s c jain basel-ii presentation
TRANSCRIPT
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ase ormsNEW CAPITAL ADEQUACY FRAMEWORK
Basel II norms were required to have been implemented by
the Banks for the first time as at 31st
March 2009 per RBImaster circular RBI/ 2008-09/ 68 -DBOD. No. BP. BC.11/21.06.001/ 2008-09 dated July 1, 2008 on New CapitalAdequacy Framework (NCAF). Master circular RBI/ 2009-10DBOD. No. BP. BC. 21 /21.06.001/ 2009 10Dated July 1, 2009 is applicable for such norms for the balancesheet as at 31st March 2010.
Upto 31st December 2008, Capital Adequacy Audit / Reviewunder Basel I was done at the Corporate Office of the banksbased on the data and the additional information called for
in the Audit Booklet duly signed by the Statutory branchAuditors .
With effect from 31st March 2009, calculation of riskweighted assets for credit exposures as per RBI guide linesare being carried out & validated at the branches level.
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Basel II framework rests on 3 mutually
supportive pillars which are :
I - Minimum Capital requirements
II - Supervisory Review of Capital
Adequacy
III - Market Discipline
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3
Three Pillars
Banking:
Risk Management System
Minimum Capital
Requirement (CRAR)
Supervisory
Review Process(ICAAP)
Market Discipline
(Disclosures)
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4
An Overview of BASEL- II Pillars
1. Enhance
disclosures
2. Core
disclosures &
supplementary
disclosures
3. Timely Semi
annual /
annual
1. Evaluate risk assessment
2. Ensure soundness &
integrity of banks
internal processes to
assess the adequacy ofcapital
3. Ensure maintenance of
minimum capital with
PCA for shortfall.
4. Prescribe differential
capital, where necessary-
i.e. , where the internal
processes are slack.
5. Introduction of ICAAP
covering the above.
1. Capital for credit Risk
Standardised approch
Internal Ratings based
approach
* Foundation
*Advanced
2. Capital for Market Risk
Standardised Method
* Maturity cum Duration Method
VaR based Approach
3. Capital for Operational Risk
Basic Indicator Approach
Standardised Approach
Advanced Measurement
Approach
PILLAR 3
MARKET DISCIPLINE
PILLAR 2
SUPERVISORY
REVIEW PROCESS
PILLAR 1
MINIMUM CAPITAL
REQUIREMENT
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Implementation of NCAF
As at 31st March 2009, and onward the Banks are required
to implement NCAF as under:
Capital Allocation for Methodologyto be used
Credit Risk (also known asCounterparty Risk)
SimplifiedStandardizedApproach
Market Risk Maturity cum
Duration ApproachOperational Risk Basic Indicator
Approach
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New Capital Adequacy Framework
Market Risk associated with the INVESTMENTS is generally
centralized in the IntegratedTreasury of the Bank and istaken care by the Statutory Central Auditors.
Risk weight calculations for Operational Risk which arebased on Profit & Loss Statement of the Bank also beingattended to at the Corporate level by the SCAs.
Credit Risk scattered across all the branches of the bank isto be examined and assessed. Hence credit risk weightcalculations for every asset that involves a counterparty hasto be carried out at the branch level and validated /
certified by the Branch Statutory auditors. Calculation of all risk weights for fund / non fund exposures
and non balance sheet items like un-drawn / unutilizedlimits are also to be done at the branches.
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Risk Weights for Asset Classes - Sovereigns
Asset Class Risk Weight
Claims against Central Government 0%
Claims guaranteed by Central Government 0%
Claims against State Governments 0%
Investment in state govt. securities (all investments insecurities guaranteed by State Governments underapproved Market Borrowing Programmes)
0%
Claims guaranteed by State Governments where assetclassification is 'Standard'
20%
Claims against RBI / DICGC / CGFTSI 0%
Claims against ECGC 20%
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Claims against Banks (Standard)
Claims on other scheduled & non-scheduled Indian banks
Claims against Foreign banks based on External Credit Ratings:
CRAR of (%) 6 to
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Risk Weights for Standard Asset Classes - Corporates
Exposures to Corporates comprise of:
All exposures over Rs 5 crore (prescribed threshold limit)irrespective of the type / constitution of borrowers excludingexposures to GOI / State Governments (Direct or Guaranteed);
All exposures of less than or equal to Rs 5 crore where averageannual turnover of the borrower for last three years is equal to more
than Rs 50 crore; All exposures to Public Sector Entities and Primary Dealers
irrespective of level of exposure.
Specified categories like real estate exposures and anyother exposure that has been prescribed risk weight of over
100% are to be excluded. Risk weights are separately for short term claims and long
term claims. CC Limits are treated as long term claims.
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Risk Weights for Standard Asset Classes - Corporates
Risk weights are to be assigned based on External
Credit Ratings (Long / Short term) assigned byapproved ECRAs only.
No cherry picking of ratings is allowed. If a borrower has external rating from only one ECRA,
the rating is to be applied. If a borrower has external rating from two ECRAs, the
lower of the ratings is to be applied.
If a borrower has external rating from more than twoECRAs, then the higher of the two lowest ratings is to be
applied. Ratings should have been asked for by the
borrower & accepted.
Rating should be currently valid (i.e. not more than
15 months old).
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Risk Weights for Standard Asset Classes - Corporates
Only ratings by following ECRAs are to be considered:
For Foreign ExposuresS & P
Moodys
Fitch Ratings
For Domestic Exposures
CARE Ratings
CRISIL
Fitch Ratings
ICRA
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Risk Weights for Standard Asset Classes CorporatesLong Term Claims
Notes:(1)+ or sign if any in the credit rating is to be omitted
(2) Standard Corporate claims restructured / rescheduled will carry 125% Risk Weight
DomesticLongTermCredit
Rating
AAA AA A BBB BB &below
Unrated
RiskWeight
20% 30% 50% 100% 150% 100%
Claims on corporates :
As per ratings assigned by approved rating agencies registered with SEBI &
chosen by RBI : Long term claim on corporates :
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Risk Weights for Standard Asset Classes CorporatesShort Term Claims
CARE CRISIL FITCH ICRA Risk
WeightPR1+ P1+ F1+ A1+ 20%
PR1 P1 F1 A1 30%
PR2 P2 F2 A2 50%
PR3 P3 F3 A3 100%
PR4 & PR5 P4 & P5 B,C,D A4 & A5 150%
Unrated Unrated Unrated Unrated 100%
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Claims secured by (Standard) Residential Property
Loans to individuals for acquiring residential property,
which are fully secured by mortgage on the residentialproperty which is meant only for the residential purpose*(self occupied or rented):
* Excluding Staff housing loans with superannuation benefits also as security
If Loan To Value (LTV) is not more than 75%, then
For loans of upto Rs 30 lakhs 50%
For loans of Rs 30 lakhs and above 75%
If Loan to Value (LTV) is more than 75% 100%
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Claims against (Standard) Real Estate
CLAIMS SECURITISED BY COMMERCIAL REALESTATE
Claims secured by mortgage on commercialreal estates viz., office buildings, retail
space, multi-purpose commercial premises,multi-family residential buildings, multi-tenanted commercial premises, industrial orwarehouse space, hostel, land acquisition,development and construction, etc. including
Exposures for setting up SEZ or for acquiringunits in SEZs, which includes real estate andInvestments in mortgage backed securities.
100%
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Claims against (Standard) Exposures to Staff
Loans & Advances to banks ownstaff fully covered bysuperannuation benefits and / ormortgage of flat / house
20%
Other advances to banks own staff
will be eligible for inclusion under
regulatory retail portfolio at
75%
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Claims against other Specified Standard exposures
Fund based and non-fund based claims on the following
segments:Venture Capital funds 150%
Consumer Credit, including personal loans
and credit card receivables.125%
Loans up to Rs.1 lakh against gold & silverornaments
50%
Capital Market exposures and claims on Non-deposit taking systemically important NBFCs
125% oras per external ratingwhichever is higher
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Regulatory Retail Portfolio
All other credit exposures not covered in any of
the previously explained asset classes will betreated as Regulatory Retail Portfolio (RRP) subjectto satisfying 4 conditions given hereunder and suchexposure will carry a risk weight of75% :
Orientation Criterion: Exposure to an individualperson or persons or to a small business - Personmeans legal person with contracting capacity. It
includes, but not restricted to, Individuals, HUF,Partnership Firms, Trusts, Private / PublicLimited Companies, Co-op. Societies etc. Smallbusiness is one where average annual turnoverfor last three years is less than Rs.50 crore.
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Regulatory Retail Portfolio
Product Criterion: Exposures in the form of revolving credits
and lines of credit (incl. overdrafts), term loans & leases andsmall business facilities and commitments.
Granularity Criterion: Aggregate exposure to one counterpartshould not exceed 0.20% of overall regulatory retail portfolio.Aggregate exposure means gross amount (without taking
benefit of credit risk mitigation). Counterpart means one orseveral entities that may be considered as a singlebeneficiary. {This condition will be verified at Corporate levelonly].
Low value of individual exposures: Maximum aggregated
retail exposure to one counter part should not exceed theabsolute threshold limit of Rs. 5 crore.
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Other Credit Assets (Fund based)
In case of all other fund based credit assetsnot specified in any of the above categories,risk weight will be 100%
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Claims against Residential Mortgages: N P As
When specific provisions are at-least 50%of the outstanding amount
50%
When specific provisions are at-least 20%
of the outstanding amount75%
All other cases 100%
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Other Non Performing Assets
On the Unsecured portion of NPA, net of specific provisions :
When specific provisions are lessthan 20% of outstanding amount
150%
When specific provisions are at-least20% of the outstanding amount
100%
When specific provisions are at-least
50% of the outstanding amount
50%
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Other Non Performing Assets
To calculate specific provision cover as percent,total funded exposures, without netting the valueof eligible collateral, should be considered.
Here, secured portion means exposure secured by
eligible collateral for credit risk mitigationpurpose.
All other forms of collateral will not be considered.
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Other Non Performing Assets
When a NPA is fully secured by the following forms
of collateral (not recognized for CRM purpose),when specific provision reach 15% of outstandingamount.
Land & building valued by an expert valuer and where
valuation is not more than 3 years old; Plant & Machinery in good working condition at a value
not higher than the depreciated value as per audited B/Sand not older than 18 months,
Subject to (i) bank has clear title to realize the saleproceeds (ii) bank can appropriate (iii) banks title is welldocumented.
Applicable Risk Weight will be 100%
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Non Performing Assets
To calculate specific provision cover as percent,total funded exposures, without netting the valueof eligible collateral, should be considered.
Here, secured portion means exposure secured by
eligible collateral for credit risk mitigationpurpose.
All other forms of collateral will not be considered.
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Contingent Exposures
Risk Weight of off-balance sheet credit exposure = Risk Weight
of market related off-balance sheet items (like Derivatives) +Risk Weight of non-market related off-balance sheet items
Notional exposure amount is converted into a credit equivalentamount, by multiplying by specified credit conversion factor(CCF) or by applying the current exposure method; and
The resultant credit equivalent is multiplied by the risk weightapplicable to
the counterparty; or the purpose for bank has extendedfinance; or the type of asset
whichever is higher.
When the off-balance sheet item is secured by eligible collateralor guarantee, CRM guidelines may be applied.
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Contingent Exposures
Non-market related off-balance sheet items :
Credit equivalent amount in relation to a non-marketrelated off-balance sheet item like, direct creditsubstitutes, trade and performance related contingentitems and commitments with certain drawdown, othercommitments, etc. will be determined by multiplying thecontracted amount by the relevant CCF.
Undrawn or partially undrawn fund-based facility, maximumunused portion.
In case of irrevocable commitments, the original maturity
will be from the commencement of the commitment till thefacility expires.
(Market related off-balance sheet items are at Treasury only)
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Contingent Exposures
Instrument CCF
Direct Credit substitutes e.g. general guarantees ofindebtedness and acceptances (incl. endorsements)
100%
Certain transaction-related contingent items 50%
Short-term self-liquidating trade letters of creditarising from movement of goods
20%
and repurchase agreement and asset sales withrecourse, where credit risk remains with the bank
100%
Forward asset purchases, forward deposits and partlypaid shares and securities
100%
Lending of banks securities or posting of securities ascollateral by banks incl. instances where these arise
out of repo style transactions
100%
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Contingent Exposures
Instrument CCF
Note issuance facilities and revolving underwritingfacilities
50%
Commitments with certain drawdown 100%
Other commitments with an original maturity of
yUp to one yearyOver one yearySimilar commitments that are unconditionallycancellable
20%50%0%
Take-out financeyUnconditional take-out financeyConditional take-out finance
100%50%
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Contingent Exposures
Following exposures with non-bankcounterparties will be treated as claims onbanks
Guarantees issued by banks against counterguarantees of other banks;
Rediscounting of documentary bills acceptedby banks. (co-acceptance of bills)
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Eligible Financial Collaterals
A collateralised transaction is one in which:1.banks have a credit exposure and that credit
exposure is hedged in whole or in part by
collateral posted by a counterparty or by athird party on behalf of the counterparty. Here,counterparty is used to denote a party towhom a bank has an on- or off-balance sheet
credit exposure.2.banks have a specific lien on the collateral
and the requirements of legal certainty aremet.
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Eligible Financial Collaterals
The following collateral instruments are eligible for
recognition in the comprehensive approach:1. Cash (as well as certificates of deposit or comparable instruments,
including fixed deposit receipts, issued by the lending bank) ondeposit with the bank which is incurring the counterpartyexposure.
2. Gold: Gold would include both bullion and jewellery. However,the value of the collateralised jewellery should be arrived atafter notionally converting these to 99.99 purity.
3. Securities issued by Central and State Governments
4. Kisan Vikas Patra and National Savings Certificates provided no
lock-in period is operational and if they can be encashed withinthe holding period.
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Eligible Financial Collaterals
5. Life insurance policies with a declaredsurrender value of an insurance company whichis regulated by an insurance sector regulator
6. Debt securities rated by a chosen Credit RatingAgency in respect of which the banks should besufficiently confident about the market liquiditywhere these are either:
a) Attracting 100 per cent or lesser risk weight i.e.,rated at least BBB(-) when issued by public sector
entities and other entities (including banks andPrimary Dealers); or
b) Attracting 100 per cent or lesser risk weight i.e.,rated at least PR3 / P3/F3/A3 for short-term debtinstruments.
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Eligible Financial Collaterals
7. Debt securities not rated by a chosen Credit
Rating Agency in respect of which the banksshould be sufficiently confident about themarket liquidity where these are: issued by a bank; and
listed on a recognised exchange; and
classified as senior debt; and
all rated issues of the same seniority by the issuingbank are rated at least BBB(-) or PR3/P3/F3/A3 by achosen Credit Rating Agency; and
the bank holding the securities as collateral hasno information to suggest that the issue justifiesa rating below BBB(-) or PR3/P3/F3/A3 (as applicable)and;
Banks should be sufficiently confident about the
market liquidity of the security.
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Eligible Financial Collaterals
8. Units of Mutual Funds regulated by the securitiesregulator of the jurisdiction of the banks operationmutual funds where:
a price for the units is publicly quoted daily i.e.,where the daily NAV is available in public domain;and
Mutual fund is limited to investing in theinstruments listed in regulatory guidelines.
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CRM Techniques
Banks are required to adopt Comprehensive
Approach for CRM Technique that allow fulleroffset of collaterals against exposures, byeffectively reducing the exposure amount by thevalue ascribed to the collateral.
Under this approach, banks, which take eligiblefinancial collateral (e.g., cash or securities, more
specifically defined below), are allowed to reducetheir credit exposure to a counterparty whencalculating their capital requirements to take
account of the risk mitigating effect of thecollateral.
Credit risk mitigation is allowed only on anaccount-by-account basis, even within regulatory
retail portfolio.
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CRM Techniques
In the comprehensive approach, when taking collateral,banks will need to calculate their adjusted exposure to a
counterparty for capital adequacy purposes in order to takeaccount of the effects of that collateral.
Banks are required to adjust both the amount of theexposure to the counterparty and the value of anycollateral received in support of that counterparty to take
account of possible future fluctuations in the value ofeither, occasioned by market movements. These adjustments are referred to as haircuts. The
application of haircuts will produce volatility adjustedamounts for both exposure and collateral.
The volatility adjusted amount for the exposure will behigher than the exposure and the volatility adjustedamount for the collateral will be lower than the collateral,unless either side of the transaction is cash.
In other words, the haircut for the exposure will be apremium factor and the haircut for the collateral will be adiscount factor.
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CRM Techniques
It may be noted that the purpose underlying the
application of haircut is to capture the market-related volatility inherent in the value ofexposures as well as of the eligible financialcollaterals.
Since the value of credit exposures acquired by thebanks in the course of their banking operations,would not be subject to market volatility, (sincethe loan disbursal / investment would be a cashtransaction) though the value of eligible
financial collateral would be, the haircutsstipulated would apply in respect of credittransactions only to the eligible collateral but notto the credit exposure of the bank.
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Credit Risk Mitigation - Haircuts
E* = Max {0, [E x (1 + He) C x (1- Hc-Hfx) ] }
Where,E* = Exposure value after risk mitigation
E = Current value of the exposure
He = Haircut appropriate to the exposure
C = Current value of the collateral receivedHC = Haircut appropriate to the collateral
HFX = Haircut appropriate for currency mismatch between
the collateral and exposure
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Credit Risk Mitigation - Haircuts
Issue rating for debt
securities
Residual Maturity Sovereign Other
issues< 1 year 0.5 1
> 1 year, < 5 years 2 4
> 5 years 4 8
< 1 year 1 2
> 1 year, < 5 years 3 6
> 5 years 6 12
BB + to BB- All 15
AAA to AA- / A-1
A + to BBB-/A-2/A-
3/P-3 andUnrated
bank securities
UCITs/Mutual funds Highest haircut
Cash in the same currency 0
Main index equities (including convertible 15
Other equities (including convertible bonds) 25
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Credit Risk Mitigation - Haircuts
A bank has an exposure towards a term loan facility of Rs.
100. The tenor of the loan is 1 year. The bank has receiveddebt security as collateral which is rated A+.
There is no maturity mismatch between the exposure and the
collateral. The collateral received by the bank qualifies for
recognition under the credit risk mitigation. The exposure
value after mitigation would be as under:
Current value of the exposure (E) = Rs. 100,
Haircut app. to the exposure (He) = 0
Current Value of the collateral (C) = Rs. 100
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Credit Risk Mitigation - Haircuts
Haircut appropriate to the collateral 1 year Standard haircut ] (HC = 1% (i.e.0.01)
Haircut app. for currency mismatch between
collateral and exposure (HFX = 8% (i.e. 0.08)
E* = Max { 0, [100 x (1 + 0) 100 x (1- 0.01- 0.08) ] }
= Max { 0, [100 100 x (0.91)]}
= Max { 0, [100 91]}
= Max { 0, 9 } = 9The exposure value after risk mitigation will be Rs 9. This
value needs to be multiplied by applicable credit riskweight based on exposure class & counter-party.
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Credit Risk Mitigation
All haircut operations will be done by D2K System itself.
In case of securities like NSC etc, the system will calculateaccrued interest.
However for LIC Policies, Gross Surrender Value has to beobtained from LIC and entered.
In case of bonds, debentures etc, Corporate Office willprovide information on market value etc under HO CRMSecurities.