INTRODUCTION TO INTEGRATED RISK

MANAGEMENT & OVERVIEW OF

BASEL II
 How do Banks make money?

 By playing “term” of funds: Long v/s

short.
 By playing risk levels-
Accept lower risk and place in higher
risk- play safely as a market mantra
 Dispersed source v/s concentrated
use.
 Trading in the market
 Essentially by taking risk
 What is Risk?

 Its deviation in what we achieve from

what we planned or expected

 Uncertainty resulting in adverse outcome

- adverse in relation to planned objectives
or expectation.

Financial Risk – uncertainties in adverse

variations of profitability or outright losses.
 Risk & Risk Weight
Risk is inherent in all aspects of commercial operations that
covers ;

Customer service,
Technology,
HR,
Security,
Market Price,
Funding,
Legal,
Regulatory,
Frauds and Strategies etc.

Banks in the process of financial intermediation are

confronted with various kinds of Financial as well as Non-
Financial Risks.
 Risk Weight
This is the most preferred method for
assessing the Capital Adequacy of Banks as
considered by Basel Committee.

The committee believes that a Risk Ratio has

the following advantages over the simple
gearing ratio approach.

It provides a fairer basis of international

comparison between banks where their
structures might differ.
 Risk Definition and Features
Risk:
Event likely to cause loss/variability/damage to
income and thereby to reputation to a certain
extent.
Features:
 Fairly known- Cannot be avoided.

 Probabilistic and generic

 Ascertainable, although not always Quantifiable

 Essential for intermediation process.

 Risk and Reward go together.

 Expansion of Banking Operations
has become massive.
 Banks are entering New Markets
 Banks have started trading in
new asset types.
 Changes in financial system,
products and structures have
created new opportunities.
 All these have no doubt brought
in a dynamic change in the
Banking system but has brought
in various kinds of Risks.
 Why Risk Management?
 Regulator is concerned about the
Prevention of Bank Failure
 Basic objectives being :
 (1)Protection of Depositors, and
 (2) Safeguarding the integrity &
soundness of the Financial
system.
 Risk Management
 It’s a systematic process for
IDENTIFYING the risks the business
faces, EVALUATING them according
to the likelihood of their occurring
and the damage or loss that could
ensue, DECIDING whether to bear,
avoid, control or insure against them
so to MITIGATE the risk significantly.
 Management of Risk
Begins with Risk Identification and
Quantification.

1.Risk Identification
2.Risk Measurement
3.Risk Pricing
4.Risk Monitoring & Control
5.Risk Mitigation
 IDENTIFICATION
 Proper identification of
a. Existing Risk
b. And Risk that may arise from new
business
c. Both at Branch Level
d. And at Corporate Level is crucial for
the Risk Management process
 Risk Identification
It consists of identifying various risks associated
with risk taking at the transaction level and
examining its impact on the portfolio and capital
requirement.

For Example :
A branch has extended a Loan of Rs.1 Cr. For a
period of 5 years @ BPLR+1% . BPLR is say, 13%.
The loan is to be repaid in equal Quarterly
installements with 1 year moratorium period.

Say, the funding of the loan is done from a deposit

of 3 years of the same amount, with interest rate
at 8%. What are the risks associated with the
transaction, without taking into account the
SLR/CRR requirements?
When the deposit matures after 3 years - the FUNDING RISK
loan o/s would be around 50% (subject to no
default)
After the deposit matures suppose funding is GAP or MISMATCH RISK
done but the rate of interest may not remain the
same
Suppose there is a default in repayment in TIME RISK & LIQUIDITY
between RISK

Default in repayment also gives rise to DEFAULT or CREDIT

RISK

Loan interest is linked to PLR – Deposit rate is BASIS RISK

fixed rate – if the BPLR is reduced within that 3
years period
As the loan gets repaid, the repayment proceeds REINVESTMENT RISK
have to be redeployed – which may not fetch the
same rate of interest i.e. BPLR+1%
It is possible that the entire loan amount is fully EMBEDDED OPTION
prepaid – or the deposit covered is prematurely RISK
withdrawn
Since all are transaction basis OPERATIONAL RISK also
exists.
 Risk Measurement
 Accurate & Timely measurement

 Enables us to quantify the Risk

 For Monitoring and

 Control the risk levels

 RISK PRICING
1. Maintaining Necessary Capital – Regulatory
Requirement - Capital is always at a cost –
Need to pay the investors and Internal
generation of capital for business growth

2. Probability of loss associated with Risk

Pricing should therefore be undertaken after taking

into account :
1.Cost of Deployable Funds
2.Operating Expenses
3.Loss Probability
4.Capital charge
 Monitoring & Control
 Monitoring through Risk reporting
 To ensure timely Review of Risk
positions and exceptions
 Reports should be concise, timely,
frequent, reasonably accurate
 And possibly with some written
commentary of solutions, if any.
RISK MONITORING & CONTROL

1.Organizational Structure
2.Comprehensive Risk Management
Approach
3.Policy Adoption at the Corporate
level
4.Guidelines
5.Strong MIS
6.Well laid-out Procedures
7.Periodical reviews and Evaluations
 Evolution of Capital Standard
 Till 1980s Bank’s Capital was measured through the
traditional gearing ratios.
 Increasing Competition, rapid growth in the assets, and
certain debt crisis in the emerging market led to concerns
about the deteriorating capital levels.
 Varying approaches to capital measurements across
countries made international comparisons difficult.
 The market developments by the mid-1980s, coupled with
the regulatory pressures for improving the capital ratios for
the on-balance sheet activities of the banks, had also
witnessed a phenomenal growth in the banks’ off-balance
sheet business – which, at that time, was not subject to
regulatory capital charge.
 During 1987, the “Basle Committee on Banking Regulations
and Supervisory Practices”, as it was then named, arrived at
a consensus on 8% as the minimum capital adequacy ratio.
 This standard came to be commonly known as the Basel
Accord or Basel I Framework.
 Imperatives of Basel I
 First, the Accord had a broad-brush approach ->
three broad risk buckets viz., Sovereign, Bank and
Corporate, with each category attracting a risk
weight of 0, 20 and 100 per cent, respectively.

 Second, the Accord addressed only the credit risk

and market risk in the banks’ operations. The
Operational risk, that is, the risk of human error or
failure of systems leading to financial loss, was not
at all addressed.

 The credit-risk transfer products, such as

securitisation and credit derivatives, did not figure in
the Basel I framework.
 RISK MANAGEMENT AND BASEL II
RECOMMENDATIONS
A JOURNEY FROM COMPLIANCE TO PROFIT

ITS AN OPERTUNITY DISGUISED AS

REGULATION

PUBLIC FUNDING OF PRIVATE RISK IS NOT

DESIRABLE

“ONE SIZE FITS ALL” IS A DISINCENTIVE TO

THE EFFECTIVE BORROWERS.
 Objectives of Basel II
 To encourage best practices, sophisticated, analytically-
driven Risk Management Policies based on each credit
institution’s experience
 To establish a more comprehensive approach for addressing
the different types of risks
 To promote safety and soundness in the financial system;
the new framework should be at least maintain the current
overall level of capital in the system
 To increase the effectiveness of Operational Risk
Quantification
 To increase informative integration across the whole
business to manage Credit, Operational and Market Risk
 To ensure appropriate documentation of Risk Management
systems
 To effectively integrate different Risk Types
 To promote a national supervisory and regulatory process o
ensure the maintenance of adequate Capital.
 Risk Function a control function or
profit function ?

 Risk is central concern spanning

whole of Balance Sheet.
 RM is for improving Performance,
Earnings and Net Worth.
 Enable appropriate price to minimise
expected losses and provisions.
 Enable appropriate capital for
unexpected losses.
 Belgium, Canada, France, Germany,
Italy, Japan, Luxemburg, Netherlands, Spain,
Sweden, Switzerland, UK and USA
 Bank for International Settlements
was established in 1929.

 Headquarters at Basel,
Switzerland.

 Basel Committee on Banking

Supervision(BCBS)
BANK

FOR

INTERNATIONAL

SETTLEMENTS,

BASEL,

SWITZERLAND.
 Three pillars of the Basel II framework

Minimum Capital Supervisory

Market Discipline
Requirements Review Process

– Credit risk – Bank’s own capital – Enhanced disclosure

strategy
– Operational risk
– Supervisor’s review
– Market risk
 Pillar I – Minimum Capital
Requirements

The new Accord maintains the current definition of total capital and the minimum 8%
requirement*

Total capital
= Bank’s capital ratio
Credit risk + Market risk + Operational risk (minimum 9%)

Total capital = Tier 1 + Tier 2

Total Capital Tier 1: Shareholders’ equity + disclosed reserves
Tier 2: Supplementary capital (e.g. undisclosed reserves, provisions)

Credit Risk The risk of loss arising from default by a creditor or counterparty

Market Risk The risk of losses in trading positions when prices move adversely

Operational Risk The risk of loss resulting from inadequate or failed internal processes,
people and systems or from external events

* The revisions affect the denominator of the capital ratio - with more sophisticated measures for credit risk, and introducing an explicit capital charge for
operational risk
 Pillar I

 Sets minimum acceptable capital

 Capital arrived by enhanced approach
with credit ratings
• External or Public Rating
• Internal rating
 Explicit treatment to Operational risk
 ALM risk not treated but included in
 Pillar II

 Banks must attain solvency relative to

their risk profile
 Supervisors should review each bank’s
own risk assessment & capital strategies
 Banks should maintain excess of
minimum capital
 Regulators would intervene at an early
stage
 Possibility of rewarding banks with better
risk management systems.
 RBI has already taken steps to conduct
supervisory review
 Pillar III

 Improved disclosure of :
• Capital Structure
• Risk measurement and
management practices
• Risk Profile
• Capital Adequacy
 BASEL II IMPLEMENTATION IN INDIA

All Commercial banks in India (except Local Area

Banks and Regional Rural Banks) shall adopt:

Standardized Approach for Credit Risk

Basic Indicator Approach for Operational Risk

Standardized Duration Approach for Market Risk

On or before the following dates –

31.03.2008 - for those Indian banks having overseas

presence and all foreign banks operating in India.

31.03.2009 - all other Banks

 Basel I - Dec 1988
Implemented in India In 1992-93

1.Income Recognition
2.Asset Classification
3.CRAR

•Interest not paid by the borrower not be considered as

income
•Classification into Sub-standard, Doubtful and Loss
Assets
•Their provision requirement depending on the age.
•CRAR – 9% of the Positive Capital of the Assets of the
Balance Sheets

This turned the TNW of almost all Indian Banks into –ve.
Govt. had to infuse Rs.100 millions into Banks to meet
this Ratio.
1988 Accord - talked about mainly on Credit
Risk
1996 BCBS guidelines on Market Risk was
introduced
2008/2009 Basel II Accord – Introduces
Operational Risk.

Basel Committee experts say – Bank’s should

have their own capital to cover all the
potential losses.

It specifies how much cushion/capital a bank

should have against the risk involved with the
Credit. (Capital Charge calculation)
 TIER I AT
LEAST
TIER II
(PURE CAPITAL) 6% ( MAXM 100% OF TIER I)

PAID UP EQUITY CAPITAL REVALUATION RESERVE 55%

DISC
OUNT

SHARE PREMIUM GEN. PROVISIONS & LOSS

RESERVES

STATUTROY RESREVE HYBRID DEBT CAPITAL

INSTRUMENTS

CAPITAL RESERVE SUBORDINATED DEBT

INNOVATIVE PERPETUAL 15% UNDOSCLOSED PROVISIONS

DEBT INSTRUMENTS OF
TOTAL
TIER i

INVESTMENT FLUCTUATION
RESERVE
 INVESTMENT PORTFOLIO

SLR - 25% of NDTL in the form of Govt. Securities

SLR

BANKING BOOK TRADING BOOK

HTM 1.HELD FOR TRADING – HFT

Held Till Maturity 2.AVAILABLE FOR SALE – AFS

At its Acquisition Mark-to Market

Cost

HFT - Mark to Market in each 30 days – Scrip wise – No netting

AFS - Mark to Market in each 90 days – Netting allowed – Can be

kept till indefinite period.
 From Basel I to Basel II

1988 Capital Accord established minimum capital requirements

for banks

Minimum ratio: Capital

8%
Risk weighted assets

In 1998, Committee started revising the 1988 Accord:

More risk sensitive
More consistent with current best practice in banks’ risk
management
Numerator (definition of capital) remains unchanged
 What are the basic aims of Basel II?

To deliver a prudent amount of capital in relation to risk

To provide the right incentives for sound risk management
To maintain a reasonable level playing field

Basel II is not intended to be neutral between different

banks/different exposures
However, there is a desire not to change the overall amount
of capital in the system
 Capital Regulation

 Basle Committee on Capital:

• “The purpose of bank supervision is to
ensure that banks operate in a safe and
sound manner and that they hold
capital and reserves sufficient to
support the risks that arise in business.”
 Enlargement of focus from depositor
protection to financial stability
 Advantages of capital

 Provides safety and soundness

 Depositor protection
 Cushion against unexpected
losses
 Brings in discipline in risk taking
 Basle Accord I & II -
Differences
 Talks of Credit, Market
 Talks of Credit Risk only and Operational Risks
 Capital Charge
 Capital Charge for Credit dependant on Risk rating
Risk – 8% of assets
 Does not mention  Capital Charge to include
separate Capital charge risks arising out of Credit,
for Market and Market and Operational
Operational Risk risks. Not a broad brush
 No mention about market approach
Discipline  Quantitative approach for
 No effort to quantify calculation of Market and
Market and Operational Operational risks as for
Risk Credit Risk.
 Credit Risk
 Credit Risk depends both on external as well as internal
factors such as:
EXTERNAL : State of the Economy
Wide Fluctuation in commodity/equity prices
Forex rates
Interest rates
Trade Restrictions
Economic Sanctions & Govt. Polices

INTERNAL : Deficiency in Loan Policies & Administration

Inadequate Lending Limits
Deficiency in appraisal of borrowers financials
Excessive dependencies in collaterals
Absence of Loan Review Mechanism
Post Sanction Surveillance
 Management of Credit Risk
 Measurement through Credit
Rating/Scoring.
 Quantifying the risks through
estimating Expected and Unexpected
Loan Losses
 Risk pricing on a Scientific basis
 Control through LRM & Portfolio
Management
 Instruments of CRM
 Credit Approving Authority:

a. Scheme for delegation of powers

b. Multi-tier Credit Approving System

c. Suitable Framework for reporting &

evaluating the quality of Credit

decisions (through LRM)
 Instruments of CRM
 Prudential Limits:

a. Benchmark stipulation for various ratios

b. Single/Group Borrower Limit fixation
c. Substantial Exposure Limit (10% or 15% of the
capital fund)
d. Maximum exposure limit to Industry/Sector,
Restrictions/Prohibitions
 Instruments of CRM
 Risk Rating : This will serve as a single point
indicator of diverse Risk factors of a counterpart
and for taking credit decisions in a consistent
manner. A structured Risk Rating framework
should incorporate :

a. Financial Analysis
b. Projections
c. Sensitivity
d. Industrial & Management risk
 Risk Pricing : - Borrowers having weak financials

– placed in high risk category – to be priced high.

 Instruments of CRM
 Portfolio Management : for identification of credit
weakness, gauging Asset quality.
a. Stipulation of quantitative Ceiling on aggregate
exposure in specified rating category
b. Evaluation of rating-wise distribution of
borrowers in various industries, business
segments
c. Portfolio Review, Scenario analysis at intervals
d. Introduction of time-schedule for renewal of
limits
 Instruments of CRM
 Loan Review Mechanism:
a. Identify promptly loans which develop credit
weakness & initiate timely corrective measures
b. Evaluate portfolio quality and isolate potential
problem areas
c. Provide information for determining adequacy of
loan loss provisions
d. Assess and adherence to Loan Policy, Procedures
and to monitor compliance
e. Provide information to top management in
respect of credit administration, sanction, risk
evaluation and post-sanction follow up
 Pillar I – Credit Risk

Pillar 1 – Credit Risk stipulates three levels of increasing sophistication. The more
sophisticated approaches allow a bank to use its internal models to calculate its
regulatory capital. Banks who move up the ladder are rewarded by a reduced capital
charge

Advanced
c ation Internal
s ti
ophi Ratings Based
e S
ea s
Approach
c r
In
Foundation Internal Banks use internal estimations of
Ratings PD, loss given default (LGD) and
exposure at default (EAD) to
Based Approach calculate risk weights for exposure
classes

Banks use internal estimations of

Standardized probability of default (PD) to calculate risk
Approach weights for exposure classes. Other risk
components are standardized.

Risk weights are based on

assessment by external credit
assessment institutions

Reduce Capital requirements

 Credit Risk
It is the possibility that a borrower or counter party will fail to meet
its obligations in accordance with the agreed terms.

 In case of direct lending, funds may not be repaid.

 In case of Non-funded exposures fund will not be forthcoming

from the customer upon crystallisation of the liability under the
contract.

 In case of Treasury products the payment or series of payments

due from the counterparty under respective contracts may not be
forthcoming.

 In case of securities trading business, settlement will not be

effected.

 In case of cross-border exposures, the availability and free

transfer of currency is restricted or ceases.
 Credit Risk Approaches
Criteria Standard I. R. B
Foundation Advanced

Rating External Internal Internal

Risk weight Calibrated Function Function

on ratings provided by provided by
by Basel Basel Basel
Committee Committee Committee

Probability Implicitly Provided by Provided by

of default provided by bank on own bank on own
Basel estimates estimates
Committee
 Credit Risk Approaches
Criteria Standardized I.R.B
Foundation Advanced

Exposure Supervisory Supervisory Provided by

at Default values values bank on
provided by provided by own
Basel Basel estimates

Loss given Implicitly Implicitly Provided by

default provided by provided by bank own
Basel on Basel on estimates
external external
estimates estimates
 CAPITAL CHARGE FOR CREDIT RISK

SHORT TERM RATINGS RW

CARE CRISIL FITCH ICRA

PR1+ P1+ F1+ A1+ 20%

PR1 P1 F1 A1 30%

PR2 P2 F2 A2 50%

PR3 P3 F3 A3 100%

PR4 / P4 & P5 F4/F5 A4 / A5 150%

PR5
 WHAT WAS BEFORE ?

BASEL I RW Exposure RWA CAPITAL

(100 Cr ( 9% )
exposure)
1 Govt./Sovereign 0% 100 0 0

2 Banks 20% 100 20 1.8

3 Others 100% 100 100 9.0

[Corporate/Retail
and NPA etc]
300 10.8
 INTERNAL RATING BASED
APPROACH

Exposures in five categories because of

different risk characteristics

1.DOEMSTIC SOVEREIGNS
2.BANKS
3.CORPORATES
4.RETAIL PORTFOLIOS
5.NPA
 BASLE II
CLAIMS OF DOMESTIC SOVEREIGNS

1. Both Fund based & Non-Fund based claims on Govt. - 0% RW

2. Central Govt. Guaranteed Claims will also attract - 0% RW

3. Investment in State Govt. Securities - 0% RW

4. State Govt. Guaranteed Claims - 20% RW

5. Claims on RBI, DICGC & CGTSI - 0% RW

• The above RW will be applicable as long as they are classified as

Standard/Performing Assets.
 CLAIMS ON BANKS

1. Claims on Scheduled Banks, which comply with 20%

the minimum CRAR prescription of RBI

2. Claims on Non-Scheduled Banks which comply 100%

with the minimum CRAR prescription of RBI

3. Claims on other scheduled and Non-Scheduled

Banks would be as per the following table

CRAR (%) RISK WEIGHT

Scheduled Others
6 to < 9% 50% 150%
3 to < 6% 100% 250%
0 to <3% 150% 350%
Negative 625% 625%
 Retail Portfolio
Retail Category - The maximum aggregated Retail
exposure to one counterpart should not exceed the
absolute threshold limit of Rs. 5 Crore.

 No Rating is required

 A flat rate of 75% standard Risk Weight will be

applicable.

With following EXCEPTIONS –

1.Real Estate Exposure

2.Housing Loan
3.Consumer Credit, NBFC and IPO Finance
4.Staff Loans
Sl RETAIL CATEGORY Amt. Threshold RW (%)
1 REAL ESTATE 100%

2 HOUSING LOAN Upto Rs.30 Lakh 50%

(with minimum
Above Rs.30 lakh 75%
margin of 25%) *LTV
Where LTV is > 75% 100%
3 CONSUMER CREDIT 125%
NBFC
IPO FINANCE
4 STAFF LOANS Secured by PF 20%

Others 75%

LTV -
LOAN TO VALUE RATIO SHOULD NOT EXCEED 75%
( Board approved Valuation Policy)
WHERE LTV = Total Outstanding ( principal + Intt.+ Other Charges)
-----------------------------------------------------------
Realisable Value of the property mortgaged
 NON PERFORMING ASSETS

RW

When Specific Less than 20% of the 150%

Provision are outstanding amount of NPA

More than 20% but less than 100%

50% of the outstanding
amount of NPA

Equal to or more that 50% of 50%

the outstanding amount of NPA
 OFF BALANCE SHEET ITEMS
UNAVAILED/UNUTILISED/UNDISBURSED PORTIONS

The risk-weighted amount of an off-balance sheet

item or unavailed/unutilised/undisbursed portion of
credit sanctions that gives rise to credit exposure is
generally calculated by means of a two-step
process.

1.The notional amount of the transaction is

converted into a credit equivalent amount, by
multiplying the amount by the specified Credit
Conversion Factor.
2.The resulting credit equivalent amount is
multiplied by the Risk Weight applicable to the
counterparty or to the purpose for which bank has
extended the finance or the type of asset, which
ever is higher.
Sl. No. Instruments CCF
1 Direct Credit substitutes e.g. General 100%
Guarantees of indebtedness (includes
standby LC serving as Financial Guarantee
for loans and securities, credit
enhancements, liquidity facilities for
securitisation transactions)
2 Certain transaction-related contingent 50%
items e.g. - Performance Bonds, Bid Bonds,
Warranties, Indemnities, Standby LC
related to particular transaction
3 Short Term self-liquidating trade LC ( e.g. 20%
documentary credits collateralised by the
underlying shipment) for both issuing and
confirming Banks
Sl Instruments CCF
1 Sale & Repurchase Agreement and asset sales with recourse, 100%
where the credit risk remains with the bank.(these items are to
be risk weighted according to the type of asset and not
according to the type of counterparty with whom the
transaction has been entered into)

2 Forward Asset purchases, forward deposits and party paid 100%

shares & securities, which represent commitments with certain
drawdown. (these items are to be risk weighted according to
the type of asset and not according to the type of counterparty
with whom the transaction has been entered into)
3 Lending of Bank’s securities or posting of securities as 100%
collateral by banks, including instances where these arise out
of repo style transactions ( i.e. Repurchase/reverse Repurchase
and securities lending/securities borrowing transactions)

4 Note Issuance facilities and revolving / Non-revolving 50%

underwriting facilities
5 Commitments with certain drawdown 100%

6 Other commitments ( e.g. formal standby facilities and credit

lines) with an original maturity :
 Up to 1 year 20%
 Above 1 Year 50%
Similar commitments that are unconditionally cancellable at
anytime by the bank without prior notice or that effectively 0%
provide for automatic cancellation due to deterioration in
borrower’s credit worthiness
8 Take-out Finance in the books of taking-over institution ;
(i)Unconditional Takeout Finance 100%
(ii)Conditional Takeout Finance 50%
 Credit Risk Mitigation
 Simple & comprehensive approaches
 Legal certainty, robust recovery
procedures
 Effects of CRM not to be double
counted
 Should not result in increasing other
risks
 Haircuts to be used in the
comprehensive approach
 Eligible financial collateral
 Cash EQUIVALENT, CDs, Counter party
deposit with lending Bank.
 Gold – bullion & jewellery (99.99 purity)
 Central & State Govt. securities
 IVP, KVP, NSC, LIC policy
 Debt securities rated by recognized credit
rating agency
• PSEs – at least BB rating
• Other entities – at least A
• ST debt instruments – at least
P2+/A3/PL3/F3
 Mutual Fund units – daily NAV to be available
on public domain
 A Collateralised Transaction is one in which
banks have a credit exposure or potential credit
exposure to counterparty and that credit exposure
or potential credit exposure is hedged in whole or in
part by collateral posted by the counterparty or by
a third party on behalf of the counterparty.

Where banks take eligible financial collateral, they

are allowed to reduce their credit exposure to a
counterparty when calculating their requirements to
take account of the risk mitigating effect of the
collateral.
 Standard Supervisory Haircut

Rating for the Residual Maturity Sovereigns Other

securities Issuers

AAA < or = 1 year 0.5 1

to AA-/A-1
> 1y to < or = 5y 2 4

> 5 year 4 8

A+ to BBB-/A-2/A-3 and < or = 1 year 1 2

unrated bank securities
> 1y to < or = 5y 3 6

> 5 year 6 12

BB+ to BB- All 15 -

Main Index equities & Gold 15 -

Other equities listed on a recognized exchange 25 -

Banks to apply 0% haircut for eligible collateral
where it is NSC, KVP, IVP or Surrender Value of
Insurance Policies and Bank’s own deposits.

The standard supervisory haircut for currency risk

where exposure and collateral are denominated in
different currency is 8%.
Thank You!
 OPERATIONAL RISK APPROACHES

Basic Indicator Standardised Advanced

Measurement
Capital Average of Gross Income Capital Charge
Charge Positive Gross per regulatory equals internally
Income for the Line as Indicator generated
last three years measures based on
as Indicator
Capital Charge Depending on Internal Loss Data,
equals to 15% of Business Line External Loss Data,
the Indicator 12%, 15% or Scenario Analysis,
18% of the Business
Indicator as Environment &
Capital Charge Internal Control
Factor
Total Capital Recognition of Risk
Charge equals Mitigation (upto
sum of charge 20%)
per business line
 INNOVATIVE PERPETUAL DEBT INSTRUMENT
QUALIFYING CRITERIA FOR INCLUSION IN TIER I CAPITAL

i)Amount – decide by the Board of Directors

ii)Limits - Total amount shall not exceed 15% of total Tier I

Capital. Excess of the above limits shall be eligible for inclusion
under Tier 2 subject to limits prescribed for Tier 2 Capital.

iii)Maturity Period – These are perpetual instruments

iv)Rate of Interest – either fixed or floating rate referenced to a

market determined rupee interest benchmark rate. Interest should
not be cumulative.

v)Options – No “Put Option”. Call Option allowed subject to strict

compliance of certain conditions.

vi)Lock-in Clause – Available

vii)Grant of Advance – Not allowed

SUBORDINATED DEBT - Lower Tier II bonds
issued for a minimum period of 5 Years. These
instruments attract CRR/SLR requirements and
are subjected to progressive discount ranging
from 20 – 100% over the last five years of the
tenor.

HYBRID DEBT CAPITAL INSTRUMENTS - Upper

Tier II bonds – these are bonds/debentures
issued for a minimum period of 15 years. Bank
can exercise call option after 10 years. These
instruments attract CRR/SLR requirements and
are subjected to progressive discount ranging
from 20 – 100% over the last five years of the
tenor.