Supervisors!
c) Supervisors should e'pect banks to operate above the minimum
regulatory capital ratios and should have the ability to re,uire banks to hold
capital in e'cess of the minimum!
d) Supervisors should intervene at an early stage to prevent capital from falling
below the minimum levels re,uired to support the risk characteristics of a
particular bank and should re,uire rapid remedial action if capital is not
maintained or restored!
The .rinciples a ; c relates to the supervisory e'pectations while others i!e! : ; d
deals with the role of the supervisors under .illar "! This necessitates evolvement of an
effective (C**. for assessing their capital ade,uacy based on the risk profiles as well
as strategies for maintaining their capital levels! .illar " also re,uires the Supervisory
authorities to put in place an evaluation process known as Super2isor# Re2ie1 and
E2aluation Process -SREP/ and to initiate supervisory measures as may be
necessary! This would also facilitate 4B( to take suitable steps either to reduce
e'posure of the bank or augment2restore its capital!
Based on the principles& responsibilities have been casted on banks and Supervisors
under S4?. and based on which banks are e'pected to operate above the minimum
regulatory capital ratios commensurate with their individual risk profiles& etc! 1nder
S4?.& the 4B( will assess the overall capital ade,uacy through comprehensive
evaluation along with *nnual +inancial (nspection (*+() based relevant data and (C**.
document being received from banks and available information! (C**. and S4?. are "
important components of .illar "!
?very bank (e'cept 9*Bs G 44Bs) should have an (C**. both at solo and
consolidated levels and the responsibility of designing and implementation of the (C**.
rests with the Board! Before embarking on new activities or introducing new products
the senior management should identify and review the related risks arising from these
potential new products or activities and ensure that the infrastructure and internal
controls necessary to manage the related risks are in place!
Banks are re,uired to put in place an effective 6(S which should provide the board and
senior management a clear and concise manner with timely and relevant information
concerning their institutions% risk profile including risk e'posure! 6(S should be capable
of capturing limit breaches (concentrations) and same should be promptly reported to
senior management& as well as to ensure that appropriate follow-up actions are
taken! 4isk management process should be fre,uently monitored and tested by
independent control areas and internal and e'ternal auditors!
The (C**. should form an integral part of the management and decision-making
culture of a bank! The implementation of (C**. should be guided by the principle of
proportionality and 4B( e'pects degree of sophistication in the (C**. in regard to risk
measurement which should commensurate with the nature& scope& scale and the degree
of comple'ity in the bank%s business operations!
Dperational aspects of (C**.
The (C**. of banks is e'pected normally to capture the risk universe& vi/ !Credit 4isk&
6arket 4isk& Dperational 4isk& interest rate risk in the banking book& credit
concentration risk and li,uidity risk! Dther risks include reputational risk and or
business or strategic risk& Dff-balance sheet ?'posure and Securitisation 4isk etc!
(Oarious risks are briefly outlined in the 4B( Circular)!
Bank%s risk management process including the (C**. should be consistent with
the e'isting 4B( guidelines on these risks! (f banks adopt risk mitigation techni,ues&
they should understand the risk to be mitigated and reckoning its enforceability and
effectiveness on the risk profile of the bank!
Sound Stress Testing .ractices
Stress testing that alerts bank management to adverse une'pected outcomes related
to a broad variety of risks and provides an indication to banks of how much capital
might be needed to absorb losses should large shocks occur! (t is an important
tool that is used by banks as part of their internal risk management! 6oreover&
stress testing supplements other risk management approaches and measures!
Sound Compensation .ractices
4isk management must be embedded in the culture of a bank and should be under
the critical focus of the Senior 6anagement of the bank! +or developing and
maintaining a broad and deep risk management culture over time& compensation
policies may be drawn which should be linked to longer-term capital preservation and
the financial strength of the firm& and should consider risk-adjusted performance
measures! (n addition& a bank should provide ade,uate disclosure regarding its
compensation policies to stakeholders!
C. Mar"et 5iscipline - (Pillar <)
6arket iscipline is termed as development of a set of disclosure re,uirements
so that the market participants would be able to access key pieces of
information on the scope of application& capital& risk e'posures& risk assessment
processes& and in turn the capital ade,uacy of the institution! (t is considered as an
effective means of informing the market about a bank%s e'posure to those risks and
provides comparability! )on-compliance of the prescribed disclosure re,uirement
attracts penalty including financial penalty!
6arket discipline can contribute to a safe and sound banking environment!
Ience& non-compliance with the prescribed disclosure re,uirements would
attract a penalty& including financial penalty! (t is recogni/ed that the .illar 0
disclosure framework does not conflict with the re,uirement under accounting
standards which are broader in scope! 4B( will consider future modifications to
the 6arket iscipline disclosures as necessary in the light of its ongoing
monitoring of this area and industry developments! Banks should have a formal
disclosure policy approved by the Board of irectors that addresses the bank%s
approach for determining what disclosures it will make and the internal controls
over the disclosure process!
The .illar 0 disclosures as introduced under Basel ((( would become effective
from =$.=3.%=$< and the first set of disclosures as re,uired should be made by
banks as on <=.=>.%=$< (with e'ception of .ost 6arch 0$& "#$@ template (dealt
separately)!
.illar 0 applies at the top consolidated level of the banking group to which the
Capital *de,uacy +ramework applies! isclosures related to individual banks
within the groups would not generally be re,uired to be made by the parent
bank! Banks are re,uired to make .illar 0 disclosures at least on a half yearly
basis& irrespective of whether financial statements are audited& with the
e'ception i!e! Capital *de,uacy& Credit 4isk: >eneral isclosure for all banks5
and Credit 4isk: isclosures for .ortfolios subject to the Standardised
*pproach! These are to be made at least on a ,uarterly basis by banks! *ll
disclosures must either be included in a bank%s published financial results2
statements or at a minimum& must be disclosed on bank%s website!
Banks are re,uired to make disclosures in the prescribed format by 4B(! Banks are
also re,uired to maintain a L4egulatory isclosures Section% on their website where
all information relating to disclosures will be made available to the market
participants! The link should be prominently provided on the home page of the
website so as to make it easily accessible! *n archive for at least three years of all
templates relating to prior reporting periods should be made available by banks on
their websites!
Post Marc0 <$? %=$3 5isclosure Template
* common template which will be used by banks to report the details of their
regulatory capital after 6arch 0$& "#$@ i!e! after the transition period for the phasing-
in of deductions is over! (t is designed to meet the Basel ((( re,uirement to disclose
all regulatory adjustments! The template enhances consistency and comparability in
the disclosure of the elements of capital between banks and across jurisdictions!
Template durin' t0e Transitional Period
uring the transition period of phasing-in of regulatory adjustments under Basel ((( in
(ndia i!e! from *pril $& "#$0 to 6arch 0$& "#$@& banks will use a modified version of
the post 6arch 0$& "#$@ template! This template is designed to meet the Basel (((
re,uirement for banks to disclose the components of capital which will benefit from
the transitional arrangements!
Main &eatures Template
* common template has been designed to capture the main features of all regulatory
capital instruments issued by a bank at one place! This disclosure re,uirement is
intended to meet the Basel ((( re,uirement to provide a description of the main
features of capital instruments!
Ot0er 5isclosure Reuirements
This disclosure enables banks in meeting the Basel ((( re,uirement to provide the full
terms and conditions of capital instruments on their websites!
Banks operating in (ndia are re,uired to make additional disclosures in respect of:-
a. Securitisation e'posures in the trading book5
b. Sponsorship of off-balance sheet vehicles5
c. Oaluation with regard to securitisation e'posures5 and
d. .ipeline and warehousing risks with regard to securitisation e'posures
D. Capital Conser2ation Bu!!er &rame1or"
O:+ecti2e
The capital conservation buffer (CCB) is designed to ensure that banks build up capital
buffers during normal times (i!e! outside periods of stress) which can be drawn down as
losses incurred during a stressed period! The re,uirement is based on simple capital
conservation rules designed to avoid breaches of minimum capital re,uirements!
Dutside the period of stress& banks should hold buffers of capital above the
regulatory minimum! Bhen buffers have been drawn down& one way banks should look
to rebuild them is through reducing discretionary distributions of earnings! This could
include reducing dividend payments& share buybacks and staff bonus payments! Banks
may also choose to raise new capital from the market as an alternative to conserving
internally generated capital! (n the absence of raising capital from the market& the share
of earnings retained by banks for the purpose of rebuilding their capital buffers should
increase the nearer their actual capital levels are to the minimum capital re,uirement!
The capital conservation buffer can be drawn down only when a bank faces a
systemic or idiosyncratic stress! * bank should not choose in normal times to operate in
the buffer range simply to compete with other banks and win market share! This aspect
would be specifically looked into by 4B( during the S4?.! The banks which draw down
their capital conservation buffer during a stressed period should also have a definite
plan to replenish the buffer as part of its (C**. and strive to bring the buffer to the
desired level within a time limit agreed to with 4B( during the S4?.!
The framework of capital conservation buffer will enable the banks to:-
a) Strengthen the ability of banks to withstand adverse economic environment
conditions&
b) Ielp increase banking sector resilience both going into a downturn5 and
c) .rovide the mechanism for rebuilding capital during the early stages of economic
recovery!
By retaining a greater proportion of earnings during a downturn& banks will be able to
help ensure that capital remains available to support the ongoing business operations 2
lending activities during the period of stress! Therefore& this framework is e'pected to
help reduce pro-cyclicality!
&rame1or"
Banks are re,uired to maintain a capital conservation buffer of "!H< of 4B* in the form
of Common ?,uity Tier $ capital above the regulatory minimum capital re,uirement of
8<! CCB is to be phased-in over a period of : years in a uniform manner of #!="H< per
year& commencing from 0$!0!$H. Banks should not distribute capital (i!e! pay dividends
or bonuses in any form) in case capital level falls within this range! The constraints
imposed are related to the distributions only and are not related to the operations of
banks! The distribution constraints imposed on banks& when their capital levels fall into
the range& increase as the banks% capital levels approach the minimum re,uirements!
The minimum capital conservation ratios a bank must meet at various levels of the
Common ?,uity Tier $ capital ratios is shown as under:-
6inimum capital conservation standards for individual bank
C?T $ 4atio after including the
current periods of retained
earnings
6inimum Capital Conservation
4atios (in < of earnings)
H!H< - =!$"H< $##<
U=!$"H< - =!@H< ;#<
U=!@H< - @!0@H< =#<
U@!0@H< - ;!#< :#<
U;!#< #<
(t may be observed from the above that a bank with a Common ?,uity Tier $ capital
ratio in the range of =!$"H< to =!@H< is re,uired to conserve ;#< of its earnings in the
subse,uent financial year (i!e! payout not more than "#< in terms of dividends& share
buybacks and discretionary bonus payments is allowed)! Basel ((( minimum capital
conservation standards apply with reference to the applicable minimum C?T$
capital and applicable CCB! uring the transition period& banks may refer to the level of
ratios provided by 4B( in the Circular for meeting the minimum capital conservation
ratios at various levels of the C?T $ capital ratios!
Capital conservation buffer is applicable both at the solo level (global position) as well
as at the consolidated level& i!e! restrictions would be imposed on distributions at the
level of both the solo bank and the consolidated group!
E. Le2era'e Ratio &rame1or"
The leverage ratio provisions in the Basel ((( document are intended to serve as the
basis for testing the leverage ratio during the parallel run period! The Basel Committee
will test a minimum Tier $ leverage ratio of 0< during the parallel run period from
Vanuary $& "#$0 to Vanuary $& "#$@! The leverage ratio is calibrated to act as a credible
supplementary measure to the risk based capital re,uirements! The main objective of
the leverage ratio framework is:-
a) constrain the build-up of leverage in the banking sector& helping avoid
destabilising deleveraging processes which can damage the broader financial
system and the economy5 and
b) reinforce the risk based re,uirements with a simple& non-risk based
RbackstopS measure
uring the period of parallel run& banks should strive to maintain their e'isting
level of leverage ratio but& in no case the leverage ratio should fall below :!H<! *
bank whose leverage ratio is below :!H< may endeavor to bring it above :!H< as
early as possible! +inal leverage ratio re,uirement would be prescribed by 4B( after
the parallel run taking into account the prescriptions given by the Basel Committee!
The leverage ratio shall be maintained on a ,uarterly basis! The basis of
calculation at the end of each ,uarter is Rthe average of the month end leverage ratio
over the ,uarter based on the definitions of capital (i!e! the capital measure) and the
total e'posure (i!e! the e'posure measure) respectively as detailed in the 4B( Circular!
(The criteria for Classification as Common Shares (.aid up ?,uity Capital) for
4egulatory .urposes for (ndian Banks as well as +oreign Banks& etailed guidelines
on issuance of various ebt (nstruments vi/! (nnovative .erpetual ebt (nstrument
((.()& .erpetual )on-cumulative .reference Shares (.)C.S)& ebt Capital
(nstruments& .erpetual Cumulative .reference Shares (.C.S)& Credit efault Swaps
(CS)& (llustrations on Credit 4isk 6itigation (9oan ?'posures) N Calculation of
?'posure *mount for Collateralised transactions& (llustrations on computation of
capital charge for Counterparty Credit 4isk (CC4) N 4epo Transactions&
6easurement of capital charge for 6arket 4isks in respect of (nterest 4ate
erivatives and Dptions& *n (llustrative *pproach for 6easurement of (nterest 4ate
4isk in the Banking Book ((44BB) under .illar "& 4edeemable )on-cumulative
.reference Shares (4).S)& 4edeemable Cumulative .reference Shares (4C.S)&
Subordinated ebts& >uidelines on Securitisation of Standard *ssets& (llustrative
*pproach on 6easurement of Capital Charge for 6arket 4isks in respect of (nterest
4ate 4isk and erivatives& etc! are given in detail in the 4B( 6aster Circular which
also may be referred)!
(Source: 4B( 6! Circular dt! #$!#@!$0)