basel ii rbi circular

8/13/2019 Basel II RBI Circular

1/95

DBOD.No.BP.1163 /21.04.118/2004-05

February 15, 2005

To

The Chairme o!

a"" #$he%u"e% Commer$ia" Ba&'

Dear #ir,

Pru%e(ia" )ui%e"ie' o Ca*i(a" +%eua$y- m*"eme(a(io o! (he

Ne Ca*i(a" +%eua$y Frameor&

The Basel Committee on Banking Supervision (BCBS) has released the

document, "International Convergence of Capital Measurement and

Capital Standards: !evised rame#ork" on $une %&, %'' The revised

rame#ork has *een designed to provide options for *anks and *anking

s+stems, for determining the capital reuirements for credit risk and

operational risk and ena*les *anks - supervisors to select approaches that

are most appropriate for their operations and financial markets The

rame#ork is e.pected to promote adoption of stronger risk management

practices in *anks

% The !evised rame#ork, popularl+ kno#n as Basel II, *uilds on the

current frame#ork to align regulator+ capital reuirements more closel+

#ith underl+ing risks and to provide *anks and their supervisors #ith

several options for assessment of capital adeuac+ Basel II is *ased on

three mutuall+ reinforcing pillars / minimum capital reuirements,

supervisor+ revie#, and market discipline The three pillars attempt to

achieve comprehensive coverage of risks, enhance risk sensitivit+ of

capital reuirements and provide a menu of options to choose for

achieving a refined measurement of capital reuirements

0 The !evised rame#ork consists of three/mutuall+ reinforcing 1illars,

vi2 minimum capital reuirements, supervisor+ revie# of capital adeuac+,


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and market discipline 3nder 1illar 4, the rame#ork offers three distinct

options for computing capital reuirement for credit risk and three other

options for computing capital reuirement for operational risk These

approaches for credit and operational risks are *ased on increasing risk

sensitivit+ and allo#s *anks to select an approach that is most appropriate

to the stage of development of *ank5s operations The approaches

availa*le for computing capital for credit risk are Standardised pproach,

oundation Internal !ating Based pproach and dvanced Internal !ating

Based pproach The approaches availa*le for computing capital for

operational risk are Basic Indicator pproach, Standardised pproach and

dvanced Measurement pproach

6ith a vie# to ensuring migration to Basel II in a non/disruptive manner,

the !eserve Bank has adopted a consultative approach Steering

Committee comprising of senior officials from 4 *anks (private, pu*lic and

foreign) has *een constituted #here Indian Banks5 ssociation is also

represented 7eeping in vie# the !eserve Bank5s goal to have consistenc+

and harmon+ #ith international standards it has *een decided that at a

minimum, all *anks in India #ill adopt Standardi2ed pproach for credit

risk and Basic Indicator pproach for operational risk #ith effect from

March 04, %''8 fter adeuate skills are developed, *oth in *anks and at

supervisor+ levels, some *anks ma+ *e allo#ed to migrate to I!B

pproach after o*taining the specific approval of !eserve Bank

9 n the *asis of the inputs received from the Steering Committee 5draft5

guidelines for implementation of Basel II in India have *een prepared and

are enclosed Banks are reuested to stud+ these guidelines and furnishtheir feed*ack to us #ithin three #eeks from the date of this letter These

draft guidelines are also placed on the #e*/site for #ider access and

feed*ack

& 1lease ackno#ledge receipt

;ours faithfull+,

(C ! Muralidharan)

%


3/95

Chief


4/95

Dra!( )ui%e"ie' !or

m*"eme(a(io o! (he Ne Ca*i(a" +%eua$y Frameor&

!eserve Bank of India

Mum*ai


5/95

T+B OF CONTNT#

1.GENERAL.............................................................................................8

2APPROACH TO IMPLEMENTATION.............................................8

3SCOPE OF APPLICATION...............................................................10

4CAPITAL FUNDS................................................................................10

4.3ELEMENTSOFTIER1 CAPITAL.............................................................................10

4.4ELEMENTSOFTIER2 CAPITAL.............................................................................12

4.5INVESTMENTINFINANCIALENTITIES...................................................................14

4.6OTHERADJUSTMENTSTOCAPITALFUNDS...........................................................15

4.7ISSUEOFSUBORDINATEDDEBTFORRAISINGTIERII CAPITAL...........................16

5CAPITAL CHARGE FOR CREDIT RISK ......................................17

5.2CLAIMSONDOMESTICSOVEREIGNS...................................................................17

5.3CLAIMSONFOREIGNSOVEREIGNS.....................................................................18

5.4CLAIMSONPUBLICSECTORENTITIESPSES!......................................................18

5.5CLAIMSONMDBS" BIS ANDIMF ......................................................................18

5.6CLAIMSONBAN#S...............................................................................................1$

5.7CLAIMSONPRIMAR%DEALERS...........................................................................20

5.8CLAIMSONCORPORATES.....................................................................................20

5.$CLAIMSINCLUDEDINTHEREGULATOR%RETAILPORTFOLIOS............................21

5.10CLAIMSSECUREDB%RESIDENTIALPROPERT%..................................................23

5.11CLAIMSSECUREDB%COMMERCIALREALESTATE............................................23

5.12NON&PERFORMINGASSETSNPAS!...................................................................23

5.13HIGHER&RIS#CATEGORIES.................................................................................25

5.14OTHERASSETS...................................................................................................25

6EXTERNAL CREDIT ASSESSMENTS............................................30

6.1ELIGIBLECREDITRATINGAGENCIES..................................................................30

6.2SCOPEOFAPPLICATIONOFE'TERNALRATINGS..................................................30

6.3MAPPINGPROCESS...............................................................................................31

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6.4LONGTERMRATINGS...........................................................................................32

6.5SHORTTERMRATINGS.........................................................................................32

6.6USEOFUNSOLICITEDRATINGS............................................................................34

6.7USEOFMULTIPLERATINGASSESSMENTS............................................................34

6.8APPLICABILIT%OFISSUERATINGTOISSUER( OTHERCLAIMS ............................34

7CREDIT RISK MITIGATION...........................................................36

7.1CREDITRIS#MITIGATION& INTRODUCTION.........................................................36

7.2LEGALCERTAINT%..............................................................................................37

7.3CREDITRIS#MITIGATIONTECHNI)UES& COLLATERALISEDTRANSACTIONS......37

7.3.2Overall framework and minimum conditions..............................................37

7.3.3The comprehensive approach......................................................................39

7.3.4Eligible financial collateral.........................................................................4

7.3.!"alculation of capital re#uirement..............................................................4$

7.3.%&aircuts........................................................................................................42

7.4CREDITRIS#MITIGATIONTECHNI)UES& ON&BALANCESHEETNETTING............44

7.5CREDITRIS#MITIGATIONTECHNI)UES& GUARANTEES.....................................45

7.!.4Operational re#uirements for guarantees...................................................4!

7.!.!'dditional operational re#uirements for guarantees..................................4%

7.!.%(ange of eligible guarantors )counter*guarantors+....................................4%

7.!.7(isk weights.................................................................................................47

7.!.,-roportional cover.......................................................................................47

7.!.9"urrenc mismatches...................................................................................47

7.!.$/overeign guarantees and counter*guarantees.........................................4,

7.6MATURIT%MISMATCH........................................................................................48

7.%.30efinition of maturit...................................................................................4,7.%.4(isk weights for maturit mismatches..........................................................49

7.7TREATMENTOFPOOLSOFCRM TECHNI)UES.....................................................4$

8CAPITAL CHARGE FOR MARKET RISK....................................50

8.1INTRODUCTION....................................................................................................50

8.2SCOPEANDCOVERAGEOFCAPITALCHARGEFORMAR#ETRIS#S.......................51

8.3MEASUREMENTOFCAPITALCHARGEFORINTERESTRATERIS#........................51

8.4MEASUREMENTOFCAPITALCHARGEFORE)UITIES...........................................56

&


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8.5MEASUREMENTOFCAPITALCHARGEFORFOREIGNE'CHANGEANDGOLDOPEN

POSITIONS..................................................................................................................56

8.6AGGREGATIONOFTHECAPITALCHARGEFORMAR#ETRIS#S............................57

9CAPITAL CHARGE FOR OPERATIONAL RISK........................57

$.1DEFINITIONOFOPERATIONALRIS#.....................................................................57

$.2THEMEASUREMENTMETHODOLOGIES................................................................58

$.3THEBASICINDICATORAPPROACH......................................................................58

10MARKET DISCIPLINE....................................................................60

10.3ACHIEVINGAPPROPRIATEDISCLOSURE.............................................................60

10.4INTERACTION*ITHACCOUNTINGDISCLOSURES...............................................61

10.5SCOPEANDFRE)UENC%OFDISCLOSURES.........................................................61

10.6VALIDATION......................................................................................................62

10.7MATERIALIT%....................................................................................................62

10.8PROPRIETAR%ANDCONFIDENTIALINFORMATION.............................................63

10.10GENERALDISCLOSUREPRINCIPLE....................................................................63

10.11SCOPEOFAPPLICATION...................................................................................64

10.12EFFECTIVEDATEOFDISCLOSURES..................................................................64

ANNEX 1................................................................................................74

RAISINGOFSUBORDINATEDDEBTB%INDIANBAN#S.............................................74

ANNEX 2...............................................................................................77

RAISINGOFSUBORDINATEDDEBTB%FOREIGNBAN#S...........................................77

ANNEX 3.................................................................................................81

ILLUSTRATIONONCREDITRIS#MITIGATION..........................................................81

ANNEX 4.................................................................................................82

MEASUREMENTOFCAPITALCHARGEFORMAR#ETRIS#SINRESPECTOFINTEREST

RATEDERIVATIVESANDOPTIONS.............................................................................82

8


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PDNT+ NO# ON C+PT+ +D+C

1. )eera"

44 6ith a vie# to adopting the Basle Committee on BankingSupervision (BCBS) frame#ork on capital adeuac+ #hich takes

into account the elements of credit risk in various t+pes of assets in

the *alance sheet as #ell as off/*alance sheet *usiness and also to

strengthen the capital *ase of *anks, !eserve Bank of India

decided in pril 4==% to introduce a risk asset ratio s+stem for

*anks (including foreign *anks) in India as a capital adeuac+

measure >ssentiall+, under the a*ove s+stem the *alance sheet

assets, non/funded items and other off/*alance sheet e.posures

are assigned prescri*ed risk #eights and *anks have to maintain

unimpaired minimum capital funds euivalent to the prescri*ed ratio

on the aggregate of the risk #eighted assets and other e.posures

on an ongoing *asis !eserve Bank has issued guidelines to *anks

in $une %'' on maintenance of capital charge for market risks on

the lines of ?mendment to the Capital ccord to incorporate

market risks@ issued *+ the BCBS in 4==&

4% The BCBS has released the "International Convergence of Capital

Measurement and Capital Standards: !evised rame#ork" on %&

$une %'' The revised rame#ork seeks to arrive at significantl+

more risk/sensitive approach to capital reuirements The revised

rame#ork provides a range of options for determining the capital

reuirements for credit risk and operational risk to allo# *anks and

supervisors to select approaches that are most appropriate for their

operations and financial markets The revised rame#ork has kept

unchanged the options provided for determining capital

reuirements for market risks

2 +**roa$h (o im*"eme(a(io

%4 The !evised rame#ork consists of three/mutuall+ reinforcing


9/95

1illars, vi2 mininum capital reuirements, supervisor+ revie# of

capital adeuac+, and market discipline 3nder 1illar 4, the

rame#ork offers three distinct options for computing capital

reuirement for credit risk and three other options for computing

capital reuirement for operational risk These approaches for

credit and operational risks are *ased on increasing risk sensitivit+

and allo#s *anks to select an approach that is most appropriate to

the stage of development of *ank5s operations The approaches

availa*le for computing capital for credit risk are Standardised

pproach, oundation Internal !ating Based pproach and

dvanced Internal !ating Based pproach The approaches

availa*le for computing capital for operational risk are Basic

Indicator pproach, Standardised pproach and dvanced

Measurement pproach

%% Banks #ill *e reuired to implement the revised capital adeuac+

rame#ork #ith effect from March 04, %''8 6hile implementing

the revised frame#ork, *anks in India shall, at a minimum, adoptStandardised pproach (S) for credit risk and Basic Indicator

pproach (BI) for operational risk 6ith a vie# to ensuring smooth

transition to the revised rame#ork and #ith a vie# to providing

opportunit+ to *anks to streamline their s+stems and strategies,

*anks in India are reuired to commence a parallel run of the

revised rame#ork #ith effect from pril 4, %''&

%0 Banks #hich e.pect to meet the minimum reuirements for entr+

and on/going use of the Internal !ating Based pproaches (I!B)

for credit risk or the Standardised- dvanced Measurement

pproach (M) for operational risk under the revised frame#ork,

ma+ evaluate the necessar+ processes Banks that meet the

minimum reuirements for adopting the a*ove advanced

approaches ma+ approach the !eserve Bank #ith a roadmap that

has the approval of their Board of Airectors for migration to theseapproaches The roadmap should clearl+ indicate specific

=


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milestones and plans for migration to the advanced approaches

Banks #ill *e allo#ed to adopt the advanced approaches onl+ after

o*taining the specific approval of the !eserve Bank

3 #$o*e o! +**"i$a(io

04 The revised capital adeuac+ norms shall *e applica*le uniforml+

to all Scheduled Commercial Banks (e.cept !egional !ural Banks),

*oth at the solo level (glo*al position) as #ell as at the consolidated

level Consolidated *ank / defined as a group of entities #hich

include a licensed *ank / should maintain a minimum Capital to

!isk/#eighted ssets !atio (C!!) as applica*le to a *ank on an

ongoing *asis

4 Ca*i(a" !u%'

4 Banks are reuired to maintain a minimum Capital to !isk/#eighted

ssets !atio (C!!) of = percent on an ongoing *asis

% Capital funds are *roadl+ classified as Tier 4 and Tier % capital

>lements of Tier % capital #ill *e reckoned as capital funds up to a

ma.imum of 4'' per cent of Tier 4 capital, after making the

deductions- adustments referred to in paragraphs 9to8

4.3 "eme(' o! Tier 1 $a*i(a"

04 or Indian *anks, Tier 4 capital #ould include the follo#ing

elements:

i) 1aid/up capital, statutor+ reserves, and other disclosed free

reserves, if an+

ii) Capital reserves representing surplus arising out of sale

proceeds of assets

0% or foreign *anks in India, Tier 4 capital #ould include the follo#ing

elements:

(i) Interest/free funds from ead ffice kept in a separate

account in Indian *ooks specificall+ for the purpose of

meeting the capital adeuac+ norms

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(ii) Statutor+ reserves kept in Indian *ooks

(iii) !emitta*le surplus retained in Indian *ooks #hich is not

repatria*le so long as the *ank functions in India

(iv) Capital reserve representing surplus arising out of sale of

assets in India held in a separate account and #hich is not

eligi*le for repatriation so long as the *ank functions in India

(v) Interest/free funds remitted from a*road for the purpose of

acuisition of propert+ and held in a separate account in

Indian *ooks

(vi) The net credit *alance, if an+, in the inter/office account #ith

ead ffice-overseas *ranches #ill not *e reckoned as

capital funds o#ever, an+ de*it *alance in ead ffice

account #ill have to *e set/off against the capital

00 No(e'

(i) The foreign *anks are reuired to furnish to !eserve Bank,

(if not alread+ done), an undertaking to the effect that the

*anks #ill not remit a*road the remitta*le surplus retained in

India and included in Tier I capital as long as the *anks

function in India

(ii) These funds ma+ *e retained in a separate account titled as

5mount !etained in India for Meeting Capital to !isk/

#eighted sset !atio (C!!) !euirements5 under 5Capital

unds5

(iii) n auditor5s certificate to the effect that these funds

represent surplus remitta*le to ead ffice once ta.

assessments are completed or ta. appeals are decided and

do not include funds in the nature of provisions to#ards ta.

or for an+ other contingenc+ ma+ also *e furnished to

!eserve Bank

44


12/95

4.4 "eme(' o! Tier 2 $a*i(a"

4 %i'$"o'e% re'er7e' a% $umu"a(i7e *er*e(ua" *re!ere$e

'hare'

These often have characteristics similar to euit+ and disclosed

reserves These elements have the capacit+ to a*sor* une.pected

losses and can *e included in capital, if the+ represent

accumulations of post/ta. profits and not encum*ered *+ an+

kno#n lia*ilit+ and should not *e routinel+ used for a*sor*ing

normal loss or operating losses Cumulative perpetual preference

shares should *e full+ paid/up and should not contain clauses,

#hich permit redemption *+ the holder

% e7a"ua(io re'er7e'

These reserves often serve as a cushion against une.pected

losses, *ut the+ are less permanent in nature and cannot *e

considered as ?Core Capital@ !evaluation reserves arise from

revaluation of assets that are undervalued on the *ank@s *ooks,

t+picall+ *ank premises and marketa*le securities The e.tent to

#hich the revaluation reserves can *e relied upon as a cushion for

une.pected losses depends mainl+ upon the level of certaint+ that

can *e placed on estimates of the market values of the relevant

assets, the su*seuent deterioration in values under difficult market

conditions or in a forced sale, potential for actual liuidation at

those values, ta. conseuences of revaluation, etc Therefore, it

#ould *e prudent to consider revaluation reserves at a discount of

99 percent #hile determining their value for inclusion in Tier II

capital Such reserves #ill have to *e reflected on the face of the

Balance Sheet as revaluation reserves

0 )eera" *ro7i'io' a% "o'' re'er7e'

Such reserves, if the+ are not attri*uta*le to the actual diminution in

value or identifia*le potential loss in an+ specific asset and are

availa*le to meet une.pected losses, can *e included in Tier IIcapital deuate care must *e taken to see that sufficient

4%


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provisions have *een made to meet all kno#n losses and

foreseea*le potential losses *efore considering general provisions

and loss reserves to *e part of Tier II capital


14/95

emaii9 a(uri(y o! '(rume(' a(e o!Di'$ou( :;C


18/95

the+ #ould attract risk #eights as applica*le to G1s, #hich are

detailed in 1aragraph 94%

5.3 C"aim' o Forei9 #o7erei9'

904 >.posures on foreign sovereigns #ill attract risk #eights as per the

rating assigned *+ international rating agencies as follo#s:

Cre%i(+''e''me(o! # @ P

+++(o

++-

+A (o+-

BBBA(o

BBB-

BBA(o B-

Be"oB-

ra(e%

oo%y' +aa

(o+a

+ Baa Ba

(oB

Be"oB

!isk #eight ' F %' F 9' F 4'' F 49' F 4'' F

90% >.posures denominated in domestic currenc+ of the foreign

sovereign met out of the resources in the same currenc+ raised in

the urisdiction of that sovereign #ill, ho#ever, attract a risk #eight

of 2ero percent

900 o#ever, in case a ost Supervisor reuires a more conservative

treatment to such e.posures in the *ooks of the foreign *ranches of

the Indian *anks, the+ ma+ adopt the reuirements prescri*ed *+

the ost Countr+ supervisors for computing capital adeuac+

5.4 C"aim' o *ub"i$ 'e$(or e(i(ie' :P#'MI *ased facilities, #here there is no scope for redra#ing an+

portion of the sanctioned amounts, e.posure shall mean the actual

outstanding

9= The !eserve Bank #ould evaluate at periodic intervals the risk

#eight assigned to the retail portfolio #ith reference to the default

e.perience for these e.posures as appropriate from time/to/time

2Credit risk mitigation is explained in paragraph

%%


23/95

5.10 C"aim' 'e$ure% by re'i%e(ia" *ro*er(y

94'4 Dending full+ secured *+ mortgages on residential propert+ that isor #ill *e occupied *+ the *orro#er, or that is rented, shall *e risk

#eighted at 89F Investment in mortgage/*acked securities issued

*+ the housing finance companies regulated *+ the Gational

ousing Bank, #hich are *acked *+ mortgages of residential

propert+ of the a*ove nature, shall also *e risk #eighted at 89F

94'% In appl+ing the 89F risk #eight, *anks should ensure that this

concessionar+ #eight is applied restrictivel+ for residential

purposes and in accordance #ith strict prudential criteria, such as

the e.istence of su*stantial margin of additional securit+ of at least

%9 per cent over the amount of the loan *ased on strict valuation

rules ll other claims secured *+ residential propert+ #ould attract

a higher risk #eight of 4''F

94'0 !eserve Bank #ould increase the standard risk #eight #here the+

udge the criteria are not met or #here the default e.perience for

claims secured *+ residential mortgages #arrant a higher risk

#eight !eserve Bank #ould revie# the standard risk #eight

applica*le to claims secured *+ residential mortgage as appropriate

from time to time

5.11 C"aim' 'e$ure% by $ommer$ia" rea" e'(a(e

Claims secured *+ mortgages on commercial real estate #ill attract

a risk #eight of 4''F

5.12 No-*er!ormi9 a''e(' :NP+'.ternal assessments for one entit+ #ithin a corporate group

cannot *e used to risk #eight other entities #ithin the same group

&%% Banks must disclose the names of the credit rating agencies that

the+ use for the risk #eighting of their assets *+ t+pe of claims, the

risk #eights associated #ith the particular rating grades as

determined *+ !eserve Bank through the mapping process for

each eligi*le credit rating agenc+

&%0 or assets in the *ank@s portfolio that have contractual maturit+ less

than or eual to one +ear, short term ratings accorded *+ the

eligi*le credit rating agencies #ould *e relevant or other assets

#hich have a contractual maturit+ of more than one +ear, long term

ratings accorded *+ the eligi*le credit rating agencies #ould *e

relevant

6.3 a**i9 *ro$e''

&04 The Ge# Capital deuac+ rame#ork recommends developmentof a mapping process to assign the ratings issued *+ eligi*le credit

rating agencies to the risk #eights availa*le under the Standardised

risk #eighting frame#ork The mapping process is reuired to result

in a risk #eight assignment consistent #ith that of the level of credit

risk

&0% 1ending completion of the process of identif+ing the eligi*le rating

agencies, a *road mapping of the credit ratings a#arded *+ the

04


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domestic rating agencies has *een attempted #hich #ould serve as

a *road guide to the *anks in assigning risk #eights

6.4 o9 (erm ra(i9'

&4 n the *asis of the a*ove factors as #ell as the data made

availa*le *+ the rating agencies, the follo#ing tentative mapping of

ratings issued *+ the domestic credit rating agencies #ith the risk

#eights applica*le as per the Standardised approach under the

revised rame#ork has *een arrived at:

Dong term !atings of Credit ratingagencies operating in India

Standardisedapproach !isk

#eights

%'F

9'F

4''F

BBB *elo# 49'F

3nrated 4''F

&% 6here LN or L/ notation is attached to the rating, the

corresponding main rating categor+ risk #eight should *e used or

e.ample, N or / #ould *e considered to *e in the rating

categor+ and assigned 4''F risk #eight

6.5 #hor( (erm ra(i9'&94 or risk/#eighting purposes, short/term ratings are deemed to *e

issue/specific The+ can onl+ *e used to derive risk #eights for

claims arising from the rated facilit+ The+ cannot *e generalised to

other short/term claims, e.cept under the conditions mentioned in

paragraph &E In no event can a short/term rating *e used to

support a risk #eight for an unrated long/term claim Short/term

assessments ma+ onl+ *e used for short/term claims against *anks

and corporates

0%


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&9% 6hen *anks generalise risk #eight applica*le to rated short term

claims to other unrated short/term claims, su*ect to strict

compliance #ith the provisions of paragraph &E, the follo#ing

*road principles #ill appl+ The unrated short term claim on a

counter/part+ #ill attract a risk #eight of at least one level higher

than the risk #eight applica*le to the rated claim If a short/term

rated facilit+ attracts a %'F or a 9'F risk/#eight, unrated short/

term claims cannot attract a risk #eight lo#er than 9'F or 4''F

respectivel+

&90 If an issuer has a short/term facilit+ #ith an assessment that

#arrants a risk #eight of 49'F, all unrated claims, #hether long/

term or short/term, should also receive a 49'F risk #eight, unless

the *ank uses recognised credit risk mitigation techniues for such

claims

&9 In respect of the short term ratings the follo#ing mapping ma+ *e

used:

#hor( (erm ra(i9' i'&ei9h('

C# C+ C+ Fi($h

14N 4N-4 1D4 4 %'F

14 %N-% 1D% % 9'F

1%N 0N-0 1D0 0 4''F

1% N- 1D B,C 49'F

10N-10 9 1D9 A 49'F

&99 The a*ove mappings (*oth long term and short term) are tentative

and limited for the purposes of these draft guidelines The mapping

#ill *e re/visited #hile identif+ing the eligi*le domestic rating

agencies and #ill *e issued in due course The mapping done

eventuall+ #ould *e revie#ed annuall+ *+ the !eserve Bank

00


34/95

6.6 'e o! u'o"i$i(e% ra(i9'

&&4 rating #ould *e treated as solicited onl+ if the issuer of the

instrument has reuested the credit rating agenc+ for the rating and

has accepted the rating assigned *+ the agenc+ s a general rule,

*anks should use onl+ 'o"i$i(e% ra(i9 !rom (he e"i9ib"e $re%i(

ra(i9 a9e$ie'. Go ratings issued *+ the credit rating agencies on

an unsolicited *asis should *e considered for risk #eight calculation

as per the Standardised pproach

6.> 'e o! mu"(i*"e ra(i9 a''e''me('

&84 Banks shall *e guided *+ the follo#ing in respect of e.posures-

o*ligors having multiple ratings from the eligi*le credit rating

agencies chosen *+ the *ank for the purpose of risk #eight

calculation:

(i) If there is onl+ one rating *+ an eligi*le credit rating

agenc+ for a particular claim, that rating #ould *e used to

determine the risk #eight of the claim

(ii) If there are t#o ratings accorded *+ eligi*le credit ratingagencies #hich map into different risk #eights, the higher

risk #eight should *e applied

(iii) If there are three or more ratings accorded *+ eligi*le

credit rating agencies #ith different risk #eights, the

ratings corresponding to the t#o lo#est risk #eights

should *e referred to and the higher of those t#o risk

#eights should *e applied

6.8 +**"i$abi"i(y o! i''ue ra(i9 (o i''uer/ o(her $"aim'

&E4 6here a *ank invests in a particular issue that has an issue specific

rating *+ an eligi*le credit rating agenc+ the risk #eight of the claim

#ill *e *ased on this assessment 6here the *ank@s claim is not an

investment in a specific assessed issue, the follo#ing general

principles #ill appl+:

0


35/95

(i) In circumstances #here the *orro#er has a specific

assessment for an issued de*t / *ut the *ank@s claim is

not an investment in this particular de*t / the rating

applica*le to the specific de*t (#here the rating maps

into a risk #eight lo#er than that #hich applies to an

unrated claim) ma+ *e applied to the *ank@s unassessed

claim onl+ if this claim rankspari passu or senior to the

specific rated de*t in all respects and the maturit+ of the

unassessed claim is not later than the maturit+ of the

rated claim If not, the rating applica*le to the specific

de*t cannot *e used and the unassessed claim #ill

receive the risk #eight for unrated claims

(ii) If either the issuer or single issue has *een assigned a

rating #hich maps into a risk #eight eual to or higher

than that #hich applies to unrated claims, a claim on the

same counterpart+, #hich is unrated *+ an+ eligi*le credit

rating agenc+, #ill *e assigned the same risk #eight as is

applica*le to the rated e.posure, if this claim ranks pari

passuor unior to the rated e.posure in all respects

(iii) 6here a *ank intends to e.tend an issuer or an issue

specific rating assigned *+ an eligi*le credit rating

agenc+ to an+ other e.posure #hich the *ank has on the

same counterpart+ and #hich meets the a*ove criterion,

it should *e e.tended to the entire amount of credit risk

e.posure the *ank has #ith regard to that e.posure ie,

*oth principal and interest

(iv) 6ith a vie# to avoiding an+ dou*le counting of credit

enhancement factors, no recognition of credit risk

mitigation techniues should *e taken into account if the

credit enhancement is alread+ reflected in the issue

specific rating accorded *+ an eligi*le credit rating

agenc+ relied upon *+ the *ank

(v) 6here unrated e.posures are risk #eighted *ased on the

rating of an euivalent e.posure to that *orro#er, the

09


36/95

general rule is that foreign currenc+ ratings #ould *e

used onl+ for e.posures in foreign currenc+ Aomestic

currenc+ ratings, if separate, #ould *e used to risk #eight

onl+ claims denominated in the domestic currenc+

> Cre%i( i'& i(i9a(io

>.1 Cre%i( ri'& mi(i9a(io - (ro%u$(io

.1.1 Banks use a num*er of techniues to mitigate the credit risks to

#hich the+ are e.posed The revised approach to credit risk

mitigation allo#s a #ider range of credit risk mitigants to *e

recognised for regulator+ capital purposes than is permitted under

the 4=EE rame#ork provided these techniues meet the

reuirements for legal certaint+ as descri*ed in paragraph 8%

*elo#

84% The general principles applica*le to use of credit risk mitigation

techniues are as under:

(i) Go transaction in #hich Credit !isk Mitigation (C!M)

techniues are used should receive a higher capital

reuirement than an other#ise identical transaction

#here such techniues are not used

(ii) The effects of C!M #ill o( *e dou*le counted

Therefore, no additional supervisor+ recognition of C!M

for regulator+ capital purposes #ill *e granted on claims

for #hich an issue/specific rating is used that alread+

reflects that C!M

(iii) 1rincipal/onl+ ratings #ill not *e allo#ed #ithin the C!M

frame#ork

(iv) 6hile the use of C!M techniues reduces or transfers

credit risk, it simultaneousl+ ma+ increase other risks

(residual risks) !esidual risks include legal, operational,

0&


37/95

liuidit+ and market risks Therefore, it is imperative that

*anks emplo+ ro*ust procedures and processes to

control these risks 6here these risks are not adeuatel+

controlled, !eserve Bank ma+ impose additional capital

charges or take other supervisor+ actions The disclosure

reuirements prescri*ed in Ta*le & must also *e

o*served for *anks to o*tain capital relief in respect of

an+ C!M techniues

>.2 e9a" Cer(ai(y

In order for *anks to o*tain capital relief for an+ use of C!M techniues,

the follo#ing minimum standards for legal documentation must *e met ll

documentation used in collateralised transactions must *e *inding on all

parties and legall+ enforcea*le in all relevant urisdictions Banks must

have conducted sufficient legal revie#, #hich should *e #ell documented,

to verif+ this Such verification should have a #ell founded legal *asis for

reaching the conclusion a*out the *inding nature and enforcea*ilit+ of the

documents Banks should also undertake such further revie# as

necessar+ to ensure continuing enforcea*ilit+

>.3 Cre%i( ri'& mi(i9a(io (e$hiue' - Co""a(era"i'e% (ra'a$(io'

804 collateralised transaction is one in #hich:

(i) *anks have a credit e.posure and that credit e.posure is

hedged in #hole or in part *+ collateral posted *+ a

counterpart+ or *+ a third part+ on *ehalf of the

counterpart+ ere, Lcounterpart+ is used to denote a

part+ to #hom a *ank has an on/ or off/*alance sheet

credit e.posure

(ii) *anks have a specific lien on the collateral and the

reuirements of legal certaint+ are met

80% O7era"" !rameor& a% miimum $o%i(io'

The !evised rame#ork allo#s *anks to adopt either the simple

approach, #hich, similar to the 4=EE ccord, su*stitutes the risk

08


38/95

#eighting of the collateral for the risk #eighting of the counterpart+

for the collateralised portion of the e.posure (generall+ su*ect to a

%'F floor), or for the comprehensive approach, #hich allo#s fuller

offset of collateral against e.posures, *+ effectivel+ reducing the

e.posure amount *+ the value ascri*ed to the collateral Banks in

India ma+ adopt the Comprehensive pproach, #hich allo#s fuller

offset of collateral against e.posures, *+ effectivel+ reducing the

e.posure amount *+ the value ascri*ed to the collateral 3nder this

approach, *anks #hich take eligi*le financial collateral (eg cash or

securities, more specificall+ defined *elo#), are allo#ed to reduce

their credit e.posure to a counterpart+ #hen calculating their capital

reuirements to take account of the risk mitigating effect of the

collateral o#ever, *efore capital relief #ill *e granted the

standards set out *elo# must *e met:

(i) In addition to the general reuirements for legal certaint+,

the legal mechanism *+ #hich collateral is pledged or

transferred must ensure that the *ank has the right to

liuidate or take legal possession of it, in a timel+

manner, in the event of the default, insolvenc+ or

*ankruptc+ (or one or more other#ise/defined credit

events set out in the transaction documentation) of the

counterpart+ (and, #here applica*le, of the custodian

holding the collateral) urthermore *anks must take all

steps necessar+ to fulfill those reuirements under the

la# applica*le to the *ank@s interest in the collateral for

o*taining and maintaining an enforcea*le securit+

interest, eg *+ registering it #ith a registrar

(ii) In order for collateral to provide protection, the credit

ualit+ of the counterpart+ and the value of the collateral

must not have a material positive correlation or

e.ample, securities issued *+ the counterpart+ / or *+an+ related group entit+ / #ould provide little protection

0E


39/95

and so #ould *e ineligi*le

(iii) Banks must have clear and ro*ust procedures for the

timel+ liuidation of collateral to ensure that an+ legal

conditions reuired for declaring the default of the

counterpart+ and liuidating the collateral are o*served,

and that collateral can *e liuidated promptl+

(iv) 6here the collateral is held *+ a custodian, *anks must

take reasona*le steps to ensure that the custodian

segregates the collateral from its o#n assets

800 The $om*rehe'i7e a**roa$h

(i) In the comprehensive approach, #hen taking collateral,

*anks #ill need to calculate their adusted e.posure to a

counterpart+ for capital adeuac+ purposes in order to

take account of the effects of that collateral Banks are

reuired to adust *oth the amount of the e.posure to the

counterpart+ and the value of an+ collateral received in

support of that counterpart+ to take account of possi*le

future fluctuations in the value of either, occasioned *+

market movements These adustments are referred to as

?haircuts@ The application of haircuts #ill produce

volatilit+ adusted amounts for *oth e.posure and

collateral The volatilit+ adusted amount for the e.posure

#ill *e higher than the e.posure and the volatilit+

adusted amount for the collateral #ill *e lo#er than the

collateral, unless either side of the transaction is cash

(ii) dditionall+ #here the e.posure and collateral are held in

different currencies an additional do#n#ards adustment

must *e made to the volatilit+ adusted collateral amount

0=


40/95

to take account of possi*le future fluctuations in

e.change rates

(iii) 6here the volatilit+/adusted e.posure amount is greater

than the volatilit+/adusted collateral amount (including

an+ further adustment for foreign e.change risk), *anks

shall calculate their risk/#eighted assets as the

difference *et#een the t#o multiplied *+ the risk #eight

of the counterpart+ The frame#ork for performing

calculations of capital reuirement is indicated in

paragraph 809

80 "i9ib"e !ia$ia" $o""a(era"

The follo#ing collateral instruments are eligi*le for recognition in

the comprehensive approach:

(i) Cash (as #ell as certificates of deposit or compara*le

instruments issued *+ the lending *ank) on deposit #ith the

*ank #hich is incurring the counterpart+ e.posure

(ii)


41/95


42/95

>P Q ma. R', > . (4 N e) / C . (4 / c / f.)U

#here:

>PQ the e.posure value after risk mitigation

> Q current value of the e.posure for #hich the collateral

ualifies as a risk mitigant

eQ haircut appropriate to the e.posure

CQ the current value of the collateral received

cQ haircut appropriate to the collateral

f.Q haircut appropriate for currenc+ mismatch *et#een thecollateral and e.posure

The e.posure amount after risk mitigation (ie, >P) #ill *e multiplied

*+ the risk #eight of the counterpart+ to o*tain the risk/#eighted

asset amount for the collateralised transaction

80& air$u('

(i) In principle, *anks have t#o #a+s of calculating the haircuts:

(i) standard supervisor+ haircuts, using parameters set *+

the Committee, and (ii) o#n/estimate haircuts, using *anks@

o#n internal estimates of market price volatilit+ Banks in

India #ill *e allo#ed to use onl+ the standard supervisor+

haircuts for *oth the e.posure as #ell as the collateral

(ii) The Standard Supervisory Haircuts (assuming dail+ mark/to/

market, dail+ re/margining and a 4' *usiness da+ holding

period) e.pressed as percentages are as under:

%


43/95

(iii) The standard supervisor+ haircuts applica*le to e.posure-

securities issued *+ the Central or State C


44/95

(vii) 6here the collateral is a *asket of assets, the haircut on the

*asket #ill *e, , #here is the #eight of the

asset (as measured *+ units of currenc+) in the *asket and

the haircut applica*le to that asset

(viii) or *anks using the standard supervisor+ haircuts, the 4'/

*usiness da+ haircuts provided a*ove #ill *e the *asis and

this haircut #ill *e scaled up or do#n depending on the t+pe

of transaction and the freuenc+ of remargining or

revaluation using the formula *elo#:

#here:H Q haircutH10Q 4'/*usiness da+ standard supervisor+ haircutfor instrumentNQ actual num*er of *usiness da+s *et#eenremargining for capital market transactions orrevaluation for secured transactions

!" Q minimum holding period for the t+pe of

transaction

>.4 Cre%i( ri'& mi(i9a(io (e$hiue' - O-ba"a$e 'hee( e((i9

n/*alance sheet netting is confined to loans-advances and

deposits, #here *anks have legall+ enforcea*le netting

arrangements, involving specific lien #ith proof of documentation

The+ ma+ calculate capital reuirements on the *asis of net credit

e.posures su*ect to the follo#ing conditions:

6here a *ank,

a) has a #ell/founded legal *asis for concluding that the

netting or offsetting agreement is enforcea*le in each

relevant urisdiction regardless of #hether the

counterpart+ is insolvent or *ankruptH


45/95

*) is a*le at an+ time to determine the loans-advances and

deposits #ith the same counterpart+ that are su*ect to

the netting agreementH and

c) monitors and controls the relevant e.posures on a net*asis,

it ma+ use the net e.posure of loans-advances and deposits as

the *asis for its capital adeuac+ calculation in accordance #ith

the formula in paragraph 809 Doans-advances are treated as

e.posure and deposits as collateral The haircuts #ill *e 2ero

e.cept #hen a currenc+ mismatch e.ists ll the reuirements

contained in paragraph 80& and 8& #ill also appl+

>.5 Cre%i( ri'& mi(i9a(io (e$hiue' - )uara(ee'

894 6here guarantees are direct, e.plicit, irrevoca*le and unconditional

*anks ma+ take account of such credit protection in calculating

capital reuirements

89% range of guarantors are recognised s under the 4=EE ccord, a

su*stitution approach #ill *e applied Thus onl+ guarantees issued

*+ entities #ith a lo#er risk #eight than the counterpart+ #ill lead to

reduced capital charges since the protected portion of the

counterpart+ e.posure is assigned the risk #eight of the guarantor,

#hereas the uncovered portion retains the risk #eight of the

underl+ing counterpart+

890 Aetailed operational reuirements for guarantees eligi*le for *eing

treated as a C!M are as under:

89 O*era(ioa" reuireme(' !or 9uara(ee'

guarantee (counter/guarantee) must represent a direct claim on

the protection provider and must *e e.plicitl+ referenced to specific

e.posures or a pool of e.posures, so that the e.tent of the cover is

clearl+ defined and incontroverti*le The guarantee must *e

irrevoca*leH there must *e no clause in the contract that #ouldallo# the protection provider unilaterall+ to cancel the cover or that

9


46/95

#ould increase the effective cost of cover as a result of

deteriorating credit ualit+ in the guaranteed e.posure The

guarantee must also *e unconditionalH there should *e no clause in

the guarantee outside the direct control of the *ank that could

prevent the protection provider from *eing o*liged to pa+ out in a

timel+ manner in the event that the original counterpart+ fails to

make the pa+ment(s) due

899 +%%i(ioa" o*era(ioa" reuireme(' !or 9uara(ee'

In addition to the legal certaint+ reuirements in paragraphs 8%

a*ove, in order for a guarantee to *e recognised, the follo#ing

conditions must *e satisfied:

(i) n the ualif+ing default-non/pa+ment of thecounterpart+, the *ank ma+ in a timel+ manner pursuethe guarantor for an+ monies outstanding under thedocumentation governing the transaction The guarantorma+ make one lump sum pa+ment of all monies undersuch documentation to the *ank, or the guarantor ma+assume the future pa+ment o*ligations of thecounterpart+ covered *+ the guarantee The *ank musthave the right to receive an+ such pa+ments from theguarantor #ithout first having to take legal actions inorder to pursue the counterpart+ for pa+ment

(ii) The guarantee is an e.plicitl+ documented o*ligationassumed *+ the guarantor

(iii) >.cept as noted in the follo#ing sentence, the guaranteecovers all t+pes of pa+ments the underl+ing o*ligor ise.pected to make under the documentation governingthe transaction, for e.ample notional amount, margin

pa+ments etc 6here a guarantee covers pa+ment ofprincipal onl+, interests and other uncovered pa+mentsshould *e treated as an unsecured amount inaccordance #ith paragraph 89E

89& a9e o! e"i9ib"e 9uara(or' :$ou(er-9uara(or'uropean Central Bank and >uropean Communit+ as

#ell as those MABs referred to in paragraph 99, >C


47/95

and Cs, *anks and primar+ dealers #ith a

lo#er risk #eight than the counterpart+H

(ii) other entities rated or *etter This #ould include

guarantee cover provided *+ parent, su*sidiar+ and

affiliate companies #hen the+ have a lo#er risk #eight

than the o*ligor

898 i'& ei9h('

The protected portion is assigned the risk #eight of the protection

provider >.posures covered *+ State


48/95

894' #o7erei9 9uara(ee' a% $ou(er-9uara(ee'

claim ma+ *e covered *+ a guarantee that is indirectl+ counter/

guaranteed *+ a sovereign Such a claim ma+ *e treated as

covered *+ a sovereign guarantee provided that:

(i) the sovereign counter/guarantee covers all credit riskelements of the claimH

(ii) *oth the original guarantee and the counter/guaranteemeet all operational reuirements for guarantees, e.ceptthat the counter/guarantee need not *e direct and e.plicitto the original claimH and

(iii) the cover should *e ro*ust and no historical evidencesuggests that the coverage of the counter/guarantee isless than effectivel+ euivalent to that of a directsovereign guarantee

>.6 a(uri(y i'ma($h

8&4 6here the residual maturit+ of the C!M is less than that of the

underl+ing credit e.posure a maturit+ mismatch occurs 6here

there is a maturit+ mismatch and the C!M has an original maturit+

of less than one +ear, the C!M is not recognised for capital

purposes In other cases #here there is a maturit+ mismatch,

partial recognition is given to the C!M for regulator+ capital

purposes as detailed *elo# in paragraphs 8&0 to 8&9

8&% or the purposes of calculating risk/#eighted assets, a maturit+

mismatch occurs #hen the residual maturit+ of a collateral is less

than that of the underl+ing e.posure

8&0 De!ii(io o! ma(uri(y

The maturit+ of the underl+ing e.posure and the maturit+ of the

collateral should *oth *e defined conservativel+ The effective

maturit+ of the underl+ing should *e gauged as the longest possi*le

remaining time *efore the counterpart+ is scheduled to fulfil its

E


49/95

o*ligation, taking into account an+ applica*le grace period or the

collateral, em*edded options #hich ma+ reduce the term of the

collateral should *e taken into account so that the shortest possi*le

effective maturit+ is used

8& i'& ei9h(' !or ma(uri(y mi'ma($he'

s outlined in paragraph 8&4, collateral #ith maturit+ mismatches

are onl+ recognised #hen their original maturities are greater than

or eual to one +ear s a result, the maturit+ of collateral for

e.posures #ith original maturities of less than one +ear must *e

matched to *e recognised In all cases, collateral #ith maturit+

mismatches #ill no longer *e recognised #hen the+ have a residual

maturit+ of three months or less

8&9 6hen there is a maturit+ mismatch #ith recognised credit risk

mitigants (collateral, on/*alance sheet netting and guarantees) the

follo#ing adustment #ill *e applied

Pa P ? :(-0.25< / :T-0.25.> Trea(me( o! *oo"' o! C (e$hiue'

In the case #here a *ank has multiple C!M techniues covering a

single e.posure (eg a *ank has *oth collateral and guarantee

partiall+ covering an e.posure), the *ank #ill *e reuired to

su*divide the e.posure into portions covered *+ each t+pe of C!M

=


50/95

techniue (eg portion covered *+ collateral, portion covered *+

guarantee) and the risk/#eighted assets of each portion must *e

calculated separatel+ 6hen credit protection provided *+ a single

protection provider has differing maturities, the+ must *e su*divided

into separate protection as #ell

8 Ca*i(a" $har9e !or ar&e( i'&

8.1 (ro%u$(io

E44 Market risk is defined as the risk of losses in on/*alance sheet and

off/*alance sheet positions arising from movements in market

prices The market risk positions su*ect to capital charge

reuirement are:

(i) The risks pertaining to interest rate related instruments

and euities in the trading *ookH and

(ii) oreign e.change risk (including open position in

precious metals) throughout the *ank (*oth *anking and

trading *ooks)

E4% The guidelines in this regard are organi2ed under the follo#ing

seven sections:

#e$(io

Par(i$u"ar'

+ Scope and coverage of capital charge for market risks

B Measurement of capital charge for interest rate risk in the trading *ook

C Measurement of capital charge for euities in the trading *ook

D Measurement of capital charge for foreign e.change risk and goldopen positions

ggregation of capital charge for market risks

#e$(io +

9'


51/95

8.2 #$o*e a% $o7era9e o! $a*i(a" $har9e !or mar&e( ri'&'

E%4These guidelines seek to address the issues involved in computing

capital charges for interest rate related instruments in the trading

*ook, euities in the trading *ook and foreign e.change risk

(including gold and other precious metals) in *oth trading and

*anking *ooks Trading *ook for the purpose of these guidelines

#ill include:

(i) Securities included under the eld for Trading categor+

(ii) Securities included under the vaila*le for Sale categor+

(iii) pen gold position limits

(iv) pen foreign e.change position limits

(v) Trading positions in derivatives, and

(vi) Aerivatives entered into for hedging trading *ook

e.posures

E%% To *egin #ith, capital charge for market risks is applica*le to *anks

on a glo*al *asis t a later stage, this #ould *e e.tended to all

groups #here the controlling entit+ is a *ank

E%0 Banks are reuired to manage the market risks in their *ooks on an

ongoing *asis and ensure that the capital reuirements for market

risks are *eing maintained on a continuous *asis, ie at the close

of each *usiness da+ Banks are also reuired to maintain strict risk

management s+stems to monitor and control intra/da+ e.posures to

market risks

#e$(io B

8.3 ea'ureme( o! $a*i(a" $har9e !or i(ere'( ra(e ri'&

E04 This section descri*es the frame#ork for measuring the risk of

holding or taking positions in de*t securities and other interest rate

related instruments in the %ome'(i$ $urre$yin the trading *ook

94


52/95

E0% The capital charge for interest rate related instruments and euities

#ould appl+ to $urre( mar&e( 7a"ue of these items in *ank@s

trading *ook Since *anks are reuired to maintain capital for

market risks on an ongoing *asis, the+ are reuired to mark to

market their trading positions on a dail+ *asis The current market

value #ill *e determined as per e.tant !BI guidelines on valuation

of investments

E00 The minimum capital reuirement is e.pressed in terms of t#o

separatel+ calculated charges, (i) L'*e$i!i$ ri'& charge for each

securit+, #hich is akin to the conventional capital charge for credit

risk, *oth for short (short position is not allo#ed in India e.cept inderivatives) and long positions, and (ii) L9eera" mar&e( ri'&

charge to#ards interest rate risk in the portfolio, #here long and

short positions (#hich is not allo#ed in India e.cept in derivatives)

in different securities or instruments can *e offset

Specific risk

E0 The capital charge for specific risk is designed to protect against an

adverse movement in the price of an individual securit+ o#ing to

factors related to the individual issuer The risk #eights to *e used

in this calculation must *e consistent #ith those used for calculating

the capital reuirements in the *anking *ook Thus, *anks using the

standardised approach for credit risk in the *anking *ook #ill use

the standardised approach risk #eights for counterpart+ risks in the

trading *ook in a consistent manner

E09 Banks shall, in addition to computing specific risk charge for TC

derivatives in the trading *ook, calculate the counterpart+ credit risk

charge for TC derivatives as part of capital for credit risk as per

the Standardised pproach covered in paragraph 9 a*ove


53/95

rates The capital charge is the sum of four components:

(i) the net short (short position is not allo#ed in India e.cept

in derivatives) or long position in the #hole trading *ookH

(ii) a small proportion of the matched positions in each time/

*and (the Lvertical disallo#ance)H

(iii) a larger proportion of the matched positions across

different time/*ands (the Lhori2ontal disallo#ance), and

(iv) a net charge for positions in options, #here appropriate

E08 The Basle Committee has suggested t#o *road methodologies for

computation of capital charge for market risks ne is the

standardised method and the other is the *anks@ internal risk

management models method s *anks in India are still in a

nascent stage of developing internal risk management models, it

has *een decided that, to start #ith, *anks ma+ adopt the

standardised method 3nder the standardised method there are

t#o principal methods of measuring market risk, a Lmaturit+

method and a Lduration method s Lduration method is a more

accurate method of measuring interest rate risk, it has *een

decided to adopt standardised duration method to arrive at the

capital charge ccordingl+, *anks are reuired to measure the

general market risk charge *+ calculating the price sensitivit+

(modified duration) of each position separatel+ 3nder this method,

the mechanics are as follo#s:

(i) first calculate the price sensitivit+ (modified duration) of

each instrumentH

(ii) ne.t appl+ the assumed change in +ield to the modified

duration of each instrument *et#een '& and 4'

percentage points depending on the maturit+ of the

instrument (see Ta*le/4 *elo#)H

(iii) slot the resulting capital charge measures into a maturit+

90


54/95

ladder #ith the fifteen time *ands as set out in Ta*le/4H

(iv) su*ect long and short positions (short position is not

allo#ed in India e.cept in derivatives) in each time *and

to a 9 per cent vertical disallo#ance designed to capture

*asis riskH and

(v) carr+ for#ard the net positions in each time/*and for

hori2ontal offsetting su*ect to the disallo#ances set out

in Ta*le/%

Tab"e 1

Dura(io me(ho% E (ime ba%' a% a''ume% $ha9e' i yie"%

Time Ba%' +''ume%Cha9e i

ie"%

oe 1

4 month or less 4''

4 to 0 months 4''

0 to & months 4''

& to 4% months 4''

oe 2

4' to 4= +ears '='

4= to %E +ears 'E'

%E to 0& +ears '89

oe 3

0& to 0 +ears '89

0 to 98 +ears '8'98 to 80 +ears '&9

80 to =0 +ears '&'

=0 to 4'& +ears '&'

4'& to 4% +ears '&'

4% to %' +ears '&'

over %' +ears '&'

Tab"e 2

9


55/95

oriGo(a" Di'a""oa$e'

oe' Time ba% Hi(hi (heGoe'

Be(eea%=a$e(

Goe'

Be(eeGoe' 1 a%

3

oe 1

4 month or less

'F

'F

'F

4''F

4 to 0 months

0 to & months

& to 4% months

oe 2

4' to 4= +ears

0'F4= to %E +ears

%E to 0& +ears

oe 3

0& to 0 +ears

0'F

0 to 98 +ears

98 to 80 +ears

80 to =0 +ears

=0 to 4'&

+ears

4'& to 4%+ears

4% to %' +ears

over %' +ears

Capital charge for interest rate derivatives

E0E The measurement of capital charge for market risks should include

all interest rate derivatives and off/*alance sheet instruments in the

trading *ook and derivatives entered into for hedging trading *ook

e.posures #hich #ould react to changes in the interest rates, like

!s, interest rate positions etc The details of measurement of

capital charge for interest rate derivatives are furnished in nne.

Aetails of computing capital charges for market risks in maor

currencies are detailed in ttachment I. In the case of residual

currencies the gross positions in each time/*and #ill *e su*ect tothe assumed change in +ield set out in Ta*le/4 #ith no further

99


56/95

offsets

#e$(io C

8.4 ea'ureme( o! $a*i(a" $har9e !or eui(ie'

E4 t present euities are also treated as an+ other investments for

the purpose of assigning credit risk n additional risk #eight of

%9F is assigned on these positions to capture market risk

E% Minimum capital reuirement to cover the risk of holding or taking

positions in euities in the trading *ook is set out *elo# This is

applied to all instruments that e.hi*it market *ehaviour similar to

euities *ut not to non/converti*le preference shares (#hich are

covered *+ the interest rate risk reuirements descri*ed earlier)

The instruments covered include euit+ shares, #hether voting or

non/voting, converti*le securities that *ehave like euities, for

e.ample: units of mutual funds, and commitments to *u+ or sell

euit+

#*e$i!i$ a% 9eera" mar&e( ri'&

E0 Capital charge for specific risk (akin to credit risk) #ill *e =F and

specific risk is computed on the *anks@ gross euit+ positions (ie

the sum of all long euit+ positions and of all short euit+ positions

Y short euit+ position is, ho#ever, not allo#ed for *anks in India)

The general market risk charge #ill also *e =F on the gross euit+

positions

#e$(io D

E9 ea'ureme( o! $a*i(a" $har9e !or !orei9 e?$ha9e a% 9o"%

o*e *o'i(io'

E94 oreign e.change open positions and gold open positions are at

present risk/#eighted at 4''F Thus, capital charge for foreign

e.change and gold open position is =F at present These open

9&


57/95

positions, "imi(' or a$(ua" hi$he7er i' hi9her, #ould continue

to attract capital charge at =F This is in line #ith the Basel

Committee reuirement

#e$(io

E& +99re9a(io o! (he $a*i(a" $har9e !or mar&e( ri'&'

E&4 s e.plained earlier capital charges for specific risk and general

market risk are to *e computed separatel+ *efore aggregation or

computing the total capital charge for market risks, the calculations

ma+ *e plotted in the follo#ing ta*le:

Pro!orma 1

(!s in crore)

i'& Ca(e9ory Ca*i(a" $har9e

I (ere'( a(e:aAbBI-other regulator+ authorities in regard to issue of the

instruments

d) In the case of foreign *anks rupee su*ordinated de*t should *e issued

*+ the ead ffice of the *ank, through the Indian *ranch after o*taining

specific approval from oreign >.change Aepartment

2. $"u'io i Tier $a*i(a"

Su*ordinated de*t instruments #ill *e limited to 9' per cent of Tier/I

Capital of the *ank These instruments, together #ith other components of

Tier II capital, should not e.ceed 4''F of Tier I capital

3. )ra( o! a%7a$e' a9ai'( bo%'

Banks should not grant advances against the securit+ of their o#n *onds

4. Com*"ia$e i(h e'er7e euireme('

The total amount of Su*ordinated Ae*t raised *+ the *ank has to *e

reckoned as lia*ilit+ for the calculation of net demand and time lia*ilities

for the purpose of reserve reuirements and, as such, #ill attract

C!!-SD! reuirements

89


76/95

5. Trea(me( o! 7e'(me( i 'ubor%ia(e% %eb(

Investments *+ *anks in su*ordinated de*t of other *anks #ill *e assigned

4''F risk #eight for capital adeuac+ purpose lso, the *ank5s

aggregate investment in Tier II *onds issued *+ other *anks and financial

institutions shall *e #ithin the overall ceiling of 4' percent of the investing

*ank5s total capital The capital for this purpose #ill *e the same as that

reckoned for the purpose of capital adeuac+

. #ubor%ia(e% Deb( i !orei9 $urre$y

Banks ma+ take approval of !BI on a case/*+/case *asis

. e*or(i9 euireme('

The *anks should su*mit a report to !eserve Bank of India giving details

of the capital raised, such as, amount raised, maturit+ of the instrument,

rate of interest together #ith a cop+ of the offer document soon after the

issue is completed

8&


77/95

+NN 2

PDNT+ NO# ON C+PT+ +D+C

ai'i9 o! 'ubor%ia(e% %eb( by !orei9 ba&'

ai'i9 o! ea% O!!i$e borroi9' i !orei9 $urre$y by !orei9ba&' o*era(i9 i %ia !or i$"u'io i Tier $a*i(a"

(Oide paragraph E%)

Aetailed guidelines on the standard reuirements and conditions for ead

ffice *orro#ings in foreign currenc+ raised *+ foreign *anks operating in

India for inclusion , as su*ordinated de*t in Tier II capital are as indicated

*elo#:/

+mou( o! borroi9

% The total amount of *orro#ing in foreign currenc+ #ill *e at the

discretion of the foreign *ank o#ever, the amount eligi*le for inclusion inTier II capital as su*ordinated de*t #ill *e su*ect to a ma.imum ceiling of

9'F of the Tier I capital maintained in India, and the applica*le discount

rate mentioned in para 9 *elo# urther as per e.tant instructions, the

total of Tier II capital should not e.ceed 4''F of Tier I capital

a(uri(y *erio%

0 ead ffice *orro#ings should have a minimum initial maturit+ of 9

+ears If the *orro#ing is in tranches, each tranche #ill have to *e retained

in India for a minimum period of five +ears *orro#ings in the nature of

perpetual su*ordinated de*t, #here there ma+ *e no final maturit+ date,

#ill not *e permitted

88


78/95

Fea(ure'

The *orro#ings should *e full+ paid up, ie the entire *orro#ing

or each tranche of the *orro#ing should *e availa*le in full to the *ranch

in India It should *e unsecured, su*ordinated to the claims of other

creditors of the foreign *ank in India, free of restrictive clauses and should

not *e redeema*le at the instance of the

a(e o! %i'$ou(

9 The *orro#ings #ill *e su*ected to progressive discount as

the+ approach maturit+ at the rates indicated *elo#:

emaii9 ma(uri(y o! borroi9 a(e o! %i'$ou(

More than 9 +ears Got pplica*le (the entire amountcan *e included as su*ordinatedde*t in Tier II capital su*ect tothe ceiling mentioned in para %)

More than +ears and less than 9+ears

%'F

More than 0 +ears and less than +ears

'F

More than % +ears and less than 0+ears

&'F

More than 4 +ear and less than %+ears

E'F

Dess than 4 +ear 4''F (Go amount can *e treated

as su*ordinated de*t for Tier IIcapital)

a(e o! i(ere'(

& The rate of interest on *orro#ings should not e.ceed the on/

going market rate Interest should *e paid at half +earl+ rests

Hi(hho"%i9 (a?

8 The interest pa+ments to the #ill *e su*ect to applica*le

8E


79/95

#ithholding ta.

e*ayme(

E ll repa+ments of the principal amount #ill *e su*ect to prior

approval of !eserve Bank of India, Aepartment of Banking perations and

Aevelopment

Do$ume(a(io

= The *ank should o*tain a letter from its agreeing to give the

loan for supplementing the capital *ase for the Indian operations of the

foreign *ank The loan documentation should confirm that the loan given

*+ ead ffice #ould *e su*ordinated to the claims of all other creditors

of the foreign *ank in India The loan agreement #ill *e governed *+, and

construed in accordance #ith the Indian la# 1rior approval of the !BI

should *e o*tained in case of an+ material changes in the original terms of

issue

Di'$"o'ure

4' The total amount of *orro#ings ma+ *e disclosed in the

*alance sheet under the head ^Su*ordinated loan in the nature of long

term *orro#ings in foreign currenc+ from ead ffice@

e'er7e reuireme('

44 The total amount of *orro#ings is to *e reckoned as lia*ilit+ for

the calculation of net demand and time lia*ilities for the purpose of reserve

reuirements and, as such, #ill attract C!!-SD! reuirements

e%9i9

4% The entire amount of *orro#ing should remain full+ s#apped

#ith *anks at all times The s#ap should *e in Indian rupees

e*or(i9 @ Cer(i!i$a(io

40 Such *orro#ings done in compliance #ith the guidelines set out

a*ove, #ould not reuire prior approval of !eserve Bank of India

o#ever, information regarding the total amount of *orro#ing raised from

8=


80/95

ead ffice under this circular, along #ith a certification to the effect that

the *orro#ing is as per the guidelines, should *e advised to the Chief

.ternal

Investments perations and oreign >.change Aepartment (ore.

Markets Aivision), !eserve Bank of India, Mum*ai

E'


81/95

+e? 3

""u'(ra(io o Cre%i( ri'& mi(i9a(io

a? 0, J ? :1 A e< E C ? :1- $-!?< L Q

6here,

>P Q >.posure value after risk mitigation

> Q Current value of the e.posure

e Q aircut appropriate to the e.posure

C Q Current value of the collateral received

C Q aircut appropriate to the collateral

Z Q aircut appropriate for currenc+ mismatch *et#een the

collateral and e.posure

*ank has an e.posure to#ards a term loan facilit+ of !s 4'' The tenorof the loan is 4 +ear The *ank has received de*t securit+ as collateral#hich is rated N There is no maturit+ mismatch *et#een the e.posure

and the collateral The collateral received *+ the *ank ualifies forrecognition under the credit risk mitigation The e.posure value aftermitigation #ould *e as under:

Current value of the e.posure (>) Q !s 4'',

aircut app to the e.posure (e) Q '

Current Oalue of the collateral (C) Q !s 4''

aircut appropriate to the collateral_ 4 +ear Y Standard haircut (C Q 4F (ie''4)

aircut app for currenc+ mismatch *et#eencollateral and e.posure (1ara 49%) (Z Q EF (ie ''E)

>P Q Ma. R ', 4'' . (4 N ') Y 4'' . (4/ ''4/ ''E) U

Q Ma. R ', 4'' Y 4'' . ('=4)U

Q Ma. R ', 4'' Y =4U

Q Ma. R ', = U Q =The e.posure value after risk mitigation #ill *e !s=

E4


82/95

+e? 4

ea'ureme( o! $a*i(a" $har9e !or mar&e( ri'&' i re'*e$( o! i(ere'(

ra(e %eri7a(i7e' a% o*(io':Para 8.3.8uropean/st+le options or e.ample, the

holder of a three/+ear floating rate *ond inde.ed to si. month DIB! #ith

a cap of 49F #ill treat it as:

(i) a de*t securit+ that reprices in si. monthsH and

(ii) a series of five #ritten call options on a ! #ith a reference

rate of 49F, each #ith a negative sign at the time the underl+ing

! takes effect and a positive sign at the time the underl+ing !

matures%&

& The capital charge for options wit# e5uities as t#e underlying #ill also

*e *ased on the delta/#eighted positions #hich #ill *e incorporated in the

measure of market risk descri*ed in Section C or purposes of this

calculation each national market is to *e treated as a separate underl+ing

The capital charge for options on foreign exc#ange and gold positions #ill

*e *ased on the method set out in Section A or delta risk, the net delta/

*ased euivalent of the foreign currenc+ and gold options #ill *e

incorporated into the measurement of the e.posure for the respective

currenc+ (or gold) position

8 In addition to the a*ove capital charges arising from delta risk, there #ill

*e further capital charges for ga''a and for vega ris&. Banks using the

delta/plus method #ill *e reuired to calculate the gamma and vega for

each option position (including hedge positions) separatel+ The capital

%9 t#o/months call option on a *ond future, #here deliver+ of the *ond takes place in

Septem*er, #ould *e considered in pril as *eing long the *ond and short a five/months

deposit, *oth positions *eing delta/#eighted

2(he rules applying to closely6matched positions set out in paragraph 2 $a%of this "nnex #ill also apply in this respect.

='


91/95

charges should *e calculated in the follo#ing #a+:

(i) for each individual option a "gamma impact" should *e

calculated according to a Ta+lor series e.pansion as:


92/95

for euities and stock indices, each national marketH

for foreign currencies and gold, each currenc+ pair and goldH

(iv) >ach option on the same underl+ing #ill have a gamma impact

that is either positive or negative These individual gamma impacts

#ill *e summed, resulting in a net gamma impact for each

underl+ing that is either positive or negative nl+ those net gamma

impacts that are negative #ill *e included in the capital calculation

(v) The total gamma capital charge #ill *e the sum of the a*solute

value of the net negative gamma impacts as calculated a*ove

(vi) or volatilit! risk"*anks #ill *e reuired to calculate the capitalcharges *+ multipl+ing the sum of the vegas for all options on the

same underl+ing, as defined a*ove, *+ a proportional shift in

volatilit+ of b]%9F

(vii) The total capital chare for vega risk #ill *e the sum of the

a*solute value of the individual capital charges that have *een

calculated for vega risk

:b< #$eario a**roa$h

E More sophisticated *anks #ill also have the right to *ase the market risk

capital charge for options portfolios and associated hedging positions on

scenario 'atrix analysis This #ill *e accomplished *+ specif+ing a fi.ed

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" or the purpose of calculating the capital charge, the *ank #ill

revalue the option portfolio using matrices for simultaneous changes in the

option@s underl+ing rate or price and in the volatilit+ of that rate or price

different matri. #ill *e set up for each individual underl+ing as defined in

paragraph 8 a*ove s an alternative, at the discretion of each national

authorit+, *anks #hich are significant traders in options for interest rate

options #ill *e permitted to *ase the calculation on a minimum of si. sets

of time/*ands 6hen using this method, not more than three of the time/

able 1 of ection

=%


93/95

*ands as defined in Section B should *e com*ined into an+ one set

= The options and related hedging positions #ill *e evaluated over a

specified range a*ove and *elo# the current value of the underl+ing The

range for interest rates is consistent #ith the assumed changes in +ield in

Ta*le 4 of Section B Those *anks using the alternative method for

interest rate options set out in paragraph E a*ove should use, for each set

of time/*ands, the highest of the assumed changes in +ield applica*le to

the group to #hich the time/*ands *elong0'The other ranges are b= F for

euities and b= F for foreign e.change and gold or all risk categories, at

least seven o*servations (including the current o*servation) should *e

used to divide the range into euall+ spaced intervals

4' The second dimension of the matri. entails a change in the volatilit+ of

the underl+ing rate or price single change in the volatilit+ of the

underl+ing rate or price eual to a shift in volatilit+ of N %9F and / %9F is

e.pected to *e sufficient in most cases s circumstances #arrant,

ho#ever, the !eserve Bank ma+ choose to reuire that a different change

in volatilit+ *e used and - or that intermediate points on the grid *e

calculated

44 fter calculating the matri., each cell contains the net profit or loss of

the option and the underl+ing hedge instrument The capital charge for

each underl+ing #ill then *e calculated as the largest loss contained in the

matri.

4% In dra#ing up these intermediate approaches it has *een sought to

cover the maor risks associated #ith options In doing so, it is conscious

that so far as specific risk is concerned, onl+ the delta/related elements

are capturedH to capture other risks #ould necessitate a much more

comple. regime n the other hand, in other areas the simplif+ing

assumptions used have resulted in a relativel+ conservative treatment of

certain options positions

!0 3f, for example, the time6bands ! to ) years, ) to 5 years and 5 to years arecombined, the highest assumed change in yield of these three bands #ould be 0.5.

=0


94/95

40 Besides the options risks mentioned a*ove, the !BI is conscious of

the other risks also associated #ith options, eg rho (rate of change of the

value of the option #ith respect to the interest rate) and theta (rate of

change of the value of the option #ith respect to time) 6hile not

proposing a measurement s+stem for those risks at present, it e.pects

*anks undertaking significant options *usiness at the ver+ least to monitor

such risks closel+ dditionall+, *anks #ill *e permitted to incorporate rho

into their capital calculations for interest rate risk, if the+ #ish to do so

=


95/95

+((a$hme(

De(ai"' o! $om*u(i9 $a*i(a" $har9e' !or

*o'i(io' i o(her $urre$ie'

Capital charges should *e calculated for each currenc+ separatel+ and

then summed #ith no offsetting *et#een positions of opposite sign In the

case of those currencies in #hich *usiness is insignificant (#here the

turnover in the respective currenc+ is less than 9 per cent of overall

foreign e.change turnover), separate calculations for each currenc+ arenot reuired The *ank ma+, instead, slot #ithin each appropriate time/

*and, the net long or short position for each currenc+ o#ever, these

individual net positions are to *e summed #ithin each time/*and,

irrespective of #hether the+ are long or short positions, to produce a gross

position figure

=9

basel ii rbi circular

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