Executive Summary:
This circular clarifies the capital charge for market risk applicable to banks' investments in debt mutual funds and Exchange Traded Funds (ETFs) under Basel III capital regulations. It details the specific risk capital charges based on the underlying debt instruments within these funds, differentiating between funds with available and unavailable constituent debt details. This circular is addressed to all Scheduled Commercial Banks excluding Local Area Banks and Regional Rural Banks.
Key Points / Main Content:
* **Debt Mutual Funds/ETFs with Available Constituent Debt Details:**
* Attract a general market risk charge of 9%.
* Specific risk capital charge is applied based on the nature of the underlying debt securities:
* Central, State, and Foreign Central Government bonds: Use Table 16 Part B.
* Bank Bonds: Use Table 16 Part D.
* Corporate Bonds (other than Bank Bonds): Use Table 16 Part E.
* For funds with a mix of debt instruments, the highest specific risk capital charge corresponding to the lowest-rated instrument in the fund applies.
* **Debt Mutual Funds/ETFs with Unavailable Constituent Debt Details:**
* Treated as equity for capital charge computation, as prescribed in para 8.4.1 of Master Circular on Basel III Capital Regulations.
* **Specific Risk Capital Charge Tables:**
* Table 16 Part B: Details specific risk capital charges for securities issued by Indian and foreign sovereigns, varying based on the issuer and credit rating.
* Table 16 Part D: Details specific risk capital charge for bonds issued by banks, depending on capital levels.
* Table 16 Part E: Details specific risk capital charges for corporate bonds, based on ratings by ECAIs.
Impact Analysis:
* **Scheduled Commercial Banks (Excluding Local Area Banks and Regional Rural Banks):**
* Impact: These banks must adjust their capital charge calculations for investments in debt mutual funds/ETFs according to the guidelines provided, impacting their capital adequacy ratios.
* Action Required: Review current debt mutual fund/ETF holdings, determine the availability of constituent debt details, and apply the appropriate specific risk capital charges as outlined in the circular.
Key Entities Referenced
Basel III Capital Regulations: A set of international banking regulations designed to improve risk management in the banking sector.
Scheduled Commercial Banks: Banks in India that are listed in the Second Schedule of the Reserve Bank of India Act, 1934, excluding Local Area Banks and Regional Rural Banks.
Debt Mutual Funds/ETFs: Investment funds that primarily invest in fixed-income securities like government bonds, corporate bonds, and other debt instruments.
Central Government Bonds: Debt securities issued by the central government.
State Government Bonds: Debt securities issued by the state governments in India.
Foreign Central Governments bonds: Debt securities issued by the central government of foreign countries.
Corporate Bonds: Debt securities issued by corporations.
Saurav Sinha: Chief General Manager-in-Charge at Reserve Bank of India.
RBI/2020-21/18
DOR.No.BP.BC/5/21.04.201/2020-21 August 6, 2020
All Scheduled Commercial Banks
(Excluding Local Area Banks
and Regional Rural Banks)
Dear Sir/Madam
Basel III Capital Regulations – Treatment of debt mutual funds/ETFs
Please refer to our circular DBR.No.BP.BC.1/21.06.201/2015-16 dated July 1, 2015,
on Basel III capital regulations.
2. In terms of para 8.4.1 of the circular, capital charge for equities is applicable
to units of mutual funds. It has now been decided that the banks investing in debt
mutual fund/exchange traded fund (ETF) with underlying comprising of (i) Central,
State and Foreign Central Governments’ bonds (ii) Bank’s Bonds and (iii) Corporate
Bonds (other than Bank Bonds) shall compute capital charge for market risk as
under:
a) Investment in debt mutual fund/ETF for which full constituent debt details are
available shall attract general market risk charge of 9 per cent, as hitherto.
Specific risk capital charge for various kinds of exposures would be applied as
detailed below:
Sr. Nature of debt securities/issuer Table to be followed
No. (details in Annex)
a Central, State and Foreign Central Table 16 – Part B
Governments’ bonds
b Banks’ Bonds Table 16 – Part D
c Corporate Bonds (other than Bank Bonds) Table 16 - Part E(ii)
b) In case of debt mutual fund/ETF which contains a mix of the above debt
instruments, the specific risk capital charge shall be computed based on the
lowest rated debt instrument/ instrument attracting the highest specific risk
capital charge in the fund.c) Debt mutual fund/ETF for which constituent debt details are not available, at
least as of each month-end, shall continue to be treated on par with equity for
computation of capital charge for market risk as prescribed in para 8.4.1 of
Master Circular on Basel III Capital Regulations.
Yours faithfully
(Saurav Sinha)
Chief General Manager-in-ChargeAnnex
Table 16 – Part B: Specific risk capital charge for securities issued by
Indian and foreign sovereigns
Sr. Nature of Investment Residual Specific risk
No. Maturity capital (as % of
exposure)
A. Indian Central Government and State Governments
1. Investment in Central and State All 0.00
Government Securities
2. Investments in other approved securities All 0.00
guaranteed by Central Government
3. Investments in other approved securities All 1.80
guaranteed by State Government
4. Investment in other securities where All 0.00
payment of interest and repayment of
principal are guaranteed by Central
Government
5. Investments in other securities where All 1.80
payment of interest and repayment of
principal are guaranteed by State
Government.
B. Foreign Central Governments
1. AAA to AA All 0.00
2. A All 1.80
3. BBB All 4.50
4. BB to B All 9.00
5. Below B All 13.50
6. Unrated All 9.00Table 16 - Part D – Specific Risk Capital Charge for bonds issued by banks
Specific risk capital charge (%)
All Scheduled Banks All Non-Scheduled Banks
(Commercial, Regional (Commercial, Regional Rural
Rural Banks, Local Banks, Local Area Banks and
Area Banks and Co- Co-operative Banks)
operative Banks)
Level of Common Investments All other Investments in All other
Equity Tier 1 capital in capital claims capital claims
(CET1) including instruments instruments
applicable capital (other than (other than
conservation buffer equity) equity) referred to
(CCB) (%) of the referred to in para 5.6.1(i)
investee bank (where in para
applicable)) 5.6.1(i)
1 2 3 4 5
Applicable Minimum 11.25 1.8 11.25 11.25
CET1 + Applicable
CCB and above
Applicable Minimum 13.5 4.5 22.5 13.5
CET1 + CCB = 75%
and <100% of
applicable CCB
Applicable Minimum 22.5 9 31.5 22.5
CET1 + CCB = 50%
and <75% of
applicable CCB
Applicable Minimum 31.5 13.5 56.25 31.5
CET1 + CCB = 0%
and <50% of
applicable CCB
Minimum CET1 less 56.25 56.25 Full deduction* 56.25
than applicable
minimum
* deduction should be made from Common Equity Tier 1 capitalTable 16 – Part E (ii): Specific Risk Capital Charge for Corporate Bonds (Other
than bank bonds)
Rating by the ECAI* Specific Risk Capital Charge (%)
AAA 1.8
AA 2.7
A 4.5
BBB 9.0
BB and below 13.5
Unrated 9.0
* These ratings indicate the ratings assigned by Indian rating agencies/ECAIs or
foreign rating agencies. In the case of foreign ECAIs, the rating symbols used here
correspond to Standard and Poor. The modifiers “+” or “-” have been subsumed with
the main rating category.