RBI/2004-2005/53 DBOD No. BP.BC.12 / 21.01.002 / 2004-05 DT.19/07/2004

Master Circular- Prudential Norms on Capital Adequacy

Please refer to the Master Circular No. DBOD. BP. BC. 20/ 21.01.002/ 2002- 2003 dated September 03, 2003 consolidating instructions/ guidelines issued to banks till 30 June 2003 on matters relating to prudential norms on capital adequacy. The Master Circular has been suitably updated by incorporating instructions issued upto 6th July 2004 and has also been placed on the RBI web-site (http: // www.rbi.org.in). It may be noted that all relevant instructions on the above subject contained in the circulars listed in the Appendix have been consolidated. We advise that the revised Master Circular supercedes the instructions contained in these circulars issued by the RBI.

Yours faithfully,

Sd/-

(C R Muralidharan)
Chief General Manager-in-Charge

PRUDENTIAL NORMS ON CAPITAL ADEQUACY

1. General

1.1 With a view to adopting the Basle Committee framework on capital adequacy norms which takes into account the elements of risk in various types of assets in the balance sheet as well as off-balance sheet business and also to strengthen the capital base of banks, Reserve Bank of India decided in April 1992 to introduce a risk asset ratio system for banks (including foreign banks) in India as a capital adequacy measure.

1.2 Essentially, under the above system the balance sheet assets, non-funded items and other off-balance sheet exposures are assigned weights according to the prescribed risk weights and banks have to maintain unimpaired minimum capital funds equivalent to the prescribed ratio on the aggregate of the risk weighted assets and other exposures on an ongoing basis. The broad details of the capital adequacy framework are detailed below.

2. Capital funds

2.1 Capital funds of Indian banks

For Indian banks, 'capital funds' would include the following elements:

2.1.1 Elements of Tier I capital

i) Paid-up capital, statutory reserves, and other disclosed free reserves, if any.

ii) Capital reserves representing surplus arising out of sale proceeds of assets.

2.1.2 Equity investments in subsidiaries, intangible assets and losses in the current period and those brought forward from previous periods, should be deducted from Tier I capital.

2.1.3 In the case of public sector banks which have introduced Voluntary Retirement Scheme (VRS), in view of the extra-ordinary nature of the event, the VRS related Deferred Revenue Expenditure would not be reduced from Tier I capital. However, it will attract 100% risk weight for capital adequacy purpose.

2.1.4 Creation of deferred tax asset (DTA) results in an increase in Tier I capital of a bank without any tangible asset being added to the banks’ balance sheet. Therefore, DTA, which is an intangible asset, should be deducted from Tier I capital.

2.1.5 Elements of Tier II capital

i) Undisclosed reserves and cumulative perpetual preference shares

These often have characteristics similar to equity and disclosed reserves. These elements have the capacity to absorb unexpected losses and can be included in capital, if they represent accumulations of post-tax profits and not encumbered by any known liability and should not be routinely used for absorbing normal loss or operating losses. Cumulative perpetual preference shares should be fully paid-up and should not contain clauses, which permit redemption by the holder.

ii) Revaluation reserves

These reserves often serve as a cushion against unexpected losses, but they are less permanent in nature and cannot be considered as ‘Core Capital’. Revaluation reserves arise from revaluation of assets that are undervalued on the bank’s books, typically bank premises and marketable securities. The extent to which the revaluation reserves can be relied upon as a cushion for unexpected losses depends mainly upon the level of certainty that can be placed on estimates of the market values of the relevant assets, the subsequent deterioration in values under difficult market conditions or in a forced sale, potential for actual liquidation at those values, tax consequences of revaluation, etc. Therefore, it would be prudent to consider revaluation reserves at a discount of 55 percent while determining their value for inclusion in Tier II capital. Such reserves will have to be reflected on the face of the Balance Sheet as revaluation reserves.

iii) General provisions and loss reserves

Such reserves, if they are not attributable to the actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, can be included in Tier II capital. Adequate care must be taken to see that sufficient provisions have been made to meet all known losses and foreseeable potential losses before considering general provisions and loss reserves to be part of Tier II capital. General provisions/loss reserves will be admitted up to a maximum of 1.25 percent of total risk weighted assets.

iv) Hybrid debt capital instruments

In this category, fall a number of capital instruments, which combine certain characteristics of equity and certain characteristics of debt. Each has a particular feature, which can be considered to affect its quality as capital. Where these instruments have close similarities to equity, in particular when they are able to support losses on an ongoing basis without triggering liquidation, they may be included in Tier II capital.

v) Subordinated debt

(a) To be eligible for inclusion in Tier II capital, the instrument 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. They often carry a fixed maturity, and as they approach maturity, they should be subjected to progressive discount, for inclusion in Tier II capital. Instruments with an initial maturity of less than 5 years or with a remaining maturity of one year should not be included as part of Tier II capital. Subordinated debt instruments eligible to be reckoned as Tier II capital will be limited to 50 percent of Tier I capital.

b) In the case of public sector banks, the bonds issued to the VRS employees as a part of the compensation package, net of the unamortised VRS Deferred Revenue Expenditure, could be treated as Tier II capital, subject to compliance with the terms and conditions stipulated in para 2.4 below.

c) The subordinated debt instruments included in Tier II capital may be subjected to discount at the rates shown below:

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

d) Banks should indicate the amount of subordinated debt raised as Tier II capital by way of explanatory notes/ remarks in the Balance Sheet as well as in Schedule 5 under 'Other Liabilities & Provisions'.

vi) The Investment Fluctuation Reserve (IFR) would continue to be treated as Tier II capital but it would not be subject to the ceiling of 1.25 per cent of the total risk weighted assets. The above treatment has been effective from March 31, 2003 onwards.

vii) Banks are allowed to include the ‘General Provisions on Standard Assets’ and ‘provisions held for country exposures’ in Tier II capital. However, the provisions on ‘standard assets together with other ‘general provisions/ loss reserves’ and ‘provisions held for country exposures’ will be admitted as Tier II capital up to a maximum of 1.25 per cent of the total risk-weighted assets.

2.1.6 Tier II elements should be limited to a maximum of 100 percent of total Tier I elements for the purpose of compliance with the norms.

2.1.7 A bank’s / FI’s investments in all types of instruments listed at 2.1.8 below, which are issued by other banks / FIs and are eligible for capital status for the investee bank / FI, will be limited to 10 per cent of the investing bank's capital funds (Tier I plus Tier II capital).

2.1.8 Banks' / FIs' investment in the following instruments will be included in the prudential limit of 10 per cent referred to at 2.1.7 above.

a) Equity shares;

b) Preference shares eligible for capital status;

c) Subordinated debt instruments;

d) Hybrid debt capital instruments; and

e) Any other instrument approved as in the nature of capital.

2.1.9 Banks / FIs should not acquire any fresh stake in a bank's equity shares, if by such acquisition, the investing bank's / FI's holding exceeds 5 per cent of the investee bank's equity capital.

2.1.10 Banks’ / FIs’ investments in the equity capital of subsidiaries are at present deducted from their Tier I capital for capital adequacy purposes. Investments in the instruments issued by banks / FIs which are listed at paragraph 2.1.8 above, which are not deducted from Tier I capital of the investing bank/ FI, will attract 100 per cent risk weight for credit risk for capital adequacy purposes.

2.2 Capital funds of foreign banks operating in India

For foreign banks, 'capital funds' would include the following elements:

2.2.1 Elements of Tier I capital

i) Interest-free funds from Head Office kept in a separate account in Indian books specifically for the purpose of meeting the capital adequacy norms.

ii) Statutory reserves kept in Indian books.

iii) Remittable surplus retained in Indian books which is not repatriable so long as the bank functions in India.

Notes:

a) The foreign banks are required to furnish to Reserve Bank, (if not already done), an undertaking to the effect that the banks will not remit abroad the remittable surplus retained in India and included in Tier I capital as long as the banks function in India.

b) These funds may be retained in a separate account titled as 'Amount Retained in India for Meeting Capital to Risk-weighted Asset Ratio (CRAR) Requirements' under 'Capital Funds'.

c) An auditor's certificate to the effect that these funds represent surplus remittable to Head Office once tax assessments are completed or tax appeals are decided and do not include funds in the nature of provisions towards tax or for any other contingency may also be furnished to Reserve Bank.

d) Foreign banks operating in India are permitted to hedge their Tier I capital held in Indian books. These banks are free to make their own decision as regards the timing of the hedge transactions subject to compliance with all other terms and conditions contained in Foreign Exchange Department’s instructions issued vide A.P. (DIR Series) Circular No.63 dated December 21 2002..

iv) Capital reserve representing surplus arising out of sale of assets in India held in a separate account and which is not eligible for repatriation so long as the bank functions in India.

v) Interest-free funds remitted from abroad for the purpose of acquisition of property and held in a separate account in Indian books.

vi) The net credit balance, if any, in the inter-office account with Head Office/overseas branches will not be reckoned as capital funds. However, any debit balance in Head Office account will have to be set-off against the capital.

2.2.2 Elements of Tier II capital

To the extent relevant, elements of Tier II capital as indicated above in paragraph 2.1.4 in respect of Indian banks will be eligible.

2.2.3 The elements of Tier I & Tier II capital do not include foreign currency loans granted to Indian parties.

2.3 Minimum requirement of capital funds

Banks were required to maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) norm of 8 percent on an ongoing basis up to the year ending 31 March 1999. With effect from the year ending 31 March 2000, banks are required to maintain a minimum CRAR of 9 percent on an ongoing basis.

2.4 Issue of subordinated debt for raising Tier II capital

2.4.1 The Reserve Bank has given autonomy to Indian banks to raise rupee subordinated debt as Tier II capital, subject to the terms and conditions given in the Annexure 1. It should be ensured that the terms & conditions are strictly adhered to.

2.4.2 Foreign banks also would not require prior approval of RBI for raising subordinated debt in foreign currency through borrowings from Head Office for inclusion in Tier II capital. To ensure transparency and uniformity, detailed guidelines in this regard are given at Annexure 1A.

2.4.3 The banks should submit a report to Reserve Bank of India giving details of the Subordinated debt issued for raising Tier II capital, 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.

3. Risk adjusted assets and off-balance sheet items

3.1 Risk adjusted assets would mean weighted aggregate of funded and non-funded items. Degrees of credit risk expressed as percentage weightings, have been assigned to balance sheet assets and conversion factors to off-balance sheet items.

3.2 As an initial step towards prescribing capital requirement for market risks, banks were advised to:

i) assign an additional risk weight of 2.5 per cent on the entire investment portfolio;

ii) assign a risk weight of 100 per cent on the open position limits on foreign exchange and gold; and

iii) build up Investment Fluctuation Reserve up to a minimum of five per cent of the investments held in Held for Trading and Available for Sale categories in the investment portfolio.

Keeping in view the ability of banks to identify and measure market risk, it has now been decided to assign explicit capital charge for market risks. Banks are required to maintain capital charge for market risks in a phased manner over a two year period, as detailed below:

a) Banks should maintain capital for market risks on securities included in the Held for Trading category, open gold position, open forex position, trading positions in derivatives and derivatives entered into for hedging trading book exposures by March 31, 2005. Consequently, the additional risk weight of 2.5% towards market risk maintained at present on the investment included under Held for Trading category would not be required

b) Banks should maintain capital for market risks on securities included in the Available for Sale category also by March 31, 2006. Consequently, the additional risk weight of 2.5% towards market risks maintained at present on the investment included under Available for Sale and Held to Maturity categories would not be required with effect from the above date.

3.3 The banks’ overall minimum capital requirement will be the sum of: capital requirement for credit risk on the basis of the risk weights indicated in Annexure 2 including counter party credit risk on all OTC derivatives, and capital requirement for market risks in the trading book.

3.4 The value of each asset/ item shall be multiplied by the relevant weights to produce risk adjusted values of assets and off-balance sheet items. The aggregate will be taken into account for reckoning the minimum capital ratio.

3.5 The risk-weights allotted to each of the items of assets and off-balance sheet items are furnished in the Annexure 2.

4. Capital charge for market risk

4.1 Introduction

The Basel Committee on Banking Supervision (BCBS) had issued the ‘Amendment to the Capital Accord to incorporate market risks’ containing comprehensive guidelines to provide explicit capital charge for market risks. Market risk is defined as the risk of losses in on-balance sheet and off-balance sheet positions arising from movements in market prices. The market risk positions subject to capital charge requirement are:

The risks pertaining to interest rate related instruments and equities in the trading book; and

Foreign exchange risk (including open position in precious metals) throughout the bank (both banking and trading books).

4.2 The interim measures adopted in India represent a broad brush and simplistic approach. Besides, over a period of time, banks’ ability to identify and measure market risk has improved. Since it would be appropriate for banks to adopt the BCBS norm on capital charge for market risks, it has been decided to assign explicit capital charge for market risks as per the following guidelines.

4.3 The guidelines in this regard are organized under the following seven sections:

Section	Particulars
A	Scope and coverage of capital charge for market risks
B	Measurement of capital charge for interest rate risk in the trading book
C	Measurement of capital charge for equities in the trading book
D	Measurement of capital charge for foreign exchange risk and gold open positions
E	Aggregation of capital charge for market risks
F	Reporting formats
G	Worked out examples for computing capital charge for market risks

Section A

4.4 Scope and coverage of capital charge for market risks

General

4.4.1. These guidelines seek to address the issues involved in computing capital charges for interest rate related instruments in the trading book, equities in the trading book and foreign exchange risk (including gold and other precious metals) in both trading and banking books. Trading book for the purpose of these guidelines will include:

Securities included under the Held for Trading category

Securities included under the Available for Sale category

Open gold position limits

Open foreign exchange position limits

Trading positions in derivatives, and

Derivatives entered into for hedging trading book exposures.

4.4.2 To begin with, capital charge for market risks is applicable to banks on a global basis. At a later stage, this would be extended to all groups where the controlling entity is a bank.

4.4.3. The banks’ overall minimum capital requirement will be the sum of:

Capital requirement for credit risk including counter party credit risk on all OTC derivatives, and

Capital requirement for market risks in the trading book.

4.4.4. Banks are required to manage the market risks in their books on an ongoing basis and ensure that the capital requirements for market risks are being maintained on a continuous basis, i.e. at the close of each business day. Banks are also required to maintain strict risk management systems to monitor and control intra-day exposures to market risks.

Section B

4.5 Measurement of capital charge for interest rate risk in the trading book

4.5.1 This section describes the framework for measuring the risk of holding or taking positions in debt securities and other interest rate related instruments in the domestic currency in the trading book.

4.5.2. The capital charge for interest rate related instruments and equities would apply to current market value of these items in bank’s trading book. The current market value will be determined as per extant RBI guidelines on valuation of investments.

4.5.3 The minimum capital requirement is expressed in terms of two separately calculated charges,

(i) “specific risk” charge for each security, which is akin to the conventional capital charge for credit risk, both for short (short position is not allowed in India except in derivatives) and long positions, and

(ii) “general market risk” charge towards interest rate risk in the portfolio, where long and short positions (which is not allowed in India except in derivatives) in different securities or instruments can be offset. Specific risk

4.5.4 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. The specific risk charge is graduated for various exposures as follows:

Sr.No.	Nature of investment	Maturity	Specific risk capital charge (as % of exposure)
	Claims on Government
1.	Investments in Government Securities.	All	0.0
2.	Investments in other approved securities guaranteed by Central/ State Government.	All	0.0
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.)	All	0.0
4.	Investments in other securities where payment of interest and repayment of principal are guaranteed by State Governments.	All	0.0
5.	Investment in securities included under item 4 above, where the guarantee has been invoked and the investment is non-performing. However the banks need to maintain capital at 9.0% 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.	All	9.00
6.	Investments in other approved securities where payment of interest and repayment of principal are not guaranteed by Central/State Govt.	All	1.80
7.	Investments in Government guaranteed securities of Government Undertakings which do not form part of the approved market borrowing programme.	All	1.80
	Claims on Banks
8.	Claims on banks, including investments in securities which are guaranteed by banks as to payment of interest and repayment of principal	For residual term to final maturity 6 months or less	0.30
		For residual term to final maturity between 6 and 24 months	1.125
		For residual term to final maturity exceeding 24 months	1.80
9.	Investments in subordinated debt instruments and bonds issued by other banks for their Tier II capital.	All	9.00
	Claims on Others
10.	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 2C).	All	4.50
11.	Investment in securitised paper pertaining to an infrastructure facility. (subject to satisfying terms & conditions given in Annexure 3).	All	4.50
12.	All other investments	All	9.00

4.5.5. The category ‘claim on government’ will include all forms of government securities including dated Government securities, Treasury bills and other short-term investments and instruments where repayment of both principal and interest are fully guaranteed by the Government. The category 'Claims on Others' will include issuers of securities other than Government and banks.

General Market Risk

4.5.6. The capital requirements for general market risk are designed to capture the risk of loss arising from changes in market interest rates. The capital charge is the sum of four components:

the net short (short position is not allowed in India except in derivatives) or long position in the whole trading book;

a small proportion of the matched positions in each time-band (the “vertical disallowance”);

a larger proportion of the matched positions across different time-bands (the “horizontal disallowance”), and

a net charge for positions in options, where appropriate.

4.5.7. The Basle Committee has suggested two broad methodologies for computation of capital charge for market risks. One is the standardised method and the other is the banks’ internal risk management models method. As banks in India are still in a nascent stage of developing internal risk management models, it has been decided that, to start with, banks may adopt the standardised method. Under the standardised method there are two principal methods of measuring market risk, a “maturity” method and a “duration” method. As “duration” method is a more accurate method of measuring interest rate risk, it has been decided to adopt standardised duration method to arrive at the capital charge. Accordingly, banks are required to measure the general market risk charge by calculating the price sensitivity (modified duration) of each position separately. Under this method, the mechanics are as follows:

first calculate the price sensitivity (modified duration) of each instrument;

next apply the assumed change in yield to the modified duration of each instrument between 0.6 and 1.0 percentage points depending on the maturity of the instrument (see Table-1 below);

slot the resulting capital charge measures into a maturity ladder with the fifteen time bands as set out in Table-1;

subject long and short positions (short position is not allowed in India except in derivatives) in each time band to a 5 per cent vertical disallowance designed to capture basis risk; and

carry forward the net positions in each time-band for horizontal offsetting subject to the disallowances set out in Table-2.

Table 1

Duration method-time bands and assumed changes in yield

Time Bands	Assumed Change in Yield
Zone 1
1 month or less	1.00
1 to 3 months	1.00
3 to 6 months	1.00
6 to 12 months	1.00
Zone 2
1.0 to 1.9 years	0.90
1.9 to 2.8 years	0.80
2.8 to 3.6 years	0.75
Zone 3
3.6 to 4.3 years	0.75
4.3 to 5.7 years	0.70
5.7 to 7.3 years	0.65
7.3 to 9.3 years	0.60
9.3 to 10.6 years	0.60
10.6 to 12 years	0.60
12 to 20 years	0.60
over 20 years	0.60

Table 2
Horizontal Disallowances

Zones	Time band	Within the zones	Between adjacent zones	Between zones 1 and 3
Zone 1	1 month or less 1 to 3 months 3 to 6 months 6 to 12 months	40%	40% 40%	100%
Zone 2	1.0 to 1.9 years 1.9 to 2.8 years 2.8 to 3.6 years	30%
Zone 3	3.6 to 4.3 years 4.3 to 5.7 years 5.7 to 7.3 years 7.3 to 9.3 years 9.3 to 10.6 years 10.6 to 12 years 12 to 20 years over 20 years	30%

Capital charge for interest rate derivatives

4.5.8 The measurement of capital charge for market risks should include all interest rate derivatives and off-balance sheet instruments in the trading book and derivatives entered into for hedging trading book exposures which would react to changes in the interest rates, like FRAs, interest rate positions etc. The details of measurement of capital charge for interest rate derivatives are furnished in Attachment I. Details of computing capital charges for market risks in major currencies are detailed in Attachment II. In the case of residual currencies the gross positions in each time-band will be subject to the assumed change in yield set out in Table-1 with no further offsets.

4.5.9 Two examples for computing capital charge for market risks, including the vertical and horizontal disallowances are given in Section G.

Section C

4.6 Measurement of capital charge for equities in the trading book

4.6.1 At present equities are also treated as any other investments for the purpose of assigning credit risk. An additional risk weight of 2.5% is assigned on these positions to capture market risk.

4.6.2 Minimum capital requirement to cover the risk of holding or taking positions in equities in the trading book is set out below. This is applied to all instruments that exhibit market behaviour similar to equities but not to nonconvertible preference shares (which are covered by the interest rate risk requirements described earlier). The instruments covered include equity shares, whether voting or non-voting, convertible securities that behave like equities, for example: units of mutual funds, and commitments to buy or sell equity.

Specific and general market risk

4.6.3 Capital charge for specific risk (akin to credit risk) will be 9% and specific risk is computed on the banks’ gross equity positions (i.e. the sum of all long equity positions and of all short equity positions-short equity position is, however, not allowed for banks in India). The general market risk charge will also be 9% on the gross equity positions.

Section D

4.7 Measurement of capital charge for foreign exchange and gold open positions

4.7.1 Foreign exchange open positions and gold open positions are at present risk-weighted at 100%. Thus, capital charge for foreign exchange and gold open position is 9% at present. These open positions, limits or actual whichever is higher, would continue to attract capital charge at 9%. This is in line with the Basel Committee requirement.

Section E

4.8 Aggregation the capital charge for market risks

Calculation of the risk-weighted assets for market risk

4.8.1. As explained earlier capital charges for specific risk and general market risk are to be computed separately before aggregation. For computing the total capital charge for market risks, the calculations may be plotted in the following table:

Proforma 1

(Rs. in crore)

Risk Category	Capital charge
I. Interest Rate (a+b)
a. General market risk
Net position (parallel shift) Horizontal disallowance (curvature) Vertical disallowance (basis) Options
b. Specific risk
II. Equity (a+b)
a. General market risk
b. Specific risk
III. Foreign Exchange & Gold
IV.Total capital charge for market risks (I+II+III)

4.8.2 Calculation of total risk-weighted assets and capital ratio

a) Arrive at the risk weighted assets for credit risk in the banking book (i.e., all exposures other than those specified in paragraph 4.4.1 above, but including counterparty credit risk on all OTC derivatives).

b) Convert the capital charge for market risk to notional risk weighted assets by multiplying the capital charge arrived at as above in Proforma-1 by 100 ÷ 9 [the present requirement of CRAR is 9% and hence notional risk weighted assets are arrived at by multiplying the capital charge by (100 ÷ 9)]

c) Add the risk-weighted assets for credit risk as at (a) above and notional risk-weighted assets of trading book as at (b) above to arrive at total risk weighted assets for the bank.

d) Compute capital ratio on the basis of regulatory capital maintained and risk-weighted assets.

4.8.3 For the year ending March 31, 2005, securities included under the Available for Sale category would be subject to extant guidelines on capital adequacy. Consequently risk weighted assets for credit risk for these securities would be computed as at para 4.8.2 (a) above.

Computation of capital available for market risk:

4.8.4 Capital required for supporting credit risk should be deducted from total capital funds to arrive at capital available for supporting market risk. This is illustrated below:

Illustration 1

(Rs. in Crore)

1	Capital funds Tier I capital ------------------------------------------------- Tier II capital ------------------------------------------------	55 50	105
2	Total risk weighted assets RWA for credit risk ---------------------------------------- RWA for market risk --------------------------------------	1000 140	1140
3	Total CRAR		9.21
4	Minimum capital required to support credit risk (1000*9%) Tier I - 45 (@ 4.5% of 1000) --------------------------- Tier II - 45 (@ 4.5% of 1000) --------------------------	45 45	90
5	Capital available to support market risk (105 - 90) Tier I - (55 - 45) ------------------------------------------- Tier II - (50 - 45) ------------------------------------------	10 5	15

Section F

4.9 Reporting Formats

4.9.1 Reporting format for the purpose of monitoring the capital ratio is given hereunder:

Name of bank: _____________________ Position as on: _____________

A. Capital Base

(Rs. in crore)

Sl. No.	Details	Amount
A1.	Tier I Capital
A2.	Tier II Capital
A3.	Total Regulatory Capital

B. Risk Weighted Assets

B1.	Risk Weighted Assets on Banking Book
	a) On-balance sheet assets
	b) Contingent Credits
	c) Forex contracts
	d) Other off-balance sheet items
	Total
B2.	Risk Weighted Assets on Trading Book	AFS	Other trading book exposures	Total
	a) Capital charge on account of Specific Risk
	i) On interest rate related instruments
	ii) On Equities
	Sub-total
	b) Capital charge on account of general market risk
	i) On interest rate related instruments
	ii) On Equities
	iii) On Foreign Exchange and gold open positions
	Sub-total
	Total Capital Charge on Trading Book
	Total Risk weighted Assets on Trading Book (total capital charge on trading book * (100/9))
B3.	Total Risk Weighted Assets (B1 + B2)

C. Capital Ratio

C1

Capital to Risk-weighted Assets Ratio (CRAR) (A3/B3*100)

D. Memo items

D1	Investment Fluctuation Reserve
D2	Book value of securities held in HFT category
D3	Book value of securities held in AFS category
D4	Net unrealised gains in HFT category
D5	Net unrealised gains in AFS category

4.9.2 Banks should furnish data in the above format as on the last day of each calendar quarter to the Chief General Manager-in-Charge, Department of Banking Supervision, Central Office, World Trade Centre I, 3rd floor, Cuffe Parade, Mumbai 400 005 both in hard copy and soft copy. Soft copy in excel format may also be forwarded through e-mail to osmos@rbi.org.in and dbodmrg@rbi.org.in. The first such report may be furnished with reference to the position as on September 30, 2004.

Section G

Worked out examples for computing capital charge for market risks

4.10.1. Example indicating computation of capital charge for market risks-without equities and interest rate related derivative instruments is given below:

4.10.2 A bank may have the following position:

Sl.No	Details	Amount Rs. Crore
1	Cash & Balances with RBI	200.00
2	Bank balances	200.00
3	Investments: Held for Trading Available for Sale Held to Maturity	500.00 1000.00 500.00
4	Advances (net)	2000.00
5	Other Assets	300.00
6	Total Assets	4700.00

4.10.3 In terms of counter party, the investments are assumed to be as under:

Government - Rs.1000 crore

Banks - Rs. 500 crore

Others - Rs. 500 crore

For simplicity sake let us assume the details of investments as under:

Government securities

Date of Issue	Date of reporting	Maturity Date	Amount Rs.in crore	Coupon (%)	Type
01/03/1992	31/03/2003	01/03/2004	100	12.50	AFS
01/05/1993	31/03/2003	01/05/2003	100	12.00	AFS
01/03/1994	31/03/2003	31/05/2003	100	12.00	AFS
01/03/1995	31/03/2003	01/03/2015	100	12.00	AFS
01/03/1998	31/03/2003	01/03/2010	100	11.50	AFS
01/03/1999	31/03/2003	01/03/2009	100	11.00	AFS
01/03/2000	31/03/2003	01/03/2005	100	10.50	HFT
01/03/2001	31/03/2003	01/03/2006	100	10.00	HTM
01/03/2002	31/03/2003	01/03/2012	100	8.00	HTM
01/03/2003	31/03/2003	01/03/2023	100	6.50	HTM
Total			1000

Bank Bonds

Date of Issue	Date of reporting	Maturity Date	Amount Rs. in crore	Coupon (%)	Type
01/03/1992	31/03/2003	01/03/2004	100	12.50	AFS
01/05/1993	31/03/2003	01/05/2003	100	12.00	AFS
01/03/1994	31/03/2003	31/05/2003	100	12.00	AFS
01/03/1995	31/03/2003	01/03/2006	100	12.50	AFS
01/03/1998	31/03/2003	01/03/2007	100	11.50	HFT
Total			500

Others

Date of Issue	Date of reporting	Maturity Date	Amount Rs. in crore	Coupon (%)	Type
01/03/1992	31/03/2003	01/03/2004	100	12.50	HFT
01/05/1993	31/03/2003	01/05/2003	100	12.00	HFT
01/03/1994	31/03/2003	31/05/2003	100	12.00	HFT
01/03/1995	31/03/2003	01/03/2006	100	12.50	HTM
01/03/1998	31/03/2003	01/03/2017	100	11.50	HTM
Total			500

4.10.4 As per the extant instructions to arrive at the risk-weight for the above position the following table would be helpful:

(Rs. in crore)

Details of Assets	Book Value	Risk Weight (%)	Risk weighted Assets
Cash & balances with RBI	200	0	0
Bank balances	200	20	40
Investments: Government Banks Others	1000 500 500	2.5 22.5 102.5	25 112.5 512.5
Advances (net)	2000	100	2000
Other Assets	300	100	300
Total	4700		2990

Assuming that the bank has a capital of Rs.400 crore, the CRAR works out to13.38%.

4.10.5 Computation of risk weighted assets as per proposed method

A. Risk weighted assets for credit risk

As per the guidelines, held for trading and available for sale securities would qualify to be categorized as Trading Book. Thus trading book in the instant case would be Rs.1500 crore. While computing the credit risk, the securities held under trading book would be excluded and hence the credit risk based risk-weights would be as under:

(Rs. in crore)

Sl.No.	Details of Assets	Book Value	Risk Weight (%)	Risk weighted Assets
1	Cash & balances with RBI	200	0	0
2	Bank balances	200	20	40
3	Investments:Government Banks Others	300 0 200	0 20 100	0 0 200
4	Advances (net)	2000	100	2000
5	Other Assets	300	100	300
6	Total Assets	3200
7	Total RWAs			2540

B. Risk weighted assets for market risk

Computation of capital charge for Trading Book:

a. Specific Risk

(i) Government securities: Rs.700 crore-Nil
(ii) Banks :

(Rs. in crore)

Details	Capital charge	Amount	Capital charge
For residual term to final maturity 6 months or less	0.30%	200	0.60
For residual term to final maturity between 6 and 24 months	1.125%	100	1.125
For residual term to final maturity exceeding 24 months	1.80%	200	3.60
Total		500	5.325

(iii) Others : Rs.300 crore @ 9% =Rs. 27 crore

(i)+(ii)+(iii) = Rs.0 crore+Rs.5.325 crore + Rs.27 crore = Rs. 32.325 crore

Therefore, capital charge for specific risk in trading book is Rs.32.33 crore.

b. General Market Risk

Modified duration is used to arrive at the price sensitivity of an interest rate related instrument.

For all the securities listed below, date of reporting is taken as 31/3/2003.

(Rs. in crore)

Counter Party	Maturity Date	Amount (market value)	Coupon (%)	Capital Charge for general market risk
Govt.	01/03/2004	100	12.50	0.84
Govt.	01/05/2003	100	12.00	0.08
Govt.	31/05/2003	100	12.00	0.16
Govt.	01/03/2015	100	12.50	3.63
Govt.	01/03/2010	100	11.50	2.79
Govt.	01/03/2009	100	11.00	2.75
Govt.	01/03/2005	100	10.50	1.35
Banks	01/03/2004	100	12.50	0.84
Banks	01/05/2003	100	12.00	0.08
Banks	31/05/2003	100	12.00	0.16
Banks	01/03/2006	100	12.50	1.77
Banks	01/03/2007	100	11.50	2.29
Others	01/03/2004	100	12.50	0.84
Others	01/05/2003	100	12.00	0.08
Others	31/05/2003	100	12.00	0.16
Total		1500		17.82

c. Adding the capital charges for specific risk as well as general market risk would give the total capital charge for the trading book of interest rate related instruments. Therefore, capital charge for Market Risks = Rs.32.33 crore + Rs.17.82 crore, i.e., Rs.50.15 crore.

d. To facilitate computation of CRAR for the whole book, this capital charge needs to be converted into equivalent risk weighted assets. In India, the minimum CRAR is 9%. Hence, the capital charge could be converted to risk weighted assets by multiplying the capital charge by (100 ÷ 9), Thus risk weighted assets for market risk is 50.15*(100 ÷ 9) = Rs.557.23 crore.

4.10.6 Computing the capital ratio:

(Rs. in Crore)

1	Total Capital	400
2	Risk weighted assets for Credit Risk	2540.00
3	Risk weighted assets for Market Risk	557.23
4	Total Risk weighted assets (2+3)	3097.23
5	CRAR [(1÷4)*100]	12.91 %

4.10.7 Example indicating computation of capital charge for market risks-with equities and interest rate related derivative instruments. Foreign exchange and gold open positions also have been assumed.

4.10.8. A bank may have the following position:

Sl.No	Details	Amount Rs. Crore
1	Cash & Balances with	200.00
2	Bank balances	200.00
3	Investments: Held for Trading Available for Sale, Held to Maturity Equities	500.00 1000.00 500.00 300.00
4	Advances (net)	2000.00
5	Other Assets	300.00
6	Total Assets	5000.00

In addition,

(a) foreign exchange open position limit is assumed as Rs.60 crore and

(b) Gold open position is assumed at Rs.40 crore.

(c) Let us also assume that the bank is having the following positions in interest rate related derivatives:

(i) Interest Rate Swaps (IRS), Rs.100 crore-bank received floating rate interest and pays fixed, next interest fixing after 6 months, residual life of swap 8 years, and

(ii) Long position in interest rate future (IRF), Rs.50 crore, delivery after 6 months, life of underlying government security 3.5 years.

4.10.9 In terms of counter party the investments are assumed to be as under:

a) Interest rate related securities

Government - Rs.1000 crore

Banks - Rs. 500 crore

Others - Rs. 500 crore

b) Equities

Others - Rs.300 crore

For simplicity sake let us assume the details of investments in interest rate related securities as under:

Government securities

Date of Issue	Date of reporting	Maturity Date	Amount Rs.crore	Coupon (%)	Type
01/03/1992	31/03/2003	01/03/2004	100	12.50	AFS
01/05/1993	31/03/2003	01/05/2003	100	12.00	AFS
01/03/1994	31/03/2003	31/05/2003	100	12.00	AFS
01/03/1995	31/03/2003	01/03/2015	100	12.50	AFS
01/03/1998	31/03/2003	01/03/2010	100	11.50	AFS
01/03/1999	31/03/2003	01/03/2009	100	11.00	AFS
01/03/2000	31/03/2003	01/03/2005	100	10.50	HFT
01/03/2001	31/03/2003	01/03/2006	100	10.00	HTM
01/03/2002	31/03/2003	01/03/2012	100	8.00	HTM
01/03/2003	31/03/2003	01/03/2023	100	6.50	HTM
Total			1000

Bank Bonds

Date of Issue	Date of reporting	Maturity Date	Amount Rs.crore	Coupon (%)	Type
01/03/1992	31/03/2003	01/03/2004	100	12.50	AFS
01/05/1993	31/03/2003	01/05/2003	100	12.00	AFS
01/03/1994	31/03/2003	31/05/2003	100	12.00	AFS
01/03/1995	31/03/2003	01/03/2006	100	12.50	AFS
01/03/1998	31/03/2003	01/03/2007	100	11.50	HFT
Total			500

Others

Date of Issue	Date of reporting	Maturity Date	Amount Rs.crore	Coupon (%)	Type
01/03/1992	31/03/2003	01/03/2004	100	12.50	HFT
01/05/1993	31/03/2003	01/05/2003	100	12.00	HFT
01/03/1994	31/03/2003	31/05/2003	100	12.00	HFT
01/03/1995	31/03/2003	01/03/2006	100	12.50	HTM
01/03/1998	31/03/2003	01/03/2017	100	11.50	HTM
Total			500

4.10.10 As per the extant instructions to arrive at the risk-weighted assets for the bank with the above position the following table would be helpful:

(Rs.in crore)

Details of Assets	Book Value	Risk Weight	Risk weighted Assets
Cash & RBI	200	0%	0
Bank balances	200	20%	40
Interest rate related Investments: Government Banks Others	1000 500 500	2.5% 22.5% 102.5%	25 112.5 512.5
Other investments: Equities	300	102.5%	307.5
Advances (net)	2000	100%	2000
Other Assets	300	100%	300
Total Assets	5000		3297.5
IRS	100	1%+1% per year (Credit Conversion Factor) and 100% RW	8.00
IRF	50	1%+1% per year (Credit Conversion Factor) and 100% RW	4.00
Forex + Gold Open position	60 + 40 =100	100%	100.00
Total RWAs			3407.50

Assuming that the bank has a capital of Rs.400 crore, the CRAR works out to 11.74%.

4.10.11 Computation of risk weighted assets as per proposed method

A. Risk weighted assets for credit risk

As per the guidelines, held for trading and available for sale securities would qualify to be categorized as Trading Book. Thus trading book in respect of interest rate related investments in the instant case would be Rs.1500 crore. In addition, equities position of Rs.300 crore would be in the trading book. The derivative products held by banks are to be considered as part of trading book. Open position on foreign exchange and gold also would be considered for market risk. While computing the capital charge for credit risk, the securities held under trading book would be excluded and hence the credit risk based risk-weights would be as under:

(Rs. in crore)

Details of Assets	Book Value	Risk Weight	Risk weighted Assets
Cash & RBI	200	0%	0
Bank balances	200	20%	40
Investments in (HTM category) Government Banks Others	300 0 200	0% 20% 100%	0 0 200
Advances (net)	2000	100%	2000
Other Assets	300	100%	300
Total	4700		2540