DBOD No. BP.BC. 13/21.01.002/2006-07 DT. 01/07/2006 (PART-II)
Master Circular- Prudential Norms on Capital AdequacyB. Treatment of Options
1. In recognition of the wide diversity of banks’ activities in options and the difficulties of measuring price risk for options, alternative approaches are permissible as under:
· those banks which solely use purchased options
1 will be free to use the simplified approach described in Section I below;
· those banks which also write options will be expected to use one of the intermediate approaches as set out in Section II below.
2. In the simplified approach, the positions for the options and the associated underlying, cash or forward, are not subject to the standardised methodology but rather are "carved-out" and subject to separately calculated capital charges that incorporate both general market risk and specific risk. The risk numbers thus generated are then added to the capital charges for the relevant category, i.e. interest rate related instruments, equities, and foreign exchange as described in Sections B to D. The delta-plus method uses the sensitivity parameters or "Greek letters" associated with options to measure their market risk and capital requirements. Under this method, the delta-equivalent position of each option becomes part of the standardised methodology set out in Section B to D with the delta-equivalent amount subject to the applicable general market risk charges. Separate capital charges are then applied to the gamma and vega risks of the option positions. The scenario approach uses simulation techniques to calculate changes in the value of an options portfolio for changes in the level and volatility of its associated underlyings. Under this approach, the general market risk charge is determined by the scenario "grid" (i.e. the specified combination of underlying and volatility changes) that produces the largest loss. For the delta-plus method and the scenario approach the specific risk capital charges are determined separately by multiplying the delta-equivalent of each option by the specific risk weights set out in Section B and Section C.
I. Simplified approach
3. Banks which handle a limited range of purchased options only will be free to use the simplified approach set out in Table A, on page 32, for particular trades. As an example of how the calculation would work, if a holder of 100 shares currently valued at Rs.10 each holds an equivalent put option with a strike price of Rs.11, the capital charge would be: Rs.1,000 x 18% (i.e. 9% specific plus 9% general market risk) = Rs.180, less the amount the option is in the money (Rs.11-Rs.10) x 100 = Rs.100, i.e. the capital charge would be Rs.80. A similar methodology applies for options whose underlying is a foreign currency or an interest rate related instrument.
Table A
Simplified approach: capital charges
| Position | Treatment |
| Long cash and Long putOrShort cash and Long call | The capital charge will be the market value of the underlying security2 multiplied by the sum of specific and general market risk charges 3 for the underlying less the amount the option is in the money (if any)bounded at zero 4 |
| Long callorLong put | The capital charge will be the lesser of:
(i) the market value of the underlying security multiplied by the sum of specific and general market risk charges3 for the underlying
(ii) the market value of the option 5 |
II. Intermediate approaches
(a) Delta-plus method
4. Banks which write options will be allowed to include delta-weighted options positions within the standardised methodology set out in Section B - D. Such options should be reported as a position equal to the market value of the underlying multiplied by the delta.
However, since delta does not sufficiently cover the risks associated with options positions, banks will also be required to measure gamma (which measures the rate of change of delta) and vega (which measures the sensitivity of the value of an option with respect to a change in volatility) sensitivities in order to calculate the total capital charge. These sensitivities will be calculated according to an approved exchange model or to the bank’s proprietary options pricing model subject to oversight by the Reserve Bank of India
6.
5. Delta-weighted positions with debt securities or interest rates as the underlying will be slotted into the interest rate time-bands, as set out in Table 1 of Section B, under the following procedure. A two-legged approach should be used as for other derivatives, requiring one entry at the time the underlying contract takes effect and a second at the time the underlying contract matures. For instance, a bought call option on a June three-month interest-rate future will in April be considered, on the basis of its delta-equivalent value, to be a long position with a maturity of five months and a short position with a maturity of two months
7. The written option will be similarly slotted as a long position with a maturity of two months and a short position with a maturity of five months. Floating rate instruments with caps or floors will be treated as a combination of floating rate securities and a series of European-style options. For example, the holder of a three-year floating rate bond indexed to six month LIBOR with a cap of 15% will treat it as:
(i) a debt security that reprices in six months; and
(ii) a series of five written call options on a FRA with a reference rate of 15%, each with a negative sign at the time the underlying FRA takes effect and a positive sign at the time the underlying FRA matures
8.
6. The capital charge for options with equities as the underlying will also be based on the delta-weighted positions which will be incorporated in the measure of market risk described in Section C. For purposes of this calculation each national market is to be treated as a separate underlying. The capital charge for options on foreign exchange and gold positions will be based on the method set out in Section D. For delta risk, the net delta-based equivalent of the foreign currency and gold options will be incorporated into the measurement of the exposure for the respective currency (or gold) position.
7. In addition to the above capital charges arising from delta risk, there will be further capital charges for gamma and for vega risk. Banks using the delta-plus method will be required to calculate the gamma and vega for each option position (including hedge positions) separately. The capital charges should be calculated in the following way:
(i) for each individual option a "gamma impact" should be calculated according to a Taylor series expansion as:
Gamma impact = ½ x Gamma x VU²
where VU = Variation of the underlying of the option.
(ii) VU will be calculated as follows:
· for interest rate options if the underlying is a bond, the price sensitivity should be worked out as explained. An equivalent calculation should be carried out where the underlying is an interest rate.
· for options on equities and equity indices; which are not permitted at present, the market value of the underlying should be multiplied by 9%
9;
· for foreign exchange and gold options: the market value of the underlying should be multiplied by 9%;
(iii) For the purpose of this calculation the following positions should be treated as the same underlying:
· for interest rates
10, each time-band as set out in Table 1 of Section B
11;
· for equities and stock indices, each national market;
· for foreign currencies and gold, each currency pair and gold;
(iv) Each option on the same underlying will have a gamma impact that is either positive or negative. These individual gamma impacts will be summed, resulting in a net gamma impact for each underlying that is either positive or negative. Only those net gamma impacts that are negative will be included in the capital calculation.
(v) The total gamma capital charge will be the sum of the absolute value of the net negative gamma impacts as calculated above.
(vi) For volatility risk, banks will be required to calculate the capital charges by multiplying the sum of the vegas for all options on the same underlying, as defined above, by a proportional shift in volatility of ±?25%.
(vii) The total capital charge for vega risk will be the sum of the absolute value of the individual capital charges that have been calculated for vega risk.
(b) Scenario approach
8. More sophisticated banks will also have the right to base the market risk capital charge for options portfolios and associated hedging positions on scenario matrix analysis. This will be accomplished by specifying a fixed range of changes in the option portfolio’s risk factors and calculating changes in the value of the option portfolio at various points along this "grid". For the purpose of calculating the capital charge, the bank will revalue the option portfolio using matrices for simultaneous changes in the option’s underlying rate or price and in the volatility of that rate or price. A different matrix will be set up for each individual underlying as defined in paragraph 7 above. As an alternative, at the discretion of each national authority, banks which are significant traders in options for interest rate options will be permitted to base the calculation on a minimum of six sets of time-bands. When using this method, not more than three of the time-bands as defined in Section B should be combined into any one set.
9. The options and related hedging positions will be evaluated over a specified range above and below the current value of the underlying. The range for interest rates is consistent with the assumed changes in yield in Table 1 of Section B. Those banks using the alternative method for interest rate options set out in paragraph 8 above should use, for each set of time-bands, the highest of the assumed changes in yield applicable to the group to which the time-bands belong
12. The other ranges are ±9 % for equities and ±9 % for foreign exchange and gold. For all risk categories, at least seven observations (including the current observation) should be used to divide the range into equally spaced intervals.
10. The second dimension of the matrix entails a change in the volatility of the underlying rate or price. A single change in the volatility of the underlying rate or price equal to a shift in volatility of + 25% and - 25% is expected to be sufficient in most cases. As circumstances warrant, however, the Reserve Bank may choose to require that a different change in volatility be used and / or that intermediate points on the grid be calculated.
11. After calculating the matrix, each cell contains the net profit or loss of the option and the underlying hedge instrument. The capital charge for each underlying will then be calculated as the largest loss contained in the matrix.
12. In drawing up these intermediate approaches it has been sought to cover the major risks associated with options. In doing so, it is conscious that so far as specific risk is concerned, only the delta-related elements are captured; to capture other risks would necessitate a much more complex regime. On the other hand, in other areas the simplifying assumptions used have resulted in a relatively conservative treatment of certain options positions.
13. Besides the options risks mentioned above, the RBI is conscious of the other risks also associated with options, e.g. rho (rate of change of the value of the option with respect to the interest rate) and theta (rate of change of the value of the option with respect to time). While not proposing a measurement system for those risks at present, it expects banks undertaking significant options business at the very least to monitor such risks closely. Additionally, banks will be permitted to incorporate rho into their capital calculations for interest rate risk, if they wish to do so.
[*
1Unless all their written option positions are hedged by perfectly matched long positions in exactly the same options, in which case no capital charge for market risk is required
2In some cases such as foreign exchange, it may be unclear which side is the "underlying security"; this should be taken to be the asset which would be received if the option were exercised. In addition the nominal value should be used for items where the market value of the underlying instrument could be zero, e.g. caps and floors, swaptions etc.
3Some options (e.g. where the underlying is an interest rate or a currency) bear no specific risk, but specific risk will be present in the case of options on certain interest rate-related instruments (e.g. options on a corporate debt security or corporate bond index; see Section B for the relevant capital charges) and for options on equities and stock indices (see Section C). The charge under this measure for currency options will be 9%.
4 For options with a residual maturity of more than six months, the strike price should be compared with the forward, not current, price. A bank unable to do this must take the "in-the-money" amount to be zero.
5 Where the position does not fall within the trading book (i.e. options on certain foreign exchange or commodities positions not belonging to the trading book), it may be acceptable to use the book value instead.
6 Reserve Bank of India may wish to require banks doing business in certain classes of exotic options (e.g. barriers, digitals) or in options "at-the-money" that are close to expiry to use either the scenario approach or the internal models alternative, both of which can accommodate more detailed revaluation approaches.
7 A two-months call option on a bond future, where delivery of the bond takes place in September, would be considered in April as being long the bond and short a five-months deposit, both positions being delta-weighted.
8 The rules applying to closely-matched positions set out in paragraph 2 (a) of this Attachment will also apply in this respect.
9 The basic rules set out here for interest rate and equity options do not attempt to capture specific risk when calculating gamma capital charges. However, Reserve Bank may require specific banks to do so.
10 Positions have to be slotted into separate maturity ladders by currency.
11 Banks using the duration method should use the time-bands as set out in Table 1 of Section B
12 If, for example, the time-bands 3 to 4 years, 4 to 5 years and 5 to 7 years are combined, the highest assumed change in yield of these three bands would be 0.75.]
Attachment II
(Para 7.2.3)
Example for computing the capital charge including the vertical and horizontal disallowances on interest rate related instruments| | ** 0.22 x 5%=0.01 | @ 2.79 x 5%=0.14 | # 0.29 x 30%=0.09 | |
| | Zone 1 | Zone 2 | Zone 3 | |
| Time-band | 0-1 month | 1-3 month | 3-6 month | 6m - 1y | 1– 1.9y | 1.9– 2.8y | 2.8– 3.6y | 3.6-4.3y | 4.3– 5.7y | 5.7- 7.3y | 7.3-9.3y | 9.3-10.6y | 10.6- 12y | 12- 20y | Over 20y | Capital Charge |
| Position | | 0.72 | | 2.51 | | 1.35 | 1.77 | 2.29 | | 2.75 | 2.79 | | 3.63 | | | 17.82 |
| Derivatives (long) | | | 0.47 | | | | | 1.07 | | | | | | | | 1.54 |
| Derivatives (short) | | | (-)0.22 | | | | | | | | (-)3.08 | | | | | (-)3.30 |
| Net Position | | 0.72 | 0.25 | 2.51 | | 1.35 | 1.77 | 3.36 | | 2.75 | (-)0.29 | | 3.63 | | | 16.06 |
| Vertical Disallowance (5%) | | | 0.01** | | | | | | | | 0.14 @ | | | | | 0.15 |
| | | | | | | | | | | | | | | | | |
| Horizontal Disallowance 1 (under Zone 3) | | | | | | | | | | | 0.09 # | | | | | 0.09 |
| | | | | | | | | | | | | | | | | |
| Horizontal disallowance 2 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Horizontal Disallowance 3 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
1. Calculation of Vertical Disallowance
While calculating capital charge for general market risk on interest rate related instruments, banks should recognize the basis risk (different types of instruments whose price responds differently for movement in general rates) and gap risk (different maturities within timebands). This is addressed by a small capital charge (5%) on matched (off-setting) positions in each time band (“Vertical Disallowance”)
An off-setting position, for vertical disallowance, will be the either the sum of long positions and or the short positions within a time band, whichever is lower. In the above example, except for the time band 3-6 months in Zone 1 and the time band of 7.3-9.3 years, where there are off-setting positions of (-) 0.22 and 2.79, there is no off-setting position in any other time band. The sum of long positions in the 3-6 months time band is + 0.47 and the sum of short positions in this time band is (-) 0.22. This off-setting position of 0.22 is subjected to a capital charge of 5% i.e. 0.01. The sum of long positions in the 7.3-9.3 years time band is + 2.79 and the sum of short positions in this time band is (-) 3.08. This off-setting position of 2.79 is subjected to a capital charge of 5% i.e. 0.1395. It may be mentioned here that if a bank does not have both long and short positions in the same time band, there is no need for any vertical disallowance. Banks in India are not allowed to take any short position in their books, except in derivatives. Therefore, banks in India will generally not be subject to vertical disallowance unless they have a short position in derivatives.
2. Calculation of Horizontal Disallowance
While calculating capital charge for general market risk on interest rate related instruments, banks must subject their positions to a second round of off-setting across time bands with a view to give recognition to the fact that interest rate movements are not perfectly correlated across maturity bands (yield curve risk and spread risk) i.e matched long and short positions in different time bands may not perfectly off-set. This is achieved by a “Horizontal Disallowance”.
An off-setting position, for horizontal disallowance, will be the either the sum of long positions and or the short positions within a Zone, whichever is lower. In the above example, except in Zone 3 (7.3 to 9.3 years) where there is an off-setting (matched) position of (-) 0.29 , there is no off-setting position in any other Zone. The sum of long positions in this Zone is 9.74 and the sum of short positions in this Zone is (-) 0.29 . This off-setting position of 0.29 is subject to horizontal disallowance as under:
With in the same Zone (Zone 3) 30% of 0.29 = 0.09
Between adjacent Zones (Zone 2 & 3) = Nil
Between Zones 1 and Zone 3 = Nil
It may be mentioned here that if a bank does not have both long and short positions in different time zones, there is no need for any horizontal disallowance. Banks in India are not allowed to take any short position in their books except in derivatives. Therefore, banks in India will generally not be subject to horizontal disallowance unless they have short positions in derivatives.
3. Total capital charge for interest rate related instruments
| For overall net position | 16.06 |
| For vertical disallowance | 0.15 |
| For horizontal disallowance in Zone 3 | 0.09 |
| For horizontal disallowance in adjacent zones | nil |
| For horizontal disallowance between Zone 1 & 3 | Nil |
| Total capital charge for interest rate related instruments | 16.30 |
ANNEX 1
Terms and conditions applicable to Innovative Perpetual Debt Instruments for inclusion as Tier 1 capital
The Innovative Perpetual Debt Instruments (Innovative Instruments) that may be issued as bonds or debentures by Indian banks should meet the following terms and conditions to qualify for inclusion as Tier 1 Capital for capital adequacy purposes.
1. Terms of Issue of innovative instruments
i) Currency of issue
Banks shall issue innovative instruments in Indian Rupees. Banks shall obtain prior approval of the Reserve Bank of India, on a case-by-case basis, for issue of innovative instruments in foreign currency.
ii) Amount
The amount of innovative instruments to be raised may be decided by the Board of Directors of banks.
iii) Limits
Innovative instruments shall not exceed 15 per cent of total Tier 1 capital. The above limit will be based on the amount of Tier 1 capital after deduction of goodwill and other intangible assets but before the deduction of investments. Innovative instruments in excess of the above limits shall be eligible for inclusion under Tier 2, subject to limits prescribed for Tier 2 capital. However, investors’ rights and obligations would remain unchanged.
iv) Maturity period
The innovative instruments shall be perpetual.
v) Rate of interest
The interest payable to the investors may be either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate.
vi) Options
Innovative instruments shall not be issued with a ‘put option’. However banks may issue the instruments with a call option subject to strict compliance with each of the following conditions:
a) Call option may be exercised after the instrument has run for at least ten years; and
b) Call option shall be exercised only with the prior approval of RBI (Department of Banking Operations & Development). While considering the proposals received from banks for exercising the call option the RBI would, among other things, take into consideration the bank’s CRAR position both at the time of exercise of the call option and after exercise of the call option.
vii) Step-up option
The issuing bank may have a step-up option which may be exercised only once during the whole life of the instrument, in conjunction with the call option, after the lapse of ten years from the date of issue. The step-up shall not be more than 100 bps. The limits on step-up apply to the all-in cost of the debt to the issuing banks.
viii) Lock-In Clause
(a) Innovative instruments shall be subjected to a lock-in clause in terms of which the issuing bank shall not be liable to pay interest, if
1. the bank’s CRAR is below the minimum regulatory requirement prescribed by RBI; OR
2. the impact of such payment results in bank’s capital to risk assets ratio (CRAR) falling below or remaining below the minimum regulatory requirement prescribed by Reserve Bank of India;
(b) However, banks may pay interest with the prior approval of RBI when the impact of such payment may result in net loss or increase the net loss, provided the CRAR remains above the regulatory norm.
(c) The interest shall not be cumulative.
(d) All instances of invocation of the lock-in clause should be notified by the issuing banks to the Chief General Managers-in-Charge of Department of Banking Operations & Development and Department of Banking Supervision of the Reserve Bank of India, Mumbai.
ix) Seniority of claim
The claims of the investors in innovative instruments shall be
a) Superior to the claims of investors in equity shares; and
b) Subordinated to the claims of all other creditors.
x) Discount
The innovative instruments shall not be subjected to a progressive discount for capital adequacy purposes since these are perpetual.
xi) Other conditions
a) Innovative instruments should be fully paid-up, unsecured, and free of any restrictive clauses.
b) Investment in these instruments by FIIs and NRIs shall be within an overall limit of 49% and 24% of the issue respectively, subject to the investment by each FII not exceeding 10% of the issue and investment by each NRI not exceeding 5% of the issue.
c) Banks should compute their overall eligibility level for raising capital through Innovative Perpetual Debt Instruments with reference to the Tier I capital as on the last annual balance sheet date (i.e. March 31). A bank may raise fresh capital through Innovative Perpetual Debt Instruments from FIIs and NRIs up to 49 percent and 24 percent (respectively) of the amount proposed to be raised within one year or the eligible limit whichever is less. The bank should, however, raise the remaining amount from the domestic investors within a period of one year from the date of issue to FIIs / NRIs, to ensure compliance with the limits set for FIIs and NRIs at the end of the one year period.
d) Banks should comply with the terms and conditions, if any, stipulated by SEBI / other regulatory authorities in regard to issue of the instruments.
2. Compliance with Reserve Requirements
i) The funds collected by various branches of the bank or other banks for the issue and held pending finalisation of allotment of the innovative instruments will have to be taken into account for the purpose of calculating reserve requirements.
ii) The total amount raised by a bank through innovative instruments shall be reckoned as liability for the calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will attract CRR/SLR requirements.
3. Reporting Requirements
Banks issuing innovative instruments shall submit a report to the Chief General Manager-in-charge, Department of Banking Operations & Development, Reserve Bank of India, Mumbai giving details of the debt raised, including the terms of issue specified at item 1 above together with a copy of the offer document soon after the issue is completed.
4. Investment in innovative instruments issued by other banks/ FIs
i) A bank's investment in innovative instruments issued by other banks and financial institutions will be reckoned along with the investment in other instruments eligible for capital status while computing compliance with the overall ceiling of 10 percent for cross holding of capital among banks/FIs prescribed vide circular DBOD.BP.BC.No.3/ 21.01.002/ 2004-05 dated 6th July 2004 and also subject to cross holding limits.
ii) Bank's investments in innovative instruments issued by other banks/ financial institutions will attract a 100% risk weight for capital adequacy purposes.
5. Grant of advances against innovative instruments
Banks should not grant advances against the security of the innovative instruments issued by them.
6. Raising of innovative Instruments for inclusion as Tier 1 capital by foreign banks in India
Foreign banks in India may raise Head Office (HO) borrowings in foreign currency for inclusion as Tier 1 capital subject to the same terms and conditions as mentioned in items 1 to 5 above for Indian banks. In addition, the following terms and conditions would also be applicable:
i) Maturity period
If the amount of innovative Tier 1 capital raised as Head Office borrowings shall be retained in India on a perpetual basis .
ii) Rate of interest
Rate of interest on innovative Tier 1 capital raised as HO borrowings should not exceed the on-going market rate. Interest should be paid at half yearly rests.
iii) Withholding tax
Interest payments to the HO will be subject to applicable withholding tax.
iv) Documentation
The foreign bank raising innovative Tier 1 capital as HO borrowings should obtain a letter from its HO agreeing to give the loan for supplementing the capital base for the Indian operations of the foreign bank. The loan documentation should confirm that the loan given by Head Office shall be eligible for the same level of seniority of claim as the investors in innovative instruments capital instruments issued by Indian banks. The loan agreement will be governed by and construed in accordance with the Indian law.
v) Disclosure
The total eligible amount of HO borrowings shall be disclosed in the balance sheet under the head ‘Innovative Tier 1 capital raised in the form of Head Office borrowings in foreign currency’.
vi) Hedging
The total eligible amount of HO borrowing should remain fully swapped in Indian Rupees with the bank at all times.
vii) Reporting and certification
Details regarding the total amount of innovative Tier 1 capital raised as HO borrowings, along with a certification to the effect that the borrowing is in accordance with these guidelines, should be advised to the Chief General Managers-in-Charge of the Department of Banking Operations & Development (International Banking Section), Department of External Investments & Operations and Foreign Exchange Department (Forex Markets Division), Reserve Bank of India, Mumbai.
ANNEX 2
Terms and conditions applicable to Debt capital Instruments to qualify for inclusion as Upper Tier 2 Capital
The debt capital instruments that may be issued as bonds / debentures by Indian banks should meet the following terms and conditions to qualify for inclusion as Upper Tier 2 Capital for capital adequacy purposes.
1.Terms of Issue of Upper Tier 2 Capital instruments
i) Currency of issue
Banks shall issue Upper Tier 2 instruments in Indian Rupees. Banks shall obtain prior approval of the Reserve Bank of India, on a case-by-case basis, for issue of Upper Tier 2 instruments in foreign currency.
ii) Amount
The amount of Upper Tier 2 instruments to be raised may be decided by the Board of Directors of banks.
iii) Limits
Upper Tier 2 instruments along with other components of Tier 2 capital shall not exceed 100% of Tier 1 capital. The above limit will be based on the amount of Tier 1 capital after deduction of goodwill and other intangible assets but before the deduction of investments.
iv) Maturity period
The Upper Tier 2 instruments should have a minimum maturity of 15 years.
v) Rate of interest
The interest payable to the investors may be either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate.
vi) Options
Upper Tier 2 instruments shall not be issued with a ‘put option’. However banks may issue the instruments with a call option subject to strict compliance with each of the following conditions:
a) Call option may be exercised only if the instrument has run for at least ten years;
b) Call option shall be exercised only with the prior approval of RBI (Department of Banking Operations & Development). While considering the proposals received from banks for exercising the call option the RBI would, among other things, take into consideration the bank’s CRAR position both at the time of exercise of the call option and after exercise of the call option.
vii) Step-up option
The issuing bank may have a step-up option which may be exercised only once during the whole life of the instrument, in conjunction with the call option, after the lapse of ten years from the date of issue. The step-up shall not be more than 100 bps. The limits on step-up apply to the all-in cost of the debt to the issuing banks.
viii) Lock-In Clause
a) Upper Tier 2 instruments shall be subjected to a lock-in clause in terms of which the issuing bank shall not be liable to pay either interest or principal, even at maturity, if
1. the bank’s CRAR is below the minimum regulatory requirement prescribed by RBI OR
2. the impact of such payment results in bank’s capital to risk assets ratio (CRAR) falling below or remaining below the minimum regulatory requirement prescribed by Reserve Bank of India.
b) However, banks may pay interest with the prior approval of RBI when the impact of such payment may result in net loss or increase the net loss provided CRAR remains above the regulatory norm.
c) The interest amount due and remaining unpaid may be allowed to be paid in the later years in cash/ cheque subject to the bank complying with the above regulatory requirement. While paying such unpaid interest and principal banks are allowed to pay compound interest at a rate not exceeding the coupon rate of the relative Upper Tier 2 bonds, on the outstanding principal and interest.
d) All instances of invocation of the lock-in clause should be notified by the issuing banks to the Chief General Managers-in-Charge of Department of Banking Operations & Development and Department of Banking Supervision of the Reserve Bank of India, Mumbai.
ix) Seniority of claim
The claims of the investors in Upper Tier 2 instruments shall be
i. Superior to the claims of investors in instruments eligible for inclusion in Tier 1 capital; and
ii. Subordinate to the claims of all other creditors.
x) Discount
The Upper Tier 2 instruments shall be subjected to a progressive discount for capital adequacy purposes as in the case of long term subordinated debt over the last five years of their tenor. As they approach maturity these instruments should be subjected to progressive discount as indicated in the table below for being eligible for inclusion in Tier 2 capital.
| Remaining Maturity of Instruments | Rate of Discount (%) |
| Less than one year | 100 |
| One year and more but less than two years | 80 |
| Two years and more but less than three years | 60 |
| Three years and more but less than four years | 40 |
| Four years and more but less than five years | 20 |
xi) Redemption
Upper Tier 2 instruments shall not be redeemable at the initiative of the holder. All redemptions shall be made only with the prior approval of the Reserve Bank of India (Department of Banking Operations & Development).
xii) Other conditions
i. Upper Tier 2 instruments should be fully paid-up, unsecured, and free of any restrictive clauses.
ii. Investment in Upper Tier 2 instruments by FIIs shall be within the limits as laid down in the ECB Policy for investment in debt instruments. In addition, NRIs shall also be eligible to invest in these instruments as per existing policy.
iii. Banks should comply with the terms and conditions, if any, stipulated by SEBI/other regulatory authorities in regard to issue of the instruments.
2. Compliance with Reserve Requirements
i) The funds collected by various branches of the bank or other banks for the issue and held pending finalisation of allotment of the Upper Tier 2 Capital instruments will have to be taken into account for the purpose of calculating reserve requirements.
ii) The total amount raised by a bank through Upper Tier 2 instruments shall be reckoned as liability for the calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will attract CRR/SLR requirements.
3. Reporting Requirements
Banks issuing Upper Tier 2 instruments shall submit a report to the Chief General Manager-in-charge, Department of Banking Operations & Development, Reserve Bank of India, Mumbai giving details of the debt raised, including the terms of issue specified at item 1 above together with a copy of the offer document soon after the issue is completed.
4. Investment in Upper Tier 2 instruments issued by other banks/ FIs
i) A bank's investment in Upper Tier 2 instruments issued by other banks and financial institutions will be reckoned along with the investment in other instruments eligible for capital status while computing compliance with the overall ceiling of 10 percent for cross holding of capital among banks/FIs prescribed vide circular DBOD.BP.BC.No.3/ 21.01.002/ 2004-05 dated 6th July 2004 and also subject to cross holding limits.
ii) Bank's investments in Upper Tier 2 instruments issued by other banks/ financial institutions will attract a 100% risk weight for capital adequacy purposes.
5. Grant of advances against Upper Tier 2 instruments
Banks should not grant advances against the security of the Upper Tier 2 instruments issued by them.
6. Raising of Upper Tier 2 Instruments by foreign banks in India
Foreign banks in India may raise Head Office (HO) borrowings in foreign currency for inclusion as Upper Tier 2 capital subject to the same terms and conditions as mentioned in items 1 to 5 above for Indian banks. In addition, the following terms and conditions would also be applicable:
i) Maturity period
If the amount of Upper Tier 2 capital raised as Head Office borrowings is in tranches, each tranche shall be retained in India for a minimum period of fifteen years.
ii) Rate of interest
Rate of interest on Upper Tier 2 capital raised as HO borrowings should not exceed the on-going market rate. Interest should be paid at half yearly rests.
iii) Withholding tax
Interest payments to the HO will be subject to applicable withholding tax.
iv) Documentation
The foreign bank raising Upper Tier 2 capital as HO borrowings should obtain a letter from its HO agreeing to give the loan for supplementing the capital base for the Indian operations of the foreign bank. The loan documentation should confirm that the loan given by Head Office shall be eligible for the same level of seniority of claim as the investors in Upper Tier 2 debt capital instruments issued by Indian banks. The loan agreement will be governed by and construed in accordance with the Indian law.
v) Disclosure
The total eligible amount of HO borrowings shall be disclosed in the balance sheet under the head ‘Upper Tier 2 capital raised in the form of Head Office borrowings in foreign currency’.
vi) Hedging
The total eligible amount of HO borrowing should remain fully swapped in Indian Rupees with the bank at all times.
vii) Reporting and certification
Details regarding the total amount of Upper Tier 2 capital raised as HO borrowings, along with a certification to the effect that the borrowing is in accordance with these guidelines, should be advised to the Chief General Managers-in-Charge of the Department of Banking Operations & Development (International Banking Division), Department of External Investments & Operations and Foreign Exchange Department (Forex Markets Division), Reserve Bank of India, Mumbai.
ANNEXURE 3
Terms and conditions applicable to issue of unsecured bonds as Subordinated Debt by banks for raising Tier II capital
I. Rupee Subordinated Debt
1. Terms of Issue of Bond
To be eligible for inclusion in Tier - II Capital, terms of issue of the bonds as subordinated debt instruments should be in conformity with the following:
(i) Amount
The amount of subordinated debt to be raised may be decided by the Board of Directors of the banks.
(ii) Maturity period
(a) Subordinated debt instruments with an initial maturity period of less than 5 years, or with a remaining maturity of one year should not be included as part of Tier-II Capital. Further, they should be subjected to progressive discount as they approach maturity at the rates shown below:
| Remaining Maturity of Instruments | Rate of Discount (%) |
| Less than one year | 100 |
| More than One year and less than Two years | 80 |
| More than Two years and less than Three years | 60 |
| More than Three years and less than Four years | 40 |
| More than Four years and less than Five years | 20 |
(b) The bonds should have a minimum maturity of 5 years. However if the bonds are issued in the last quarter of the year i.e. from 1st January to 31st March, they should have a minimum tenure of sixty three months.
(iii) Rate of interest
The interest rate should not be more than 200 basis points above the yield on Government of India securities of equal residual maturity at the time of issuing bonds. The instruments should be 'vanila' with no special features like options etc.
(iv) Other conditions
a) The instruments should be fully paid-up, unsecured, subordinated to the claims of other creditors, free of restrictive clauses and should not be redeemable at the initiative of the holder or without the consent of the Reserve Bank of India.
b) Necessary permission from Foreign Exchange Department should be obtained for issuing the instruments to NRIs/OCBs/FIIs.
c) Banks should comply with the terms and conditions, if any, set by SEBI/other regulatory authorities in regard to issue of the instruments.
d) In the case of foreign banks rupee subordinated debt should be issued by the Head Office of the bank, through the Indian branch after obtaining specific approval from Foreign Exchange Department.
2. Inclusion in Tier II capital
Subordinated debt instruments will be limited to 50 per cent of Tier-I Capital of the bank. These instruments, together with other components of Tier II capital, should not exceed 100% of Tier I capital.
3. Grant of advances against bonds
Banks should not grant advances against the security of their own bonds.
4. Compliance with Reserve Requirements
The total amount of Subordinated Debt raised by the bank has to be reckoned as liability for the calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will attract CRR/SLR requirements.
5. Treatment of Investment in subordinated debt
Investments by banks in subordinated debt of other banks will be assigned 100% risk weight for capital adequacy purpose. Also, the bank's aggregate investment in Tier II bonds issued by other banks and financial institutions shall be within the overall ceiling of 10 percent of the investing bank's total capital. The capital for this purpose will be the same as that reckoned for the purpose of capital adequacy.
II. Subordinated Debt in foreign currency and Subordinated Debt in the form of Foreign Currency Borrowings from Head Office by foreign banks
Banks may take approval of RBI on a case-by-case basis.
III. Reporting Requirements
The banks should submit a report to Reserve Bank of India giving details of the capital raised, such as, amount raised, maturity of the instrument, rate of interest together with a copy of the offer document soon after the issue is completed.
ANNEXURE 3A
Tier II capital - Subordinated debt - Head Office borrowings in foreign currency raised by foreign banks operating in India for inclusion in Tier II capitalDetailed guidelines on the standard requirements and conditions for Head Office borrowings in foreign currency raised by foreign banks operating in India for Inclusion , as subordinated debt in Tier II capital are as indicated below:-
Amount of borrowing
2. The total amount of HO borrowing in foreign currency will be at the discretion of the foreign bank. However, the amount eligible for inclusion in Tier II capital as subordinated debt will be subject to a maximum ceiling of 50% of the Tier I capital maintained in India, and the applicable discount rate mentioned in para 5 below. Further as per extant instructions, the total of Tier II capital should not exceed 100% of Tier I capital.
Maturity period
3. Head Office borrowings should have a minimum initial maturity of 5 years. If the borrowing is in tranches, each tranche will have to be retained in India for a minimum period of five years. HO borrowings in the nature of perpetual subordinated debt, where there may be no final maturity date, will not be permitted.
Features
4. The HO borrowings should be fully paid up, i.e. the entire borrowing or each tranche of the borrowing should be available in full to the branch in India. It should be unsecured, subordinated to the claims of other creditors of the foreign bank in India, free of restrictive clauses and should not be redeemable at the instance of the HO.
Rate of discount
5. The HO borrowings will be subjected to progressive discount as they approach maturity at the rates indicated below:
| Remaining maturity of borrowing | Rate of discount |
| More than 5 years | Not Applicable (the entire amount can be included as subordinated debt in Tier II capital subject to the ceiling mentioned in para 2) |
| More than 4 years and less than 5 years | 20% |
| More than 3 years and less than 4 years | 40% |
| More than 2 years and less than 3 years | 60% |
| More than 1 year and less than 2 years | 80% |
| Less than 1 year | 100% (No amount can be treated as subordinated debt for Tier II capital) |
Rate of interest
6. The rate of interest on HO borrowings should not exceed the on-going market rate. Interest should be paid at half yearly rests.
Withholding tax
7. The interest payments to the HO will be subject to applicable withholding tax.
Repayment
8. All repayments of the principal amount will be subject to prior approval of Reserve Bank of India, Department of Banking Operations and Development.
Documentation
9. The bank should obtain a letter from its HO agreeing to give the loan for supplementing the capital base for the Indian operations of the foreign bank. The loan documentation should confirm that the loan given by Head Office would be subordinated to the claims of all other creditors of the foreign bank in India. The loan agreement will be governed by, and construed in accordance with the Indian law. Prior approval of the RBI should be obtained in case of any material changes in the original terms of issue.
Disclosure
10. The total eligible amount of HO borrowings may be disclosed in the balance sheet under the head `Subordinated loan in the nature of long term borrowings in foreign currency from Head Office’.
Reserve requirements
11. The total amount of HO borrowings is to be reckoned as liability for the calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will attract CRR/SLR requirements.
Hedging
12. The total eligible amount of HO borrowing should remain fully swapped with banks at all times. The swap should be in Indian rupees.
Reporting & Certification
13. Such borrowings done in compliance with the guidelines set out above, would not require prior approval of Reserve Bank of India. However, information regarding the total amount of borrowing raised from Head Office under this circular, along with a certification to the effect that the borrowing is as per the guidelines, should be advised to the Chief General Managers-in-Charge of the Department of Banking Operations & Development (International Banking Section), Department of External Investments & Operations and Foreign Exchange Department (Forex Markets Division), Reserve Bank of India, Mumbai.
ANNEXURE 4
Risk Weights for Calculation of CRAR
(Vide paragraph 3.4)I. Domestic Operations
A Funded Risk Assets
| Sr. No. | Item of asset or liability | Risk Weight % |
| I | Balances |
| 1. | Cash, balances with RBI | 0 |
| 2. | i. Balances in current account with other banks | 20 |
| ii. Claims on Bank | 20 |
| II | Investments(Applicable to securities held in HTM) |
| 1. | Investments in Government Securities. | 0 |
| 2. | Investments in other approved securities guaranteed by Central/ State Government.
Note: If the repayment of principal / interest in respect of State Government Guaranteed securities included in item 2, 4 and 6 has remained in default, for a period of more than 90 days banks should assign 102.5% risk weight. However the banks need to assign 102.5% risk weight only on those State Government guaranteed securities issued by the defaulting entities and not on all the securities issued or guaranteed by that State Government. | 0 |
| 3. | Investments in other securities where payment of interest and repayment of principal are guaranteed by Central Govt. (This will include investments in Indira/Kisan Vikas Patra (IVP/KVP) and investments in Bonds and Debentures where payment of interest and principal is guaranteed by Central Govt.)(cf para (i) of circular listed at item 4 part ‘B’ of Appendix) | 0 |
| 4. | Investments in other securities where payment of interest and repayment of principal are guaranteed by State Governments. | 0 |
| 5. | Investments in other approved securities where payment of interest and repayment of principal are not guaranteed by Central/State Govt. | 20 |
| 6. | Investments in Government guaranteed securities of Government Undertakings which do not form part of the approved market borrowing programme. | 20 |
| 7. | Claims on commercial banks | 20 |
| 8. | Investments in bonds issued by other banks | 20 |
| 9. | Investments in securities which are guaranteed by banks as to payment of interest and repayment of principal. | 20 |
| 10. | Investments in subordinated debt instruments and bonds issued by other banks or Public Financial Institutions for their Tier II capital. | 100 |
| 11. | Deposits placed with SIDBI/NABARD in lieu of shortfall in lending to priority sector. | 100 |
| 12. | Investment in Mortgage Backed Securities (MBS) of residential assets of Housing Finance Companies (HFCs) which are recognised and supervised by National Housing Bank (subject to satisfying terms & conditions given in Annexure 4B). | 75 |
| 13. | Investment in securitised paper pertaining to an infrastructure facility. (subject to satisfying terms & conditions given in Annexure 4C). | 50 |
| 14 | Investments in debentures/ bonds/ security receipts/ Pass Through Certificates issued by Securitisation Company / SPVs/ Reconstruction Company and held by banks as investment | 100 |
| 15. | All other investments including investments in securities issued by PFIs.
Note: Equity investments in subsidiaries, intangible assets and losses deducted from Tier I capital should be assigned zero weight | 100 |
| 16 | Direct investment in equity shares, convertible bonds, debentures and units of equity oriented mutual funds | 125 |
| 17 | Investment in Mortgaged Backed Securities and other securitised exposures to Commercial Real Estate | 150 |
| 18 | Investments in Venture Capital Funds | 150 |
| 19 | Securities issued by SPVs in respect of securitisaion standard asset transactions underwritten and devolved by originator banks during the stipulated period of three months | 100 |
| 20 | Securities issued by SPVs in respect of securitisaion standard asset transactions underwritten and devolved to bank as party service provider during the stipulated period of three months | 100 |
| 21 | NPA Investment purchased from other banks | 100 |
| III | Loans & Advances including bills purchased and discounted and other credit facilities |
| 1. | Loans guaranteed by Govt. of India | 0 |
| 2. | Loans guaranteed by State Govts.
Note: If the loans guaranteed by State Govts. have remained in default for a period of more than 90 days a risk weight of 100 percent should be assigned. | 0 |
| 3. | Loans granted to public sector undertakings of Govt. of India | 100 |
| 4. | Loans granted to public sector undertakings of State Govts. | 100 |
5. (i)
(ii) | For the purpose of credit exposure, bills purchased/discounted /negotiated under LC (where payment to the beneficiary is not under reserve) is treated as an exposueon the LC issuing bank and assigned risk weight as is normally applicable to inter-bank exposures.Bills negotiated undr LCs 'under reserve', bills purchased/discounted/negotiated without LCs, will be reckoned as exposure on the borrower constituent. Accordingly, the exposure will attract a risk weight appropriate to the borrower.
(i) Govt
(ii) Banks
(iii) Others | 20
0
20
100 |
| 6. | Others including PFIs | 100 |
| 7. | Leased assets | 100 |
| 8. | Advances covered by DICGC/ECGC
Note: The risk weight of 50% should be limited to the amount guaranteed and not the entire outstanding balance in the accounts. In other words, the outstandings in excess of the amount guaranteed, will carry 100% risk weight. | 50 |
| 9. | SSI Advances Guaranteed by Credit Guarantee Fund Trust for Small Industries (CGTSI) up to the guaranteed portion.Note: Banks may assign zero risk weight for the guaranteed portion. The balance outstanding in excess of the guaranteed portion would attract a risk-weight as appropriate to the counter-party. Two illustrative examples are given in Annexure 4A. | 0 |
| 10. | Insurance cover under Business Credit Shield the product of New India Assurance Company Ltd. (Subject to Conditions given in Annexure 4D)
Note: The risk weight of 50% should be limited to the amount guaranteed and not the entire outstanding balance in the accounts. In other words, the outstandings in excess of the amount guaranteed, will carry 100% risk weight. | 50 |
| 11 | Advances against term deposits, Life policies, NSCs, IVPs and KVPs where adequate margin is available. | 0 |
| 12. | Loans and Advances granted to staff of banks which are fully covered by superannuation benefits and mortgage of flat/house. | 20 |
| 13. | Housing loans to individuals against the mortgage of residential housing properties. | 75 |
| 14 | Consumer credit including personal loans and credit cards | 125 |
| 15. | Takeout Finance |
(i) Unconditional takeover (in the books of lending institution)
(a) Where full credit risk is assumed by the taking over institution
(b) Where only partial credit risk is assumed by taking over institution
i)the amount to be taken over
ii) the amount not to be taken over | 20
20
100 |
| (ii) Conditional take-over (in the books of lending and Taking over institution) | 100 |
| 16 | Advances against shares to individuals for investment in equity shares (including IPOs/ESOPs), bonds and debentures, units of equity oriented mutual funds, etc. | 125 |
| 17 | Secured and unsecured advances to stock brokers | 125 |
| 18 | Fund based exposures commercial real estate | 150 |
| 19 | Funded liquidity facility for securitisation of standard asset transactions | 100 |
| 20 | NPA purchased from other banks | 100 |
| IV | Other Assets |
| 1. | Premises, furniture and fixtures | 100 |
| 2. | (i) Income tax deducted at source (net of provision) | 0 |
| (ii) Advance tax paid (net of provision) | 0 |
| (iii) Interest due on Government securities | 0 |
| (iv) Accrued interest on CRR balances and claims on RBI on account of Government transactions (net of claims of Government/RBI on banks on account of such transactions) | 0 |
| (v) All other assets | 100 |
B. Off-Balance Sheet Items
The credit risk exposure attached to off-Balance Sheet items has to be first calculated by multiplying the face value of each of the off-Balance Sheet items by ‘credit conversion factor’ as indicated in the table below. This will then have to be again multiplied by the weights attributable to the relevant counter-party as specified above.
| Sr. No. | Instruments | Credit Conversion Factor (%) |
| 1. | Direct credit substitutes e.g. general guarantees of indebtedness (including standby L/Cs serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptance). | 100 |
| 2. | Certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby L/Cs related to particular transactions). | 50 |
| 3. | Short-term self-liquidating trade-related contingencies (such as documentary credits collateralised by the underlying shipments). | 20 |
| 4. | Sale and repurchase agreement and asset sales with recourse, where the credit risk remains with the bank. | 100 |
| 5. | Forward asset purchases, forward deposits and partly paid shares and securities, which represent commitments with certain drawdown. | 100 |
| 6. | Note issuance facilities and revolving underwriting facilities. | 50 |
| 7. | Other commitments (e.g., formal standby facilities and credit lines) with an original maturity of over one year. | 50 |
| 8. | Similar commitments with an original maturity upto one year, or which can be unconditionally cancelled at any time. | 0 |
| 9. | Aggregate outstanding foreign exchange contracts of original maturity - | |
| · less than one year | 2 |
| · for each additional year or part thereof | 3 |
| 10. | Take-out Finance in the books of taking-over institution | |
| (i) Unconditional take-out finance | 100 |
| (ii) Conditional take-out finance | 50 |
| Note: As the counter-party exposure will determine the risk weight, it will be 100 percent in respect of all borrowers or zero percent if covered by Government guarantee. | |
| 11 | Non-Funded exposures to commercial real estate | 150 |
| 12 | Guarantees issued on behalf of stock brokers and market makers | 125 |
| 13 | Commitment to provide liquidity facility for secuitisation of stanadard asset transactions | 100 |
| 14 | Second loss credit enchancement for securitisation of standard asset transactions provided by third party | 100 |
NOTE: In regard to off-balance sheet items, the following transactions with non-bank counterparties will be treated as claims on banks and carry a risk-weight of 20%
a) Guarantees issued by banks against the counter guarantees of other banks.
b) Rediscounting of documentary bills accepted by banks. Bills discounted by banks which have been accepted by another bank will be treated as a funded claim on a bank.
In all the above cases banks should be fully satisfied that the risk exposure is in fact on the other bank.
C. Risk weights for Open positions
| Sr.No. | Item | Risk weight (%) |
| 1. | Foreign exchange open position. | 100 |
| 2. | Open position in gold
Note: The risk weighted position both in respect of foreign exchange and gold open position limits should be added to the other risk weighted assets for calculation of CRAR | 100 |
D. Risk weights for Forward Rate Agreement (FRA) /Interest Rate Swap (IRS)
For reckoning the minimum capital ratio, the computation of risk weighted assets on account of FRAs / IRS should be done as per the two steps procedure set out below:
Step 1
The notional principal amount of each instruments is to be multiplied by the conversion factor given below:
| Original Maturity | Conversion Factor |
| Less than one year | 0.5 per cent |
| One year and less than two years | 1.0 per cent |
| For each additional year | 1.0 per cent |
Step 2
The adjusted value thus obtained shall be multiplied by the risk weightage allotted to the relevant counter-party as specified below:
| Counter party | Risk weight |
| Banks | 20 per cent |
| Central & State Govt. | 0 percent |
| All others | 100 per cent |
II. Overseas operations (applicable only to Indian banks having branches abroad)
A. Funded Risk Assets
| Sr. No. | Item of asset or liability | Risk Weight % |
| i) | Cash | 0 |
| ii) | Balances with Monetary Authority | 0 |
| iii) | Investments in Government securities | 0 |
| iv) | Balances in current account with other banks | 20 |
| v) | All other claims on banks including but not limited to funds loaned in money markets, deposit placements, investments in CDs/FRNs. Etc. | 20 |
| vi) | Investment in non-bank sectors | 100 |
| vii) | Loans and advances, bills purchased and discounted and other credit facilities |
| a) Claims guaranteed by Government of India. | 0 |
| b) Claims guaranteed by State Governments | 0 |
| c) Claims on public sector undertakings of Government of India. | 100 |
| d) Claims on public sector undertakings of State Governments | 100 |
| e) Others | 100 |
| viii) | All other banking and infrastructural assets | 100 |
B. Non-funded risk assets
| Sr. No. | Instruments | Credit Conversion Factor (%) |
| i) | Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities) and acceptances (including endorsements with the character of acceptances) | 100 |
| ii) | Certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions) | 50 |
| iii) | Short-term self-liquidating trade related contingencies- such as documentary credits collateralised by the underlying shipments | 20 |
| iv) | Sale and repurchase agreement and asset sales with recourse, where the credit risk remains with the bank. | 100 |
| v) | Forward asset purchases, forward deposits and partly paid shares and securities, which represent commitments with certain draw down | 100 |
| vi) | Note issuance facilities and revolving underwriting facilities | 50 |
| vii) | Other commitments (e.g. formal standby facilities and credit lines) with an original maturity of over one year. | 50 |
| viii) | Similar commitments with an original maturity up to one year, or which can be unconditionally cancelled at any time. | 0 |
ANNEXURE 4 A
SSI Advances Guaranteed by Credit Guarantee Fund Trust for Small Industries (CGTSI)-Risk weights and Provisioning norms (paragraph I (A)(III)(9) of Annexure 4)
Risk-Weight
Example I
CGTSI Cover : 75% of the amount outstanding or 75% of the unsecured amount or Rs.18.75 lakh , whichever is the least.
| Realisable value of Security | : Rs.1.50 lakh |
| a) Balance outstanding | : Rs. 10.00 lakh |
| b) Realisable value of security | : Rs. 1.50 lakh |
| c) Unsecured amount (a) - (b) | : Rs 8.50 lakh |
| d) Guaranteed portion (75% of (c) ) | : Rs. 6.38 lakh |
| e) Uncovered portion (8.50 lakh-6.38 lakh) | : Rs. 2.12 lakh |
| Risk-weight on (b) and (e) | – Linked to the counter party |
| Risk-weight on (d) | – Zero |
Example II
CGTSI cover : 75% of the amount outstanding or 75% of the unsecured amount or Rs.18.75 lakh whichever is the least.
| Realisable value of Security | : Rs. 10.00 lakh. |
| a) Balance outstanding | : Rs. 40.00 lakh |
| b) Realisable value of security | : Rs. 10.00 lakh |
| c) Unsecured amount (a) - (b) | : Rs. 30.00 lakh |
| d) Guaranteed portion (max.) | : Rs. 18.75 lakh |
| e) Uncovered portion (Rs.30 lakh-18.75 lakh) | : Rs. 11.25 lakh |
| Risk-weight (b) and (e) | - Linked to the counter party |
| Risk-weight on (d) | - Zero |
ANNEXURE 4 B
Terms and conditions for the purpose of liberal Risk Weight for Capital Adequacy for investments in Mortgage Backed Securities (MBS) of residential assets of Housing Finance Companies (HFC).
(Vide item (I)(A)(II)(12)of Annexure 4)1(a) The right, title and interest of a HFC in securitised housing loans and receivables thereunder should irrevocably be assigned in favour of a Special Purpose Vehicle (SPV) / Trust.
1(b) Mortgaged securities underlying the securitised housing loans should be held exclusively on behalf of and for the benefit of the investors by the SPV/Trust.
1(c) The SPV or Trust should be entitled to the receivables under the securitised loans with an arrangement for distribution of the same to the investors as per the terms of issue of MBS. Such an arrangement may provide for appointment of the originating HFC as the servicing and paying agent. However, the originating HFC participating in a securitisation transaction as a seller, manager, servicer or provider of credit enhancement or liquidity facilities :
i. shall not own any share capital in the SPV or be the beneficiary of the trust used as a vehicle for the purchase and securitisation of assets. Share capital for this purpose shall include all classes of common and preferred share capital;
ii. shall not name the SPV in such manner as to imply any connection with the bank;
iii. shall not have any directors, officers or employees on the board of the SPV unless the board is made up of at least three members and where there is a majority of independent directors. In addition, the official(s) representing the bank will not have veto powers;
iv. shall not directly or indirectly control the SPV; or
v. shall not support any losses arising from the securitisation transaction or by investors involved in it or bear any of the recurring expenses of the transaction.
1(d) The loans to be securitised should be loans advanced to individuals for acquiring/constructing residential houses which should have been mortgaged to the HFC by way of exclusive first charge.
1(e) The loans to be securitised should be accorded an investment grade credit rating by any of the credit rating agencies at the time of assignment to the SPV.
1(f) The investors should be entitled to call upon the issuer - SPV - to take steps for recovery in the event of default and distribute the net proceeds to the investors as per the terms of issue of MBS.
1(g) The SPV undertaking the issue of MBS should not be engaged in any business other than the business of issue and administration of MBS of individual housing loans.
1(h) The SPV or Trustees appointed to manage the issue of MBS should have to be governed by the provisions of Indian Trusts Act, 1882.
2. If the issue of MBS is in accordance with the terms and conditions stated in paragraph 1 above and includes irrevocable transfer of risk and reward of the housing loan assets to the Special Purpose Vehicle (SPV)/Trust, investment in such MBS by any bank would not be reckoned as an exposure on the HFC originating the securitised housing loan. However, it would be treated as an exposure on the underlying assets of the SPV / Trust.
ANNEXURE 4C
Conditions for availing concessional risk weight on investment in securitised paper pertaining to an infrastructure facility
(Vide item (I)(A)(II)(13)of Annexure 4)1. The infrastructure facility should satisfy the conditions stipulated in our circular DBOD. No. BP. BC. 92/21.04.048/ 2002- 2003 dated June 16, 2004.
2. The infrastructure facility should be generating income/ cash flows which would ensure servicing/ repayment of the securitised paper.
3. The securitised paper should be rated at least 'AAA' by the rating agencies and the rating should be current and valid. The rating relied upon will be deemed to be current and valid if :
(i) The rating is not more than one month old on the date of opening of the issue, and the rating rationale from the rating agency is not more than one year old on the date of opening of the issue, and the rating letter and the rating rationale is a part of the offer document.
(ii) In the case of secondary market acquisition, the 'AAA' rating of the issue should be in force and confirmed from the monthly bulletin published by the respective rating agency.
4. The securitised paper should be a performing asset on the books of the investing/ lending institution.
ANNEXURE 4D
Conditions for availing concessional risk weight for Advances covered by Insurance cover under Business Credit Shield the product of New India Assurance Company Ltd.
(Vide item (I)(A)(III)(10)of Annexure 4)New India Assurance Company Limited (NIA) should comply with the provisions of the Insurance Act, 1938, the Regulations made thereunder - especially those relating to Reserves for unexpired risks and the Insurance Regulatory and Development Authority (Assets, Liabilities and Solvency Margin of Insurers) Regulations, 2000 and any other conditions/regulations that may be prescribed by IRDA in future, if their insurance product - Business Credit Shield (BCS) - is to quality for the above treatment.
2. To be eligible for the above regulatory treatment in respect of export credit covered by BCS policy of NIA, banks should ensure that:
i) The BCS policy is assigned in its favour, and
ii) NIA abides by the provisions of the Insurance Act, 1938 and the regulations made thereunder, especially those relating to Reserves for unexpired risks and the Insurance Regulatory and Development Authority (Assets, Liabilities and Solvency Margin of Insurers) Regulations, 2000, and any other conditions/regulations that may be prescribed by IRDA in future.
3. Banks should maintain separate account(s) for the advances to exporters, which are covered by the insurance under the "Business Credit Shield" to enable easy administration/verification of risk weights/provisions.
Appendix
PRUDENTIAL NORMS ON CAPITAL ADEQUACYPart-A
List of Circulars
| No. | Circular No. | Date | Subject | Para No. in this circular |
| 1 | DBOD.No.BP.BC. 57 / 21.01.002 / 2005-2006 | January 25, 2006 | Enhancement of banks’ capital raising options for capital adequacy purposes | 2.1.1, 2.1.5(iv),2.1.8(ii)(b),2.2.1(ii),2.2.2Annex 1, &2 |
| 2. | DBOD.NO.BP.BC.23/21.01.002/2002-03 | 29.8.2002 | Capital Adequacy and Provisioning Requirements for Export Credit Covered by Insurance/Guarantee. | Annexure2 (I)(A)(III)(10) |
| 3. | DBOD. No. IBS. BC.65/ 23. 10.015 / 2001-02 | 14.02.2002 | Subordinated debt for inclusion in Tier II capital-Head Office borrowings in foreign currency by Foreign Banks operating in India | 2.4.2 |
| 4. | DBOD No. BP. BC. 106/21. 01.002/2001- 02 | 24.05 2002 | Risk Weight on Housing Finance and Mortgage Backed Securities | Annexure 2(I)(A)(II)(12)Annexure 2(I)(A)(III) (11) |
| 5. | DBOD.No.BP.BC.128/21.04.048/00-01 | 7.06.2001 | SSI Advances Guaranteed by Credit Guarantee Fund Trust for Small Industries (CGTSI) | Annexure 2(III)(9) |
| 6. | DBOD.BP.BC.110/21.01.002/00-01 | 20.04.2001 | Risk Weight on Deposits placed with SIDBI /NABARD in lieu of shortfall in lending to Priority Sectors | Annexure 2(II)(11) |
| 7. | DBOD.BP.BC.83/21.01.002/00-01 | 28.02.2001 | Loans and advances to staff-assignment of risk weight and treatment in the balance sheet. | Annexure 2(I)(A)(10) (III) |
| 8. | DBOD.No.BP.BC.87/21.01.002/99 | 08.09.99 | Capital Adequacy Ratio - Risk Weight on Banks' Investments in Bonds/Securities Issued by Financial Institutions | Annexure 2(I)(A)(2) (ii) |
| 9. | DBOD.No.BP.BC.5/21.01.002/98-99 | 08.02.99 | Issue of Subordinated Debt for Raising Tier II Capital | 2.1.4 (v)(c) 2.4.1, 2.4.2 |
| 10. | DBOD.No.BP.BC.119/21.01.002/ 98 | 28.12.98 | Monetary & Credit Policy Measures - Capital Adequacy Ratio - Risk Weight on Banks' Investments in Bonds/Securities Issued by Financial Institutions | Annexure 2(I)(A)(2) (ii) |
| 11. | DBOD.No.BP.BC.152/21.01.002/ 96 | 27.11.96 | Capital Adequacy Measures | 2.3.1 (ii) |
| 12. | DBOD.No.IBS.BC.64/23.61.001/ 96 | 24.05.96 | Capital Adequacy Measures | 2.2.1 (a) & (b) |
| 13. | DBOD.No.BP.BC.13/21.01.002/96 | 08.02.96 | Capital Adequacy Measures | Annexure 2(I)(A)(II) (10) |
| 14. | DBOD.No.BP.BC.99/21.01.002/94 | 24.08.94 | Capital Adequacy Measures | 2.1.4 (ii) |
| 15. | DBOD.No.BP.BC.9/21.01.002/94 | 08.02.94 | Capital Adequacy Measures | Annexure 2(I)(A)(II)(7),Annexure 2(I)(A)(III)(2),Annexure 2(I)(B),Annexure 2(I)(A)(III)(7),Annexure 2(I)(A)(IV)(2),Annexure 2(I)(A)(III)(9), |
| 16. | DBOD.No.IBS.BC.98/23-50-001-92/93 | 06.04.93 | Capital Adequacy Measures - Treatment of Foreign Currency Loans to Indian Parties (DFF) | 2.2.3 |
| 17. | DBOD.No.BP.BC.117/21.01.002-92 | 22.04.92 | Capital Adequacy Measures | 2 |
Part-B
List of Other Circulars containing Instructions/ Guidelines/Directives related to Prudential Norms| No. | Circular No. | Para No. of circular | Date | Subject | Para No. in this circular |
| 1 | DBOD.BP.BC.105/21.01.002/2002-2003, | 1 | 7.05.2003 | Monetary And Credit Policy 2003-04 - Investment Fluctuation Reserve | 2.1.4(vi) |
| 2 | DBOD.No.BP.BC.96/21.04.048/2002-03 | 5(B) of Annexure | 23.4.2003 | Guidelines on Sale Of Financial Assets to Securitisation Company (SC)/Reconstruction Company (RC) (Created Under The Securitisation and Reconstruction of Financial Assets And Enforcement of Security Interest Act, 2002) and Related Issues. | Annexure2 (I)(A)(II)(14) |
| 3 | DBOD No. BP.BC. 89/21.04.018/2002-03 | 9.3.1 of Annexure | 29.3.2003 | Guidelines on compliance with Accounting Standards (AS) by banks | 2.1.4 |
| 4 | DBOD.No.BP.BC.72/21.04.018/2002-03 | 27 of Annexure | 25.2.2003 | Guidelines for Consolidated Accounting And Other Quantitative Methods to Facilitate Consolidated Supervision. | 4.3 |
| 5 | DBOD NO. BP.BC 71/21.04.103/2002-03 | 23 of Annexure | 19.2.2003 | Risk Management system in Banks Guidelines in Country Risk Managements | 2.1.5 (vii) |
| 6 | DBOD.No.BP.BC. 67/21.04.048/2002-2003 | 5.2 of Annexure | 4.2.2003 | Guidelines on Infrastructure Financing. | Annexure2 (I)(A)(II)(13) |
| 7 | DBOD.Dir.BC. 62/13.07.09/2002-03 | 2(iv) | 24.1.2003 | Discounting/ Rediscounting of Bills by Banks. | Annexure2 (I)(A)(III)(5) |
| 8 | A.P.(DIR Series) Circular No. 63 | 5 | 21.12.2002 | Risk Management and Inter Bank Dealings | 2.2.1 Notes (d) |
| 9 | No.EC.CO.FMD.6/02.03.75/2002-2003 | 1 | 20.11.2002 | Hedging of Tier I Capital | 2.2.1 Notes (d) |
| 10 | DBOD.No.BP.BC. 57/ 21.04.048/2001-02 | 2(v) | 10.01.2002 | Valuation of investments by banks | 2.1.4(vi) |
| 11 | DBOD.No.BC.34/12.01.001/2001-02 | 2(b) | 22.10.2001 | Section 42(1) Of The Reserve Bank Of India Act, 1934 - Maintenance of Cash Reserve Ratio (CRR). | Annexure 1 (I) (4) |
| 12 | DBOD.BP.BC. 73/21.04.018/2000-01 | 3 | 30.01.2001 | Voluntary Retirement Scheme (VRS) Expenditure-Accounting and Prudential Regulatory Treatment. | 2.1.3 & 2.1.4(v)(b) |
| 13 | DBOD.No.BP.BC.31/21.04.048/ 2000 | 2 & 3 | 10.10.2000 | Monetary & Credit Policy Measures-Mid term review for the year 2000-01 | 2.1.4 (vii),5.2 |
| 14 | DBOD.No.BP.BC.169/21.01.002/ 2000 | 3 | 03.05.2000 | Monetary & Credit Policy Measures | 5.2 |
| 15 | DBOD.No.BP.BC.144/21.04.048/ 2000 | 1 (A), (B)(a) | 29.02.2000 | Income Recognition, Asset Classification and Provisioning and Other Related Matters and Adequacy Standards - Takeout Finance | Annexure 2 (I)(A)(III)(14) |
| 16 | DBOD.No.BP.BC.121/21.04.124/ 99 | 1(i) | 03.11.99 | Monetary & Credit Policy Measures | 3.2 |
| 17 | DBOD.No.BP.BC.101/21.04.048/ 99 | 2 & 3 | 18.10.99 | Income Recognition, Asset Classification and Provisioning-Valuation of Investments by Banks in Subsidiaries. | 2.4.3, & 4.1 |
| 18 | DBOD.No.BP.BC.82/ 21.01.002/99 | 2 | 18.08.99 | Monetary & Credit Policy Measures | One Time Report |
| 19 | FSC.BC.70/24.01.001 /99 | 5(i) | 17.7.1999 | Equipment Leasing Activity - Accounting / Provisioning Norms | Annexure 2(I)(A)(III)(6), |
| 20 | MPD.BC.187/07.01.279/1999-2001 | 11 | 7.7.1999 | Forward Rate Agreements / Interest Rate Swaps | Annexure 2.(I)(D) |
| 21 | DBOD.No.BP.BC.24/ 21.04.048/99 | 1 & 2 | 30.03.99 | Prudential Norms - Capital Adequacy - Income Recognition, Asset Classification and Provisioning | Annexure 2.(III)(1) |
| 22 | DBOD.No.BP.BC.35/ 21.01.002/99 | 2(ii) | 24.04.99 | Monetary & Credit Policy Measures | Annexure 2 (II)(10), 2.1.5 |
| 23 | DBOD.No.BP.BC.103/21.01.002/ 98 | 1,2,3,4 | 31.10.98 | Monetary & Credit Policy Measures | 2.3, 3.2, Annexure 2 (I) (A) (II) (Sr.no.1–11)Annexure 2(I)(III)(2)Annexure 2(I)(C) |
| 24 | DBOD.No.BP.BC.32/ 21.04.018/98 | (i) | 29.04.98 | Monetary and Credit Policy Measures | Annexure 2 (I) (A) (II)(3) |
| 25 | DBOD.No.BP.BC.9/21.04.018/98 | (v) | 27.01.1998 | Balance Sheet of Bank - Disclosures | 2.1.4(v)(c) |
| 26 | DBOD.No.BP.BC.9/21.04.048/97 | 1 | 29.01.97 | Prudential Norms - Capital Adequacy, Income Recognition, Asset Classification and Provisioning | Annexure 2 (III)(1) |
| 27 | DBOD. BP. BC. No. 3/21.01.002/2004-05 | 1,2 | 06.07.04 | Prudential norms on Capital Adequacy –Cross holding of capital among banks/ financial institutions | 2.1.7, |
| 28 | DBOD.No.BP.BC. 103 / 21.04.151/ 2003-04 | -- | June 24, 2004 | Guidelines on Capital Charge for Market risks | 4 (4.1 to 4.10) |
| 29 | DBOD.No.BP.BC. 92 / 21.04.048/ 2003-04 | Annexure 3 (1) | June 16, 2004 | Annual Policy Statement for the year 2004-05-Guidelines on infrastructure financing | Annexure 3 (1) |
| 30 | DBOD.No.BP.BC. 91/21.01.002/ 2003-04 | Annexure 2. I. A.2 (ii), 7,8,9; III.5 (ii); D (Step 2). | June 15, 2004 | Annual Policy Statement for the year 2004-05-Risk Weight for Exposure to Public Financial Institutions (PFIs) | Annexure 2. I. A.2 (ii), 7,8,9; III.5 (ii); D (Step 2). |
| 31 | F.No.11/7/2003-BOA | Annexure 1 I.19 (iv) (d) | 6th May 2004 | Permission to nationalised banks to issue subordinated debt for augmenting Tier II capital | -- |
| 32 | DBS.FID.No.C-15/01.02.00/2003-04 | 3 | 15th June 2004 | Risk Weight for Exposures to PFIs | Annexure 2 |
| 33 | DBOD.BP.BC.29/21.01.048/2004-05 | 3(a) & (b) | 13th August 2004 | Prudential Norms-State Govt. guaranteed expsosures | Annexure 2 |
| 34 | DBOD. BP.BC. 61 / 21.01.002/ 2004-05 | 2(i) | 23rd December 2004 | Mid-Term Review of the Annual Policy Statement for the year 2004-05. Risk weight on housing loans and consumer credit | Annexure 2Item A.III (13) |
| 35 | DBOD.No.BP.BC.85/21.04.141/2004-05 | 2 | 30th April 2005 | Capital Adequacy- IFR | 2.1.5 (vi) |
| 36 | DBOD.No.BP.BC.16/21.04.048/2005-06 | 6(D) | July 13,2005 | Guidelines on purchase of Non-Performing Assets | Annex 4 |
| 37 | DBOD.No.BP.BC.21/21.01.002/2005-06 | 1 & 2 | July 26, 2005 | Risk weight on Capital market Exposure | Annex 4 |
| 38 | DBOD.No.BP.BC.38/21.04.141/2005-06 | 4 | Oct 10, 2005 | Capital Adequacy-IFR | 2.1.5 (vii) |
| 39 | DBOD.No.BP.BC.60/21.04.048/2005-06 | 12.1, 12.2, 13.1, 13.2, 15.1, 17.1, 17.2, & 19.1 | February 1, 2006 | Guidelines on Securitisation of Standad Assts | 2.1.6, Annex 4 |
| 40 | DBOD.No.BP.BC.73/21.04.048/2005-06 | 2(i) & (ii) | March 24, 2006 | Bills Discounted under LC-Risk Weight and Exposure Norms | Annex 4 |
| 41 | DBOD.No.BP.BC.84/21.01.002/2005-06 | 1 &2 | May 25, 2006 | APS for 2006-07-Risk Weight on Exposures to Commercial Real estate and Venture Capital Funds | Annex 4 |
| 42 | DBOD.BP.BC. 87 /21.01.002/2005-06 | 1 | June 8, 2006 | Innovative Tier I/Tier II Bonds -Hedging by banks through Derivative Structures | 2.3 |
| 43 | DBOD.NO.BP. BC. 89 / 21.04.048/ 2005-06 | 2(iii) | June 22,2006 | Prudential norms on creation and utilisation of floating provisions | 2.1.2((iii) |
Presented by eximkey.com