Eximkey India DGFT, Customs, Excise, Export Import policy, Foreign Trade Policy and export import data.

PART -II

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

B. Risk weighted assets for market risk

Computation of capital charge for the Trading Book:

a. Specific Risk

1. Investments in interest rate related instruments:

(Rs.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

2. Equities-capital charge of 9% - Rs.27 crore

Therefore, capital charge for specific risk in the trading book is Rs. 59.33 crore (Rs. 32.33 crore + Rs. 27 crore).

b. General Market Risk

(1). Investments in interest rate related instruments:

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.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

(2) Positions in interest rate related derivatives

Interest rate swap

Counter Party	Maturity Date	Notional Amount (i.e.,market value)	Modified duration or price sensitivity	Assumed change in yield	Capital charge
GOI	30/09/2003	100	0.47	1.00	0.47
GOI	31/03/2011	100	5.14	0.60	(-) 3.08
					(-) 2.61

Interest rate future

Counter Party	Maturity Date	Notional Amount (i.e.,market value)	Modified duration or price sensitivity	Assumed change in yield	Capital charge
GOI	30/09/2003	50	0.45	1.00	(-) 0.45
GOI	31/03/2007	50	2.84	0.75	2.13
					1.68

(3) Disallowances

The price sensitivities calculated as above have been slotted into a durationbased ladder with fifteen time-bands (Attachment III). Long and short positions within a time band have been subjected to vertical disallowance of 5%. In the instant case, vertical disallowance is applicable under 3-6 month time band and 7.3-9.3 year time band. Then, net positions in each time band have been computed for horizontal offsetting subject to the disallowances mentioned in the table. In the instant case, horizontal disallowance is applicable only in respect of Zone 3. Horizontal disallowances in respect of adjacent zones are not applicable in the instant case.

(4) The total capital charge in this example for general market risk for interest rate related instruments is computed as under:

Sl.No	Capital charge	Amount (Rs.)
1	For the vertical disallowance (under 3-6 month time band)	2,25,000
2	For the vertical disallowance (under 7.3-9.3 year time band)	13,95,000
3	For the horizontal disallowance (under Zone 3)	9,00,000
4	For the horizontal disallowances between adjacent zones	0
5	For the overall net open position (17.82-2.61 + 1.68)	16,89,00,000
6	Total capital charge for general market risk on interest rate related instruments (1 + 2 + 3 + 4 + 5)	17,14,00,000

(5) Equities

Capital charge for General Market Risk for equities is 9%. Thus, general market risk capital charge on equities would work out to Rs.27 crore.

(6) Forex / Gold Open Position

Capital charge on forex/gold position would be computed at 9%. Thus the same works out to Rs.9 crore

(7) Capital charge for market risks in this example is computed as under:

(Rs. crore)

Details	Capital charge for Specific Risk	Capital charge for General Market Risk
Interest Rate Related	32.33	17.14
Equities	27.00	27.00
Forex/Gold		9.00
Total	59.33	53.14

Total capital charge for specific risk and general market risk: Rs. 112.47 crore.

Computing Capital Ratio

4.10.12 To facilitate computation of CRAR for the whole book, this capital charge for market risks in the Trading Book needs to be converted into equivalent risk weighted assets. As in India, a CRAR of 9% is required, the capital charge could be converted to risk weighted assets by multiplying the capital charge by (100 ÷ 9), i.e. Rs. 112.47*(100 ÷ 9) = Rs. 1249.67 crore. Therefore, risk weight for market risk is : Rs. 1249.67 crore.

(Rs. Crore)

1	Total Capital	400
2	Risk weighted assets for Credit Risk	2540.00
3	Risk weighted assets for Market Risk	1249.67
4	Total Risk weighted assets (2+3)	3789.67
5	CRAR [(1÷4)*100]	10.56 %

5. Capital Adequacy for Subsidiaries

5.1 The Basel Committee on Banking Supervision has proposed that the New Capital Adequacy Framework should be extended to include, on a consolidated basis, holding companies that are parents of banking groups. On prudential considerations, it is necessary to adopt best practices in line with international standards, while duly reflecting local conditions.

5.2 Accordingly, banks may voluntarily build-in the risk weighted components of their subsidiaries into their own balance sheet on notional basis, at par with the risk weights applicable to the bank's own assets. Banks should earmark additional capital in their books over a period of time so as to obviate the possibility of impairment to their net worth when switchover to unified balance sheet for the group as a whole is adopted after sometime. The additional capital required may be provided in the bank's books in phases, beginning from the year ended March 2001.

5.3 A Consolidated bank defined as a group of entities which include a licensed bank should maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) as applicable to the parent bank on an ongoing basis from the year ended 31 March 2003. While computing capital funds, parent bank may consider the following points :

(i) Banks are required to maintain a minimum capital to risk weighted assets ratio of 9%. Non-bank subsidiaries are required to maintain the capital adequacy ratio prescribed by their respective regulators. In case of any shortfall in the capital adequacy ratio of any of the subsidiaries, the parent should maintain capital in addition to its own regulatory requirements to cover the shortfall.

(ii) Risks inherent in deconsolidated entities (i.e., entities which are not consolidated in the Consolidated Prudential Reports) in the group need to be assessed and any shortfall in the regulatory capital in the deconsolidated entities should be deducted (in equal proportion from Tier 1 and Tier 2 capital) from the consolidated bank's capital in the proportion of its equity stake in the entity.

Attachment I

(Para 4.5.8, Section B)

Measurement system in respect of interest rate derivatives and options

A. Interest rate derivatives

The measurement system should include all interest rate derivatives and off-balancesheet instruments in the trading book, which react to changes in interest rates, (e.g. forward rate agreements (FRAs), other forward contracts, bond futures, interest rate and cross-currency swaps and forward foreign exchange positions). Options can be treated in a variety of ways as described in B.1 below. A summary of the rules for dealing with interest rate derivatives is set out in the Table at the end of this section.

1. Calculation of positions

The derivatives should be converted into positions in the relevant underlying and be subjected to specific and general market risk charges as described in the guidelines. In order to calculate the capital charge, the amounts reported should be the market value of the principal amount of the underlying or of the notional underlying. For instruments where the apparent notional amount differs from the effective notional amount, banks must use the effective notional amount.

(a) Futures and forward contracts, including forward rate agreements These instruments are treated as a combination of a long and a short position in a notional government security. The maturity of a future or a FRA will be the period until delivery or exercise of the contract, plus - where applicable - the life of the underlying instrument. For example, a long position in a June three-month interest rate future (taken in April) is to be reported as a long position in a government security with a maturity of five months and a short position in a government security with a maturity of two months. Where a range of deliverable instruments may be delivered to fulfill the contract, the bank has flexibility to elect which deliverable security goes into the duration ladder but should take account of any conversion factor defined by the exchange.

(b) Swaps

Swaps will be treated as two notional positions in government securities with relevant maturities. For example, an interest rate swap under which a bank is receiving floating rate interest and paying fixed will be treated as a long position in a floating rate instrument of maturity equivalent to the period until the next interest fixing and a short position in a fixed-rate instrument of maturity equivalent to the residual life of the swap. For swaps that pay or receive a fixed or floating interest rate against some other reference price, e.g. a stock index, the interest rate component should be slotted into the appropriate repricing maturity category, with the equity component being included in the equity framework.

Separate legs of cross-currency swaps are to be reported in the relevant maturity ladders for the currencies concerned.

2. Calculation of capital charges for derivatives under the standardised methodology

(a) Allowable offsetting of matched positions

Banks may exclude the following from the interest rate maturity framework altogether (for both specific and general market risk);

Long and short positions (both actual and notional) in identical instruments with exactly the same issuer, coupon, currency and maturity.

A matched position in a future or forward and its corresponding underlying may also be fully offset, (the leg representing the time to expiry of the future should however be reported) and thus excluded from the calculation.

When the future or the forward comprises a range of deliverable instruments, offsetting of positions in the future or forward contract and its underlying is only permissible in cases where there is a readily identifiable underlying security which is most profitable for the trader with a short position to deliver. The price of this security, sometimes called the "cheapest-to-deliver", and the price of the future or forward contract should in such cases move in close alignment.

No offsetting will be allowed between positions in different currencies; the separate legs of cross-currency swaps or forward foreign exchange deals are to be treated as notional positions in the relevant instruments and included in the appropriate calculation for each currency.

In addition, opposite positions in the same category of instruments can in certain circumstances be regarded as matched and allowed to offset fully. To qualify for this treatment the positions must relate to the same underlying instruments, be of the same nominal value and be denominated in the same currency. In addition:

for futures: offsetting positions in the notional or underlying instruments to which the futures contract relates must be for identical products and mature within seven days of each other;

for swaps and FRAs: the reference rate (for floating rate positions) must be identical and the coupon closely matched (i.e. within 15 basis points); and

for swaps, FRAs and forwards: the next interest fixing date or, for fixed coupon positions or forwards, the residual maturity must correspond within the following limits:

o less than one month hence: same day;

o between one month and one year hence: within seven days;

o over one year hence: within thirty days.

Banks with large swap books may use alternative formulae for these swaps to calculate the positions to be included in the duration ladder. The method would be to calculate the sensitivity of the net present value implied by the change in yield used in the duration method and allocate these sensitivities into the time-bands set out in Table 1 in Section B.

(b) Specific risk

Interest rate and currency swaps, FRAs, forward foreign exchange contracts and interest rate futures will not be subject to a specific risk charge. This exemption also applies to futures on an interest rate index (e.g. LIBOR). However, in the case of futures contracts where the underlying is a debt security, or an index representing a basket of debt securities, a specific risk charge will apply according to the credit risk of the issuer as set out in paragraphs above.

(c) General market risk

General market risk applies to positions in all derivative products in the same manner as for cash positions, subject only to an exemption for fully or very closely matched positions in identical instruments as defined in paragraphs above. The various categories of instruments should be slotted into the maturity ladder and treated according to the rules identified earlier.

Table - Summary of treatment of interest rate derivatives

Instrument	Specific risk charge	General Market risk charge
Exchange-traded future - Government debt security - Corporate debt security - Index on interest rates (e.g. MIBOR)	No Yes No	Yes, as two positions Yes, as two positions Yes, as two positions
OTC forward - Government debt security - Corporate debt security - Index on interest rates (e.g. MIBOR)	No Yes No	Yes, as two positions Yes, as two positions Yes, as two positions
FRAs, Swaps	No	Yes, as two positions
Forward Foreign Exchange	No	Yes, as one position in each currency
Options - Government debt security - Corporate debt security - Index on interest rates (e.g. MIBOR) - FRAs, Swaps	No Yes No No

B. 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 options¹ 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 put Or	The capital charge will be the market value of the underlying security²multiplied by the sum of
Short cash and Long call	specific and general market risk charges³for the underlying less the amount the option is in the money (if any) bounded at zero⁴
Long call or Long 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 charges³for the underlying (ii) the market value of the option⁵

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 India⁶.

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 months⁷. 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:

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,¹⁰each 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 belong¹². 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.

Attachment II

(Para 4.5.8, Section B)

Details of computing capital charges for positions in other currencies

Capital charges should be calculated for each currency separately and then summed with no offsetting between positions of opposite sign. In the case of those currencies in which business is insignificant (where the turnover in the respective currency is less than 5 per cent of overall foreign exchange turnover), separate calculations for each currency are not required. The bank may, instead, slot within each appropriate time-band, the net long or short position for each currency. However, these individual net positions are to be summed within each time-band, irrespective of whether they are long or short positions, to produce a gross position figure.

Attachment III

(Para 4.10.11 (3), Section G)

Example for computing the capital charge including the vertical and horizontal disallowances on interest rate related instruments

** 0.45 x 5%=0.02 @ 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					2.13								2.60
Derivatives (short)			(-)0.45								(-)3.08					(-)3.53
Net Position		0.72	0.02	2.51		1.35	1.77	4.42		2.75	(-)0.29		3.63			16.89
Vertical Disallowance (5%)			0.02**								0.14 @					0.16
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 (-) 0.45 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 (-) 0.45. This off-setting position of 0.45 is subjected to a capital charge of 5% i.e. 0.0225. 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 n 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 10.81 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:

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	16.89
For vertical disallowance	0.16
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	17.14

ANNEXURE 1

PRUDENTIAL NORMS ON CAPITAL ADEQUACY

Issue of unsecured bonds as Subordinated Debt by banks for raising Tier II capital

(Vide paragraph 2.4.1)

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:

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

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 1A

PRUDENTIAL NORMS ON CAPITAL ADEQUACY

Tier II capital - Subordinated debt - Head Office borrowings in foreign currency raised by foreign banks operating in India for inclusion in Tier II capital (Vide paragraph 2.4.2)

Detailed 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 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 entire 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 2

PRUDENTIAL NORMS ON CAPITAL ADEQUACY

Risk Weights for Calculation of CRAR

(Vide paragraph 3.5)

I. Domestic OperationsA 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
2.	ii. Claims on Bank /FIs (as per Annexure 2A)**	20
II	Investments*
1.	Investments in Government Securities.	2.5
2.	Investments in other approved securities guaranteed by Central/ State Government.	2.5
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)	2.5
4.	Investments in other securities where payment of interest and repayment of principal are guaranteed by State Governments. Note: Where guarantee has been invoked and the concerned State Government has remained in default, 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.	2.5
5.	Investments in other approved securities where payment of interest and repayment of principal are not guaranteed by Central/State Govt.	22.50
6.	Investments in Government guaranteed securities of Government Undertakings which do not form part of the approved market borrowing programme.	22.50
7.	Claims on commercial banks and public financial institutions [as per Annexure 2A]**	22.50
8.	Investments in bonds issued by other banks/PFIs [as per Annexure 2A].**	22.50
9.	Investments in securities which are guaranteed by banks or PFIs [as per Annexure 2A]** as to payment of interest and repayment of principal.	22.50
10.	Investments in subordinated debt instruments and bonds issued by other banks or Public Financial Institutions for their Tier II capital.	102.50
11.	Deposits placed with SIDBI/NABARD in lieu of shortfall in lending to priority sector.	102.50
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 2C).	52.50
13.	Investment in securitised paper pertaining to an infrastructure facility. (subject to satisfying terms & conditions given in Annexure 3).	52.50
14.	Investments in debentures/ bonds/ security receipts/ Pass Through Certificates issued by Securitisation Company / Reconstruction Company and held by banks as investment	102.50
15.	All other investments Note: Equity investments in subsidiaries, intangible assets and losses deducted from Tier I capital should be assigned zero weight	102.50
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: Loans guaranteed by State Govts. where guarantee has been invoked and the concerned State Govt. has remained in default for a period of more than 180 days (or more than 90 days with effect from March 31, 2004) after invocation of the state government guarantee 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.	For the purpose of credit exposure, bills purchased /discounted / negotiated under LCs or otherwise should be reckoned on the bank's borrower constituent. Accordingly, the exposure should attract a risk weight appropriate to the borrower constituent for capital adequacy purposes, as under. (i) Government (ii) Banks/PFIs [as per Annexure 2A]**. (iii) Firms, individuals, corporates etc.	0 20 100
6.	Others	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 2B.	0
10.	Insurance cover under Business Credit Shield the product of New India Assurance Company Ltd. (Subject to Conditions given in Annexure 4) 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.	50
14.	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
14.	(ii) Conditional take-over (in the books of lending and Taking over institution)	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.

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:

Banks / All India Financial Institutions**	20 per cent
All other (except Government)	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	2.5
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	102.5
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 drawdown	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

III. Procedure

1. While calculating the aggregate of funded and non-funded exposure of a borrower for the purpose of assignment of risk weight, banks may ‘net-off’ against the total outstanding exposure of the borrower -

(a) advances collateralised by cash margins or deposits,

(b) credit balances in current or other accounts which are not earmarked for specific purposes and free from any lien,

(c) in respect of any assets where provisions for depreciation or for bad debts have been made

(d) claims received from DICGC/ ECGC and kept in a separate account pending adjustment, and

(e) subsidies received against advances in respect of Government sponsored schemes and kept in a separate account.

2. After applying the conversion factor as indicated above, the adjusted off Balance Sheet value shall again be multiplied by the weight attributable to the relevant counterparty as specified.

3. Foreign exchange contracts with an original maturity of 14 calendar days or less, irrespective of the counterparty, may be assigned "zero" risk weight as per international practice.

4. Foreign Exchange and Interest Rate related Contracts

(i) Foreign exchange contracts include the following:

(a) Cross currency interest rate swaps

(b) Forward foreign exchange contracts

(c) Currency futures

(d) Currency options purchased

(e) Other contracts of a similar nature

(ii) As in the case of other off-Balance Sheet items, a two stage calculation prescribed below shall be applied:

(a) Step 1 - The notional principal amount of each instrument is multiplied by the conversion factor given below:

Original Maturity	Conversion Factor
Less than one year	2%
One year and less than two years	5% (i.e. 2% + 3%)
For each additional year	3%

(b) Step 2 - The adjusted value thus obtained shall be multiplied by the risk weightage allotted to the relevant counter-party as given in IIA and above.

(iii) Interest rate contracts include the following:

(a) Single currency interest rate swaps

(b) Basis swaps

(c) Forward rate agreements

(d) Interest rate futures

(e) Interest rate options purchased

(f) Other contracts of a similar nature

(ii) As in the case of other off-Balance Sheet items, a two stage calculation prescribed below shall be applied:

(a) Step 1 - The notional principal amount of each instrument is multiplied by the percentages given below:

Original Maturity	Conversion Factor
Less than one year	0.5%
One year and less than two years	1.0%
For each additional year	1.0%

(c) Step 2 - The adjusted value thus obtained shall be multiplied by the risk weightage allotted to the relevant counter-party as given in IIA above.

*Risk weight of 2.5 per cent need not be applied on securities included in the Held for Trading category, where banks are maintaining exclusive capital charge for market risk.

** Investments in the instruments issued by banks / FIs which are listed at paragraph 2.1.8 and 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. With effect from April 1, 2005, other exposures to all PFIs would attract a uniform risk weight of 100 per cent towards credit risk.

ANNEXURE 2A

PRUDENTIAL NORMS ON CAPITAL ADEQUACY

List of All-India Financial Institutions whose bonds/debentures would qualify for 20% Risk Weight for Capital Adequacy Ratio
(Vide items II(A)- 7, 8 & 9 of Annexure 2)

1. Industrial Credit and Investment Corporation of India Ltd.

2. Industrial Finance Corporation of India Ltd.

3. Industrial Development Bank of India

4. Industrial Investment Bank of India Ltd.

5. Tourism Finance Corporation of India Ltd.

6. Risk Capital and Technology Finance Corporation Ltd.

7. Technology Development and Information Company of India Ltd.

8. Power Finance Corporation Ltd.

9. National Housing Bank

10. Small Industries Development Bank of India

11. Rural Electrification Corporation Ltd.

12. Indian Railways Finance Corporation Ltd.

13. National Bank for Agriculture and Rural Development

14. Export Import Bank of India

15. Infrastructure Development Finance Co. Ltd.

16. Housing and Urban Development Corporation Ltd. (HUDCO)

17. Indian Renewable Energy Development Agency Ltd. (IREDA)

ANNEXURE 2 B

PRUDENTIAL NORMS ON CAPITAL ADEQUACY
SSI Advances Guaranteed by Credit Guarantee Fund
Trust for Small Industries (CGTSI)-Risk weights and
Provisioning norms (paragraph I (A)(III)(9) of Annexure 2)

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 2 C

PRUDENTIAL NORMS ON CAPITAL ADEQUACY
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 2)

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 3

PRUDENTIAL NORMS ON CAPITAL ADEQUACY
Conditions for availing concessional risk weight on investment in securitised paper pertaining to an infrastructure facility

(Vide item (I)(A)(II)(13)of Annexure 2)

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 4

PRUDENTIAL NORMS ON CAPITAL ADEQUACY
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 2)

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 o f 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 ADEQUACY

Part-A

List of Circulars

No.	Circular No.	Date	Subject	Para No. in this circular
1.	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)
2.	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
3.	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)
4.	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)
5.	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)
6.	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)
7.	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)
8.	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
9.	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)
10.	DBOD.No.BP.BC.152/21.01.002/ 96	27.11.96	Capital Adequacy Measures	2.3.1 (ii)
11.	DBOD.No.IBS.BC.64/23.61.001/ 96	24.05.96	Capital Adequacy Measures	2.2.1 (a) &(b)
12.	DBOD.No.BP.BC.13/21.01.002/96	08.02.96	Capital Adequacy Measures	Annexure 2(I)(A)(II) (10)
13.	DBOD.No.BP.BC.99/21.01.002/94	24.08.94	Capital Adequacy Measures	2.1.4 (ii)
14.	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),
15.	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
16.	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.	Annexure 2 (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, 2.1.8, 2.1.9, 2.1.10
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	Annexure2. 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	--

¹ Unless 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

² In 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.

³ Some 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.

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