s c jain Basel-II Presentation

8/9/2019 s c jain Basel-II Presentation

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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 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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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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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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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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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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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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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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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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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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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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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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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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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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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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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.

Documents

s c jain Basel-II Presentation