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भारतीय ररज़र्व बैंक
RESERVE BANK OF INDIA
_________________________ ______________________
www.rbi.org.in
RBI/2024-25/08
DOR.CAP.REC.4/21.06.201/2024-25
April 01, 2024
All Scheduled Commercial Banks
(Excluding Small Finance Banks, Payments Banks
and Regional Rural Banks)
Madam / Dear Sir,
Master Circular – Basel III Capital Regulations
Please refer to the Master Circular No. DOR.CAP.REC.15/21.06.201/2023-24 dated May
12, 2023, consolidating therein the prudential guidelines on Basel III capital adequacy
issued to banks till that date.
2. The instructions contained in the aforesaid Master Circular have been suitably
updated / amended by incorporating relevant guidelines, issued as on date. A list of
circulars consolidated in this Master Circular is contained in Annex 26.
3. Small Finance Banks and Payments Banks may refer to their respective licensing
guidelines and operating guidelines issued by Reserve Bank, for prudential guidelines on
capital adequacy.
Yours faithfully,
(Usha Janakiraman)
Chief General Manager
Encl.: As above
विवियमि विभाग,केंद्रीय कायाालय, 12 िीं और 13 िीं मंविल, केंद्रीय कायाालय भिि, शहीद भगत स ंह माग,ाफोर्ा,म ंबई-400001
दरू भाष: 022-22601000 फैक् : 022-22705691 ई-मले : cgmicdor@rbi.org.in
_____________________________________________________________________________________________________________________________________
Department of Regulation, Central Office, 12th and 13th Floor, Central Office Building, Shahid Bhagat Singh Marg, Fort, Mumbai- 400 001
Tel: 022- 2260 1000 Fax: 022-2270 5691 email: cgmicdor@rbi.org.in
ह िंदी आसान ै इसका प्रयोग बढाइएTABLE OF CONTENTS
Part A : Minimum Capital Requirement (Pillar 1)
1 Introduction
2 Approach to Implementation and Effective Date
3 Scope of Application of Capital Adequacy Framework
4 Composition of Regulatory Capital
4.1 General
4.2 Elements and Criteria of Regulatory Capital
4.3 Recognition of Minority Interest
4.4 Regulatory Adjustments / Deductions
4.5 Transitional Arrangements
5 Capital Charge for Credit Risk
5.1 General
5.2 Claims on Domestic Sovereigns
5.3 Claims on Foreign Sovereigns and Foreign Central Banks
5.4 Claims on Public Sector Entities (PSEs)
5.5 Claims on MDBs, BIS and IMF
5.6 Claims on Banks
5.7 Claims on Primary Dealers
5.8 Claims on Corporates & NBFCs
5.9 Claims included in the Regulatory Retail Portfolios
5.10 Claims secured by Residential Property
5.11 Claims Classified as Commercial Real Estate
5.12 Non-Performing Assets
5.13 Specified Categories
5.14 Other Assets
5.15 Off-Balance Sheet Items
5.15.1 General
5.15.2 Non-Market-related Off-balance Sheet items
5.15.3 Treatment of Total Counterparty Credit Risk
5.15.4 Failed Transactions
5.16 Securitisation Exposures
Capital Adequacy Requirements for Credit Default Swaps (CDS)
5.17
Position in Banking Book
5.17.1 Recognition of External/Third Party CDS Hedges
5.17.2 Internal Hedges
6 External Credit Assessments
6.1 Eligible Credit Rating Agencies
6.2 Scope of Application of External Ratings
6.3 Mapping Process
6.4 Long Term Ratings
6.5 Short Term Ratings
6.6 Use of Unsolicited Ratings
6.7 Use of Multiple Rating Assessments
6.8 Applicability of Issue rating to Issuer/other claims
7 Credit Risk Mitigation
7.1 General Principles
27.2 Legal Certainty
7.3 Credit Risk Mitigation Techniques – Collateralised Transactions
7.3.2 Overall Framework and Minimum Conditions
7.3.4 The Comprehensive Approach
7.3.5 Eligible Financial Collateral
7.3.6 Calculation of Capital Requirement
7.3.7 Haircuts
Capital Adequacy Framework for Repo-/Reverse Repo-
7.3.8
style Transactions.
7.3.9 Collateralised OTC derivatives transactions
7.4 Credit Risk Mitigation Techniques – On–balance Sheet netting
7.5 Credit Risk Mitigation Techniques – Guarantees
7.5.4 Operational requirements for Guarantees
7.5.5 Additional operational requirements for Guarantees
7.5.6 Range of Eligible Guarantors (counter-guarantors)
7.5.7 Risk Weights
7.5.8 Proportional Cover
7.5.9 Currency Mismatches
7.5.10 Sovereign Guarantees and Counter-guarantees
7.5.11 ECGC Guaranteed Exposures
7.6 Maturity Mismatch
7.7 Treatment of pools of CRM Techniques
8 Capital Charge for Market Risk
8.1 Introduction
8.2 Scope and Coverage of Capital Charge for Market Risks
8.3 Measurement of Capital Charge for Interest Rate Risk
8.4 Measurement of Capital Charge for Equity Risk
8.5 Measurement of Capital Charge for Foreign Exchange Risk
8.6 Measurement of Capital Charge for CDS in Trading Book
8.6.1 General Market Risk
8.6.2 Specific Risk for Exposure to Reference Entity
8.6.3 Capital Charge for Counterparty Credit Risk
8.6.4 Treatment of Exposures below Materiality Thresholds of CDS
8.7 Aggregation of the Capital Charge for Market Risk
8.8 Treatment of illiquid positions
9 Capital charge for Operational Risk
9.1 Definition of Operational Risk
9.2 The Measurement Methodologies
9.3 The Basic Indicator Approach
Part B : Supervisory Review and Evaluation Process (Pillar 2)
10 Introduction to SREP under Pillar 2
11 Need for improved risk management
12 Guidelines for SREP of the RBI and the ICAAP of the Banks
12.1 The Background
12.2 Conduct of the SREP by the RBI
312.3 The Structural Aspects of the ICAAP
12.4 Review of ICAAP Outcomes
12.5 ICAAP to be an integral part of the Mgmt. & Decision making Culture
12.6 The Principle of Proportionality
12.7 Regular independent review and validation
12.8 ICAAP to be a Forward looking Process
12.9 ICAAP to be a Risk-based Process
12.10 ICAAP to include Stress Tests and Scenario Analysis
12.11 Use of Capital Models for ICAAP
13 Select Operational Aspects of ICAAP
Part C : Market Discipline (Pillar 3)
14 Guidelines on Market Discipline
14.1 General
14.2 Achieving Appropriate Disclosure
14.3 Interaction with Accounting Disclosure
14.4 Validation
14.5 Materiality
14.6 Proprietary and Confidential Information
14.7 General Disclosure Principle
14.8 Implementation Date
14.9 Scope and Frequency of Disclosures
14.10 Regulatory Disclosure Section
14.11 Pillar 3 Under Basel III Framework
14.12 Disclosure Template
14.13 Reconciliation Requirements
14.14 Format of Disclosure Template
Table DF-1 Scope of Application and Capital Adequacy
Table DF-2 Capital Adequacy
Table DF-3 Credit Risk: General Disclosures for All Banks
Credit Risk: Disclosures for Portfolios subject to the
Table DF-4
Standardised Approach
Table DF-5 Credit Risk Mitigation: Disclosures for Standardised Approach
Table DF-6 Securitisation: Disclosure for Standardised Approach
Table DF-7 Market Risk in Trading Book
Table DF-8 Operational Risk
Table DF-9 Interest Rate Risk in the Banking Book (IRRBB)
General Disclosure for Exposures Related to Counterparty
Table DF-10
Credit Risk
Table DF-11 Composition of Capital
Table DF-12 Composition of Capital- Reconciliation Requirements
Table DF-13 Main Features of Regulatory Capital Instruments
Table DF-14 Full Terms and Conditions of Regulatory Capital Instruments
Table DF-15 Disclosure Requirements for Remuneration
Table DF-16 Equities – Disclosure for Banking Book Positions
Summary Comparison of Accounting Assets vs. Leverage Ratio
Table DF-17
Exposure Measure
Table DF-18 Leverage Ratio Common Disclosure Template
Part D : Capital Conservation Buffer Framework
415 Capital Conservation Buffer
15.1 Objective
15.2 The Framework
Part E : Leverage Ratio Framework
16 Leverage Ratio
16.1 Rationale and Objective
Definition, Minimum Requirement and Scope of Application of the
16.2
Leverage Ratio
16.3 Capital Measure
16.4 Exposure Measure
16.4.1 General measurement principles
16.4.2 On-balance sheet exposures
16.4.3 Derivative exposures
16.4.4 Securities financing transaction exposures
16.4.5 Off-balance sheet items
16.5 Disclosure and Reporting Requirements
16.6 Disclosure Templates
Part F : Countercyclical Capital Buffer Framework
17 Countercyclical Capital Buffer
17.1 Objective
17.2 The Framework
Annex
Annex 1 Criteria for classification as Common Shares (paid-up equity capital) for
regulatory purposes – Indian Banks
Annex 2 Criteria for classification as common equity for regulatory purposes –
Foreign Banks
Annex 3 Criteria for inclusion of Perpetual Non-Cumulative Preference Shares
(PNCPS) in Additional Tier 1 capital
Annex 4 Criteria for inclusion of Perpetual Debt Instruments (PDI) in Additional Tier
1 capital
Annex 5 Criteria for inclusion of Debt Capital instruments as Tier 2 capital
Annex 6 Criteria for inclusion of Perpetual Cumulative Preference Shares (PCPS)/
Redeemable Non-Cumulative Preference Shares (RNCPS) / Redeemable
Cumulative Preference Shares (RCPS) as part of Tier 2 capital
Annex 7 Prudential guidelines on Credit Default Swaps (CDS)
Annex 8 Illustrations on Credit Risk Mitigation
Annex 9 Measurement of capital charge for Market Risks in respect of Interest Rate
Derivatives and Options.
Annex 10 An Illustrative Approach for Measurement of Interest Rate Risk in the
Banking Book (IRRBB) under Pillar 2
Annex 11 Investments in the capital of banking, financial and insurance entities
which are outside the scope of regulatory consolidation
Annex 12 Calculation of CVA risk capital charge
Annex 13 Calculation of SFT Exposure for the purpose of Leverage Ratio
Annex 14 An Illustrative outline of the ICAAP document
Annex 15 Minimum requirements to ensure loss absorbency of Additional Tier 1
instruments at pre-specified trigger and of all non-equity regulatory capital
instruments at the point of non-viability
Annex 16 Calculation of minority interest - illustrative example
5Annex 17 Pillar 3 disclosure requirements
Annex 18 Requirements for Recognition of Net Replacement Cost in Close-out
Netting Sets
Annex 19 Guidelines on General permission for infusion of capital in overseas
branches and banking subsidiaries and retention/ repatriation/ transfer of
profits in these centres by banks incorporated in India
Annex 20 Calculation of 15% of common equity limit on items subject to limited
recognition
Annex 21 Illustrations of revised instructions on Regulatory Retail
Annex 22 Format- Reporting of Capital Issuances
Annex 23 Clarifications regarding Bilateral Netting under Current Exposure Method
Annex 24 Illustrative Examples - Risk Weights (RW) applicable on credit facilities
guaranteed under specific existing schemes
Annex 25 Glossary
Annex 26 List of circulars consolidated in the Master Circular
6Master Circular on Basel III Capital Regulations
Part A: Minimum Capital Requirement
1. Introduction
1.1 Basel III reforms are the response of Basel Committee on Banking Supervision (BCBS) to
improve the banking sector’s ability to absorb shocks arising from financial and economic stress,
whatever the source, thus reducing the risk of spill over from the financial sector to the real
economy. During Pittsburgh summit in September 2009, the G20 leaders committed to strengthen
the regulatory system for banks and other financial firms and also act together to raise capital
standards, to implement strong international compensation standards aimed at ending practices
that lead to excessive risk-taking, to improve the over-the-counter derivatives market and to
create more powerful tools to hold large global firms to account for the risks they take. For all
these reforms, the leaders set for themselves strict and precise timetables. Consequently, the
Basel Committee on Banking Supervision (BCBS) released comprehensive reform package
entitled “Basel III: A global regulatory framework for more resilient banks and banking systems”
(known as Basel III capital regulations) in December 2010.
1.2 Basel III reforms strengthen the bank-level i.e., micro prudential regulation, with the intention
to raise the resilience of individual banking institutions in periods of stress. Besides, the reforms
have a macro prudential focus also, addressing system wide risks, which can build up across the
banking sector, as well as the procyclical amplification of these risks over time. These new global
regulatory and supervisory standards mainly seek to raise the quality and level of capital to ensure
banks are better able to absorb losses on both a going concern and a gone concern basis,
increase the risk coverage of the capital framework, introduce leverage ratio to serve as a
backstop to the risk-based capital measure, raise the standards for the supervisory review
process (Pillar 2) and public disclosures (Pillar 3) etc. The macro prudential aspects of Basel III
are largely enshrined in the capital buffers. Both the buffers i.e., the capital conservation buffer
and the countercyclical buffer are intended to protect the banking sector from periods of excess
credit growth.
2. Approach to Implementation and Effective Date
2.1 The Basel III capital regulations continue to be based on three-mutually reinforcing Pillars,
viz. minimum capital requirements, supervisory review of capital adequacy, and market discipline
of the Basel II capital adequacy framework1. Under Pillar 1, the Basel III framework will continue
to offer the three distinct options for computing capital requirement for credit risk and three other
options for computing capital requirement for operational risk, albeit with certain modifications /
enhancements. These options for credit and operational risks are based on increasing risk
1 For reference, please refer to the Master Circular on Prudential Guidelines on Capital Adequacy and Market
Discipline - New Capital Adequacy Framework (NCAF) issued vide circular DBOD.No.BP.BC.4/21.06.001/2015-16
dated July 1, 2015.
7sensitivity and allow banks to select an approach that is most appropriate to the stage of
development of bank's operations. The options available for computing capital for credit risk are
Standardised Approach, Foundation Internal Rating Based Approach and Advanced Internal
Rating Based Approach. The options available for computing capital for operational risk are Basic
Indicator Approach (BIA), The Standardised Approach (TSA) and Advanced Measurement
Approach (AMA).
2.2 Keeping in view the Reserve Bank’s goal to have consistency and harmony with international
standards, it was decided in 2007 that all commercial banks in India (excluding Local Area Banks
and Regional Rural Banks) should adopt Standardised Approach for credit risk, Basic Indicator
Approach for operational risk by March 2009 and banks should continue to apply the Standardised
Duration Approach (SDA) for computing capital requirement for market risks.
2.3 Banks were advised to undertake an internal assessment of their preparedness for migration
to advanced approaches and take a decision with the approval of their Boards, whether they
would like to migrate to any of the advanced approaches. Based on bank's internal assessment
and its preparation, a bank may choose a suitable date to apply for implementation of advanced
approach. Besides, banks, at their discretion, would have the option of adopting the advanced
approaches for one or more of the risk categories, as per their preparedness, while continuing
with the simpler approaches for other risk categories, and it would not be necessary to adopt the
advanced approaches for all the risk categories simultaneously. However, banks should invariably
obtain prior approval of the RBI for adopting any of the advanced approaches.
2.4 Effective Date: The Basel III capital regulations were implemented in India with effect from
April 1, 2013 and have been fully implemented as on October 1, 2021. Banks have to comply with
the regulatory limits and minima as prescribed under Basel III capital regulations, on an ongoing
basis.
3. Scope of Application of Capital Adequacy Framework
3.1 A bank shall comply with the capital adequacy ratio requirements at two levels:
(a) the consolidated (“Group”) level2 capital adequacy ratio requirements, which measure the
capital adequacy of a bank based on its capital strength and risk profile after consolidating the
assets and liabilities of its subsidiaries / joint ventures / associates etc. except those engaged
in insurance and any non-financial activities; and
2 In terms of guidelines on preparation of consolidated prudential reports issued vide circular DBOD.
No.BP.BC.72/21.04.018/ 2001-02 dated February 25, 2003, a consolidated bank may exclude group companies which
are engaged in insurance business and businesses not pertaining to financial services. A consolidated bank should
maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) as applicable to a bank on an ongoing basis. Please
also refer to circular DBOD.No.FSD.BC.46/24.01.028/2006-07 dated December 12, 2006.
8(b) the standalone (“Solo”) level capital adequacy ratio requirements, which measure the
capital adequacy of a bank based on its standalone capital strength and risk profile.
Accordingly, overseas operations of a bank through its branches will be covered in both the above
scenarios.
3.2 For the purpose of these guidelines, the subsidiary is an enterprise that is controlled by
another enterprise (known as the parent). Banks will follow the definition of ‘control’ as given in
the applicable accounting standards.
3.3 The components, elements and eligibility criteria of the regulatory capital instruments for
foreign banks operating in India under the Wholly Owned Subsidiary (WOS) model would be as
applicable to the other domestic banks as stipulated in this Master Circular. The WOS shall meet
the Basel III requirements on a continuous basis from the time of its entry / conversion. WOS
shall, however, maintain a minimum capital adequacy ratio, on a continuous basis for an initial
period of three years from the commencement of its operations, at 10 per cent. In addition, the
WOS shall maintain the Capital Conservation Buffer and other buffers as applicable3.
3.4 Capital Adequacy at Group / Consolidated Level
3.4.1 All banking and other financial subsidiaries except subsidiaries engaged in insurance and
any non-financial activities (both regulated and unregulated) should be fully consolidated for the
purpose of capital adequacy. This would ensure assessment of capital adequacy at the group
level, taking into account the risk profile of assets and liabilities of the consolidated subsidiaries.
3.4.2 The insurance and non-financial subsidiaries / joint ventures / associates etc. of a bank
should not be consolidated for the purpose of capital adequacy. The equity and other regulatory
capital investments in the insurance and non-financial subsidiaries will be deducted from
consolidated regulatory capital of the group. Equity and other regulatory capital investments in
the unconsolidated insurance and non-financial entities of banks (which also include joint ventures
/ associates of the parent bank) will be treated in terms of paragraphs 4.4.9 and 5.13.6
respectively.
3.4.3 All regulatory adjustments indicated in paragraph 4.4 are required to be made to the
consolidated capital of the banking group as indicated therein.
3.4.4 Minority interest (i.e., non-controlling interest) and other capital issued out of consolidated
subsidiaries as per paragraph 3.4.1 that is held by third parties will be recognized in the
consolidated regulatory capital of the group subject to certain conditions as stipulated in
paragraph 4.3.
3 Please refer to the Framework for setting up of Wholly Owned Subsidiaries by Foreign Banks in India dated
November 6, 2013.
93.4.5 Banks should ensure that majority owned financial entities that are not consolidated for
capital purposes and for which the investment in equity and other instruments eligible for
regulatory capital status is deducted, meet their respective regulatory capital requirements. In
case of any shortfall in the regulatory capital requirements in the unconsolidated entity, the
shortfall shall be fully deducted from the Common Equity Tier 1 capital.
3.4.6 It is clarified that group/ consolidated level capital adequacy would also mean application
of consolidated capital adequacy norms to the Non-Operative Financial Holding Company
(NOFHC) after consolidating the relevant entities held by it in terms of paragraph 3.1(a) above, in
conjunction with the Guidelines for consolidated accounting and other quantitative methods to
facilitate consolidated supervision issued vide circular dated DBOD.No.BP.BC.72
/21.04.018/2001-02 dated February 25, 20034.
3.4.7 Banks may refer to Annex 19 for guidelines on general permission for infusion of capital
in overseas banking centres and retention/ repatriation/ transfer of profits in these centres.
3.5 Capital Adequacy at Solo Level
3.5.1 While assessing the capital adequacy of a bank at solo level, all regulatory adjustments
indicated in paragraph 4.4 are required to be made. In addition, investments in the capital
instruments of the subsidiaries, which are consolidated in the consolidated financial statements
of the group, shall be deducted from the corresponding capital instruments issued by the bank.
3.5.2 In case of any shortfall in the regulatory capital requirements in the unconsolidated entity
(e.g., insurance subsidiary), the shortfall shall be fully deducted from the Common Equity Tier 1
capital.
4. Composition of Regulatory Capital
4.1 General
Banks shall maintain a minimum Pillar 1 Capital to Risk-weighted Assets Ratio (CRAR) of 9% on
an on-going basis (other than capital conservation buffer and countercyclical capital buffer etc.).
The Reserve Bank will take into account the relevant risk factors and the internal capital adequacy
assessments of each bank to ensure that the capital held by a bank is commensurate with the
bank’s overall risk profile. This would include, among others, the effectiveness of the bank’s risk
management systems in identifying, assessing / measuring, monitoring and managing various
risks including interest rate risk in the banking book, liquidity risk, concentration risk and residual
risk. Accordingly, the Reserve Bank will consider prescribing a higher level of minimum capital
ratio for each bank under the Pillar 2 framework on the basis of their respective risk profiles and
their risk management systems. Further, in terms of the Pillar 2 requirements, banks are expected
4 Please refer circular no. DBR.No.BP.BC.57/21.06.201/2015-16 dated November 19, 2015 on Non-Operative
Financial Holding Company (NOFHC) – Application of Capital Adequacy Norms.
10to operate at a level well above the minimum requirement. A bank should compute Basel III capital
ratios in the following manner:
Common Equity Tier 1 capital
Common Equity Tier 1
=
capital ratio Credit Risk RWA* + Market Risk RWA + Operational Risk RWA
Eligible Tier 1 capital
Tier 1 capital ratio = Credit Risk RWA + Market Risk RWA + Operational Risk RWA
Eligible Total Capital
Total Capital (CRAR#) =
Credit Risk RWA + Market Risk RWA + Operational Risk RWA
*Risk Weight Assets
#Capital to Risk Weighted Assets Ratio
4.2 Elements of Regulatory Capital and the Criteria for their Inclusion in the Definition
of Regulatory Capital
4.2.1 Components of Capital
Total regulatory capital will consist of the sum of the following categories:
(i) Tier 1 Capital (going-concern capital)5
(a) Common Equity Tier 1
(b) Additional Tier 1
(ii) Tier 2 Capital (gone-concern capital)
4.2.2 Limits and Minima
(i) As a matter of prudence, it has been decided that scheduled commercial banks operating
in India shall maintain a minimum total capital (MTC) of 9% of total risk weighted assets (RWAs)
i.e., capital to risk weighted assets (CRAR). This will be further divided into different components
as described under paragraphs 4.2.2(ii) to 4.2.2(viii).
(ii) Common Equity Tier 1 (CET1) capital must be at least 5.5% of risk-weighted assets
(RWAs) i.e., for credit risk + market risk + operational risk on an ongoing basis.
(iii) Tier 1 capital must be at least 7% of RWAs on an ongoing basis. Thus, within the minimum
Tier 1 capital, Additional Tier 1 capital can be admitted maximum at 1.5% of RWAs.
5 From regulatory capital perspective, going-concern capital is the capital which can absorb losses without triggering
bankruptcy of the bank. Gone-concern capital is the capital which will absorb losses only in a situation of liquidation
of the bank.
11(iv) Total Capital (Tier 1 Capital plus Tier 2 Capital) must be at least 9% of RWAs on an
ongoing basis. Thus, within the minimum CRAR of 9%, Tier 2 capital can be admitted maximum
up to 2%.
(v) If a bank has complied with the minimum Common Equity Tier 1 and Tier 1 capital ratios,
then the excess Additional Tier 1 capital can be admitted for compliance with the minimum CRAR
of 9% of RWAs.
(vi) In addition to the minimum Common Equity Tier 1 capital of 5.5% of RWAs, banks are
also required to maintain a capital conservation buffer (CCB) of 2.5% of RWAs6 in the form of
Common Equity Tier 1 capital. Details of operational aspects of CCB have been furnished in
paragraph 15. The capital requirements are summarised as follows:
S.No. Regulatory Capital As % to RWAs
(i) Minimum Common Equity Tier 1 Ratio 5.5
(ii) Capital Conservation Buffer (comprised of Common Equity) 2.5
(iii) Minimum Common Equity Tier 1 Ratio plus Capital
8.0
Conservation Buffer [(i)+(ii)]
(iv) Additional Tier 1 Capital 1.5
(v) Minimum Tier 1 Capital Ratio [(i) +(iv)] 7.0
(vi) Tier 2 Capital 2.0
(vii) Minimum Total Capital Ratio (MTC) [(v)+(vi)] 9.0
(viii) Minimum Total Capital Ratio plus Capital Conservation
11.5
Buffer [(vii)+(ii)]
4.2.3 Common Equity Tier 1 Capital
4.2.3.1 Common Equity – Indian Banks
A. Elements of Common Equity Tier 1 Capital
Elements of Common Equity component of Tier 1 capital will comprise the following:
(i) Common shares (paid-up equity capital) issued by the bank which meet the criteria for
classification as common shares for regulatory purposes as given in Annex 1;
(ii) Stock surplus (share premium) resulting from the issue of common shares;
(iii) Statutory reserves;
6 The CCB of 2.5% of RWAs has been fully phased in from October 1, 2021.
12(iv) Capital reserves representing surplus arising out of sale proceeds of assets;
(v) AFS reserve7;
(vi) Revaluation reserves arising out of change in the carrying amount of a bank’s property
consequent upon its revaluation may be reckoned as CET1 capital at a discount of 55 per cent,
subject to meeting the following conditions:
bank is able to sell the property readily at its own will and there is no legal impediment in
selling the property;
the revaluation reserves are shown under Schedule 2: Reserves & Surplus in the Balance
Sheet of the bank;
revaluations are realistic, in accordance with Indian Accounting Standards.
valuations are obtained, from two independent valuers, at least once in every 3 years;
where the value of the property has been substantially impaired by any event, these are
to be immediately revalued and appropriately factored into capital adequacy
computations;
the external auditors of the bank have not expressed a qualified opinion on the revaluation
of the property;
the instructions on valuation of properties and other specific requirements as mentioned
in the circular DBOD.BP.BC.No.50/21.04.018/2006-07 January 4, 2007 on ‘Valuation of
Properties - Empanelment of Valuers’ are strictly adhered to.
Revaluation reserves which do not qualify as CET1 capital shall also not qualify as Tier 2 capital.
The bank may choose to reckon revaluation reserves in CET1 capital or Tier 2 capital at its
discretion, subject to fulfilment of all the conditions specified above.
(vii) Banks may, at their discretion, reckon foreign currency translation reserve arising due to
translation of financial statements of their foreign operations in terms of Accounting Standard (AS)
11 as CET1 capital at a discount of 25 per cent subject to meeting the following conditions:
the FCTR are shown under Schedule 2: Reserves & Surplus in the Balance Sheet of the
bank;
the external auditors of the bank have not expressed a qualified opinion on the FCTR.
(viii) Other disclosed free reserves, if any;
(ix) Balance in Profit & Loss Account at the end of the previous financial year;
7 Please refer to Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial
Banks (Directions), 2023 dated September 12, 2023. It is also clarified that any negative balance in the AFS reserve
shall be deducted from CET1 capital.
13(x) Banks may reckon the profits in current financial year for CRAR calculation on a quarterly
basis provided the incremental provisions made for non-performing assets at the end of any of
the four quarters of the previous financial year have not deviated more than 25% from the average
of the four quarters. The amount which can be reckoned would be arrived at by using the following
formula:
EPt= {NPt – 0.25*D*t}
where;
EPt = Eligible profit up to the quarter ‘t’ of the current financial year; t varies from 1 to 4
NPt = Net profit up to the quarter ‘t’
D= average annual dividend paid during last three years
It is clarified that the cumulative net loss up to the quarter end must be deducted while calculating
CET1 capital for the relevant quarter.
(xi) While calculating capital adequacy at the consolidated level, common shares issued by
consolidated subsidiaries of the bank and held by third parties (i.e., minority interest) which meet
the criteria for inclusion in Common Equity Tier 1 capital (refer to paragraph 4.3.2); and
(xii) Less: Regulatory adjustments / deductions applied in the calculation of Common Equity
Tier 1 capital [i.e., to be deducted from the sum of items (i) to (xi)].
B. Criteria for Classification as Common Shares for Regulatory Purposes
Common Equity is recognised as the highest quality component of capital and is the primary form
of funding which ensures that a bank remains solvent. Therefore, under Basel III, common shares
to be included in Common Equity Tier 1 capital must meet the criteria as furnished in Annex 1.
4.2.3.2 Common Equity Tier 1 Capital – Foreign Banks’ Branches
A. Elements of Common Equity Tier 1 Capital
Elements of Common Equity Tier 1 capital will remain the same and consist of the following:
(i) Interest-free funds from Head Office kept in a separate account in Indian books specifically
for the purpose of meeting the capital adequacy norms*;
(ii) Statutory reserves kept in Indian books;
(iii) Remittable surplus retained in Indian books which is not repatriable so long as the bank
functions in India*;
14(iv) Interest-free funds remitted from abroad for the purpose of acquisition of property and held
in a separate account in Indian books provided they are non-repatriable and have the ability to
absorb losses regardless of their source;
(v) Capital reserve representing surplus arising out of sale of assets in India held in a separate
account and which is not eligible for repatriation so long as the bank functions in India;
(vi) AFS reserve8;
(vii) Revaluation reserves arising out of change in the carrying amount of a bank’s property
consequent upon its revaluation may be reckoned as CET1 capital at a discount of 55 per cent,
subject to meeting the same set of conditions mentioned for Indian banks in paragraph 4.2.3.1.A
(vi) above9;
(viii) Banks may, at their discretion, reckon foreign currency translation reserve arising due to
translation of financial statements of their foreign operations in terms of Accounting Standard (AS)
11 as CET1 capital at a discount of 25 per cent subject to meeting the same set of conditions
mentioned for Indian banks in paragraph 4.2.3.1.A (vii) above; and
(ix) Less: Regulatory adjustments / deductions applied in the calculation of Common Equity
Tier 1 capital [i.e., to be deducted from the sum of items (i) to (viii)].
Note: *Banks are advised to refer to circular DOR.CRE.REC.47/21.01.003/2021-22 dated
September 09, 2021 on ‘Large Exposures Framework – Credit Risk Mitigation (CRM) for offsetting
– non-centrally cleared derivative transactions of foreign bank branches in India with their Head
Office’ which inter alia, states that there shall not be any double counting of the funds placed
under section 11(2) of the Banking Regulation Act, 1949 as both capital and CRM.
B. Criteria for Classification as Common Equity for Regulatory Purposes
The instruments to be included in Common Equity Tier 1 capital must meet the criteria furnished
in Annex 2.
Notes:
(i) Foreign banks are required to furnish to Reserve Bank, an undertaking to the effect that
the bank will not remit abroad the ‘capital reserve’ and ‘remittable surplus retained in India’
8 Please refer to Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial
Banks (Directions), 2023 dated September 12, 2023. It is also clarified that any negative balance in the AFS reserve
shall be deducted from CET1 capital.
9 Revaluation reserves which do not qualify as CET1 capital shall also not qualify as Tier 2 capital. The bank may
choose to reckon revaluation reserves in CET1 capital or Tier 2 capital at its discretion, subject to fulfilment of all the
conditions specified in paragraph 4.2.3.1.A (vi).
15as long as they function in India to be eligible for including this item under Common Equity
Tier 1 capital.
(ii) These funds may be retained in a separate account titled as 'Amount Retained in India for
Meeting Capital to Risk-weighted Asset Ratio (CRAR) Requirements' under 'Capital
Funds'.
(iii) An auditor's certificate to the effect that these funds represent surplus remittable to Head
Office once tax assessments are completed or tax appeals are decided and do not include
funds in the nature of provisions towards tax or for any other contingency may also be
furnished to Reserve Bank.
(iv) The net credit balance, if any, in the inter-office account with Head Office / overseas
branches will not be reckoned as capital funds. However, the debit balance in the Head
Office account will have to be set-off against capital subject to the following provisions10:
(a) If net overseas placements with Head Office / other overseas branches / other
group entities (Placement minus borrowings, excluding Head Office borrowings for Tier I
and II capital purposes) exceed 10% of the bank's minimum CRAR requirement, the
amount in excess of this limit would be deducted from Tier I capital.
(b) For the purpose of the above prudential cap, the net overseas placement would
be the higher of the overseas placements as on date and the average daily outstanding
over year to date.
(c) The overall cap on such placements / investments will continue to be guided by
the present regulatory and statutory restrictions i.e., net open position limit and the gap
limits approved by the Reserve Bank of India, and Section 25 of the Banking Regulation
Act, 1949. All such transactions should also be in conformity with other FEMA guidelines.
4.2.4 Additional Tier 1 Capital
4.2.4.1 Additional Tier 1 Capital – Indian Banks
A. Elements of Additional Tier 1 Capital
Additional Tier 1 capital will consist of the sum of the following elements:
(i) Perpetual Non-Cumulative Preference Shares (PNCPS), which comply with the regulatory
requirements as specified in Annex 3;
10 Please refer to the circular DBOD.No.BP.BC.28/21.06.001/2012-13 dated July 9, 2012 on ‘Treatment of Head Office
Debit Balance - Foreign Banks’.
16(ii) Stock surplus (share premium) resulting from the issue of instruments included in
Additional Tier 1 capital;
(iii) Debt capital instruments eligible for inclusion in Additional Tier 1 capital, which comply
with the regulatory requirements as specified in Annex 4;
(iv) Any other type of instrument generally notified by the Reserve Bank from time to time for
inclusion in Additional Tier 1 capital;
(v) While calculating capital adequacy at the consolidated level, Additional Tier 1 instruments
issued by consolidated subsidiaries of the bank and held by third parties which meet the criteria
for inclusion in Additional Tier 1 capital (refer to paragraph 4.3.3); and
(vi) Less: Regulatory adjustments / deductions applied in the calculation of Additional Tier 1
capital [i.e., to be deducted from the sum of items (i) to (v)].
B. Criteria for Classification as Additional Tier 1 Capital for Regulatory Purposes
(i) Under Basel III, the criteria for instruments to be included in Additional Tier 1 capital have
been modified to improve their loss absorbency as indicated in Annex 3, 4 and 15. Criteria for
inclusion of Perpetual Non-Cumulative Preference Shares (PNCPS) in Additional Tier 1 Capital
are furnished in Annex 3. Criteria for inclusion of Perpetual Debt Instruments (PDI) in Additional
Tier 1 Capital are furnished in Annex 4. Annex 15 contains criteria for loss absorption through
conversion / write-down / write-off of Additional Tier 1 instruments on breach of the pre-specified
trigger and of all non-common equity regulatory capital instruments at the point of non-viability.
4.2.4.2 Elements and Criteria for Additional Tier 1 Capital – Foreign Banks’ Branches
Various elements and their criteria for inclusion in the Additional Tier 1 capital are as follows:
(i) Head Office borrowings in foreign currency by foreign banks operating in India for inclusion
in Additional Tier 1 capital which comply with the regulatory requirements as specified in Annex
4 and Annex 15;
(ii) Any other item specifically allowed by the Reserve Bank from time to time for inclusion in
Additional Tier 1 capital; and
(iii) Less: Regulatory adjustments / deductions applied in the calculation of Additional Tier 1
capital [i.e., to be deducted from the sum of items (i) to (ii)].
4.2.5 Elements of Tier 2 Capital
Under Basel III, there will be a single set of criteria governing all Tier 2 debt capital instruments.
174.2.5.1 Tier 2 Capital - Indian Banks
A. Elements of Tier 2 Capital
(i) General Provisions and Loss Reserves
a. Provisions or loan-loss reserves held against future, presently unidentified losses, which
are freely available to meet losses which subsequently materialize, will qualify for inclusion
within Tier 2 capital. Accordingly, General Provisions on Standard Assets, Floating
Provisions11, incremental provisions in respect of unhedged foreign currency exposures12,
Provisions held for Country Exposures, Investment Reserve Account, excess provisions
which arise on account of sale of NPAs and ‘countercyclical provisioning buffer’13 will qualify
for inclusion in Tier 2 capital. However, these items together will be admitted as Tier 2 capital
up to a maximum of 1.25% of the total credit risk-weighted assets under the standardized
approach. Under Internal Ratings Based (IRB) approach, where the total expected loss
amount is less than total eligible provisions, banks may recognise the difference as Tier 2
capital up to a maximum of 0.6% of credit-risk weighted assets calculated under the IRB
approach.
b. Investment Fluctuation Reserve shall also qualify for inclusion in Tier 2 capital, without any
ceiling14.
c. Provisions ascribed to identified deterioration of particular assets or loan liabilities,
whether individual or grouped should be excluded. Accordingly, for instance, specific
provisions on NPAs, both at individual account or at portfolio level, provisions in lieu of
diminution in the fair value of assets in the case of restructured advances, provisions against
depreciation in the value of investments will be excluded.
(ii) Debt Capital Instruments issued by the banks;
(iii) Preference Share Capital Instruments [Perpetual Cumulative Preference Shares (PCPS)
/ Redeemable Non-Cumulative Preference Shares (RNCPS) / Redeemable Cumulative
Preference Shares (RCPS)] issued by the banks;
11 Banks will continue to have the option to net off such provisions from Gross NPAs to arrive at Net NPA or reckoning
it as part of their Tier 2 capital as per circular DBOD.NO.BP.BC 33/21.04.048/2009-10 dated August 27, 2009.
12 Please refer to Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022 issued vide
DOR.MRG.REC.76/00-00-007/2022-23 dated October 11, 2022.
13 Please refer to circular DBOD.No.BP.BC.87/21.04.048/2010-11 dated April 21, 2011 on provisioning coverage ratio
(PCR) for advances.
14 Please refer to clause 37 of the Master Direction DOR.MRG.36/21.04.141/2023-24 dated September 12, 2023
titled ‘Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023’.
18(iv) Stock surplus (share premium) resulting from the issue of instruments included in Tier 2
capital;
(v) While calculating capital adequacy at the consolidated level, Tier 2 capital instruments
issued by consolidated subsidiaries of the bank and held by third parties which meet the criteria
for inclusion in Tier 2 capital (refer to paragraph 4.3.4);
(vi) Any other type of instrument generally notified by the Reserve Bank from time to time for
inclusion in Tier 2 capital; and
(vii) Less: Regulatory adjustments / deductions applied in the calculation of Tier 2 capital [i.e.,
to be deducted from the sum of items (i) to (vi)].
B. Criteria for Classification as Tier 2 Capital for Regulatory Purposes
Under Basel III, the criteria for instruments to be included in Tier 2 capital have been modified to
improve their loss absorbency as indicated in Annex 5, 6 and 15. Criteria for inclusion of Debt
Capital Instruments as Tier 2 capital are furnished in Annex 5. Criteria for inclusion of Perpetual
Cumulative Preference Shares (PCPS) / Redeemable Non-Cumulative Preference Shares
(RNCPS) / Redeemable Cumulative Preference Shares (RCPS) as part of Tier 2 capital are
furnished in Annex 6. Annex 15 contains criteria for loss absorption through conversion / write-
off of all non-common equity regulatory capital instruments at the point of non-viability.
4.2.5.2 Tier 2 Capital – Foreign Banks’ Branches
A. Elements of Tier 2 Capital
Elements of Tier 2 capital in case of foreign banks’ branches will be as under:
(i) General Provisions and Loss Reserves (as detailed in paragraph 4.2.5.1.A.(i) above);
(ii) Head Office (HO) borrowings in foreign currency received as part of Tier 2 debt capital;
and
(iii) Less: Regulatory adjustments / deductions applied in the calculation of Tier 2 capital [i.e.,
to be deducted from the sum of items (i) and (iii)].
B. Criteria for Classification as Tier 2 Capital for Regulatory Purposes
Criteria for inclusion of Head Office (HO) borrowings in foreign currency received as part of Tier
2 debt Capital for foreign banks are furnished in Annex 5 and Annex 15.
4.3 Recognition of Minority Interest (i.e., Non-Controlling Interest) and Other Capital
Issued out of Consolidated Subsidiaries that is Held by Third Parties
194.3.1 Under Basel III, the minority interest is recognised only in cases where there is
considerable explicit or implicit assurance that the minority interest which is supporting the risks
of the subsidiary would be available to absorb the losses at the consolidated level. Accordingly,
the portion of minority interest which supports risks in a subsidiary that is a bank will be included
in group’s Common Equity Tier 1. Consequently, minority interest in the subsidiaries which are
not banks will not be included in the regulatory capital of the group. In other words, the proportion
of surplus capital which is attributable to the minority shareholders would be excluded from the
group’s Common Equity Tier 1 capital. Further, under Basel III, the minority interest in relation to
other components of regulatory capital will also be recognised.
4.3.2 Treatment of Minority Interest Corresponding to Common Shares Issued by
Consolidated Subsidiaries
Minority interest arising from the issue of common shares by a fully consolidated subsidiary of the
bank may receive recognition in Common Equity Tier 1 capital only if: (a) the instrument giving
rise to the minority interest would, if issued by the bank, meet all of the criteria for classification
as common shares for regulatory capital purposes as stipulated in Annex 1; and (b) the subsidiary
that issued the instrument is itself a bank15. The amount of minority interest meeting the criteria
above that will be recognised in consolidated Common Equity Tier 1 capital will be calculated as
follows:
(i) Total minority interest meeting the two criteria above minus the amount of the
surplus Common Equity Tier 1 capital of the subsidiary attributable to the minority
shareholders.
(ii) Surplus Common Equity Tier 1 capital of the subsidiary is calculated as the
Common Equity Tier 1 of the subsidiary minus the lower of: (a) the minimum Common
Equity Tier 1 capital requirement of the subsidiary plus the capital conservation buffer (i.e.
8.0% of risk weighted assets) and (b) the portion of the consolidated minimum Common
Equity Tier 1 capital requirement plus the capital conservation buffer (i.e. 8.0% of
consolidated risk weighted assets) that relates to the subsidiary.
(iii) The amount of the surplus Common Equity Tier 1 capital that is attributable to the
minority shareholders is calculated by multiplying the surplus Common Equity Tier 1 by the
percentage of Common Equity Tier 1 that is held by minority shareholders.
4.3.3 Treatment of Minority Interest Corresponding to Tier 1 Qualifying Capital Issued by
Consolidated Subsidiaries
15For the purposes of this paragraph, All India Financial Institutions, Non-banking Financial Companies regulated by
RBI and Primary Dealers will be considered to be a bank
20Tier 1 capital instruments issued by a fully consolidated subsidiary of the bank to third party
investors (including amounts under paragraph 4.3.2) may receive recognition in Tier 1 capital only
if the instruments would, if issued by the bank, meet all of the criteria for classification as Tier 1
capital. The amount of this capital that will be recognised in Tier 1 capital will be calculated as
follows:
(i) Total Tier 1 capital of the subsidiary issued to third parties minus the amount of the surplus
Tier 1 capital of the subsidiary attributable to the third party investors.
(ii) Surplus Tier 1 capital of the subsidiary is calculated as the Tier 1 capital of the subsidiary
minus the lower of: (a) the minimum Tier 1 capital requirement of the subsidiary plus the capital
conservation buffer (i.e., 9.5% of risk weighted assets) and (b) the portion of the consolidated
minimum Tier 1 capital requirement plus the capital conservation buffer (i.e. 9.5% of consolidated
risk weighted assets) that relates to the subsidiary.
(iii) The amount of the surplus Tier 1 capital that is attributable to the third party investors is
calculated by multiplying the surplus Tier 1 capital by the percentage of Tier 1 capital that is held
by third party investors.
The amount of this Tier 1 capital that will be recognised in Additional Tier 1 capital will exclude
amounts recognised in Common Equity Tier 1 capital under paragraph 4.3.2.
4.3.4 Treatment of Minority Interest Corresponding to Tier 1 Capital and Tier 2 Capital
Qualifying Capital Issued by Consolidated Subsidiaries
Total capital instruments (i.e., Tier 1 and Tier 2 capital instruments) issued by a fully consolidated
subsidiary of the bank to third party investors (including amounts under paragraphs 4.3.2 and
4.3.3) may receive recognition in Total Capital only if the instruments would, if issued by the bank,
meet all of the criteria for classification as Tier 1 or Tier 2 capital. The amount of this capital that
will be recognised in consolidated Total Capital will be calculated as follows:
(i) Total capital instruments of the subsidiary issued to third parties minus the amount of the
surplus Total Capital of the subsidiary attributable to the third party investors.
(ii) Surplus Total Capital of the subsidiary is calculated as the Total Capital of the subsidiary
minus the lower of: (a) the minimum Total Capital requirement of the subsidiary plus the capital
conservation buffer (i.e., 11.5% of risk weighted assets) and (b) the portion of the consolidated
minimum Total Capital requirement plus the capital conservation buffer (i.e., 11.5% of
consolidated risk weighted assets) that relates to the subsidiary.
(iii) The amount of the surplus Total Capital that is attributable to the third party investors is
calculated by multiplying the surplus Total Capital by the percentage of Total Capital that is
held by third party investors.
21The amount of this Total Capital that will be recognised in Tier 2 capital will exclude amounts
recognised in Common Equity Tier 1 capital under paragraph 4.3.2 and amounts recognised in
Additional Tier 1 under paragraph 4.3.3.
4.3.5 An illustration of calculation of minority interest and other capital issued out of consolidated
subsidiaries that is held by third parties is furnished in Annex 16.
4.4 Regulatory Adjustments / Deductions
The following paragraphs deal with the regulatory adjustments / deductions which will be applied
to regulatory capital both at solo and consolidated level.
4.4.1 Goodwill and all Other Intangible Assets
(i) Goodwill and all other intangible assets should be deducted from Common Equity Tier 1
capital including any goodwill included in the valuation of significant investments in the capital of
banking, financial and insurance entities which are outside the scope of regulatory consolidation.
In terms of AS 23 – Accounting for investments in associates, goodwill/capital reserve arising on
the acquisition of an associate by an investor should be included in the carrying amount of
investment in the associate but should be disclosed separately. Therefore, if the acquisition of
equity interest in any associate involves payment which can be attributable to goodwill, this should
be deducted from the Common Equity Tier 1 of the bank.
(ii) The full amount of the intangible assets is to be deducted net of any associated deferred
tax liabilities which would be extinguished if the intangible assets become impaired or
derecognized under the relevant accounting standards. For this purpose, the definition of
intangible assets would be in accordance with the Indian accounting standards. Losses in the
current period and those brought forward from previous periods should also be deducted from
Common Equity Tier 1 capital, if not already deducted.
(iii) Application of these rules at consolidated level would mean deduction of any goodwill and
other intangible assets from the consolidated Common Equity which is attributed to the Balance
Sheets of subsidiaries, in addition to deduction of goodwill and other intangible assets which
pertain to the solo bank.
4.4.2 Deferred Tax Assets (DTAs)16
(i) Deferred tax assets (DTAs) associated with accumulated losses and other such assets
shall be deducted in full, from CET1 capital.
(ii) DTAs which relate to timing differences (other than those related to accumulated losses)
may, instead of full deduction from CET1 capital, be recognised in the CET1 capital up to 10% of
16 Please refer to paragraph 2.3 of circular no. DBR.No.BP.BC.83/21.06.201/2015-16 dated March 1, 2016 on Master
Circular – Basel III Capital Regulations – Revision.
22a bank's CET1 capital, at the discretion of banks [after the application of all regulatory adjustments
mentioned from paragraphs 4.4.1 to 4.4.9.2(C)(ii)].
(iii) Further, the limited recognition of DTAs as at (ii) above along with limited recognition of
significant investments in the common shares of unconsolidated financial (i.e. banking, financial
and insurance) entities in terms of paragraph 4.4.9.2(C) (iii) taken together must not exceed 15%
of the CET1 capital, calculated after all regulatory adjustments set out from paragraphs 4.4.1 to
4.4.9. Please refer to Annex 20 clarifying this applicable limited recognition. However, banks shall
ensure that the CET1 capital arrived at after application of 15% limit should in no case result in
recognising any item more than the 10% limit applicable individually.
(iv) The amount of DTAs which are to be deducted from CET1 capital may be netted with
associated deferred tax liabilities (DTLs) provided that:
(a) both the DTAs and DTLs relate to taxes levied by the same taxation authority and
offsetting is permitted by the relevant taxation authority;
(b) the DTLs permitted to be netted against DTAs must exclude amounts that have been
netted against the deduction of goodwill, intangibles and defined benefit pension assets; and
(c) the DTLs must be allocated on a pro rata basis between DTAs subject to deduction from
CET1 capital as at (i) and (ii) above.
(v) The amount of DTAs which is not deducted from CET1 capital (in terms of para (ii) above)
will be risk weighted at 250% as in the case of significant investments in common shares not
deducted from bank's CET1 capital as indicated in paragraph 4.4.9 (C)(iii).
4.4.3 Cash Flow Hedge Reserve
(i) The amount of the cash flow hedge reserve which relates to the hedging of items that are
not fair valued on the balance sheet (including projected cash flows) should be derecognised in
the calculation of Common Equity Tier 1. This means that positive amounts should be deducted
and negative amounts should be added back. This treatment specifically identifies the element of
the cash flow hedge reserve that is to be derecognised for prudential purposes. It removes the
element that gives rise to artificial volatility in Common Equity, as in this case the reserve only
reflects one half of the picture (the fair value of the derivative, but not the changes in fair value of
the hedged future cash flow).
(ii) Application of these rules at consolidated level would mean derecognition of cash flow
hedge reserve from the consolidated Common Equity which is attributed to the subsidiaries, in
addition to derecognition of cash flow hedge reserve pertaining to the solo bank.
234.4.4 Shortfall of the Stock of Provisions to Expected Losses
The deduction from capital in respect of a shortfall of the stock of provisions to expected losses
under the Internal Ratings Based (IRB) approach should be made in the calculation of Common
Equity Tier 1. The full amount is to be deducted and should not be reduced by any tax effects that
could be expected to occur if provisions were to rise to the level of expected losses.
4.4.5 Gain-on-Sale Related to Securitisation Transactions
(i) Banks shall be guided by the Master Direction no. DOR.STR.REC.53/21.04.177/2021-22
dated September 24, 2021 titled Reserve Bank of India (Securitisation of Standard Assets)
Directions, 2021 in this regard.
(ii) Application of these rules at consolidated level would mean deduction of gain-on-sale from
the consolidated Common Equity which is recognized by the subsidiaries in their P&L and / or
equity, in addition to deduction of any gain-on-sale recognised by the bank at the solo level.
4.4.6 Cumulative Gains and Losses due to Changes in Own Credit Risk on Fair Valued
Financial Liabilities
(i) Banks are required to derecognise in the calculation of Common Equity Tier 1 capital, all
unrealised gains and losses which have resulted from changes in the fair value of liabilities that
are due to changes in the bank’s own credit risk. In addition, with regard to derivative liabilities,
derecognise all accounting valuation adjustments arising from the bank's own credit risk. The
offsetting between valuation adjustments arising from the bank's own credit risk and those arising
from its counterparties' credit risk is not allowed. If a bank values its derivatives and securities
financing transactions (SFTs) liabilities taking into account its own creditworthiness in the form of
debit valuation adjustments (DVAs), then the bank is required to deduct all DVAs from its Common
Equity Tier 1 capital, irrespective of whether the DVAs arises due to changes in its own credit risk
or other market factors. Thus, such deduction also includes the deduction of initial DVA at
inception of a new trade. In other words, though a bank will have to recognize a loss reflecting
the credit risk of the counterparty (i.e., credit valuation adjustments-CVA), the bank will not be
allowed to recognize the corresponding gain due to its own credit risk.
(ii) Application of these rules at consolidated level would mean derecognition of unrealised
gains and losses which have resulted from changes in the fair value of liabilities that are due to
changes in the subsidiaries’ credit risk, in the calculation of consolidated Common Equity Tier 1
capital, in addition to derecognition of any such unrealised gains and losses attributed to the bank
at the solo level.
244.4.7 Defined Benefit Pension Fund17 Assets and Liabilities
(i) Defined benefit pension fund liabilities, as included on the balance sheet, must be fully
recognised in the calculation of Common Equity Tier 1 capital (i.e., Common Equity Tier 1 capital
cannot be increased through derecognising these liabilities). For each defined benefit pension
fund that is an asset on the balance sheet, the asset should be deducted in the calculation of
Common Equity Tier 1 net of any associated deferred tax liability which would be extinguished if
the asset should become impaired or derecognised under the relevant accounting standards.
(ii) Application of these rules at consolidated level would mean deduction of defined benefit
pension fund assets and recognition of defined benefit pension fund liabilities pertaining to
subsidiaries in the consolidated Common Equity Tier 1, in addition to those pertaining to the solo
bank.
4.4.8 Investments in Own Shares (Treasury Stock)
(i) Investment in a bank’s own shares is tantamount to repayment of capital and therefore, it
is necessary to knock-off such investment from the bank’s capital with a view to improving the
bank’s quality of capital. This deduction would remove the double counting of equity capital which
arises from direct holdings, indirect holdings via index funds and potential future holdings as a
result of contractual obligations to purchase own shares.
(ii) Banks should not repay their equity capital without specific approval of Reserve Bank of
India. Repayment of equity capital can take place by way of share buy-back, investments in own
shares (treasury stock) or payment of dividends out of reserves, none of which are permissible.
However, banks may end up having indirect investments in their own stock if they invest in / take
exposure to mutual funds or index funds / securities which have long position in bank’s share. In
such cases, banks should look through holdings of index securities to deduct exposures to own
shares from their Common Equity Tier 1 capital. Following the same approach outlined above,
banks must deduct investments in their own Additional Tier 1 capital in the calculation of their
Additional Tier 1 capital and investments in their own Tier 2 capital in the calculation of their Tier
2 capital. In this regard, the following rules may be observed:
(a) If the amount of investments made by the mutual funds / index funds / venture capital
funds / private equity funds / investment companies in the capital instruments of the investing
bank is known; the indirect investment would be equal to bank’s investments in such entities
multiplied by the percent of investments of these entities in the investing bank’s respective
capital instruments.
(b) If the amount of investments made by the mutual funds / index funds / venture capital
funds / private equity funds / investment companies in the capital instruments of the investing
17It includes other defined employees’ funds also.
25bank is not known but, as per the investment policies / mandate of these entities such
investments are permissible; the indirect investment would be equal to bank’s investments in
these entities multiplied by 10%18 of investments of such entities in the investing bank’s capital
instruments. Banks must note that this method does not follow corresponding deduction
approach i.e., all deductions will be made from the Common Equity Tier 1 capital even though,
the investments of such entities are in the Additional Tier 1 / Tier 2 capital of the investing
banks.
(iii) Application of these rules at consolidated level would mean deduction of subsidiaries’
investments in their own shares (direct or indirect) in addition to bank’s direct or indirect
investments in its own shares while computing consolidated Common Equity Tier 1.
4.4.9 Investments in the Capital of Banking, Financial and Insurance Entities19
4.4.9.1 Limits on a Bank’s Investments in the Capital of Banking, Financial and Insurance
Entities
(i) A bank’s investment in the capital instruments issued by banking, financial and insurance
entities is subject to the following limits:
(a) A bank’s investments in the capital instruments issued by banking, financial and
insurance entities should not exceed 10% of its capital funds, but after all deductions
mentioned in paragraph 4 (upto paragraph 4.4.8).
(b) A bank’s acquisition of share capital or voting rights in a banking company shall be guided
by the Master Direction and Guidelines on Acquisition and Holding of Shares or Voting rights
in Banking Companies dated January 16, 2023, as amended from time to time.
(c) Prudential Regulations for Banks’ Investments shall be as prescribed in Master Direction
- Reserve Bank of India (Financial Services provided by Banks) Directions, 2016 dated May
16, 2016, as amended from time to time.
(ii) An indicative list of institutions which may be deemed to be financial institutions other than
banks and insurance companies for capital adequacy purposes is as under:
Asset Management Companies of Mutual Funds / Venture Capital Funds / Private Equity
Funds etc;
Non-Banking Finance Companies;
Housing Finance Companies;
Primary Dealers;
18 In terms of Securities and Exchange Board of India (Mutual Funds) Regulations 1996, no mutual fund under all its
schemes should own more than ten per cent of any company's paid up capital carrying voting rights.
19 These rules will be applicable to a bank’s equity investments in other banks and financial entities, even if such
investments are exempted from ‘capital market exposure’ limit.
26 Merchant Banking Companies;
Entities engaged in activities which are ancillary to the business of banking under the B.R.
Act, 1949; and
Central Counterparties (CCPs).
(iii) Investments made by a banking subsidiary/ associate in the equity or non- equity
regulatory capital instruments issued by its parent bank should be deducted from such
subsidiary's regulatory capital following corresponding deduction approach, in its capital
adequacy assessment on a solo basis. The regulatory treatment of investment by the non-banking
financial subsidiaries / associates in the parent bank's regulatory capital would, however, be
governed by the applicable regulatory capital norms of the respective regulators of such
subsidiaries / associates.
4.4.9.2 Treatment of a Bank’s Investments in the Capital Instruments Issued by Banking,
Financial and Insurance Entities within Limits
The investment of banks in the regulatory capital instruments of other financial entities contributes
to the inter-connectedness amongst the financial institutions. In addition, these investments also
amount to double counting of capital in the financial system. Therefore, these investments have
been subjected to stringent treatment in terms of deduction from respective tiers of regulatory
capital. A schematic representation of treatment of banks’ investments in capital instruments of
financial entities is shown in Figure 1 below. Accordingly, all investments20 in the capital
instruments issued by banking, financial and insurance entities within the limits mentioned in
paragraph 4.4.9.1 will be subject to the following rules:
20 For this purpose, investments may be reckoned at values according to their classification in terms of Master
Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023
dated September 12, 2023.
27(A) Reciprocal Cross- Holdings in the Capital of Banking, Financial and Insurance
Entities
Reciprocal cross holdings of capital might result in artificially inflating the capital position of
banks. Such holdings of capital will be fully deducted. Banks must apply a “corresponding
deduction approach” to such investments in the capital of other banks, other financial
institutions and insurance entities. This means the deduction should be applied to the same
component of capital (Common Equity, Additional Tier 1 and Tier 2 capital) for which the
capital would qualify if it was issued by the bank itself. For this purpose, a holding will be
treated as reciprocal cross holding if the investee entity has also invested in any class of
bank’s capital instruments which need not necessarily be the same as the bank’s holdings.
28(B) Investments in the Capital of Banking, Financial and Insurance Entities which are
outside the Scope of Regulatory Consolidation and where the Bank does not Own more
than 10% of the Issued Common Share Capital of the Entity
(i) The regulatory adjustment described in this section applies to investments in the capital
of banking, financial and insurance entities that are outside the scope of regulatory
consolidation and where the bank does not own more than 10% of the issued common
share capital of the entity. In addition:
(a) Investments include direct, indirect21 and synthetic holdings of capital instruments.
For example, banks should look through holdings of index securities to determine
their underlying holdings of capital.
(b) Holdings in both the banking book and trading book are to be included. Capital
includes common stock (paid-up equity capital) and all other types of cash and
synthetic capital instruments (e.g., subordinated debt).
(c) Underwriting positions held for five working days or less can be excluded.
Underwriting positions held for longer than five working days must be included.
(d) If the capital instrument of the entity in which the bank has invested does not meet
the criteria for Common Equity Tier 1, Additional Tier 1, or Tier 2 capital of the bank,
the capital is to be considered common shares for the purposes of this regulatory
adjustment22.
(e) With the prior approval of RBI, a bank can temporarily exclude certain investments
where these have been made in the context of resolving or providing financial
assistance to reorganise a distressed institution.
(ii) If the total of all holdings listed in paragraph (i) above, in aggregate exceed 10% of the
bank’s Common Equity (after applying all other regulatory adjustments in full listed prior
to this one), then the amount above 10% is required to be deducted, applying a
corresponding deduction approach. This means the deduction should be applied to the
same component of capital for which the capital would qualify if it was issued by the
bank itself. Accordingly, the amount to be deducted from common equity should be
calculated as the total of all holdings which in aggregate exceed 10% of the bank’s
common equity (as per above) multiplied by the common equity holdings as a
percentage of the total capital holdings. This would result in a Common Equity deduction
which corresponds to the proportion of total capital holdings held in Common Equity.
21 Indirect holdings are exposures or part of exposures that, if a direct holding loses its value, will result in a loss to
the bank substantially equivalent to the loss in the value of direct holding.
22 If the investment is issued out of a regulated financial entity and not included in regulatory capital in the relevant
sector of the financial entity, it is not required to be deducted.
29Similarly, the amount to be deducted from Additional Tier 1 capital should be calculated
as the total of all holdings which in aggregate exceed 10% of the bank’s Common Equity
(as per above) multiplied by the Additional Tier 1 capital holdings as a percentage of the
total capital holdings. The amount to be deducted from Tier 2 capital should be
calculated as the total of all holdings which in aggregate exceed 10% of the bank’s
Common Equity (as per above) multiplied by the Tier 2 capital holdings as a percentage
of the total capital holdings. (Please refer to illustration given in Annex 11).
(iii) If, under the corresponding deduction approach, a bank is required to make a deduction
from a particular tier of capital and it does not have enough of that tier of capital to satisfy
that deduction, the shortfall will be deducted from the next higher tier of capital (e.g., if a
bank does not have enough Additional Tier 1 capital to satisfy the deduction, the shortfall
will be deducted from Common Equity Tier 1 capital).
(iv) Investments below the threshold of 10% of bank’s Common Equity, which are not
deducted, will be risk weighted. Thus, instruments in the trading book will be treated as
per the market risk rules and instruments in the banking book should be treated as per
the standardised approach or internal ratings-based approach (as applicable). For the
application of risk weighting the amount of the holdings which are required to be risk
weighted would be allocated on a pro rata basis between the Banking and Trading Book.
However, in certain cases, such investments in both scheduled and non-scheduled
commercial banks will be fully deducted from Common Equity Tier 1 capital of investing
bank as indicated in paragraphs 5.6, 8.3.4 and 8.4.4.
(v) For the purpose of risk weighting of investments in as indicated in para (iv) above,
investments in securities having comparatively higher risk weights will be considered for
risk weighting to the extent required to be risk weighted, both in banking and trading
books. In other words, investments with comparatively poor ratings (i.e., higher risk
weights) should be considered for the purpose of application of risk weighting first and
the residual investments should be considered for deduction.
(C) Significant Investments in the Capital of Banking, Financial and Insurance Entities
which are outside the Scope of Regulatory Consolidation23
(i) The regulatory adjustment described in this section applies to investments in the capital
of banking, financial and insurance entities that are outside the scope of regulatory
23 Investments in entities that are outside of the scope of regulatory consolidation refers to investments in entities
that have not been consolidated at all or have not been consolidated in such a way as to result in their assets being
included in the calculation of consolidated risk-weighted assets of the group.
30consolidation where the bank owns more than 10% of the issued common share capital
of the issuing entity or where the entity is an affiliate24 of the bank. In addition:
Investments include direct, indirect25 and synthetic holdings of capital instruments.
For example, banks should look through holdings of index securities to determine
their underlying holdings of capital.
Holdings in both the banking book and trading book are to be included. Capital
includes common stock and all other types of cash and synthetic capital instruments
(e.g., subordinated debt).
Underwriting positions held for five working days or less can be excluded.
Underwriting positions held for longer than five working days must be included.
If the capital instrument of the entity in which the bank has invested does not meet
the criteria for Common Equity Tier 1, Additional Tier 1, or Tier 2 capital of the bank,
the capital is to be considered common shares for the purposes of this regulatory
adjustment26.
With the prior approval of RBI, a bank can temporarily exclude certain investments
where these have been made in the context of resolving or providing financial
assistance to reorganise a distressed institution.
(ii) Investments other than Common Shares
All investments included in para (i) above which are not common shares must be fully
deducted following a corresponding deduction approach. This means the deduction
should be applied to the same tier of capital for which the capital would qualify if it was
issued by the bank itself. If the bank is required to make a deduction from a particular
tier of capital and it does not have enough of that tier of capital to satisfy that deduction,
the shortfall will be deducted from the next higher tier of capital (e.g., if a bank does not
have enough Additional Tier 1 capital to satisfy the deduction, the shortfall will be
deducted from Common Equity Tier 1 capital).
(iii) Investments which are Common Shares
All investments included in para (i) above which are common shares and which exceed
10% of the bank’s Common Equity (after the application of all regulatory adjustments)
shall be deducted while calculating Common Equity Tier 1 capital. The amount that is
not deducted (upto 10% if bank’s common equity invested in the equity capital of such
24 An affiliate of a bank is defined as a company that controls, or is controlled by, or is under common control with,
the bank. Control of a company is defined as (1) ownership, control, or holding with power to vote 20% or more of
a class of voting securities of the company; or (2) consolidation of the company for financial reporting purposes.
25 Indirect holdings are exposures or part of exposures that, if a direct holding loses its value, will result in a loss to
the bank substantially equivalent to the loss in the value of direct holding.
26 If the investment is issued out of a regulated financial entity and not included in regulatory capital in the relevant
sector of the financial entity, it is not required to be deducted.
31entities) in the calculation of Common Equity Tier 1 shall be risk weighted at 250% (refer
to illustration in Annex 11). However, in certain cases, such investments in both
scheduled and non-scheduled commercial banks shall be fully deducted from Common
Equity Tier 1 capital of investing bank as indicated in paragraphs 5.6, 8.3.4 and 8.4.4.
4.4.9.3 With regard to computation of indirect holdings through mutual funds or index funds, of
capital of banking, financial and insurance entities which are outside the scope of regulatory
consolidation as mentioned in paragraphs 4.4.9.2(B) and 4.4.9.2(C) above, the following rules
may be observed:
(i) If the amount of investments made by the mutual funds / index funds / venture capital
funds / private equity funds / investment companies in the capital instruments of the
financial entities is known; the indirect investment of the bank in such entities would be
equal to bank’s investments in these entities multiplied by the percent of investments of
such entities in the financial entities’ capital instruments.
(ii) If the amount of investments made by the mutual funds / index funds / venture capital
funds / private equity funds / investment companies in the capital instruments of the
investing bank is not known but, as per the investment policies / mandate of these
entities such investments are permissible; the indirect investment would be equal to
bank’s investments in these entities multiplied by maximum permissible limit which these
entities are authorized to invest in the financial entities’ capital instruments.
(iii) If neither the amount of investments made by the mutual funds / index funds / venture
capital funds / private equity funds in the capital instruments of financial entities nor the
maximum amount which these entities can invest in financial entities are known but, as
per the investment policies / mandate of these entities such investments are permissible;
the entire investment of the bank in these entities would be treated as indirect investment
in financial entities. Banks must note that this method does not follow corresponding
deduction approach i.e. all deductions shall be made from the Common Equity Tier 1
capital even though, the investments of such entities are in the Additional Tier 1 / Tier 2
capital of the investing banks.
4.4.9.4 Application of these rules at consolidated level would mean:
(i) Identifying the relevant entities below and above threshold of 10% of common share
capital of investee entities, based on aggregate investments of the consolidated group
(parent plus consolidated subsidiaries) in common share capital of individual investee
entities.
(ii) Applying the rules as stipulated in paragraphs 4.4.9.2(A), 4.4.9.2(B) and 4.4.9.2(C) and
segregating investments into those which shall be deducted from the consolidated
capital and those which shall be risk weighted. For this purpose,
32 investments of the entire consolidated entity in capital instruments of investee entities
shall be aggregated into different classes of instruments.
the consolidated Common Equity of the group shall be taken into account.
4.4.9.5 It has come to our notice that certain investors such as Employee Pension Funds have
subscribed to regulatory capital issues of commercial banks concerned. These funds enjoy the
counter guarantee by the bank concerned in respect of returns. When returns of the investors of
the capital issues are counter guaranteed by the bank, such investments shall not be considered
as regulatory capital for the purpose of capital adequacy.
4.4.10 As indicated in paragraphs 3.4.2 and 3.5.1, equity investments in non-financial
subsidiaries should be fully deducted from the consolidated and solo CET1 capital of the bank
respectively, after making all the regulatory adjustments as indicated in above paragraphs.
4.4.11 Intra Group Transactions and Exposures
Attention is invited to circular DBOD.No.BP.BC.96/21.06.102/ 2013-14 dated February 11, 2014
on “Guidelines on Management of Intra-Group Transactions and Exposures” in terms of which
intra-group exposures beyond permissible limits subsequent to March 31, 2016, if any, would be
deducted from Common Equity Tier 1 capital of the bank.
4.4.12 The net unrealised gains arising on fair valuation of Level 3 financial instruments
recognised in the Profit and Loss Account or in the AFS-Reserve shall be deducted from CET 1
capital27.
4.5 Transitional Arrangements
4.5.1 Capital instruments, which no longer qualified as non-common equity Tier 1 capital or Tier
2 capital, were phased out beginning January 1, 2013, and completely derecognised from
regulatory capital by March 31, 2022.
4.5.2 Non-common equity regulatory capital instruments, issued on or after January 1, 2013, must
comply with all the eligibility criteria, including the non-viability criteria, in order to be an eligible
regulatory capital instrument (Additional Tier 1 or Tier 2 capital). Otherwise, such instrument will
be fully derecognised as eligible capital instrument.
4.5.3 Capital instruments, which do not meet the criteria for inclusion in Common Equity Tier 1,
were excluded from Common Equity Tier 1 as on April 1, 2013.
27 Please refer to clause 28 and 41 of Master Direction - Classification, Valuation and Operation of Investment
Portfolio of Commercial Banks (Directions), 2023 dated September 12, 2023.
335. Capital Charge for Credit Risk
5.1 General
Under the Standardised Approach, the rating assigned by the eligible external credit rating
agencies will largely support the measure of credit risk. The Reserve Bank has identified the
external credit rating agencies that meet the eligibility criteria specified under the revised
Framework. Banks shall rely upon the ratings assigned by the external credit rating agencies
chosen by the Reserve Bank for assigning risk weights for capital adequacy purposes as per the
mapping furnished in these guidelines.
5.2 Claims on Domestic Sovereigns
5.2.1 Both fund based and non-fund based claims on the central government will attract a zero
risk weight. Central Government guaranteed claims will attract a zero risk weight.
5.2.2 The Direct loan / credit / overdraft exposure, if any, of banks to the State Governments
and the investment in State Government securities will attract zero risk weight. State Government
guaranteed claims will attract 20 per cent risk weight.
5.2.3 The risk weight applicable to claims on central government exposures will also apply to
the claims on the Reserve Bank of India, DICGC, Credit Guarantee Fund Trust for Micro and
Small Enterprises (CGTMSE) and Credit Risk Guarantee Fund Trust for Low Income Housing
(CRGFTLIH) and individual schemes under National Credit Guarantee Trustee Company Ltd.
(NCGTC) which are backed by explicit Central Government Guarantee. The claims on ECGC will
attract a risk weight of 20 per cent.
5.2.4 The risk weight of zero percent as mentioned in para 5.2.3 above shall be applicable in
respect of exposures guaranteed under any existing or future schemes launched by CGTMSE,
CRGFTLIH and NCGTC satisfying the following conditions28:
i. Prudential Aspects: The guarantees provided under the respective schemes should comply
with the requirements for credit risk mitigation in terms of paragraph 7.5 of this Master Circular
which inter alia requires such guarantees to be direct, explicit, irrevocable and unconditional.
ii. Restrictions on permissible claims: Where the terms of the guarantee schemes restrict the
maximum permissible claims through features like specified extent of guarantee coverage, clause
on first loss absorption by member lending institutions (MLI), payout cap, etc., the zero percent
risk weight shall be restricted to the maximum permissible claim and the residual exposure shall
be subjected to risk weight as applicable to the counterparty in terms of extant regulations.
iii. In case of a portfolio-level guarantee, effective from April 1, 2023, the extent of exposure
subjected to first loss absorption by the MLI, if any, shall be subjected to full capital deduction and
28 Please refer to the circular DOR.STR.REC.67/21.06.201/2022-23 dated September 7, 2022 on Review of Prudential
Norms – Risk Weights for Exposures guaranteed by Credit Guarantee Schemes (CGS).
34the residual exposure shall be subjected to risk weight as applicable to the counterparty in terms
of extant regulations, on a pro rata basis. The maximum capital charge shall be capped at a
notional level arrived at by treating the entire exposure as unguaranteed.
Subject to the aforementioned prescriptions, any scheme launched after September 7, 2022
under any of the aforementioned Trust Funds, in order to be eligible for zero percent risk weight,
shall provide for settlement of the eligible guaranteed claims within thirty days from the date of
lodgement, and the lodgement shall be permitted within sixty days from the date of default. Some
illustrative examples of risk weights applicable on claims guaranteed under specific existing
schemes are given in the Annex 24.
The above regulatory stipulation shall be applicable to all the banks to the extent they are
recognised as eligible MLIs under the respective schemes.
5.2.5 The above risk weights for both direct claims and guarantee claims will be applicable as
long as they are classified as ‘standard’ / performing assets. Where these sovereign exposures
are classified as non-performing, they would attract risk weights as applicable to NPAs, which are
detailed in paragraph 5.12.
5.2.6 The above risk weights will be applied if such exposures are denominated in Indian
Rupees and also funded in Indian Rupees.
5.3 Claims on Foreign Sovereigns and Foreign Central Banks29
5.3.1 Subject to paragraph 5.3.2 below, claims on foreign sovereigns and their central banks
will attract risk weights as per the rating assigned30 to those sovereigns and central banks/
sovereign and central bank claims, by international rating agencies as follows:
Table 1: Claims on Foreign Sovereigns / Central Banks – Risk Weights
S&P*/Fitch AAA to AA A BBB BB to B Below B Unrated
ratings
Moody’s ratings Aaa to Aa A Baa Ba to B Below B Unrated
Risk weight (%) 0 20 50 100 150 100
* Standard & Poor’s
5.3.2 Claims on the foreign sovereign or foreign central bank in their jurisdiction, denominated
in the domestic currency of that jurisdiction, met out of resources of the same currency31 will
29 Please refer to the circular DBR.BP.BC.No.43/21.06.001/2015-16 dated October 8, 2015 on Risk Weights for Claims
on Foreign Central Banks
30 For example: The risk weight assigned to an investment in US Treasury Bills by any overseas branch of an Indian
Bank in Paris, irrespective of the currency of funding, will be determined by the rating assigned to the Treasury Bills,
as indicated in Table 1.
31 For example: The risk weight assigned to an investment in US Treasury Bills by overseas branch of any Indian bank
in New York will attract a zero per cent risk weight, irrespective of the rating of the claim, if the investment is funded
from out of the USD denominated resources of that overseas branch of the Indian bank in New York. In case the
35attract a risk weight of zero percent. However, in case a Host Supervisor requires a more
conservative treatment to such claims in the books of the foreign branches of the Indian Banks,
they should adopt the requirements prescribed by the Host Country supervisors for computing
capital adequacy.
5.4 Claims on Public Sector Entities (PSEs)
5.4.1 Claims on domestic public sector entities will be risk weighted in a manner similar to claims
on Corporates.
5.4.2 Claims on foreign PSEs will be risk weighted as per the rating assigned by the international
rating agencies as under:
Table 2: Claims on Foreign PSEs – Risk Weights
S&P / Fitch AAA to AA A BBB to BB Below BB Unrated
ratings
Moody’s ratings Aaa to Aa A Baa to Ba Below Ba Unrated
Risk weight (%) 20 50 100 150 100
5.5 Claims on MDBs, BIS and IMF
Claims on the Bank for International Settlements (BIS), the International Monetary Fund (IMF)
and the following eligible Multilateral Development Banks (MDBs) evaluated by the BCBS will be
treated similar to claims on scheduled banks meeting the minimum capital adequacy
requirements and assigned a uniform twenty per cent risk weight:
(a) World Bank Group: IBRD and IFC,
(b) Asian Development Bank,
(c) African Development Bank,
(d) European Bank for Reconstruction and Development,
(e) Inter-American Development Bank,
(f) European Investment Bank,
(g) European Investment Fund,
(h) Nordic Investment Bank,
(i) Caribbean Development Bank,
(j) Islamic Development Bank and
(k) Council of Europe Development Bank
(l) International Finance Facility for Immunization (IFFIm)
(m) Asian Infrastructure Investment Bank (AIIB)
overseas branch of the Indian bank in New York, did not have any USD denominated resources, the risk weight will
be determined by the rating assigned to the Treasury Bills, as indicated in Table 1 above.
365.6 Claims on Banks (Exposure to capital instruments)
5.6.1 In case of a banks’ investment in capital instruments of other banks, the following such
investments would not be deducted, but would attract appropriate risk weights (refer to the
paragraph 4.4.9 above):
(i) Investments in capital instruments of banks where the investing bank holds not more
than 10% of the issued common shares of the investee banks, subject to the following
conditions:
Aggregate of these investments, together with investments in the capital instruments
in insurance and other financial entities, do not exceed 10% of Common Equity of the
investing bank; and
The equity investment in the investee entities is outside the scope of regulatory
consolidation.
(ii) Equity investments in other banks where the investing bank holds more than 10% of the
issued common shares of the investee banks, subject to the following conditions:
Aggregate of these investments, together with such investments in insurance and
other financial entities, do not exceed 10% of Common Equity of the investing bank.
The equity investment in the investee entities is outside the scope of regulatory
consolidation.
Accordingly, the claims on banks incorporated in India and the branches of foreign banks in India,
other than those deducted in terms of paragraph 4.4.9 above, will be risk weighted as under:
Table 3: Claims on Banks32 Incorporated in India and Foreign Bank Branches in India
Risk Weights (%)
All Scheduled Banks All Non-Scheduled Banks
(Commercial, Regional Rural (Commercial, Regional Rural
Banks, Local Area Banks and Co- Banks, Local Area Banks and Co-
Operative Banks) Operative Banks)
Level of Investments Investmen All Investments Investmen All
Common Equity Tier referred to in ts referred other referred to in ts referred other
1 capital (CET1) paragraph to in claims paragraph to in claims
including applicable 5.6.1 (i) paragraph 5.6.1 (i) paragraph
capital conservation 5.6.1 (ii) 5.6.1 (ii)
buffer (CCB) (%) of
the investee bank
(where applicable)
1 2 3 4 5 6 7
32 For claims held in trading book, please see the paragraphs 8.3.4 and 8.4.4 under ‘capital charge for market risk’
37Applicable Minimum 125 % or the 125% or the
CET1 + Applicable risk weight as risk weight as
CCB and above per the rating per the rating
of the of the
250 20 300 100
instrument or instrument or
counterparty, counterparty,
whichever is whichever is
higher higher
Applicable Minimum
CET1 + CCB = 75%
150 300 50 250 350 150
and <100% of
applicable CCB33
Applicable Minimum
CET1 + CCB = 50%
250 350 100 350 450 250
and <75% of
applicable CCB
Applicable Minimum
CET1 + CCB = 0% Full
350 450 150 625 350
and <50% of deduction*
applicable CCB
Minimum CET1 less
Full Full Full
than applicable 625 625 625
deduction* deduction* deduction*
minimum
* The deduction should be made from Common Equity Tier 1 Capital.
Notes:
(i) In the case of banks where no capital adequacy norms have been prescribed by the
RBI, the lending / investing bank may calculate the CRAR of the cooperative bank
concerned, notionally, by obtaining necessary information from the investee bank,
using the capital adequacy norms as applicable to the commercial banks. In case, it is
not found feasible to compute CRAR on such notional basis, the risk weight of 350 or
625 per cent, as per the risk perception of the investing bank, should be applied
uniformly to the investing bank’s entire exposure.
(ii) In case of banks where capital adequacy norms are not applicable at present, the
matter of investments in their capital-eligible instruments would not arise for now.
However, this Table above will become applicable to them, if in future they issue any
capital instruments where other banks are eligible to invest.
(iii) Till such time the investee banks have not disclosed their Basel III capital ratios
publicly, the risk weights / capital charges shall be arrived at based on the applicable
tables / paragraph as contained in the Master Circular
DBOD.No.BP.BC.4/21.06.001/2015-16 dated July 1, 2015 on Prudential Guidelines
on Capital Adequacy and Market Discipline - New Capital Adequacy Framework.
33 For example, as on March 31, 2022, minimum Common Equity Tier 1 of 5.5% and CCB between equal to 75% of
2.50% and less than 2.50%.
385.6.2 The claims on foreign banks will be risk weighted as under as per the ratings assigned by
international rating agencies.
Table 4: Claims on Foreign Banks – Risk Weights
S&P / Fitch ratings AAA to AA A BBB BB to B Below B Unrated
Moody’s ratings Aaa to Aa A Baa Ba to B Below B Unrated
Risk weight (%) 20 50 50 100 150 50
The exposures of the Indian branches of foreign banks, guaranteed / counter-guaranteed by the
overseas Head Offices or the bank’s branch in another country shall amount to a claim on the
parent foreign bank if exposure is reckoned as per prudential norms on the foreign bank’s branch
/ Head office and shall also attract the risk weights as per Table 4 above. If bank reckons the
exposure on the original counterparty, it shall attract the risk weight as per Table 5, if the
counterparty is a person resident in India, or 150%34 if the counterparty is a person resident
outside India.
5.6.3 However, the claims on a bank which are denominated in 'domestic35' foreign currency
met out of the resources in the same currency raised in that jurisdiction will be risk weighted at 20
per cent provided the bank complies with the minimum CRAR prescribed by the concerned bank
regulator(s).
5.6.4 However, in case a Host Supervisor requires a more conservative treatment for such
claims in the books of the foreign branches of the Indian banks, they should adopt the
requirements prescribed by the Host supervisor for computing capital adequacy.
5.7 Claims on Primary Dealers
Claims on Primary Dealers shall be risk weighted in a manner similar to claims on corporates.
5.8 Claims on Corporates and NBFCs
5.8.1 Claims on corporates36, and exposures to all NBFCs37, excluding Core Investment
Companies (CICs), will be risk weighted as per the ratings assigned by the rating agencies
registered with SEBI and accredited by the Reserve Bank of India. Exposures to CICs, rated as
34 Please refer to Circular DOR.No.BP.BC.43 /21.01.003/2019-20 dated March 23, 2020 on “Large Exposures
Framework”
35 For example: A Euro denominated claim of SBI branch in Paris on BNP Paribas, Paris which is funded from out of
the Euro denominated deposits of SBI, Paris will attract a 20 per cent risk weight irrespective of the rating of the
claim, provided BNP Paribas complies with the minimum CRAR stipulated by its regulator/supervisor in France. If
BNP Paribas were breaching the minimum CRAR, the risk weight will be as indicated in Table 3 above.
36 Claims on corporates will include all fund based and non-fund based exposures other than those which qualify for
inclusion under ‘sovereign’, ‘bank’, ‘regulatory retail’, ‘residential mortgage’, ‘non performing assets’, specified
category addressed separately in these guidelines.
37 Please refer circular DBR.BP.BC.No.25/21.06.001/2018-19 dated February 22, 2019 on Risk Weights for exposures
to NBFCs
39well as unrated, will be risk-weighted at 100%. The following table indicates the risk weight
applicable to claims on corporates and exposures to all NBFCs, excluding CICs.
Table 5: Part A – Long term Claims on Corporates and NBFCs excluding CICs
– Risk Weights
Domestic rating AAA AA A BBB BB & Unrated
agencies below
Risk weight (%) 20 30 50 100 150 100
Table 5: Part B – Short term Claims on Corporates and NBFCs excluding CICs
– Risk Weights
CARE CRISIL India ICRA Brickwork38 Acuite Infomerics (%)
Ratings Ratings and Ratings & Valuation
Ltd. Research Research and
Private Limited Rating Pvt
Limited (Acuite)39 Ltd.
(India
Ratings)
CARE CRISIL IND A1+ ICRA Brickwork Acuite A1+ 20
IVR A1+
A1+ A1+ A1+ A1+
CARE A1 CRISIL IND A1 ICRA A1 Brickwork A1 Acuite A1 30
IVR A1
A1
CARE A2 CRISIL IND A2 ICRA A2 Brickwork A2 Acuite A2 50
IVR A2
A2
CARE A3 CRISIL IND A3 ICRA A3 Brickwork A3 Acuite A3 100
IVR A3
A3
CARE A4 CRISIL IND A4 ICRA A4 Brickwork A4 Acuite A4 150
IVR A4
& D A4 & D & D & D & D
and D
& D
Unrated Unrated Unrated Unrated Unrated Unrated Unrated 100
Note:
(i) No claim on an unrated corporate may be given a risk weight preferential to that
assigned to its sovereign of incorporation.
(ii) Claims on corporates and NBFCs, except CICs, having aggregate exposure from
banking system of more than ₹ 100 crore which were rated earlier and subsequently
have become unrated will attract a risk weight of 150%.
(iii) All unrated claims on corporates and NBFCs, except CICs, having aggregate
exposure from banking system of more than ₹ 200 crore will attract a risk weight of
150%.
(iv) In all cases where the extant risk weight as per external rating of NBFCs is below
100%, the risk weights applicable to such exposures will be 25 percentage points over
and above the risk weight associated with the given external rating. For this purpose,
38 Banks shall also be guided by paragraph 6.1.2 regarding treatment of ratings issued by Brickwork Ratings India
Private Limited.
39 Please refer to circular DBOD.BP.BC.No.59/21.06.007/2013-14 dated October 17, 2013.
40loans to HFCs, and loans to NBFCs which are eligible for classification as priority
sector in terms of the extant instructions shall be excluded40.
5.8.2 The Reserve Bank may increase the standard risk weight for unrated claims where a
higher risk weight is warranted by the overall default experience. As part of the supervisory review
process, the Reserve Bank would also consider whether the credit quality of unrated corporate
claims held by individual banks should warrant a standard risk weight higher than 100 per cent.
5.8.3 The claims on non-resident corporates will be risk weighted as under as per the ratings
assigned by international rating agencies.
Table 6: Claims on Non-Resident Corporates – Risk Weights
S&P/ Fitch Ratings AAA to AA A BBB to BB Below BB Unrated
Moody’s ratings Aaa to Aa A Baa to Ba Below Ba Unrated
Risk Weight (%) 20 50 100 150 100
Note:
(i) Unrated claims having aggregate exposure from banking system of more than ₹ 200
crore will attract a risk weight of 150%.
(ii) Claims with aggregate exposure from banking system of more than ₹ 100 crore which
were rated earlier and subsequently have become unrated will attract a risk weight of
150%.
5.9 Claims included in the Regulatory Retail Portfolios
5.9.1 Claims (including both fund-based and non-fund based) that meet all the four criteria listed
below in paragraph 5.9.3 may be considered as retail claims for regulatory capital purposes and
included in a regulatory retail portfolio. Claims included in this portfolio shall be assigned a risk-
weight of 75 per cent, except as provided in paragraph 5.12 below for non-performing assets.
5.9.2 The following claims, both fund based and non-fund based, shall be excluded from the
regulatory retail portfolio:
(a) Exposures by way of investments in securities (such as bonds and equities), whether listed
or not;
(b) Mortgage Loans to the extent that they qualify for treatment as claims secured by
residential property41 or claims secured by commercial real estate42;
(c) Loans and Advances to bank’s own staff which are fully covered by superannuation
benefits and / or mortgage of flat/ house;
(d) Consumer Credit, including Personal Loans and credit card receivables;
40 Please refer to circular - DOR.STR.REC.57/21.06.001/2023-24 dated November 16, 2023 on Regulatory measures
towards consumer credit and bank credit to NBFCs.
41 Mortgage loans qualifying for treatment as ‘claims secured by residential property’ are defined in paragraph 5.10.
42 As defined in paragraph 5.11.1.
41(e) Capital Market Exposures;
(f) Venture Capital Funds.
5.9.3 Qualifying Criteria
(i) Orientation Criterion - The exposure (both fund-based and non fund-based) is to an
individual person or persons or to a small business; Person under this clause would mean any
legal person capable of entering into contracts and would include but not be restricted to
individual and HUF; small business would include partnership firm, trust, private limited
companies, public limited companies, co-operative societies etc. Small business is one where
the total average annual turnover is less than ₹ 50 crore. The turnover criterion will be linked
to the average of the last three years in the case of existing entities; projected turnover in the
case of new entities; and both actual and projected turnover for entities which are yet to
complete three years.
(ii) Product Criterion - The exposure (both fund-based and non-fund-based) takes the form of
any of the following: revolving credits and lines of credit (including overdrafts), term loans and
leases (e.g., instalment loans and leases, student and educational loans) and small business
facilities and commitments.
(iii) Granularity Criterion - Banks must ensure that the regulatory retail portfolio is sufficiently
diversified to a degree that reduces the risks in the portfolio, warranting the 75 per cent risk
weight. One way of achieving this is that no aggregate exposure to one counterpart should
exceed 0.2 per cent of the overall regulatory retail portfolio. ‘Aggregate exposure’ means
gross amount (i.e., not taking any benefit for credit risk mitigation into account) of all forms of
debt exposures (e.g., loans or commitments) that individually satisfy the three other criteria. In
addition, ‘one counterpart’ means one or several entities that may be considered as a single
beneficiary (e.g., in the case of a small business that is affiliated to another small business, the
limit would apply to the bank's aggregated exposure on both businesses). While banks may
appropriately use the group exposure concept for computing aggregate exposures, they
should evolve adequate systems to ensure strict adherence with this criterion. NPAs under
retail loans are to be excluded from the overall regulatory retail portfolio when assessing the
granularity criterion for risk-weighting purposes.
(iv) Low value of individual exposures - The maximum aggregated retail exposure to one
counterpart should not exceed the absolute threshold limit of ₹ 7.5 crore.
Note: The threshold limit referred above was raised from ₹ 5 crore to ₹ 7.5 crore vide circular
no. DOR.No.BP.BC.23/21.06.201/2020-21 dated October 12, 2020 on ‘Regulatory Retail
Portfolio – Revised Limit for Risk Weight’. In terms of the aforesaid circular, the risk weight of
75 per cent will apply to all fresh exposures and also to existing exposures where incremental
42exposure may be taken by the banks upto the revised limit of ₹ 7.5 crore. Illustrations are given
in Annex 21.
5.9.4 For the purpose of ascertaining compliance with the absolute threshold, exposure would
mean sanctioned limit or the actual outstanding, whichever is higher, for all fund based and non-
fund based facilities, including all forms of off-balance sheet exposures. In the case of term loans
and EMI based facilities, where there is no scope for redrawing any portion of the sanctioned
amounts, exposure shall mean the actual outstanding.
5.9.5 The RBI would evaluate at periodic intervals the risk weight assigned to the retail portfolio
with reference to the default experience for these exposures. As part of the supervisory review
process, the RBI would also consider whether the credit quality of regulatory retail claims held by
individual banks should warrant a standard risk weight higher than 75 per cent.
5.10 Claims secured by Residential Property
5.10.1 Lending to individuals meant for acquiring residential property which are fully secured by
mortgages on the residential property that is or will be occupied by the borrower, or that is rented,
shall be risk weighted as indicated as per Table 7 below, based on Board approved valuation
policy. LTV ratio should be computed as a percentage with total outstanding in the account (viz.
“principal + accrued interest + other charges pertaining to the loan” without any netting) in the
numerator and the realisable value of the residential property mortgaged to the bank in the
denominator.
Table 7: Claims Secured by Residential Property – Risk Weights43
Category of Loan LTV Ratio44 (%) Risk Weight (%)
(a) Individual Housing Loans
(i) Up to Rs. 30 lakh ≤80 35
>80 and ≤90 50
(ii) Above Rs. 30 lakh and up to Rs. 75 lakh ≤80 35
(iii) Above Rs.75 lakh ≤75 50
(b) Commercial Real Estate – Residential Housing N A 75
(CRE-RH)
(c) Commercial Real Estate (CRE) N A 100
43 Please refer to the circular no. circular no. DBR.BP.BC.No.72/08.12.015/2016-17 dated June 7, 2017 on Individual
Housing Loans: Rationalisation of Risk-Weights and Loan to Value (LTV) Ratios
44 Please also refer to para 2 of the circular DBOD.No.BP.BC.78/08.12.001/2011-12 dated February 3, 2012 on
Housing Loans by Commercial Banks – Loan to Value (LTV) Ratio and para 2 of the DBR.BP.BC.No.74/08.12.015/2014-
15 dated March 5, 2015
43However, the following LTV ratios and Risk Weights shall apply to individual housing loans
sanctioned on or after October 16, 2020 and upto March 31, 2023, irrespective of the loan
amount45.
LTV Ratio (%) Risk Weight (%)
≤ 80 35
> 80 and ≤ 90 50
Notes:
1 - The LTV ratios and Risk Weights set out in the circular
DBR.BP.BC.No.44/08.12.015/2015-16 dated October 8, 2015, shall continue to apply to
loans sanctioned up to June 6, 2017.
2 - The LTV ratio should not exceed the prescribed ceiling in all fresh cases of sanction.
In case the LTV ratio is currently above the ceiling prescribed for any reasons, efforts shall
be made to bring it within limits.
3 - Banks’ exposures to third dwelling unit onwards to an individual will also be treated as
CRE exposures, as indicated in paragraph 2 in Appendix 2 of Circular
DBOD.BP.BC.No.42/08.12.015/2009-10 dated September 9, 2009 on ‘Guidelines on
Classification of Exposures as Commercial Real Estate (CRE) Exposures’.
5.10.2 All other claims secured by residential property would attract the higher of the risk weight
applicable to the counterparty or to the purpose for which the bank has extended finance.
5.10.3 Loans / exposures to intermediaries for on-lending will not be eligible for inclusion under
claims secured by residential property but will be treated as claims on corporates or claims
included in the regulatory retail portfolio as the case may be.
5.10.4 Investments in mortgage backed securities (MBS) backed by exposures as at paragraph
5.10.1 above will be governed by the guidelines pertaining to securitisation exposures46.
5.11 Claims Classified as Commercial Real Estate Exposure
5.11.1 Commercial Real Estate exposure is defined as per the guidelines issued vide circular
DBOD.No.BP.BC.42/08.12.015/2009-10 dated September 9, 2009.
45 Please refer to circulars no. DOR.No.BP.BC.24/08.12.015/2020-21 dated October 16, 2020 and
DOR.CRE.REC.13/08.12.015/2022-23 dated April 8, 2022 on Individual Housing Loans – Rationalisation of Risk
Weights
46 Please refer to Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 dated
September 24, 2021.
445.11.2 Claims mentioned above will attract a risk weight of 100 per cent.
5.11.3 Investments in mortgage backed securities (MBS) backed by exposures as at paragraph
5.11.1 above will be governed by the guidelines pertaining to securitisation exposures47.
5.12 Non-Performing Assets (NPAs)
5.12.1 The unsecured portion of NPA (other than a qualifying residential mortgage loan which is
addressed in paragraph 5.12.6), net of specific provisions (including partial write-offs), will be risk-
weighted as follows:
(i) 150 per cent risk weight when specific provisions are less than 20 per cent of the
outstanding amount of the NPA;
(ii) 100 per cent risk weight when specific provisions are at least 20 per cent of the
outstanding amount of the NPA;
(iii) 50 per cent risk weight when specific provisions are at least 50 per cent of the
outstanding amount of the NPA
5.12.2 For the purpose of computing the level of specific provisions in NPAs for deciding the risk-
weighting, all funded NPA exposures of a single counterparty (without netting the value of the
eligible collateral) should be reckoned in the denominator.
5.12.3 For the purpose of defining the secured portion of the NPA, eligible collateral will be the
same as recognised for credit risk mitigation purposes (paragraph 7.3.5). Hence, other forms of
collateral like land, buildings, plant, machinery, current assets, etc. will not be reckoned while
computing the secured portion of NPAs for capital adequacy purposes.
5.12.4 In addition to the above, where a NPA is fully secured by the following forms of collateral
that are not recognised for credit risk mitigation purposes, either independently or along with other
eligible collateral a 100 per cent risk weight may apply, net of specific provisions, when provisions
reach 15 per cent of the outstanding amount:
(i) Land and building which are valued by an expert valuer and where the valuation is not
more than three years old, and
(ii) Plant and machinery in good working condition at a value not higher than the depreciated
value as reflected in the audited balance sheet of the borrower, which is not older than
eighteen months.
5.12.5 The above collaterals (mentioned in paragraph 5.12.4) will be recognized only where the
bank is having clear title to realize the sale proceeds thereof and can appropriate the same
47 Please refer to Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 dated
September 24, 2021.
45towards the amounts due to the bank. The bank’s title to the collateral should be well documented.
These forms of collaterals are not recognised anywhere else under the standardised approach.
5.12.6 Claims secured by residential property, as defined in paragraph 5.10.1, which are NPA
will be risk weighted at 100 per cent net of specific provisions. If the specific provisions in such
loans are at least 20 per cent but less than 50 per cent of the outstanding amount, the risk weight
applicable to the loan net of specific provisions will be 75 per cent. If the specific provisions are
50 per cent or more the applicable risk weight will be 50 per cent.
5.13 Specified Categories
5.13.1 Fund based and non-fund based claims on Venture Capital Funds, which are considered
as high risk exposures, will attract a higher risk weight of 150 per cent.
5.13.2 Reserve Bank may, in due course, decide to apply a 150 per cent or higher risk weight
reflecting the higher risks associated with any other claim that may be identified as a high risk
exposure.
5.13.3 Consumer credit exposure (outstanding as well as new), including personal loans, but
excluding housing loans, education loans, vehicle loans and loans secured by gold and gold
jewellery, will attract a risk weight of 125 per cent48. Credit card receivables will attract a higher
risk weight of 150 per cent or higher, if warranted by the external rating (or, the lack of it) of the
counterparty. As gold and gold jewellery are eligible financial collateral, the counterparty exposure
in respect of personal loans secured by gold and gold jewellery will be worked out under the
comprehensive approach as per paragraph 7.3.4. The ‘exposure value after risk mitigation’ shall
attract the risk weight of 125 per cent.
5.13.4 Advances classified as ‘Capital market exposures’ will attract a 125 per cent risk weight
or risk weight warranted by external rating (or lack of it) of the counterparty, whichever is higher.
These risk weights will also be applicable to all banking book exposures, which are exempted
from capital market exposure ceilings for direct investments / total capital market exposures49.
5.13.5 The exposure to capital instruments issued by NBFCs which are not deducted and are
required to be risk weighted in terms of paragraph 4.4.9.2(B) would be risk weighted at 125% or
as per the external ratings, whichever is higher. The exposure to equity instruments issued by
NBFCs which are not deducted and are required to be risk weighted in terms of paragraph
4.4.9.2(C) would be risk weighted at 250%. The claims (other than in the form of capital
48 Please refer to circular - DOR.STR.REC.57/21.06.001/2023-24 dated November 16, 2023 on Regulatory measures
towards consumer credit and bank credit to NBFCs.
49 The applicable risk weight for banking book exposure / capital charge for market risk exposure for a bank’s equity
investments in other banks/financial institutions etc. are covered under paragraphs 5 and 8 respectively. These risk
weights / capital charge will also apply to exposures which are exempt from ‘capital market exposure’ limit.
46instruments of investee companies) on all NBFCs excluding Core Investment Companies (CIC)
shall be risk weighted as per the ratings assigned by the rating agencies registered with SEBI and
accredited by the Reserve Bank of India, in a manner similar to that of corporates. The claims on
CICs, rated and unrated, shall be risk-weighted at 100%.
5.13.6 All investments in the paid-up equity of non-financial entities (other than subsidiaries)
which exceed 10% of the issued common share capital of the issuing entity or where the entity is
an unconsolidated affiliate as defined in paragraph 4.4.9.2(C)(i) will receive a risk weight of
1250%50. Equity investments equal to or below 10% paid-up equity of such investee companies
shall be assigned a 125% risk weight or the risk weight as warranted by rating or lack of it,
whichever higher.
5.13.7 The exposure to capital instruments issued by financial entities (other than banks and
NBFCs) which are not deducted and are required to be risk weighted in terms of paragraph
4.4.9.2(B) would be risk weighted at 125% or as per the external ratings whichever is higher. The
exposure to equity instruments issued by financial entities (other than banks and NBFCs) which
are not deducted and are required to be risk weighted in terms of paragraph 4.4.9.2(C) would be
risk weighted at 250%.
5.13.8 Bank’s investments in the non-equity capital eligible instruments of other banks should be
risk weighted as prescribed in paragraph 5.6.1.
5.13.9 Unhedged Foreign Currency Exposure51
The extent of unhedged foreign currency exposures of entities52 continues to be significant and
this can increase the probability of default in times of high currency volatility. It was, therefore,
decided to introduce incremental capital requirements for bank exposures to entities with
unhedged foreign currency exposures (i.e. over and above the present capital requirements) as
under:
Potential Loss/EBID (%) Incremental Capital Requirement
Up to 75 per cent 0
More than 75 per cent 25 percentage point53 increase in the
risk weight
5.13.10 Guidelines on Enhancing Credit Supply for Large Borrowers through Market Mechanism
50 Equity investments in non-financial subsidiaries will be deducted from the consolidated / solo bank capital as
indicated in paragraphs 3.4.2 / 3.5.1.
51 Please refer to Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022 issued vide
DOR.MRG.REC.76/00-00-007/2022-23 dated October 11, 2022.
52 In this context, ‘entities’ means those entities which have borrowed from banks including borrowing in INR and
other currencies.
53 For example: for an entity which otherwise attracts a risk weight of 50 per cent, the applicable risk weight would
become 75 per cent.
47Additional Risk weight of 75 percentage points over and above the applicable risk weight for the
exposure to the specified borrower54 shall apply on the incremental exposure of the banking
system to a specified borrower beyond Normally permitted lending limit (NPLL)55 as per the
instructions contained in circular no. DBR.BP.BC.No.8/21.01.003/2016-17 dated August 25,
2016. The resultant additional risk weighted exposure, in terms of risk weighted assets (RWA),
shall be distributed in proportion to each bank’s funded exposure to the specified borrower.
5.14 Other Assets
5.14.1 Loans and advances to bank’s own staff which are fully covered by superannuation
benefits and/or mortgage of flat/ house will attract a 20 per cent risk weight. Since flat / house is
not an eligible collateral and since banks normally recover the dues by adjusting the
superannuation benefits only at the time of cessation from service, the concessional risk weight
shall be applied without any adjustment of the outstanding amount. In case a bank is holding
eligible collateral in respect of amounts due from a staff member, the outstanding amount in
respect of that staff member shall be adjusted to the extent permissible, as indicated in paragraph
7 below.
5.14.2 Other loans and advances to bank’s own staff will be eligible for inclusion under regulatory
retail portfolio and will therefore attract a 75 per cent risk weight.
5.14.3 All other assets will attract a uniform risk weight of 100 per cent.
5.15 Off-Balance Sheet Items
5.15.1 General
(i) The total risk weighted off-balance sheet credit exposure is calculated as the sum of the
risk-weighted amount of the market related and non-market related off-balance sheet items.
The risk-weighted amount of an off-balance sheet item that gives rise to credit exposure is
generally calculated by means of a two-step process:
54 ‘Specified borrower’, means a borrower having an Aggregate Sanctioned Credit Limit (ASCL) of more than
Rs.10,000 crore at any time from April 1, 2019 onwards.
55 Normally permitted lending limit (NPLL), means 50 percent of the incremental funds raised by the specified
borrower over and above its Aggregate Sanctioned Credit Limit as on the reference date, in the financial years (FYs)
succeeding the FY in which the reference date falls. For this purpose, any funds raised by way of equity shall be
deemed to be part of incremental funds raised by the specified borrower (from outside the banking system) in the
given year; Provided that where a specified borrower has already raised funds by way of market instruments and
the amount outstanding in respect of such instruments as on the reference date is 15 per cent or more of ASCL on
that date, the NPLL will mean 60 percent of the incremental funds raised by the specified borrower over and above
its ASCL as on the reference date, in the financial years (FYs) succeeding the FY in which the reference date falls.
Aggregate Sanctioned Credit Limit (ASCL) means the aggregate of the fund based credit limits sanctioned or
outstanding, whichever is higher, to a borrower by the banking system. ASCL would also include unlisted privately
placed debt with the banking system.
48(a) the notional amount of the transaction is converted into a credit equivalent amount,
by multiplying the amount by the specified credit conversion factor or by applying the
current exposure method; and
(b) the resulting credit equivalent amount is multiplied by the risk weight applicable to the
counterparty or to the purpose for which the bank has extended finance or the type of
asset, whichever is higher.
(ii) Where the off-balance sheet item is secured by eligible collateral or guarantee, the credit
risk mitigation guidelines detailed in paragraph 7 shall be applied.
5.15.2 Non-market-related Off Balance Sheet Items56
(i) The credit equivalent amount in relation to a non-market related off-balance sheet item like,
direct credit substitutes, trade and performance related contingent items and commitments
with certain drawdown, other commitments, etc. will be determined by multiplying the
contracted amount of that particular transaction by the relevant credit conversion factor
(CCF).
(ii) Where the non-market related off-balance sheet item is an undrawn or partially undrawn
fund-based facility57, the amount of undrawn commitment to be included in calculating the
off-balance sheet non-market related credit exposures is the maximum unused portion of
the commitment that could be drawn during the remaining period to maturity. Any drawn
portion of a commitment forms a part of bank's on-balance sheet credit exposure.
(iii) In the case of irrevocable commitments to provide off-balance sheet facilities, the original
maturity will be measured from the commencement of the commitment until the time the
associated facility expires. For example, an irrevocable commitment with an original
maturity of 12 months, to issue a 6 month documentary letter of credit, is deemed to have
an original maturity of 18 months. Irrevocable commitments to provide off-balance sheet
facilities should be assigned the lower of the two applicable credit conversion factors. For
56 The aggregate capital required to be maintained by the banks providing Partial Credit Enhancement will be
computed as provided in circular DBR.BP.BC.No.40/21.04.142/2015-16 dated September 24, 2015, as amended from
time to time.
57 For example: (a) In the case of a cash credit facility for Rs.100 lakh (which is not unconditionally cancellable) where
the drawn portion is Rs. 60 lakh, the undrawn portion of Rs. 40 lakh will attract a CCF of 20 per cent (since the CC
facility is subject to review / renewal normally once a year). The credit equivalent amount of Rs. 8 lakh (20% of Rs.40
lakh) will be assigned the appropriate risk weight as applicable to the counterparty / rating to arrive at the risk
weighted asset for the undrawn portion. The drawn portion (Rs. 60 lakh) will attract a risk weight as applicable to
the counterparty / rating.
(b) A TL of Rs. 700 cr is sanctioned for a large project which can be drawn down in stages over a three year period.
The terms of sanction allow draw down in three stages – Rs. 150 cr in Stage I, Rs. 200 cr in Stage II and Rs. 350 cr in
Stage III, where the borrower needs the bank’s explicit approval for draw down under Stages II and III after
completion of certain formalities. If the borrower has drawn already Rs. 50 cr under Stage I, then the undrawn
portion would be computed with reference to Stage I alone i.e., it will be Rs.100 cr. If Stage I is scheduled to be
completed within one year, the CCF will be 20% and if it is more than one year then the applicable CCF will be 50 per
cent.
49example, an irrevocable commitment with an original maturity of 15 months (50 per cent -
CCF) to issue a six month documentary letter of credit (20 per cent - CCF) would attract the
lower of the CCF i.e., the CCF applicable to the documentary letter of credit viz. 20 per cent.
(iv) The credit conversion factors for non-market related off-balance sheet transactions are as
under:
Table 8: Credit Conversion Factors – Non-market related Off-Balance Sheet Items
Sr. Instruments Credit Conversion Factor
No. (%)
1. Direct credit substitutes e.g., general guarantees of
indebtedness (including standby L/Cs serving as
financial guarantees for loans and securities, credit
enhancements, liquidity facilities for securitisation
transactions), and acceptances (including 100
endorsements with the character of acceptance).
(i.e., the risk of loss depends on the credit worthiness
of the counterparty or the party against whom a
potential claim is acquired)
2. Certain transaction-related contingent items (e.g.,
performance bonds, bid bonds, warranties,
50
indemnities and standby letters of credit related to
particular transaction).
3. Short-term self-liquidating trade letters of credit arising
from the movement of goods (e.g., documentary
20
credits collateralised by the underlying shipment) for
both issuing bank and confirming bank.
4. Sale and repurchase agreement and asset sales with
recourse, where the credit risk remains with the bank.
(These items are to be risk weighted according to the
100
type of asset and not according to the type of
counterparty with whom the transaction has been
entered into.)
5. Forward asset purchases, forward deposits and partly
paid shares and securities, which represent
commitments with certain drawdown.
(These items are to be risk weighted according to the 100
type of asset and not according to the type of
counterparty with whom the transaction has been
entered into.)
6 Lending of banks’ securities or posting of securities as
collateral by banks, including instances where these
arise out of repo style transactions (i.e., repurchase / 100
reverse repurchase and securities lending / securities
borrowing transactions)
7. Note issuance facilities and revolving / non-revolving
50
underwriting facilities.
8 Commitments with certain drawdown 100
9. Other commitments (e.g., formal standby facilities and
credit lines) with an original maturity of
a) up to one year 20
50Sr. Instruments Credit Conversion Factor
No. (%)
b) over one year 50
Similar commitments that are unconditionally
cancellable at any time by the bank without prior notice
or that effectively provide for automatic cancellation
due to deterioration in a borrower’s credit 0
worthiness58.*
10. Take-out Finance in the books of taking-over
institution
(i) Unconditional take-out finance 100
(ii) Conditional take-out finance 50
* Note: In respect of borrowers having aggregate fund based working capital limit of ₹ 150
crore and above from the banking system, the undrawn portion of cash credit / overdraft
limits sanctioned, irrespective of whether unconditionally cancellable or not, shall attract a
credit conversion factor of 20 percent.59
(v) In regard to non-market related off-balance sheet items, the following transactions with non-
bank counterparties will be treated as claims on banks:
Guarantees issued by banks against the counter guarantees of other banks.
Rediscounting of documentary bills discounted by other banks and bills discounted
by banks which have been accepted by another bank will be treated as a funded
claim on a bank.
In all the above cases banks should be fully satisfied that the risk exposure is in fact on the
other bank. If they are satisfied that the exposure is on the other bank they shall assign
these exposures the risk weight applicable to banks as detailed in paragraph 5.6.
(vi) Issue of Irrevocable Payment Commitment by banks to various Stock Exchanges on behalf
of Mutual Funds and FIIs is a financial guarantee with a Credit Conversion Factor (CCF) of
100. However, capital will have to be maintained only on exposure which is reckoned as
CME, i.e. 50% of the amount, because the rest of the exposure is deemed to have been
covered by cash/securities which are admissible risk mitigants as per capital adequacy
framework. Thus, capital is to be maintained on the amount taken for CME and the risk
weight would be 125% thereon.
58 However, this will be subject to banks demonstrating that they are actually able to cancel any undrawn
commitments in case of deterioration in a borrower’s credit worthiness failing which the credit conversion factor
applicable to such facilities which are not cancellable will apply. Banks’ compliance to these guidelines will be
assessed under Supervisory Review and Evaluation Process under Pillar 2 of RBI.
59 Please refer to the circular DBR.BP.BC.No.12/21.04.048/2018-19 dated December 5, 2018 on ‘Guidelines on Loan
System for Delivery of Bank Credit’.
51(vii) For classification of banks guarantees60 viz. direct credit substitutes and transaction-related
contingent items etc. (Sr. No. 1 and 2 of Table 8 above), the following principles should be
kept in view for the application of CCFs:
(a) Financial guarantees are direct credit substitutes wherein a bank irrevocably undertakes
to guarantee the repayment of a contractual financial obligation. Financial guarantees
essentially carry the same credit risk as a direct extension of credit i.e., the risk of loss is
directly linked to the creditworthiness of the counterparty against whom a potential claim is
acquired. An indicative list of financial guarantees, attracting a CCF of 100 per cent is as
under:
Guarantees for credit facilities;
Guarantees in lieu of repayment of financial securities;
Guarantees in lieu of margin requirements of exchanges;
Guarantees for mobilisation advance, advance money before the commencement of
a project and for money to be received in various stages of project implementation;
Guarantees towards revenue dues, taxes, duties, levies etc. in favour of Tax/ Customs
/ Port / Excise Authorities and for disputed liabilities for litigation pending at courts;
Credit Enhancements;
Liquidity facilities for securitisation transactions;
Acceptances (including endorsements with the character of acceptance);
Deferred payment guarantees.
(b) Performance guarantees are essentially transaction-related contingencies that involve
an irrevocable undertaking to pay a third party in the event the counterparty fails to fulfil or
perform a contractual non-financial obligation. In such transactions, the risk of loss depends
on the event which need not necessarily be related to the creditworthiness of the
counterparty involved. An indicative list of performance guarantees, attracting a CCF of 50
per cent is as under:
Bid bonds;
Performance bonds and export performance guarantees;
Guarantees in lieu of security deposits / earnest money deposits (EMD) for
participating in tenders;
Retention money guarantees;
Warranties, indemnities and standby letters of credit related to particular transaction.
60 Please refer to the circular DBOD.No.BP.BC.89 /21.04.009 /2012-13 dated April 02, 2013 on ‘New Capital Adequacy
Framework- Non-market related Off Balance Sheet Items- Bank Guarantees’.
525.15.3 Treatment of Total Counterparty Credit Risk
5.15.3.1 The total capital charge for counterparty credit risk will cover the default risk as well as
credit migration risk of the counterparty reflected in mark-to-market losses on the expected
counterparty risk (such losses being known as credit value adjustments, CVA). Counterparty risk
may arise in the context of OTC derivatives and Securities Financing Transactions. Such
instruments generally exhibit the following abstract characteristics:
The transactions generate a current exposure or market value.
The transactions have an associated random future market value based on market
variables.
The transactions generate an exchange of payments or an exchange of a financial
instrument against payment.
Collateral may be used to mitigate risk exposure and is inherent in the nature of some
transactions.
Short-term financing may be a primary objective in that the transactions mostly consist of
an exchange of one asset for another (cash or securities) for a relatively short period of
time, usually for the business purpose of financing. The two sides of the transactions are
not the result of separate decisions but form an indivisible whole to accomplish a defined
objective.
Netting may be used to mitigate the risk.
Positions are frequently valued (most commonly on a daily basis), according to market
variables.
Remargining may be employed.
The ‘capital charge for default risk’ will be calculated using Current Exposure Method as
explained in paragraph 5.15.3.4. The ‘capital charge for CVA risk’ will be calculated as
explained in paragraph 5.15.3.5. The Current Exposure method is applicable only to OTC
derivatives. The counterparty risk on account of Securities Financing Transactions is covered in
paragraph 7.3.8 of the Master Circular.
5.15.3.2 Definitions and general terminology
Counterparty Credit Risk (CCR) is the risk that the counterparty to a transaction could default
before the final settlement of the transaction's cash flows. An economic loss would occur if the
transactions or portfolio of transactions with the counterparty has a positive economic value at
the time of default. Unlike a firm’s exposure to credit risk through a loan, where the exposure to
credit risk is unilateral and only the lending bank faces the risk of loss, CCR creates a bilateral
risk of loss: the market value of the transaction can be positive or negative to either counterparty
to the transaction. The market value is uncertain and can vary over time with the movement of
underlying market factors.
53Securities Financing Transactions (SFTs) are transactions such as repurchase agreements,
reverse repurchase agreements, security lending and borrowing, collateralised borrowing and
lending (CBLO) and margin lending transactions, where the value of the transactions depends on
market valuations and the transactions are often subject to margin agreements.
Netting Set is a group of transactions with a single counterparty that are subject to a legally
enforceable bilateral netting arrangement and for which netting is recognised for regulatory capital
purposes. Each transaction that is not subject to a legally enforceable bilateral netting
arrangement that is recognised for regulatory capital purposes should be interpreted as its own
netting set for the purpose of these rules.
Hedging Set is a group of risk positions from the transactions within a single netting set for which
only their balance is relevant for determining the exposure amount or EAD under the CCR
standardised method.
Current Exposure is the larger of zero, or the market value of a transaction or portfolio of
transactions within a netting set with a counterparty that would be lost upon the default of the
counterparty, assuming no recovery on the value of those transactions in bankruptcy. Current
exposure is often also called Replacement Cost.
Credit Valuation Adjustment is an adjustment to the mid-market valuation of the portfolio of
trades with a counterparty. This adjustment reflects the market value of the credit risk due to any
failure to perform on contractual agreements with a counterparty. This adjustment may reflect the
market value of the credit risk of the counterparty or the market value of the credit risk of both the
bank and the counterparty.
One-Sided Credit Valuation Adjustment is a credit valuation adjustment that reflects the market
value of the credit risk of the counterparty to the bank, but does not reflect the market value of the
credit risk of the bank to the counterparty.
Outstanding EAD for a given OTC derivative counterparty is defined as the greater of zero and
the difference between the sum of EADs across all netting sets with the counterparty and the
credit valuation adjustment (CVA) for that counterparty which has already been recognised by the
bank as an incurred write-down (i.e., a CVA loss).
Cross-Product Netting refers to the inclusion of transactions of different product categories
within the same netting set.
A central counterparty61 (CCP) is a clearing house that interposes itself between
counterparties to contracts traded in one or more financial markets, becoming the buyer to every
seller and the seller to every buyer and thereby ensuring the future performance of open contracts.
A CCP becomes counterparty to trades with market participants through novation, an open offer
61 Please refer to circular DBOD.No.BP.BC.28/21.06.201/2013-14 dated July 2, 2013.
54system, or another legally binding arrangement. For the purposes of the capital framework, a CCP
is a financial institution.
A qualifying central counterparty (QCCP) is an entity that is licensed to operate as a CCP
(including a license granted by way of confirming an exemption), and is permitted by the
appropriate regulator / overseer to operate as such with respect to the products offered. This is
subject to the provision that the CCP is based and prudentially supervised in a jurisdiction where
the relevant regulator/overseer has established, and publicly indicated that it applies to the CCP
on an ongoing basis, domestic rules and regulations that are consistent with the CPSS-IOSCO
Principles for Financial Market Infrastructures.
A clearing member is a member of, or a direct participant in, a CCP that is entitled to enter into
a transaction with the CCP, regardless of whether it enters into trades with a CCP for its own
hedging, investment or speculative purposes or whether it also enters into trades as a financial
intermediary between the CCP and other market participants62.
A client is a party to a transaction with a CCP through either a clearing member acting as a
financial intermediary, or a clearing member guaranteeing the performance of the client to the
CCP.
Initial margin means a clearing member’s or client’s funded collateral posted to the CCP to
mitigate the potential future exposure of the CCP to the clearing member arising from the possible
future change in the value of their transactions. For the purposes of these guidelines, initial margin
does not include contributions to a CCP for mutualised loss sharing arrangements (i.e. in case a
CCP uses initial margin to mutualise losses among the clearing members, it will be treated as a
default fund exposure).
Variation margin means a clearing member’s or client’s funded collateral posted on a daily or
intraday basis to a CCP based upon price movements of their transactions.
Trade exposures include the current63 and potential future exposure of a clearing member or a
client to a CCP arising from OTC derivatives, exchange traded derivatives transactions or SFTs,
as well as initial margin.
Default funds, also known as clearing deposits or guarantee fund contributions (or any other
names), are clearing members’ funded or unfunded contributions towards, or underwriting of, a
CCP’s mutualised loss sharing arrangements. The description given by a CCP to its mutualised
62 For the purpose of these guidelines, where a CCP has a link to a second CCP, that second CCP is to be treated as a
clearing member of the first CCP. Whether the second CCP’s collateral contribution to the first CCP is treated as
initial margin or a default fund contribution will depend upon the legal arrangement between the CCPs. In such
cases, if any, RBI should be consulted for determining the treatment of this initial margin and default fund
contributions.
63 For the purpose of this definition, the current exposure of a clearing member includes the variation margin due to
the clearing member but not yet received.
55loss sharing arrangements is not determinative of their status as a default fund; rather, the
substance of such arrangements will govern their status.
Offsetting transaction means the transaction leg between the clearing member and the CCP
when the clearing member acts on behalf of a client (e.g. when a clearing member clears or
novates a client’s trade).
5.15.3.3 When entering into bilateral OTC derivative transactions, banks are required to
hold capital to protect against the risk that the counterparty defaults and for credit valuation
adjustment (CVA) risk. The CVA charge is introduced as part of the Basel III framework as
explained in paragraphs 5.15.3.4 and 5.15.3.5 below.
5.15.3.4 Default Risk Capital Charge for CCR
The exposure amount for the purpose of computing for default risk capital charge for counterparty
credit risk will be calculated using the Current Exposure Method (CEM) described as under:
(i) The credit equivalent amount of a market related off-balance sheet transaction calculated
using the current exposure method is the sum of current credit exposure and potential future
credit exposure of these contracts. For this purpose, credit equivalent amount will be
adjusted for legally valid eligible financial collaterals in accordance with paragraph 7.3 –
Credit Risk Mitigation Techniques – Collateralised Transactions and the provisions held by
the bank for CVA losses.
(ii) The CVA loss will be calculated as a prudent valuation adjustment as per prudent valuation
guidance contained in paragraph 8.8.1, without taking into account any offsetting debit
valuation adjustments (DVA) which have been deducted from capital (please see paragraph
4.4.6). The CVA loss deducted from exposures to determine outstanding EAD is the CVA
loss gross of all DVA which have been separately deducted from capital. To the extent DVA
has not been separately deducted from a bank’s capital, the CVA loss used to determine
outstanding EAD will be net of such DVA. Risk Weighted Assets for a given OTC derivative
counterparty may be calculated as the applicable risk weight under the Standardised or IRB
approach multiplied by the outstanding EAD of the counterparty. This reduction of EAD by
CVA losses does not apply to the determination of the CVA risk capital charge as per
formula given in paragraph 5.15.3.5 (ii).
(iii) While computing the credit exposure, banks may exclude ‘sold options’ that are outside
netting and margin agreements, provided the entire premium / fee or any other form of
income is received / realised64.
64 For ‘sold options’ (outside netting and margin agreements) where the premium / fee or any other form of income
is not fully received / realised, the add-on will be capped to the amount of unpaid premia.
56(iv) Current credit exposure is defined as the sum of the positive mark-to-market value of these
contracts. The Current Exposure Method requires periodical calculation of the current credit
exposure by marking these contracts to market, thus capturing the current credit exposure.
(v) Potential future credit exposure is determined by multiplying the notional principal amount
of each of these contracts irrespective of whether the contract has a zero, positive or
negative mark-to-market value by the relevant add-on factor indicated below according to
the nature and residual maturity of the instrument.
Table 9: Credit Conversion Factors for Market-Related Off-Balance Sheet Items65
Credit Conversion Factors (%)
Interest Rate Contracts Exchange Rate
Contracts and Gold
One year or less 0.50 2.00
Over one year to five years 1.00 10.00
Over five years 3.00 15.00
Notes:
(a) For contracts with multiple exchanges of principal, the add-on factors are to be multiplied
by the number of remaining payments in the contract.
(b) For contracts that are structured to settle outstanding exposure following specified
payment dates and where the terms are reset such that the market value of the contract
is zero on these specified dates, the residual maturity would be set equal to the time
until the next reset date. However, in the case of interest rate contracts which have
residual maturities of more than one year and meet the above criteria, the CCF or add-
on factor is subject to a floor of 1.0%.
(c) No potential future credit exposure would be calculated for single currency floating /
floating interest rate swaps; the credit exposure on these contracts would be evaluated
solely on the basis of their mark-to-market value.
(d) Potential future exposures should be based on ‘effective’ rather than ’apparent notional
amounts’. In the event that the ‘stated notional amount’ is leveraged or enhanced by the
structure of the transaction, banks must use the ‘effective notional amount’ when
determining potential future exposure. For example, a stated notional amount of USD 1
million with payments based on an internal rate of two times the BPLR / Base Rate
would have an effective notional amount of USD 2 million.
65 Please refer to paragraph 8.6.3 for credit default swaps
57(vi) When effective bilateral netting contracts as specified in Annex 18 (part B) are in place, RC
will be the net replacement cost and the add-on will be A as calculated below:
Net
(a) Credit exposure on bilaterally netted forward transactions will be calculated as the sum of
the net mark-to-market replacement cost, if positive, plus an add-on based on the notional
underlying principal. The add-on for netted transactions (A ) will equal the weighted
Net
average of the gross add-on (A ) and the gross add-on adjusted by the ratio of net
Gross
current replacement cost to gross current replacement cost (NGR). This is expressed
through the following formula:
A = 0.4 · A + 0.6 · NGR · A
Net Gross Gross
where:
NGR = level of net replacement cost / level of gross replacement cost for
transactions subject to legally enforceable netting agreements66.
A = sum of individual add-on amounts (calculated by multiplying the notional
Gross
principal amount by the appropriate add-on factors set out in Table 9 of paragraph
5.15.3.4 and Tables 20 & 21 of paragraph 8.6.3) of all transactions subject to
legally enforceable netting agreements with one counterparty.
(b) For the purposes of calculating potential future credit exposure to a netting counterparty
for forward foreign exchange contracts and other similar contracts in which the notional
principal amount is equivalent to cash flows, the notional principal is defined as the net
receipts falling due on each value date in each currency. The reason for this is that
offsetting contracts in the same currency maturing on the same date will have lower
potential future exposure as well as lower current exposure.
Note: Clarifications on certain issues raised by banks regarding Bilateral netting are furnished
in Annex 23.
5.15.3.5 Capitalisation of mark-to-market counterparty risk losses (CVA capital
charge)
(i) In addition to the default risk capital requirement for counterparty credit risk, banks are
also required to compute an additional capital charge to cover the risk of mark-to-market
losses on the expected counterparty risk (such losses being known as credit value
adjustments, CVA) to OTC derivatives. The CVA capital charge will be calculated in the
manner indicated below in para (ii). Banks are not required to include in this capital charge
66 Banks must calculate NGR on a counterparty by counterparty basis for all transactions that are subject to legally
enforceable netting agreements.
58(a) transactions with a central counterparty (CCP); and (b) securities financing
transactions (SFTs).
(ii) Banks should use the following formula to calculate a portfolio capital charge for CVA risk
for their counterparties:
Where;
h is the one-year risk horizon (in units of a year), h = 1.
w is the weight applicable to counterparty ‘i’. Counterparty ‘i’ should be mapped to
i
one of the seven weights w based on its external rating, as shown in the Table below
i
in the last bullet point.
EADtotalis the exposure at default of counterparty ‘i’ (summed across its netting sets)
i
including the effect of collateral as per the existing Current Exposure Method (CEM)
as applicable to the calculation of counterparty risk capital charges for such
counterparty by the bank. The exposure should be discounted by applying the factor
(1-exp(-0.05*M))/(0.05*M).
i i
B is the notional of purchased single name CDS hedges (summed if more than one
i
position) referencing counterparty ‘i’, and used to hedge CVA risk. This notional
amount should be discounted by applying the factor (1-exp(-0.05*Mhedge))/(0.05*
i
Mhedge).
i
B is the full notional of one or more index CDS of purchased protection, used to
ind
hedge CVA risk. This notional amount should be discounted by applying the factor (1-
exp(-0.05*M ))/(0.05* M ).
ind ind
w is the weight applicable to index hedges. The bank must map indices to one of
ind
the seven weights w based on the average spread of index ‘ind’.
i
M is the effective maturity of the transactions with counterparty ‘i’. M is the notional
i i
weighted average maturity of all the contracts with counterparty ‘i’.
Mhedgeis the maturity of the hedge instrument with notional B (the quantities Mhedge.
i i i
B are to be summed if these are several positions).
i
M is the maturity of the index hedge ‘ind’. In case of more than one index hedge
ind
position, it is the notional weighted average maturity.
59 For any counterparty that is also a constituent of an index on which a CDS is used for
hedging counterparty credit risk, the notional amount attributable to that single name
(as per its reference entity weight) may be subtracted from the index CDS notional
amount and treated as a single name hedge (Bi) of the individual counterparty with
maturity based on the maturity of the index.
The weights are given in the Table below, which are based on the external rating of
the counterparty:
Weights (w)
i
Rating Wi
AAA 0.7%
AA 0.7%
A 0.8%
BBB 1.0%
BB 2.0%
B and unrated 3.0%
CCC 10.0%67
In cases where the unrated counterparty is a scheduled commercial bank, banks shall
use the following Table to arrive at the implied ratings of the counterparty-bank and
consequently, the Wi.
Applicable Risk weight of Implied Wi
the Counterparty-bank ratings
according to Table 3 of
paragraph 5.6
20 AAA/AA 0.7%
50 A 0.8%
100 BBB 1%
150 BB 2%
625 CCC 10%
Banks will have to continuously monitor the capital adequacy position of their
counterparty banks so that the effect of any change in the implied ratings is
adequately reflected in CVA capital charge calculations.
An illustration of CVA risk capital charge has been furnished in Annex 12.
5.15.3.6 Calculation of the Aggregate CCR and CVA Risk Capital Charges
67 Please refer to the revised version of Basel III capital rules (bcbs189.doc) issued by the BCBS vide press release on
June 1, 2011.
60The total CCR capital charge for the bank is determined as the sum of the following two
components:
i. The sum over all counterparties of the CEM based capital charge determined as per
paragraph 5.15.3.4; and
ii. The standardised CVA risk capital charge determined as per paragraph 5.15.3.568
5.15.3.7 Capital requirement for exposures to Central Counterparties (CCPs)
Scope of Application
i. Exposures to central counterparties arising from OTC derivatives transactions, exchange
traded derivatives transactions and securities financing transactions (SFTs) will be subject
to the counterparty credit risk treatment as indicated in this paragraph below.
ii. Exposures arising from the settlement of cash transactions (equities, fixed income, spot
FX, commodity etc.) are not subject to this treatment. The settlement of cash transactions
remains subject to the treatment described in paragraph 5.15.4 of this Master Circular.
iii. When the clearing member-to-client leg of an exchange traded derivatives transaction is
conducted under a bilateral agreement, both the client bank and the clearing member are
to capitalise that transaction as an OTC derivative.
iv. For the purpose of capital adequacy framework, CCPs will be considered as financial
institution. Accordingly, a bank’s investments in the capital of CCPs will be guided in terms
of paragraph 4.4.9 of this Master Circular.
v. Capital requirements will be dependent on the nature of CCPs viz. Qualifying CCPs
(QCCPs) and non-Qualifying CCPs. A Qualifying CCP has been defined under paragraph
5.15.3.2 of this Master Circular.
a. Regardless of whether a CCP is classified as a QCCP or not, a bank retains the
responsibility to ensure that it maintains adequate capital for its exposures. Under
Pillar 2, a bank should consider whether it might need to hold capital in excess of the
minimum capital requirements if, for example, (i) its dealings with a CCP give rise to
more risky exposures or (ii) where, given the context of that bank’s dealings, it is
unclear that the CCP meets the definition of a QCCP.
b. Banks may be required to hold additional capital against their exposures to QCCPs
via Pillar 2, if in the opinion of RBI, it is necessary to do so. This might be considered
68 Please refer to the circular DBOD.No.BP.BC.88/21.06.201/2012-13 dated March 28, 2013 on ‘Implementation of
Basel III Capital Regulations in India – Clarifications’, read with circular DBOD.No.BP.BC.81/21.06.201/2013-14 dated
December 31, 2013 in terms of which the requirements for CVA risk capital charges would become effective as on
April 1, 2014.
61appropriate where, for example, an external assessment such as an Financial Sector
Assessment Program (FSAP) of International Monetary Fund / World Bank has found
material shortcomings in the CCP or the regulation of CCPs, and the CCP and / or
the CCP regulator have not since publicly addressed the issues identified.
c. Where the bank is acting as a clearing member, the bank should assess through
appropriate scenario analysis and stress testing whether the level of capital held
against exposures to a CCP adequately addresses the inherent risks of those
transactions. This assessment will include potential future or contingent exposures
resulting from future drawings on default fund commitments, and/or from secondary
commitments to take over or replace offsetting transactions from clients of another
clearing member in case of this clearing member defaulting or becoming insolvent.
d. A bank must monitor and report to senior management and the appropriate committee
of the Board (e.g., Risk Management Committee) on a regular basis (quarterly or at
more frequent intervals) all of its exposures to CCPs, including exposures arising from
trading through a CCP and exposures arising from CCP membership obligations such
as default fund contributions.
e. Unless Reserve Bank (DOR) requires otherwise, the trades with a former QCCP may
continue to be capitalised as though they are with a QCCP for a period not exceeding
three months from the date it ceases to qualify as a QCCP. After that time, the bank’s
exposures with such a central counterparty must be capitalised according to rules
applicable for non-QCCP.
5.15.3.8 Exposures to Qualifying CCPs (QCCPs)
(i) Trade exposures
Clearing member exposures to QCCPs
(a) Where a bank acts as a clearing member of a QCCP for its own purposes, a risk weight
of 2% must be applied to the bank’s trade exposure to the QCCP in respect of OTC
derivatives transactions, exchange traded derivatives transactions and SFTs.
(b) The exposure amount for such trade exposure will be calculated in accordance with the
Current Exposure Method (CEM) for derivatives and rules as applicable for capital
adequacy for Repo / Reverse Repo-style transactions69
.
(c) Where settlement is legally enforceable on a net basis in an event of default and
regardless of whether the counterparty is insolvent or bankrupt, the total replacement cost
69 Please refer to paragraph 7.3.8 of this Master Circular.
62of all contracts relevant to the trade exposure determination70 can be calculated as a net
replacement cost if the applicable close-out netting sets meet the requirements set out in
Annex 18 of these guidelines.
(d) Banks will have to demonstrate that the conditions mentioned in Annex 18 are fulfilled on
a regular basis by obtaining independent and reasoned legal opinion as regards legal
certainty of netting of exposures to QCCPs. Banks may also obtain from the QCCPs, the
legal opinion taken by the respective QCCPs on the legal certainty of their major activities
such as settlement finality, netting, collateral arrangements (including margin
arrangements); default procedures etc.
Clearing member exposures to clients
The clearing member will always capitalise its exposure (including potential CVA71 risk exposure)
to clients as bilateral trades, irrespective of whether the clearing member guarantees the trade or
acts as an intermediary between the client and the QCCP. However, to recognize the shorter
close-out period for cleared transactions, clearing members can capitalize the exposure to their
clients by multiplying the EAD by a scalar which is not less than 0.71.
Client bank exposures to clearing member
I. Where a bank is a client of the clearing member, and enters into a transaction with the
clearing member acting as a financial intermediary (i.e., the clearing member completes
an offsetting transaction with a QCCP), the client’s exposures to the clearing member will
receive the treatment applicable to the paragraph “clearing member exposure to QCCPs”
of this section (mentioned above), if following conditions are met:
(a) The offsetting transactions are identified by the QCCP as client transactions and collateral
to support them is held by the QCCP and / or the clearing member, as applicable, under
arrangements that prevent any losses to the client due to:
(i) the default or insolvency of the clearing member;
(ii) the default or insolvency of the clearing member’s other clients; and
(iii) the joint default or insolvency of the clearing member and any of its other clients.
The client bank must obtain an independent, written and reasoned legal opinion that concludes
that, in the event of legal challenge, the relevant courts and administrative authorities would find
70 It is clarified that the trade exposure (i.e., both replacement cost and potential future exposure) can be computed
on net basis, provided other conditions stated in paragraph 5.15.3.8 are met.
71 Please refer to Guidelines on Implementation of Basel III Capital Regulations in India - Clarifications (Circular
DBOD.No.BP.BC.88/21.06.201/2012-13 dated March 28, 2013 read with circular
DBOD.No.BP.BC.81/21.06.201/2013-14 dated December 31, 2013) in terms of which CVA risk capital charges would
become effective as on April 1, 2014.
63that the client would bear no losses on account of the insolvency of an intermediary under the
relevant law, including:
the law(s) applicable to client bank, clearing member and QCCP;
the law of the jurisdiction(s) of the foreign countries in which the client bank, clearing
member or QCCP are located
the law that governs the individual transactions and collateral; and
the law that governs any contract or agreement necessary to meet this condition (a).
(b) Relevant laws, regulations, rules, contractual, or administrative arrangements provide that
the offsetting transactions with the defaulted or insolvent clearing member are highly likely
to continue to be indirectly transacted through the QCCP, or by the QCCP, should the
clearing member default or become insolvent. In such circumstances, the client positions
and collateral with the QCCP will be transferred at the market value unless the client
requests to close out the position at the market value. In this context, it may be clarified
that if relevant laws, regulations, rules, contractual or administrative agreements provide
that trades are highly likely to be ported, this condition can be considered to be met. If
there is a clear precedent for transactions being ported at a QCCP and intention of the
participants is to continue this practice, then these factors should be considered while
assessing if trades are highly likely to be ported. The fact that QCCP documentation does
not prohibit client trades from being ported is not sufficient to conclude that they are highly
likely to be ported. Other evidence such as the criteria mentioned in this paragraph is
necessary to make this claim.
II. Where a client is not protected from losses in the case that the clearing member and
another client of the clearing member jointly default or become jointly insolvent, but all
other conditions mentioned above are met and the concerned CCP is a QCCP, a risk
weight of 4% will apply to the client’s exposure to the clearing member.
III. Where the client bank does not meet the requirements in the above paragraphs, the bank
will be required to capitalize its exposure (including potential CVA risk exposure) to the
clearing member as a bilateral trade.
IV. Under situations in which a client enters into a transaction with the QCCP with a clearing
member guaranteeing its performance, the capital requirements will be based on
paragraph 5 of this Master Circular.
Treatment of posted collateral
(a) In all cases, any assets or collateral posted must, from the perspective of the bank posting
such collateral, receive the risk weights that otherwise applies to such assets or collateral
under the capital adequacy framework, regardless of the fact that such assets have been
64posted as collateral. Thus, collateral posted from Banking Book will receive Banking Book
treatment and collateral posted from Trading Book will receive Trading Book treatment.
Where assets or collateral of a clearing member or client are posted with a QCCP or a
clearing member and are not held in a bankruptcy remote manner, the bank posting such
assets or collateral must also recognise credit risk based upon the assets or collateral
being exposed to risk of loss based on the creditworthiness of the entity72 holding such
assets or collateral.
(b) Collateral posted by the clearing member (including cash, securities, other pledged
assets, and excess initial or variation margin, also called over-collateralisation), that is
held by a custodian73, and is bankruptcy remote from the QCCP, is not subject to a capital
requirement for counterparty credit risk exposure to such bankruptcy remote custodian.
(c) Collateral posted by a client, that is held by a custodian, and is bankruptcy remote from
the QCCP, the clearing member and other clients, is not subject to a capital requirement
for counterparty credit risk. If the collateral is held at the QCCP on a client’s behalf and is
not held on a bankruptcy remote basis, a 2% risk weight will be applied to the collateral if
the conditions established in paragraph on “client bank exposures to clearing members”
of this section are met (mentioned above). A risk weight of 4% will be made applicable if
a client is not protected from losses in the case that the clearing member and another
client of the clearing member jointly default or become jointly insolvent, but all other
conditions mentioned in paragraph on “client bank exposures to clearing members” of this
section are met.
(d) If a clearing member collects collateral from a client for client cleared trades and this
collateral is passed on to the QCCP, the clearing member may recognize this collateral
for both the QCCP - clearing member leg and the clearing member - client leg of the client
cleared trade. Therefore, initial margins (IMs) as posted by clients to clearing members
mitigate the exposure the clearing member has against these clients.
(ii) Default Fund Exposures to QCCPs
(a) Where a default fund is shared between products or types of business with settlement risk
only (e.g., equities and bonds) and products or types of business which give rise to
counterparty credit risk i.e., OTC derivatives, exchange traded derivatives or SFTs, all of
the default fund contributions will receive the risk weight determined according to the
72 Where the entity holding such assets or collateral is the QCCP, a risk-weight of 2% applies to collateral included in
the definition of trade exposures. The relevant risk-weight of the QCCP will apply to assets or collateral posted for
other purposes
73 In this paragraph, the word “custodian” may include a trustee, agent, pledgee, secured creditor or any other
person that holds property in a way that does not give such person a beneficial interest in such property and will not
result in such property being subject to legally-enforceable claims by such persons, creditors, or to a court-ordered
stay of the return of such property, should such person become insolvent or bankrupt.
65formulae and methodology set forth below, without apportioning to different classes or
types of business or products.
(b) However, where the default fund contributions from clearing members are segregated by
product types and only accessible for specific product types, the capital requirements for
those default fund exposures determined according to the formulae and methodology set
forth below must be calculated for each specific product giving rise to counterparty credit
risk. In case the QCCP’s prefunded own resources are shared among product types, the
QCCP will have to allocate those funds to each of the calculations, in proportion to the
respective product specific exposure i.e., EAD.
(c) Clearing member banks are required to capitalise their exposures arising from default fund
contributions to a qualifying CCP by applying the following formula:
Clearing member banks may apply a risk-weight of 1250% to their default fund
exposures to the qualifying CCP, subject to an overall cap on the risk-weighted assets
from all its exposures to the QCCP (i.e., including trade exposures) equal to 20% of the
trade exposures to the QCCP. More specifically, the Risk Weighted Assets (RWA) for
both bank i’s trade and default fund exposures to each QCCP are equal to74:
Min {(2% * TE + 1250% * DF); (20% * TE)}
i i i
Where;
TE is bank i’s trade exposure to the QCCP; and
i
DF is bank i's pre-funded contribution to the QCCP's default fund.
i
5.15.3.9 Exposures to Non-qualifying CCPs
(a) Banks must apply the Standardised Approach for credit risk according to the category of
the counterparty, to their trade exposure to a non-qualifying CCP75.
(b) Banks must apply a risk weight of 1250% to their default fund contributions to a non-
qualifying CCP.
(c) For the purposes of this paragraph, the default fund contributions of such banks will
include both the funded and the unfunded contributions which are liable to be paid should
the CCP so require. Where there is a liability for unfunded contributions (i.e. unlimited
binding commitments) the Reserve Bank will determine in its Pillar 2 assessments the
amount of unfunded commitments to which 1250% risk weight should apply.
74 The 2% risk weight on trade exposures does not apply additionally, as it is included in the equation.
75 In cases where a CCP is to be considered as non-QCCP and the exposure is to be reckoned on CCP, the applicable
risk weight will be according to the ratings assigned to the CCPs.
665.15.4 Failed Transactions
(i) With regard to unsettled securities and foreign exchange transactions, banks are exposed
to counterparty credit risk from trade date, irrespective of the booking or the accounting of
the transaction. Banks are encouraged to develop, implement and improve systems for
tracking and monitoring the credit risk exposure arising from unsettled transactions as
appropriate for producing management information that facilitates action on a timely basis.
(ii) Banks must closely monitor securities and foreign exchange transactions that have failed,
starting from the day they fail for producing management information that facilitates action
on a timely basis. Failed transactions give rise to risk of delayed settlement or delivery.
(iii) Failure of transactions settled through a delivery-versus-payment system (DvP), providing
simultaneous exchanges of securities for cash, expose banks to a risk of loss on the
difference between the transaction valued at the agreed settlement price and the
transaction valued at current market price (i.e., positive current exposure). Failed
transactions where cash is paid without receipt of the corresponding receivable (securities,
foreign currencies, or gold,) or, conversely, deliverables were delivered without receipt of
the corresponding cash payment (non-DvP, or free delivery) expose banks to a risk of loss
on the full amount of cash paid or deliverables delivered. Therefore, a capital charge is
required for failed transactions and must be calculated as under. The following capital
treatment is applicable to all failed transactions, including transactions through recognised
clearing houses and Central Counterparties. Repurchase and reverse-repurchase
agreements as well as securities lending and borrowing that have failed to settle are
excluded from this capital treatment.
(iv) For DvP Transactions – If the payments have not yet taken place five business days
after the settlement date, banks are required to calculate a capital charge by multiplying
the positive current exposure of the transaction by the appropriate factor as under. In order
to capture the information, banks will need to upgrade their information systems in order
to track the number of days after the agreed settlement date and calculate the
corresponding capital charge.
Number of working days Corresponding risk
after the agreed settlement multiplier
date (in per cent)
From 5 to 15 9
From 16 to 30 50
From 31 to 45 75
46 or more 100
67(v) For non-DvP transactions (free deliveries) after the first contractual payment / delivery leg,
the bank that has made the payment will treat its exposure as a loan if the second leg has
not been received by the end of the business day. If the dates when two payment legs are
made are the same according to the time zones where each payment is made, it is deemed
that they are settled on the same day. For example, if a bank in Tokyo transfers Yen on
day X (Japan Standard Time) and receives corresponding US Dollar via CHIPS on day X
(US Eastern Standard Time), the settlement is deemed to take place on the same value
date. Banks shall compute the capital requirement using the counterparty risk weights
prescribed in these guidelines. However, if five business days after the second contractual
payment / delivery date the second leg has not yet effectively taken place, the bank that
has made the first payment leg will receive a risk weight of 1250% on the full amount of
the value transferred plus replacement cost, if any. This treatment will apply until the
second payment / delivery leg is effectively made.
5.16 Securitisation Exposures
5.16.1 The treatment of securitisation exposures for capital adequacy has been specified in the
Master Direction– Reserve Bank of India (Securitisation of Standard Assets) Directions, 202176.
As specified under clause 4 of Master Direction ibid, these directions, including those under
chapter VI ibid, will be applicable to securitisation transactions undertaken subsequent to the
issue of these directions.
5.16.2 For transactions undertaken before issuance of the afore mentioned directions, i.e., prior
to September 24, 2021, the treatment of securitisation exposures for capital adequacy would be
as per the guidelines issued vide circular no. DBOD.NO.BP.BC.60 / 21.04.048/2005-06 dated
February 1, 2006, as amended from time to time, and as consolidated in para 5.16 of Master
Circular no. DBR.No.BP.BC.1/21.06.201/2015-16 on Basel III Capital Regulations dated July 1,
2015.
5.17 Capital Adequacy Requirement for Credit Default Swap (CDS) Positions in the
Banking Book
5.17.1 Recognition of External / Third-party CDS Hedges
5.17.1.1 In case of Banking Book positions hedged by bought CDS positions, no exposure
will be reckoned against the reference entity / underlying asset in respect of the hedged exposure,
and exposure will be deemed to have been substituted by the protection seller, if the following
conditions are satisfied:
(a) Operational requirements mentioned in paragraph 4 of circular
DBOD.BP.BC.No.61/21.06.203/2011-12 dated November 30, 2011 on Prudential
76 Master Direction no. DOR.STR.REC.53/21.04.177/2021-22 dated September 24, 2021.
68Guidelines on Credit Default Swaps (CDS) are met (refer to Annex 7 of these
guidelines);
(b) The risk weight applicable to the protection seller under the Standardised Approach for
credit risk is lower than that of the underlying asset; and
(c) There is no maturity mismatch between the underlying asset and the reference /
deliverable obligation. If this condition is not satisfied, then the amount of credit protection
to be recognised should be computed as indicated in paragraph 5.17.1.3 (ii) below.
5.17.1.2 If the conditions 5.17.1.1 (a) and (b) above are not satisfied or the bank breaches
any of these conditions subsequently, the bank shall reckon the exposure on the underlying asset;
and the CDS position will be transferred to Trading Book where it will be subject to specific risk,
counterparty credit risk and general market risk (wherever applicable) capital requirements as
applicable to Trading Book.
5.17.1.3 The unprotected portion of the underlying exposure should be risk-weighted as
applicable under the Standardised Approach for credit risk. The amount of credit protection shall
be adjusted if there are any mismatches between the underlying asset/ obligation and the
reference / deliverable asset / obligation with regard to asset or maturity. These are dealt with in
detail in the following paragraphs.
(i) Asset Mismatches: Asset mismatch will arise if the underlying asset is different from the
reference asset or deliverable obligation. Protection will be reckoned as available by the
protection buyer only if the mismatched assets meet the requirements that (1) the reference
obligation or deliverable obligation ranks pari passu with or is junior to the underlying obligation,
and (2) the underlying obligation and reference obligation or deliverable obligation share the same
obligor (i.e., the same legal entity) and legally enforceable cross-default or cross-acceleration
clauses are in place.
(ii) Maturity Mismatches: The protection buyer would be eligible to reckon the amount of
protection if the maturity of the credit derivative contract were to be equal or more than the maturity
of the underlying asset. If, however, the maturity of the CDS contract is less than the maturity of
the underlying asset, then it would be construed as a maturity mismatch. In case of maturity
mismatch the amount of protection will be determined in the following manner:
a. If the residual maturity of the credit derivative product is less than three months no
protection will be recognized.
b. If the residual maturity of the credit derivative contract is three months or more
protection proportional to the period for which it is available will be recognised.
When there is a maturity mismatch the following adjustment will be applied.
Pa = P x (t - 0.25) ÷ (T - 0.25)
69Where:
Pa = value of the credit protection adjusted for maturity mismatch
P = credit protection
t = min (T, residual maturity of the credit protection arrangement) expressed in years
T = min (5, residual maturity of the underlying exposure) expressed in years
Example: Suppose the underlying asset is a corporate bond of Face Value of Rs.100
where the residual maturity is of 5 years and the residual maturity of the CDS is 4
years. The amount of credit protection is computed as under:
100 * {(4 - 0.25) ÷ (5 - 0.25)} = 100*(3.75÷ 4.75) = 78.95
c. Once the residual maturity of the CDS contract reaches three months, protection
ceases to be recognised.
5.17.2 Internal Hedges
Banks can use CDS contracts to hedge against the credit risk in their existing corporate bonds
portfolios. A bank can hedge a Banking Book credit risk exposure either by an internal hedge (the
protection purchased from the trading desk of the bank and held in the Trading Book) or an
external hedge (protection purchased from an eligible third party protection provider). When a
bank hedges a Banking Book credit risk exposure (corporate bonds) using a CDS booked in its
Trading Book (i.e., using an internal hedge), the Banking Book exposure is not deemed to be
hedged for capital purposes unless the bank transfers the credit risk from the Trading Book to an
eligible third party protection provider through a CDS meeting the requirements of paragraph
5.17 vis-à-vis the Banking Book exposure. Where such third party protection is purchased and is
recognised as a hedge of a Banking Book exposure for regulatory capital purposes, no capital is
required to be maintained on internal and external CDS hedge. In such cases, the external CDS
will act as indirect hedge for the Banking Book exposure and the capital adequacy in terms of
paragraph 5.17, as applicable for external/ third party hedges, will be applicable.
6. External Credit Assessments
6.1 Eligible Credit Rating Agencies
6.1.1 Reserve Bank has undertaken the detailed process of identifying the eligible credit rating
agencies, whose ratings may be used by banks for assigning risk weights for credit risk. In line
with the provisions of the Revised Framework77, where the facility provided by the bank possesses
77 Please refer to the Document ‘International Convergence of Capital Measurement and Capital Standards’ (June
2006) released by the Basel Committee on Banking Supervision.
70rating assigned by an eligible credit rating agency, the risk weight of the claim will be based on
this rating.
6.1.2 Banks may use the ratings of the following domestic credit rating agencies (arranged in
alphabetical order) for the purposes of risk weighting their claims for capital adequacy purposes:
(a) Acuite Ratings & Research Limited (Acuite)78
(b) CARE Ratings Limited;
(c) CRISIL Ratings Limited79;
(d) ICRA Limited;
(e) India Ratings and Research Private Limited (India Ratings); and
(f) INFOMERICS Valuation and Rating Pvt Ltd. (INFOMERICS)80
Reference is also invited to the Press Release: 2022-2023/1033 dated October 12, 2022 in terms
of which, Regulated Entities/ Market Participants were advised that in respect of ratings/credit
evaluations required in terms of any guidelines issued by the Reserve Bank, no such fresh
ratings/evaluations shall be obtained from Brickwork Ratings India Private Limited. Banks shall
continue to be guided by the press release ibid till further review81.
6.1.3 The Reserve Bank of India has decided that banks may use the ratings of the following
international credit rating agencies (arranged in alphabetical order) for the purposes of risk
weighting their claims for capital adequacy purposes where specified:
a. Fitch;
b. Moody's; and
c. Standard & Poor’s
6.2 Scope of Application of External Ratings
6.2.1 Banks should use the chosen credit rating agencies and their ratings consistently for each
type of claim, for both risk weighting and risk management purposes. Banks will not be allowed
to “cherry pick” the assessments provided by different credit rating agencies and to arbitrarily
change the use of credit rating agencies. If a bank has decided to use the ratings of some of the
chosen credit rating agencies for a given type of claim, it can use only the ratings of those credit
rating agencies, despite the fact that some of these claims may be rated by other chosen credit
rating agencies whose ratings the bank has decided not to use. Banks shall not use one agency’s
rating for one corporate bond, while using another agency’s rating for another exposure to the
78 Please refer to circular DBOD.BP.BC.No.59/21.06.007/2013-14 dated October 17, 2013.
79 Please refer to circular DOR.No.CRE.BC.33/21.06.007/2020-21 dated January 27, 2021.
80 Please refer to circular DBR.No.BP.BC.74/21.06.009/2016-17 dated June 13, 2017. The rating-risk weight mapping
for the long term and short term ratings assigned by INFOMERICS will be the same as in case of other rating agencies.
81 Please refer to circular DOR.STR.REC.94/21.06.008/2022-23 dated January 9, 2023 on Basel III Capital Regulations
- Eligible Credit Rating Agencies.
71same counterparty, unless the respective exposures are rated by only one of the chosen credit
rating agencies, whose ratings the bank has decided to use. External assessments for one entity
within a corporate group cannot be used to risk weight other entities within the same group.
6.2.2 Banks must disclose the names of the credit rating agencies that they use for the risk
weighting of their assets, the risk weights associated with the particular rating grades as
determined by Reserve Bank through the mapping process for each eligible credit rating agency
as well as the aggregated risk weighted assets as required vide Table DF-4 of Annex 17.
6.2.3 To be eligible for risk-weighting purposes, the external credit assessment must take into
account and reflect the entire amount of credit risk exposure the bank has with regard to all
payments owed to it. For example, if a bank is owed both principal and interest, the assessment
must fully take into account and reflect the credit risk associated with timely repayment of both
principal and interest.
6.2.4 To be eligible for risk weighting purposes, the rating should be in force and confirmed from
the monthly bulletin of the concerned rating agency. The rating agency should have reviewed the
rating at least once during the previous 15 months.
6.2.5 An eligible credit assessment must be publicly available. In other words, a rating must be
published in an accessible form and included in the external credit rating agency’s transition
matrix. Consequently, ratings that are made available only to the parties to a transaction do not
satisfy this requirement.
6.2.6 For assets in the bank’s portfolio that have contractual maturity less than or equal to one
year, short term ratings accorded by the chosen credit rating agencies would be relevant. For
other assets which have a contractual maturity of more than one year, long term ratings accorded
by the chosen credit rating agencies would be relevant.
6.2.7 Cash credit exposures tend to be generally rolled over and also tend to be drawn on an
average for a major portion of the sanctioned limits. Hence, even though a cash credit exposure
may be sanctioned for period of one year or less, these exposures should be reckoned as long
term exposures and accordingly the long term ratings accorded by the chosen credit rating
agencies will be relevant. Similarly, banks may use long-term ratings of a counterparty as a proxy
for an unrated short- term exposure on the same counterparty subject to strict compliance with
the requirements for use of multiple rating assessments and applicability of issue rating to issuer
/ other claims as indicated in paragraphs 6.4, 6.5, 6.7 and 6.8 below.
6.3 Mapping Process
The Revised Framework recommends development of a mapping process to assign the ratings
issued by eligible credit rating agencies to the risk weights available under the Standardised risk
weighting framework. The mapping process is required to result in a risk weight assignment
consistent with that of the level of credit risk. A mapping of the credit ratings awarded by the
72chosen domestic credit rating agencies has been furnished below in paragraphs 6.4.1 and 6.5.4,
which should be used by banks in assigning risk weights to the various exposures.
6.4 Long Term Ratings
6.4.1 On the basis of the above factors as well as the data made available by the rating
agencies, the ratings issued by the chosen domestic credit rating agencies have been mapped to
the appropriate risk weights applicable as per the Standardised approach under the Revised
Framework. The rating-risk weight mapping furnished in the Table 10 below shall be adopted by
all banks in India:
Table 10: Risk Weight Mapping of Long Term Ratings of the chosen Domestic Rating
Agencies
Standardised
CRISIL Ratings approach risk
CARE India Ratings ICRA Brickwork82 Acuite Infomerics
Limited weights
(in per cent)
CARE AAA CRISIL AAA IND AAA ICRA AAA Brickwork AAA Acuité AAA IVR AAA 20
CARE AA CRISIL AA IND AA ICRA AA Brickwork AA Acuité AA IVR AA 30
CARE A CRISIL A IND A ICRA A Brickwork A Acuité A IVR A 50
CARE BBB CRISIL BBB IND BBB ICRA BBB Brickwork BBB Acuité BBB IVR BBB 100
CARE BB, CRISIL BB, ICRA BB, Brickwork BB,
Acuité BB, Acuité
CARE B, CRISIL B, IND BB, IND B, ICRA B, ICRA Brickwork B, IVR BB, IVR B,
B, Acuité C & 150
CARE C & CRISIL C & IND C & IND D C & Brickwork C & IVR C & IVR D
Acuité D
CARE D CRISIL D ICRA D Brickwork D
Unrated Unrated Unrated Unrated Unrated Unrated Unrated 100 $
$ The risk weight is 150% in the following two cases:
if the aggregate exposure from banking system is more than INR 200 crore
if the aggregate exposure from banking system is more than INR 100 crore for exposures which were rated
earlier and subsequently have become unrated.
6.4.2 Where “+” or “-” notation is attached to the rating, the corresponding main rating category
risk weight should be used. For example, A+ or A- would be considered to be in the A rating
category and assigned 50 per cent risk weight.
6.4.3 If an issuer has a long-term exposure with an external long term rating that warrants a risk
weight of 150 per cent, all unrated claims on the same counter-party, whether short-term or long-
term, should also receive a 150 per cent risk weight, unless the bank uses recognised credit risk
mitigation techniques for such claims.
82 Banks shall also be guided by paragraph 6.1.2 regarding treatment of ratings issued by Brickwork Ratings India
Private Limited.
736.5 Short Term Ratings
6.5.1 For risk-weighting purposes, short-term ratings are deemed to be issue-specific. They can
only be used to derive risk weights for claims arising from the rated facility. They cannot be
generalised to other short-term claims. In no event can a short-term rating be used to support a
risk weight for an unrated long-term claim. Short-term assessments may only be used for short-
term claims against banks and corporates.
6.5.2 Notwithstanding the above restriction on using an issue specific short term rating for other
short term exposures, the following broad principles will apply. The unrated short term claim on
counterparty will attract a risk weight of at least one level higher than the risk weight applicable to
the rated short term claim on that counter-party. If a short-term rated facility to counterparty
attracts a 20 per cent or a 50 per cent risk-weight, unrated short-term claims to the same counter-
party cannot attract a risk weight lower than 30 per cent or 100 per cent respectively.
6.5.3 Similarly, if an issuer has a short-term exposure with an external short term rating that
warrants a risk weight of 150 per cent, all unrated claims on the same counter-party, whether
long-term or short-term, should also receive a 150 per cent risk weight, unless the bank uses
recognised credit risk mitigation techniques for such claims.
6.5.4 In respect of the issue specific short term ratings the following risk weight mapping shall be
adopted by banks:
Table 11: Risk Weight Mapping of Short Term Ratings of Domestic Rating Agencies
Standardised approach
CRISIL Ratings India
CARE ICRA Brickwork83 Acuite Infomerics risk weights
Limited Ratings
(in per cent)
CARE ICRA Brickwork Acuité
CRISIL A1+ IND A1+ IVR A1+ 20
A1+ A1+ A1+ A1+
CARE A1 CRISIL A1 IND A1 ICRA A1 Brickwork A1 Acuité A1 IVR A1 30
CARE A2 CRISIL A2 IND A2 ICRA A2 Brickwork A2 Acuité A2 IVR A2 50
CARE A3 CRISIL A3 IND A3 ICRA A3 Brickwork A3 Acuité A3 IVR A3 100
CARE A4 CRISIL A4 IND A4 & ICRA A4 Brickwork A4 Acuité A4 IVR A4 and
150
& D & D D & D & D & D D
Unrated Unrated Unrated Unrated Unrated Unrated Unrated 100 $
$ The risk weight is 150% in the following two cases:
if the aggregate exposure from banking system is more than INR 200 crore
if the aggregate exposure from banking system is more than INR 100 crore for exposures which
were rated earlier and subsequently have become unrated.
83 Banks shall also be guided by paragraph 6.1.2 regarding treatment of ratings issued by Brickwork Ratings India
Private Limited.
746.5.5 Where “+” or “-” notation is attached to the rating, the corresponding main rating category
risk weight should be used for A2 and below, unless specified otherwise. For example, A2+ or
A2- would be considered to be in the A2 rating category and assigned 50 per cent risk weight.
6.5.6 The above risk weight mapping of both long term and short term ratings of the chosen
domestic rating agencies would be reviewed annually by the Reserve Bank.
6.6 Use of Unsolicited Ratings
A rating would be treated as solicited only if the issuer of the instrument has requested the credit
rating agency for the rating and has accepted the rating assigned by the agency. As a general
rule, banks should use only solicited rating from the chosen credit rating agencies. No ratings
issued by the credit rating agencies on an unsolicited basis should be considered for risk weight
calculation as per the Standardised Approach.
6.7 Use of Multiple Rating Assessments
Banks shall be guided by the following in respect of exposures / obligors having multiple ratings
from the chosen credit rating agencies chosen by the bank for the purpose of risk weight
calculation:
(i) If there is only one rating by a chosen credit rating agency for a particular claim, that
rating would be used to determine the risk weight of the claim.
(ii) If there are two ratings accorded by chosen credit rating agencies that map into
different risk weights, the higher risk weight should be applied.
(iii) If there are three or more ratings accorded by chosen credit rating agencies with
different risk weights, the ratings corresponding to the two lowest risk weights should
be referred to and the higher of those two risk weights should be applied. i.e., the
second lowest risk weight.
6.8 Applicability of ‘Issue Rating’ to issuer/ other claims
6.8.1 Where a bank invests in a particular issue that has an issue specific rating by a chosen
credit rating agency the risk weight of the claim will be based on this assessment. Where the
bank’s claim is not an investment in a specific assessed issue, the following general principles
will apply:
(i) In circumstances where the borrower has a specific assessment for an issued debt -
but the bank’s claim is not an investment in this particular debt - the rating applicable
to the specific debt (where the rating maps into a risk weight lower than that which
applies to an unrated claim) may be applied to the bank’s unassessed claim only if
this claim ranks pari passu or senior to the specific rated debt in all respects and the
75maturity of the unassessed claim is not later than the maturity of the rated claim84,
except where the rated claim is a short term obligation as specified in paragraph 6.5.2.
If not, the rating applicable to the specific debt cannot be used and the unassessed
claim will receive the risk weight for unrated claims.
It is observed that the Press Releases (PRs) issued by External Credit Assessment
Institutions (ECAIs) on rating actions are often devoid of the lenders’ details. Absence
of such information may result in banks applying the derived risk weights for unrated
exposures, without satisfying themselves regarding adherence to prescribed
conditions. This may, consequentially, lead to potentially lower provision of capital as
well as underpricing of risks. In order to address the above information asymmetry,
the Reserve Bank had advised the ECAIs vide letter dated June 4, 2021 to disclose
the name of the banks and the corresponding credit facilities rated by them in the PRs
issued on rating actions by August 31, 2021, after obtaining requisite consent from
the borrowers.
However, on a review it has been observed that the above disclosures are not
available in a large number of PRs issued by ECAIs owing to the absence of requisite
consent by the borrowers to the ECAIs. It is, therefore, advised85 that a bank loan
rating without the above disclosure by the ECAI shall not be eligible for being reckoned
for capital computation by banks. Banks shall treat such exposures as unrated and
assign applicable risk weights in terms of paragraph 5.8.1 of this Master Circular.
Illustratively, a scenario may be assumed, where a borrower has availed credit
facilities from Banks A, B and C and external rating from an ECAI is obtained only in
respect of the credit facility extended by Bank A. If the ECAI has disclosed the name
of Bank A and the corresponding credit facility rated by it, then Bank A can reckon the
said rating for risk weighting purpose. Banks B and C are permitted to derive risk
weights for their respective unrated credit facilities subject to conditions stated in
paragraph 6.8.1 (i) of Master Circular ibid, as permitted hitherto. In the event of ECAI
not making the above disclosure, none of the banks shall reckon the said rating, and
therefore shall apply risk weights of 100 percent or 150 percent as applicable in terms
of extant instructions.
84In a case where a short term claim on a counterparty is rated as A1+ and a long term claim on the same
counterparty is rated as AAA, then a bank may assign a 30 per cent risk weight to an unrated short term claim and
20 per cent risk weight to an unrated long term claim on that counterparty where the seniority of the claim ranks
pari-passu with the rated claims and the maturity of the unrated claim is not later than the rated claim. In a similar
case where a short term claim is rated A1+ and a long term claim is rated A, the bank may assign 50 per cent risk
weight to an unrated short term or long term claim
85 Please refer circular no. DOR.STR.REC.71/21.06.201/2022-23 dated October 10, 2022 on Review of Prudential
Norms – Risk Weights for Exposures to Corporates and NBFCs.
76(ii) In circumstances where the borrower has an issuer assessment, this assessment
typically applies to senior unsecured claims on that issuer. Consequently, only senior
claims on that issuer will benefit from a high quality issuer assessment. Other
unassessed claims of a highly assessed issuer will be treated as unrated. If either the
issuer or a single issue has a low quality assessment (mapping into a risk weight
equal to or higher than that which applies to unrated claims), an unassessed claim on
the same counterparty that ranks pari-passu or is subordinated to either the senior
unsecured issuer assessment or the exposure assessment will be assigned the same
risk weight as is applicable to the low quality assessment.
(iii) Where a bank intends to extend an issuer or an issue specific rating assigned by a
chosen credit rating agency to any other exposure which the bank has on the same
counterparty and which meets the above criterion, it should be extended to the entire
amount of credit risk exposure the bank has with regard to that exposure i.e., both
principal and interest.
(iv) With a view to avoiding any double counting of credit enhancement factors, no
recognition of credit risk mitigation techniques should be taken into account if the
credit enhancement is already reflected in the issue specific rating accorded by a
chosen credit rating agency relied upon by the bank.
(v) Where unrated exposures are risk weighted based on the rating of an equivalent
exposure to that borrower, the general rule is that foreign currency ratings would be
used only for exposures in foreign currency.
6.8.2 If the conditions indicated in paragraph 6.8.1 above are not satisfied, the rating applicable
to the specific debt cannot be used and the claims on NABARD/SIDBI/NHB86 on account of
deposits placed in lieu of shortfall in achievement of priority sector lending targets/sub-targets
shall be risk weighted as applicable for unrated claims, i.e., 100%.
7. Credit Risk Mitigation
7.1 General Principles
7.1.1 Banks use a number of techniques to mitigate the credit risks to which they are exposed.
For example, exposures may be collateralised in whole or in part by cash or securities, deposits
from the same counterparty, guarantee of a third party, etc. Credit risk mitigation approach as
detailed in this section is applicable to the banking book exposures. This will also be applicable
for calculation of the counterparty risk charges for OTC derivatives and repo-style transactions
booked in the trading book.
86 Please refer to the circular DBOD.BP.BC.No.103/21.06.001/2012-13 dated June 20, 2013 on ‘Risk Weights on
Deposits Placed with NABARD / SIDBI / NHB in lieu of Shortfall in Achievement of Priority Sector Lending Targets /
Sub-targets’.
777.1.2 The general principles applicable to use of credit risk mitigation techniques are as under:
(i) No transaction in which Credit Risk Mitigation (CRM) techniques are used should receive
a higher capital requirement than an otherwise identical transaction where such
techniques are not used.
(ii) The effects of CRM will not be double counted. Therefore, no additional supervisory
recognition of CRM for regulatory capital purposes will be granted on claims for which
an issue-specific rating is used that already reflects that CRM.
(iii) Principal-only ratings will not be allowed within the CRM framework.
(iv) While the use of CRM techniques reduces or transfers credit risk, it simultaneously may
increase other risks (residual risks). Residual risks include legal, operational, liquidity
and market risks. Therefore, it is imperative that banks employ robust procedures and
processes to control these risks, including strategy; consideration of the underlying
credit; valuation; policies and procedures; systems; control of roll-off risks; and
management of concentration risk arising from the bank’s use of CRM techniques and
its interaction with the bank’s overall credit risk profile. Where these risks are not
adequately controlled, Reserve Bank may impose additional capital charges or take
other supervisory actions. The disclosure requirements prescribed in Table DF-5 of
Annex 17 must also be observed for banks to obtain capital relief in respect of any CRM
techniques.
7.2 Legal Certainty
In order for banks to obtain capital relief for any use of CRM techniques, the following minimum
standards for legal documentation must be met. All documentation used in collateralised
transactions and guarantees must be binding on all parties and legally enforceable in all relevant
jurisdictions. Banks must have conducted sufficient legal review, which should be well
documented, to verify this requirement. Such verification should have a well-founded legal basis
for reaching the conclusion about the binding nature and enforceability of the documents. Banks
should also undertake such further review as necessary to ensure continuing enforceability.
7.3 Credit Risk Mitigation Techniques - Collateralised Transactions
7.3.1 A Collateralised Transaction is one in which:
(i) banks have a credit exposure and that credit exposure is hedged in whole or in part by
collateral posted by a counterparty or by a third party on behalf of the counterparty. Here,
“counterparty” is used to denote a party to whom a bank has an on- or off-balance sheet
credit exposure.
(ii) banks have a specific lien on the collateral and the requirements of legal certainty are
met.
787.3.2 Overall framework and minimum conditions
The framework allows banks to adopt either the simple approach, which, similar to the 1988
Accord, substitutes the risk weighting of the collateral for the risk weighting of the counterparty for
the collateralised portion of the exposure (generally subject to a 20 per cent floor), or the
comprehensive approach, which allows fuller offset of collateral against exposures, by effectively
reducing the exposure amount by the value ascribed to the collateral. Banks in India shall adopt
the Comprehensive Approach, which allows fuller offset of collateral against exposures, by
effectively reducing the exposure amount by the value ascribed to the collateral. Under this
approach, banks, which take eligible financial collateral (e.g., cash or securities, more specifically
defined below), are allowed to reduce their credit exposure to a counterparty when calculating
their capital requirements to take account of the risk mitigating effect of the collateral. Credit risk
mitigation is allowed only on an account-by-account basis, even within regulatory retail portfolio.
However, before capital relief will be granted the standards set out below must be met:
(i) In addition to the general requirements for legal certainty, the legal mechanism by which
collateral is pledged or transferred must ensure that the bank has the right to liquidate or
take legal possession of it, in a timely manner, in the event of the default, insolvency or
bankruptcy (or one or more otherwise-defined credit events set out in the transaction
documentation) of the counterparty (and, where applicable, of the custodian holding the
collateral). Furthermore, banks must take all steps necessary to fulfill those requirements
under the law applicable to the bank’s interest in the collateral for obtaining and
maintaining an enforceable security interest, e.g., by registering it with a registrar.
(ii) In order for collateral to provide protection, the credit quality of the counterparty and the
value of the collateral must not have a material positive correlation. For example,
securities issued by the counterparty - or by any related group entity - would provide little
protection and so would be ineligible.
(iii) Banks must have clear and robust procedures for the timely liquidation of collateral to
ensure that any legal conditions required for declaring the default of the counterparty and
liquidating the collateral are observed, and that collateral can be liquidated promptly.
(iv) Where the collateral is held by a custodian, banks must take reasonable steps to ensure
that the custodian segregates the collateral from its own assets.
(v) Banks must ensure that sufficient resources are devoted to the orderly operation of
margin agreements with OTC derivative and securities-financing counterparties banks,
as measured by the timeliness and accuracy of its outgoing calls and response time to
incoming calls. Banks must have collateral management policies in place to control,
monitor and report the following to the Board or one of its Committees:
79 the risk to which margin agreements exposes them (such as the volatility and
liquidity of the securities exchanged as collateral),
the concentration risk to particular types of collateral,
the reuse of collateral (both cash and non-cash) including the potential liquidity
shortfalls resulting from the reuse of collateral received from counterparties, and
the surrender of rights on collateral posted to counterparties.
7.3.3 A capital requirement will be applied to a bank on either side of the collateralised
transaction: for example, both repos and reverse repos will be subject to capital requirements.
Likewise, both sides of securities lending and borrowing transactions will be subject to explicit
capital charges, as will the posting of securities in connection with a derivative exposure or other
borrowing.
7.3.4 The Comprehensive Approach
(i) 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 take
account of the effects of that collateral. Banks are required to adjust both the amount of
the exposure to the counterparty and the value of any collateral received in support of
that counterparty to take account of possible future fluctuations in the value of either,
occasioned by market movements. These adjustments are referred to as ‘haircuts’. The
application of haircuts will produce volatility adjusted amounts for both exposure and
collateral. The volatility adjusted amount for the exposure will be higher than the
exposure and the volatility adjusted amount 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 a premium factor and the ‘haircut’ for the collateral will be a discount
factor. It may be noted that the purpose underlying the application of haircut is to capture
the market-related volatility inherent in the value of exposures as well as of the eligible
financial collaterals. Since the value of credit exposures acquired by banks in the course
of their banking operations, would not be subject to market volatility, (since the loan
disbursal / investment would be a “cash” transaction) though the value of eligible financial
collateral would be, the haircut stipulated in Table-12 (paragraph 7.3.7) would apply in
respect of credit transactions only to the eligible collateral but not to the credit exposure
of the bank. On the other hand, exposures of banks, arising out of repo-style transactions
would require upward adjustment for volatility, as the value of security sold/lent/pledged
in the repo transaction, would be subject to market volatility. Hence, such exposures
shall attract haircut.
80(ii) Additionally, where the exposure and collateral are held in different currencies an
additional downwards adjustment must be made to the volatility adjusted collateral
amount to take account of possible future fluctuations in exchange rates.
(iii) Where the volatility-adjusted exposure amount is greater than the volatility-adjusted
collateral amount (including any further adjustment for foreign exchange risk), banks
shall calculate their risk-weighted assets as the difference between the two multiplied by
the risk weight of the counterparty. The framework for performing calculations of capital
requirement is indicated in paragraph 7.3.6.
7.3.5 Eligible Financial Collateral
The following collateral instruments are eligible for recognition in the comprehensive approach:
(i) Cash (as well as certificates of deposit or comparable instruments, including fixed
deposit receipts, issued by the lending bank) on deposit with the bank which is incurring
the counterparty exposure.
(ii) Gold: Gold would include both bullion and jewellery. However, the value of the
collateralised jewellery should be arrived at after notionally converting these to 99.99
purity.
(iii) Securities issued by Central and State Governments
(iv) Kisan Vikas Patra and National Savings Certificates provided no lock-in period is
operational and if they can be encashed within the holding period.
(v) Life insurance policies with a declared surrender value of an insurance company which
is regulated by an insurance sector regulator.
(vi) Debt securities rated by a chosen Credit Rating Agency in respect of which banks should
be sufficiently confident about the market liquidity87where 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 and Primary
Dealers); or
(b) Attracting 100 per cent or lesser risk weight i.e., rated at least CARE A3/ CRISIL
A3/ India Ratings and Research Private Limited (India Ratings) A3/ICRA
A3/Brickwork A3/ Acuite A3/ IVR A3 (Infomerics) for short-term debt
instruments.
87 A debenture would meet the test of liquidity if it is traded on a recognised stock exchange(s) on at least 90 per
cent of the trading days during the preceding 365 days. Further, liquidity can be evidenced in the trading during the
previous one month in the recognised stock exchange if there are a minimum of 25 trades of marketable lots in
securities of each issuer.
81(vii) Debt Securities not rated by a chosen Credit Rating Agency in respect of which banks
should be sufficiently confident about the market liquidity where these are:
(a) issued by a bank; and
(b) listed on a recognised exchange; and
(c) classified as senior debt; and
(d) all rated issues of the same seniority by the issuing bank are rated at least BBB
(-) or CARE A3/ CRISIL A3/ India Ratings and Research Private Limited (India
Ratings) A3/ICRA A3/Brickwork A3/Acuite A3/ IVR A3 (Infomerics) by a chosen
Credit Rating Agency; and
(e) the bank holding the securities as collateral has no information to suggest that
the issue justifies a rating below BBB(-) or CARE A3/ CRISIL A3/ India Ratings
and Research Private Limited (India Ratings) A3/ICRA A3/Brickwork A3/Acuite
A3/ IVR A3 (Infomerics) (as applicable) and;
(f) Banks should be sufficiently confident about the market liquidity of the security.
(viii) Units of Mutual Funds regulated by the securities regulator of the jurisdiction of the bank’s
operation mutual funds where:
(a) a price for the units is publicly quoted daily i.e., where the daily NAV is available
in public domain; and
(b) Mutual fund is limited to investing in the instruments listed in this paragraph.
(ix) Re-securitisations, irrespective of any credit ratings, are not eligible financial collateral.
(x) For foreign bank branches, cash/unencumbered approved securities, the source of
which is interest-free funds from Head Office or remittable surplus retained in Indian
books, held with RBI under section 11(2)(b)(i) of the Banking Regulation Act,1949 may
be reckoned as CRM, for offsetting the gross exposure of the foreign bank branches in
India to the Head Office (including overseas branches), subject to the conditions
prescribed in the circular no. DOR.CRE.REC.47/21.01.003/2021-22 dated September
09, 2021 on ‘Large Exposures Framework – Credit Risk Mitigation (CRM) for offsetting
– non-centrally cleared derivative transactions of foreign bank branches in India with their
Head Office’88.
88 As mentioned in the referenced circular, the amount so held shall not be included in regulatory capital. (i.e., no
double counting of the fund placed under Section 11(2) as both capital and CRM). Accordingly, while assessing the
capital adequacy of a bank, the amount will form part of regulatory adjustments made to Common Equity Tier 1
Capital.
827.3.6 Calculation of capital requirement
For a collateralised transaction, the exposure amount after risk mitigation is calculated as follows:
E* = max {0, [E x (1 + H ) - C x (1 - H - H )]}
e c fx
where:
E* = the exposure value after risk mitigation
E = current value of the exposure for which the collateral qualifies as a risk mitigant
H = haircut appropriate to the exposure
e
C = the current value of the collateral received
H = haircut appropriate to the collateral
c
H = haircut appropriate for currency mismatch between the collateral and exposure
fx
The exposure amount after risk mitigation (i.e., E*) will be multiplied by the risk weight of the
counterparty to obtain the risk-weighted asset amount for the collateralised transaction. Illustrative
examples calculating the effect of Credit Risk Mitigation is furnished in Annex 8.
7.3.7 Haircuts
(i) In principle, banks have two ways of calculating the haircuts: (i) standard supervisory
haircuts, using parameters set by the Basel Committee, and (ii) own-estimate haircuts,
using banks’ own internal estimates of market price volatility. Banks in India shall use only
the standard supervisory haircuts for both the exposure as well as the collateral.
(ii) The Standard Supervisory Haircuts (assuming daily mark-to-market, daily re-margining
and a 10 business-day holding period)89, expressed as percentages, would be as
furnished in Table 12.
(iii) The ratings indicated in Table 12 represent the ratings assigned by the domestic rating
agencies. In the case of exposures toward debt securities issued by foreign Central
Governments and foreign corporates, the haircut may be based on ratings of the
international rating agencies, as indicated in Table 13.
(iv) Sovereign will include Reserve Bank of India and DICGC which are eligible for zero per
cent risk weight. Guarantees issued by CGTMSE, CRGFTLIH and individual schemes
under National Credit Guarantee Trustee Company Ltd. (NCGTC) which are backed by
explicit Central Government Guarantee shall also be included under Sovereign.
89 Holding period will be the time normally required by the bank to realise the value of the collateral.
83(v) Banks may apply a zero haircut for eligible collateral where it is a National Savings
Certificate, Kisan Vikas Patras, surrender value of insurance policies and banks’ own
deposits.
(vi) The standard supervisory haircut for currency risk where exposure and collateral are
denominated in different currencies is eight per cent (also based on a 10-business day
holding period and daily mark-to-market).
Table 12: Standard Supervisory Haircuts for Sovereign and other securities which
constitute Exposure and Collateral
Sl. No. Issue Rating Residual Haircut
for Debt securities Maturity (in percentage)
(in years)
A Securities issued / guaranteed by the Government of India and issued by the
State Governments (Sovereign securities)
≤ 1 year 0.5
Rating not applicable – as Government
> 1 year and ≤
I securities are not currently rated in India 2
5 years
> 5 years 4
B Domestic debt securities other than those indicated at Item No. A above
including the securities guaranteed by Indian State Governments
≤ 1 year 1
AAA to AA > 1 year and ≤
II 4
A1 5 years
> 5 years 8
A to BBB ≤ 1 year 2
A2, A3 and > 1 year and ≤
III 6
unrated bank securities as specified in years
paragraph 7.3.5 (vii) of the Circular > 5 years 12
Highest haircut
applicable to any
of the above
securities, in
IV Units of Mutual Funds
which the eligible
mutual fund {cf.
paragraph 7.3.5
(viii)} can invest
C Cash in the same currency 0
D Gold 15
E Securitisation Exposures90
≤ 1 year 2
> 1 year and ≤
II AAA to AA 8
5 years
> 5 years 16
III A to BBB ≤ 1 year 4
90 Including those backed by securities issued by foreign sovereigns and foreign corporates.
84and > 1 year and ≤
12
unrated bank securities as specified in years
paragraph 7.3.5 (vii) of the Circular > 5 years 24
Table 13: Standard Supervisory Haircut for Exposures and Collaterals which are
obligations of foreign central sovereigns / foreign corporates
Issue rating for debt securities as
Residual Other Issues Other Issues
assigned by international rating
Maturity (%) (%)
agencies
< = 1 year 0.5 1
AAA to AA /
> 1 year and <
A1 2 4
or = 5 years
> 5 years 4 8
< = 1 year 1 2
A to BBB /
> 1 year and <
A2 / A3 and Unrated Bank Securities 3 6
or = 5 years
> 5 years 6 12
(vii) For transactions in which banks’ exposures are unrated or bank lends non-eligible
instruments (i.e. non-investment grade corporate securities), the haircut to be applied on
a exposure should be 25 per cent. (Since, at present, the repos are allowed only in the
case of Government securities, banks are not likely to have any exposure which will attract
the provisions of this clause. However, this would be relevant, if in future, repos/security
lending transactions are permitted in the case of unrated corporate securities).
(viii) Where the collateral is a basket of assets, the haircut on the basket will be,
where a is the weight of the asset (as measured by the amount/value of the asset in units
i
of currency) in the basket and Hi the haircut applicable to that asset.
,
(ix) Adjustment for different holding periods:
For some transactions, depending on the nature and frequency of the revaluation and
remargining provisions, different holding periods (other than 10 business-days) are
appropriate. The framework for collateral haircuts distinguishes between repo-style
transactions (i.e., repo/reverse repos and securities lending/borrowing91), “other capital-
market-driven transactions” (i.e., OTC derivatives transactions and margin lending) and
secured lending. In capital-market-driven transactions and repo-style transactions, the
documentation contains remargining clauses; in secured lending transactions, it generally
91 In terms of Reserve Bank of India (Government Securities Lending) Directions, 2023 dated December 27, 2023.
85does not. In view of different holding periods, in the case of these transactions, the
minimum holding period shall be taken as indicated below:
Transaction type Minimum holding Period Condition
Repo-style transaction five business days daily remargining
Other capital market ten business days daily remargining
transactions
Secured lending twenty business days daily revaluation
The haircut for the transactions with other than 10 business-days minimum holding period,
as indicated above, will have to be adjusted by scaling up/down the haircut for 10
business–days indicated in the Table 12, as per the formula given in paragraph 7.3.7 (xi)
below.
(x) Adjustment for non-daily mark-to-market or remargining:
In case a transaction has margining frequency different from daily margining assumed, the
applicable haircut for the transaction will also need to be adjusted by using the formula
given in paragraph 7.3.7 (xi) below.
(xi) Formula for adjustment for different holding periods and / or non-daily mark-to-market or
remargining:
Adjustment for the variation in holding period and margining / mark-to-market, as indicated
in paragraph (ix) and (x) above will be done as per the following formula:
Where;
H = haircut
H = 10-business-day standard supervisory haircut for instrument
10
N = actual number of business days between remargining for capital market
R
transactions or revaluation for secured transactions.
T = minimum holding period for the type of transaction
M
7.3.8 Capital Adequacy Framework for Repo-/Reverse Repo-style transactions.
7.3.8.1 The repo-style transactions also attract capital charge for Counterparty credit risk (CCR),
in addition to the credit risk and market risk. The CCR is defined as the risk of default by the
counterparty in a repo-style transaction, resulting in non-delivery of the security lent/pledged/sold
or non-repayment of the cash.
86A. Treatment in the books of the borrower of funds:
(i) Where a bank has borrowed funds by selling / lending or posting, as collateral, of
securities, the ‘Exposure’ will be an off-balance sheet exposure equal to the 'market
value' of the securities sold/lent as scaled up after applying appropriate haircut. For
the purpose, the haircut as per Table 12 would be used as the basis which should
be applied by using the formula in paragraph 7.3.7 (xi), to reflect minimum
(prescribed) holding period of five business-days for repo-style transactions and
the variations, if any, in the frequency of re-margining, from the daily margining
assumed for the standard supervisory haircut. The 'off-balance sheet exposure' will
be converted into 'on-balance sheet' equivalent by applying a credit conversion
factor of 100 per cent, as per item 5 in Table 8 (paragraph 5.15).
(ii) The amount of money received will be treated as collateral for the securities
lent/sold/pledged. Since the collateral is cash, the haircut for it would be zero.
(iii) The credit equivalent amount arrived at (i) above, net of amount of cash collateral,
will attract a risk weight as applicable to the counterparty.
(iv) As the securities will come back to the books of the borrowing bank after the repo
period, it will continue to maintain the capital for the credit risk in the securities in
the cases where the securities involved in repo are held under banking book, and
capital for market risk in cases where the securities are held under trading book.
The capital charge for credit risk / specific risk would be determined according to
the credit rating of the issuer of the security. In the case of Government securities,
the capital charge for credit / specific risk will be 'zero'.
B. Treatment in the books of the lender of funds:
(i) The amount lent will be treated as on-balance sheet/funded exposure on the
counter party, collateralised by the securities accepted under the repo.
(ii) The exposure, being cash, will receive a zero haircut.
(iii) The collateral will be adjusted downwards/marked down as per applicable haircut.
(iv) The amount of exposure reduced by the adjusted amount of collateral, will receive
a risk weight as applicable to the counterparty, as it is an on- balance sheet
exposure.
(v) The lending bank will not maintain any capital charge for the security received by
it as collateral during the repo period, since such collateral does not enter its
balance sheet but is only held as a bailee.
877.3.8.2 The formula in paragraph 7.3.6 will be adapted as follows to calculate the capital
requirements for transactions with bilateral netting agreements. The bilateral netting agreements
must meet the requirements set out in Annex 18 (part A) of these guidelines.
E* = max {0, [(Σ(E) – Σ(C)) + Σ (Es x Hs) +Σ(Efx x Hfx)]}
where:
E* = the exposure value after risk mitigation
E = current value of the exposure
C = the value of the collateral received
Es = absolute value of the net position in a given security
Hs = haircut appropriate to Es
Efx = absolute value of the net position in a currency different from the settlement
currency
Hfx = haircut appropriate for currency mismatch
The intention here is to obtain a net exposure amount after netting of the exposures and collateral
and have an add-on amount reflecting possible price changes for the securities involved in the
transactions and for foreign exchange risk if any. The net long or short position of each security
included in the netting agreement will be multiplied by the appropriate haircut. All other rules
regarding the calculation of haircuts stated in paragraphs 7.3.6-7.3.7 equivalently apply for banks
using bilateral netting agreements for repo-style transactions.
7.3.9 Collateralised OTC derivatives transactions
The calculation of the counterparty credit risk charge for an individual contract will be as follows:
counterparty charge = [(RC + add-on) – C ] x r x 9%
A
where:
RC = the replacement cost,
add-on = the amount for potential future exposure calculated according to paragraph
5.15.3.4,
CA = the volatility adjusted collateral amount under the comprehensive approach prescribed
in paragraphs 7.3.6- 7.3.7 or zero if no eligible collateral is applied to the transaction, and
r = the risk weight of the counterparty.
When effective bilateral netting contracts are in place, RC will be the net replacement cost and
the add-on will be A as calculated according to Annex 18 (part B) and paragraph 5.15.3.4. The
Net
haircut for currency risk (H ) should be applied when there is a mismatch between the collateral
fx
currency and the settlement currency. Even in the case where there are more than two currencies
involved in the exposure, collateral and settlement currency, a single haircut assuming a 10-
business day holding period scaled up as necessary depending on the frequency of mark-to-
market will be applied.
887.4 Credit Risk Mitigation Techniques – On-Balance Sheet Netting
On-balance sheet netting is confined to loans/advances and deposits, where banks have legally
enforceable netting arrangements, involving specific lien with proof of documentation. They may
calculate capital requirements on the basis of net credit exposures subject to the following
conditions:
Where a bank,
(a) has a well-founded legal basis for concluding that the netting or offsetting agreement
is enforceable in each relevant jurisdiction regardless of whether the counterparty is
insolvent or bankrupt;
(b) is able at any time to determine the loans/advances and deposits withthe same
counterparty that are subject to the netting agreement;
(c) monitors and controls the relevant exposures on a net basis; and
(d) monitors and controls its roll-off risks.
it may use the net exposure of loans/advances and deposits as the basis for its capital adequacy
calculation in accordance with the formula in paragraph 7.3.6. Loans/advances are treated as
exposure and deposits as collateral. The haircuts will be zero except when a currency mismatch
exists. All the requirements contained in paragraph 7.3.6 and 7.6 will also apply.
7.5 Credit Risk Mitigation Techniques - Guarantees
7.5.1 Where guarantees are direct, explicit, irrevocable and unconditional banks may take
account of such credit protection in calculating capital requirements.
7.5.2 A range of guarantors are recognised and a substitution approach will be applied. Thus,
only guarantees issued by entities with a lower risk weight than the counterparty will lead to
reduced capital charges since the protected portion of the counterparty exposure is assigned the
risk weight of the guarantor, whereas the uncovered portion retains the risk weight of the
underlying counterparty.
7.5.3 Detailed operational requirements for guarantees eligible for being treated as a CRM are
as under:
7.5.4 Operational requirements for guarantees
(i) A guarantee (counter-guarantee) must represent a direct claim on the protection provider
and must be explicitly referenced to specific exposures or a pool of exposures, so that the
extent of the cover is clearly defined and incontrovertible. The guarantee must be
irrevocable; there must be no clause in the contract that would allow the protection
89provider unilaterally to cancel the cover or that would increase the effective cost of cover
as a result of deteriorating credit quality in the guaranteed exposure. The guarantee must
also be unconditional; there should be no clause in the guarantee outside the direct control
of the bank that could prevent the protection provider from being obliged to pay out in a
timely manner in the event that the original counterparty fails to make the payment(s) due.
(ii) All exposures will be risk weighted after taking into account risk mitigation available in the
form of guarantees. When a guaranteed exposure is classified as non-performing, the
guarantee will cease to be a credit risk mitigant and no adjustment would be permissible
on account of credit risk mitigation in the form of guarantees. The entire outstanding, net
of specific provision and net of realisable value of eligible collaterals / credit risk mitigants,
will attract the appropriate risk weight.
7.5.5 Additional operational requirements for guarantees
In addition to the legal certainty requirements in paragraph 7.2 above, in order for a guarantee
to be recognised, the following conditions must be satisfied:
(i) On the qualifying default/non-payment of the counterparty, the bank is able in a timely
manner to pursue the guarantor for any monies outstanding under the documentation
governing the transaction. The guarantor shall make one lump sum payment of all monies
under such documentation to the bank, or the guarantor shall assume the future payment
obligations of the counterparty covered by the guarantee. The bank must have the right to
receive any such payments from the guarantor without first having to take legal actions in
order to pursue the counterparty for payment.
(ii) The guarantee is an explicitly documented obligation assumed by the guarantor.
(iii) Except as noted in the following sentence, the guarantee covers all types of payments the
underlying obligor is expected to make under the documentation governing the
transaction, for example notional amount, margin payments etc. Where a guarantee
covers payment of principal only, interests and other uncovered payments should be
treated as an unsecured amount in accordance with paragraph 7.5.8.
7.5.6 Range of Eligible Guarantors (Counter-Guarantors)
Credit protection given by the following entities will be recognised:
(i) Sovereigns, sovereign entities (including BIS, IMF, European Central Bank and European
Community as well as those MDBs referred to in paragraph 5.5, ECGC and CGTMSE,
CRGFTLIH, individual schemes under NCGTC which are backed by explicit Central
Government Guarantee), banks and primary dealers with a lower risk weight than the
counterparty.
90(ii) Other entities that are externally rated except when credit protection is provided to a
securitisation exposure. This would include credit protection provided by parent,
subsidiary and affiliate companies when they have a lower risk weight than the obligor.
(iii) When credit protection is provided to a securitisation exposure, other entities that currently
are externally rated BBB- or better and that were externally rated A- or better at the time
the credit protection was provided. This would include credit protection provided by parent,
subsidiary and affiliate companies when they have a lower risk weight than the obligor.
(iv) In case of securitisation transactions, SPEs cannot be recognised as eligible guarantors.
7.5.7 Risk Weights
7.5.7.1 The protected portion is assigned the risk weight of the protection provider. Exposures
covered by State Government guarantees will attract a risk weight of 20 per cent. The uncovered
portion of the exposure is assigned the risk weight of the underlying counterparty subject to
conditions stipulated in paragraph 7.5.7.2.
7.5.7.2 As per para 7.13 of Circular No.DBR.No.BP.BC.43/21.01.003/2018-19 dated June 03,
2019 on Large Exposures Framework, any CRM instrument from which CRM benefits like shifting
of exposure/ risk weights etc. are not derived may not be counted as an exposure on the CRM
provider. In case of non-fund based credit facilities provided to a person resident outside India
where CRM benefits are not derived and the exposure is shifted to the non-resident person, such
exposures to the non-resident person shall attract a minimum risk weight of 150%.
7.5.8 Proportional Cover
Where the amount guaranteed, or against which credit protection is held, is less than the amount
of the exposure, and the secured and unsecured portions are of equal seniority, i.e. the bank and
the guarantor share losses on a pro-rata basis capital relief will be afforded on a proportional
basis: i.e. the protected portion of the exposure will receive the treatment applicable to eligible
guarantees, with the remainder treated as unsecured.
7.5.9 Currency Mismatches
Where the credit protection is denominated in a currency different from that in which the exposure
is denominated – i.e., there is a currency mismatch – the amount of the exposure deemed to be
protected will be reduced by the application of a haircut H , i.e.,
FX
G = G x (1- H )
A FX
Where;
G = nominal amount of the credit protection
91H = haircut appropriate for currency mismatch between the credit protection and
FX
underlying obligation.
Banks using the supervisory haircuts will apply a haircut of eight per cent for currency mismatch.
7.5.10 Sovereign Guarantees and Counter-Guarantees
A claim may be covered by a guarantee that is indirectly counter-guaranteed by a sovereign. Such
a claim shall be treated as covered by a sovereign guarantee provided that:
(i) the sovereign counter-guarantee covers all credit risk elements of the claim;
(ii) both the original guarantee and the counter-guarantee meet all operational
requirements for guarantees, except that the counter-guarantee need not be direct
and explicit to the original claim; and
(iii) the cover should be robust and no historical evidence suggests that the coverage of
the counter-guarantee is less than effectively equivalent to that of a direct sovereign
guarantee.
7.5.11 ECGC Guaranteed Exposures:
Under the Export Credit insurance92for banks on Whole Turnover Basis, the guarantee/insurance
cover given by ECGC for export credit exposures of the banks ranges between 50% and 75% for
pre-shipment credit and 50% to 85% in case of post-shipment credit. However, the ECGC’s total
liability on account of default by the exporters is capped by an amount specified as Maximum
Liability (ML). In this context, it is clarified that risk weight (as given in para 5.2.3 of this Master
Circular) applicable to the claims on ECGC should be capped to the ML amount specified in the
whole turnover policy of the ECGC. The banks are required to proportionately distribute the ECGC
maximum liability amount to all individual export credits that are covered by the ECGC Policy. For
the covered portion of individual export credits, the banks shall apply the risk weight applicable to
claims on ECGC. For the remaining portion of individual export credit, the banks shall apply the
risk weight as per the rating of the counter-party. The Risk Weighted Assets computation can be
mathematically represented as under:
Size of individual export credit exposure i Ai
Size of individual covered export credit exposure i Bi
Sum of individual covered export credit exposures
Where:
i = 1 to n, if total number of exposures is n
92 DBOD Mailbox Clarification dated October 18, 2013.
92Maximum Liability Amount ML
Risk Weight of counter party for exposure i RWi
RWA for ECGC Guaranteed Export Credit:
7.6 Maturity Mismatch
7.6.1 For the purpose of calculating risk-weighted assets, a maturity mismatch occurs when the
residual maturity of collateral is less than that of the underlying exposure. Where there is a
maturity mismatch and the CRM has an original maturity of less than one year, the CRM is not
recognised for capital purposes. In other cases where there is a maturity mismatch, partial
recognition is given to the CRM for regulatory capital purposes as detailed below in paragraphs
7.6.2 to 7.6.4. In case of loans collateralised by the bank’s own deposits, even if the tenor of such
deposits is less than three months or deposits have maturity mismatch vis-à-vis the tenor of the
loan, the provisions of paragraph 7.6.1 regarding derecognition of collateral would not be attracted
provided an explicit consent of the depositor has been obtained from the depositor (i.e. borrower)
for adjusting the maturity proceeds of such deposits against the outstanding loan or for renewal
of such deposits till the full repayment of the underlying loan.
1.1.1.
7.6.2 Definition of Maturity
The maturity of the underlying exposure and the maturity of the collateral should both be defined
conservatively. The effective maturity of the underlying should be gauged as the longest possible
remaining time before the counterparty is scheduled to fulfil its obligation, taking into account any
applicable grace period. For the collateral, embedded options which may reduce the term of the
collateral should be taken into account so that the shortest possible effective maturity is used.
The maturity relevant here is the residual maturity.
7.6.3 Risk Weights for Maturity Mismatches
As outlined in paragraph 7.6.1, collateral with maturity mismatches are only recognised when their
original maturities are greater than or equal to one year. As a result, the maturity of collateral for
exposures with original maturities of less than one year must be matched to be recognised. In all
cases, collateral with maturity mismatches will no longer be recognised when they have a residual
maturity of three months or less.
7.6.4 When there is a maturity mismatch with recognised credit risk mitigants (collateral, on-
balance sheet netting and guarantees) the following adjustment will be applied:
Pa = P x ( t- 0.25 ) ÷ ( T- 0.25)
93where:
Pa = value of the credit protection adjusted for maturity mismatch
P = credit protection (e.g. collateral amount, guarantee amount) adjusted for any
haircuts
t = min (T, residual maturity of the credit protection arrangement) expressed in years
T = min (5, residual maturity of the exposure) expressed in years
7.7 Treatment of pools of CRM Techniques
In the case where a bank has multiple CRM techniques covering a single exposure (e.g., a bank
has both collateral and guarantee partially covering an exposure), the bank will be required to
subdivide the exposure into portions covered by each type of CRM technique (e.g., portion
covered by collateral, portion covered by guarantee) and the risk-weighted assets of each portion
must be calculated separately. When credit protection provided by a single protection provider
has differing maturities, they must be subdivided into separate protection as well.
8. Capital Charge for Market Risk
8.1 Introduction
Market risk is defined as the risk of losses in on-balance sheet and off-balance sheet positions
arising from movements in market prices. The market risk positions subject to capital charge
requirement are:
(i) The risks pertaining to interest rate related instruments and equities in the trading book;
and
(ii) Foreign exchange risk (including open position in precious metals) throughout the bank
(both banking and trading books).
8.2 Scope and Coverage of Capital Charge for Market Risks
8.2.1 These guidelines seek to address the issues involved in computing capital charges for
interest rate related instruments in the trading book, equities in the trading book and foreign
exchange risk (including gold and other precious metals) in both trading and banking books.
Trading book for the purpose of capital adequacy will include all instruments that are classified as
“Held for Trading” as per Master Direction - Classification, Valuation and Operation of Investment
Portfolio of Commercial Banks (Directions), 2023 dated September 12, 2023. All other
94instruments93 will be included in the banking book and attract corresponding capital charge for
credit risk (or counterparty credit risk, where applicable).
8.2.2 Banks are required to manage the market risks in their books on an ongoing basis and
ensure that the capital requirements for market risks are being maintained on a continuous basis,
i.e., at the close of each business day. Banks are also required to maintain strict risk management
systems to monitor and control intra-day exposures to market risks.
8.2.3 Capital for market risk would not be relevant for securities, which have already matured
and remain unpaid. These securities will attract capital only for credit risk. On completion of 90
days delinquency, these will be treated on par with NPAs for deciding the appropriate risk weights
for credit risk.
8.2.4 The risk-weighted assets for market risk should be determined by multiplying the market
risk capital charge by a factor of 12.5, as provided in paragraph 8.7. The market risk capital charge
is the simple sum of the capital requirements arising from each of the three risk classes – namely
interest rate risk, equity risk and foreign exchange risk as detailed in the formula below:
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡 = 𝐶𝑅 ∗𝑆𝐹 + 𝐶𝑅 ∗𝑆𝐹 +𝐶𝑅 ∗𝑆𝐹
𝐼𝑅𝑅 𝐼𝑅𝑅 𝐸𝑄 𝐸𝑄 𝐹𝑋 𝐹𝑋
where:
a) 𝐶𝑅 = capital requirement prescribed for interest rate risk under paragraph 8.3
𝐼𝑅𝑅
and Annex 9 (including additional requirements for options such as non-delta risks);
b) 𝐶𝑅 = capital requirement prescribed for equity risk under paragraph 8.4;
𝐸𝑄
c) 𝐶𝑅 = capital requirement prescribed for forex risk under paragraph 8.5 and
𝐹𝑋
Annex 9 (including additional requirements for options such as non-delta risks);
d) 𝑆𝐹 = Scaling factor of 1.2;
𝐼𝑅𝑅
e) 𝑆𝐹 = Scaling factor of 2.0; and
𝐸𝑄
f) 𝑆𝐹 = Scaling factor of 1.1.
𝐹𝑋
Note: The scalars provided above are part of a transition arrangement. Upon
implementation of ‘final guidelines on minimum capital requirements for Market Risk -
Simplified Standardised Approach’, the scalars will be 𝑆𝐹 = 1.3; 𝑆𝐹 = 3.5; and 𝑆𝐹 =
𝐼𝑅𝑅 𝐸𝑄 𝐹𝑋
1.2.
93 Accordingly, instruments classified under HTM, AFS, FVTPL (non-HFT) and investments in own subsidiaries, joint
ventures and associates will also be part of banking book and will not attract market risk capital charge.
958.3 Measurement of Capital Charge for Interest Rate Risk
8.3.1 This section describes the framework for measuring the risk of holding or taking positions
in debt securities and other interest rate related instruments in the trading book.
8.3.2 The capital charge for interest rate related instruments would apply to fair value of these
items in bank's trading book. Since banks are required to maintain capital for market risks on an
ongoing basis, they are required to mark to market their trading positions on a daily basis. The
fair value will be determined as per extant RBI guidelines on valuation of investments.
8.3.3 The minimum capital requirement is expressed in terms of two separately calculated
charges, (i) "specific risk" charge for each security, which is designed to protect against an
adverse movement in the price of an individual security owing to factors related to the individual
issuer, both for short (short position is not allowed in India except in derivatives and Central
Government Securities) and long positions, and (ii) "general market risk" charge towards interest
rate risk in the portfolio, where long and short positions (which is not allowed in India except in
derivatives and Central Government Securities) in different securities or instruments can be offset.
A. Specific Risk
8.3.4 The capital charge for specific risk is designed to protect against an adverse movement in
the price of an individual security owing to factors related to the individual issuer. The specific risk
charges for various kinds of exposures would be applied as detailed below:
Sr. No. Nature of debt securities / issuer Table to be followed
a. Central, State and Foreign Central Table 14 – Part A
Governments’ Bonds
b. Banks’ Bonds Table 14 – Part B
c. Corporate Bonds (other than Bank Bonds) Table 14 – Part C
d. Securitisation Exposure Table 14 – Part D
Table 14 – Part E(i) and
E(ii)
e. Non-common Equity Capital Instruments Table 14 – Part F
issued by Financial Entities other than Banks
96f. Debt mutual fund / exchange traded fund*
(ETF) with underlying comprising of
(i) Central, State and Foreign Central Table 14 – Part A
Governments' bonds
(ii) Bank's Bonds and Table 14 – Part B
(iii) Corporate Bonds (other than Bank Bonds) Table 14 – Part C
g. Equity Investments in Banks Table 17 – Part A
h. Equity Investments in Financial Entities Table 17 – Part B
(other than Banks)
i. Equity Investments in Non-financial Table 17 – Part C
(commercial) Entities
*Note: 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 debt instrument attracting the
highest specific risk capital charge in the fund. Debt mutual fund / ETF classified in trading book
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
paragraph 8.4.1.
Table 14 – Part A: Specific Risk Capital Charge for Sovereign securities issued by
Indian and foreign sovereigns
Specific risk capital
Sr. No. Nature of Investment Residual Maturity
(as % of exposure)
A. Indian Central Government and State Governments
Investment in Central and State
1. All 0.00
Government Securities
Investments in other approved
2. securities guaranteed by Central All 0.00
Government
6 months or less 0.28
Investments in other approved
More than 6 months and up
3. securities guaranteed by State 1.13
to and including 24 months
Government
More than 24 months 1.80
Investment in other securities
where payment of interest and
4. repayment of principal are All 0.00
guaranteed by Central
Government
5. Investments in other securities 6 months or less 0.28
97where payment of interest and More than 6 months and up
1.13
repayment of principal are to and including 24 months
guaranteed by State Government.
More than 24 months 1.80
B. Foreign Central Governments
1. AAA to AA All 0.00
6 months or less 0.28
More than 6 months and up
2. A to BBB 1.13
to and including 24 months
More than 24 months 1.80
3. BB to B All 9.00
4. Below B All 13.50
5. Unrated All 13.50
Table 14 - Part B: Specific risk capital charge for bonds issued by banks
Specific risk capital charge (%)
All Scheduled Banks All Non-Scheduled
Residual (Commercial, Regional Banks (Commercial,
maturity Rural Banks, Local Area Regional Rural Banks,
Banks and Co-operative Local Area Banks and
Banks) Co-operative Banks)
Level of Common Investments
Investments
Equity Tier 1 capital in capital
in capital
(CET1) including instruments
instruments
applicable capital (other than All other All other
(other than
conservation buffer equity# ) claims # Claims
equity )
(CCB) (%) of the referred to
referred to in
investee bank (where in para
para 5.6.1(i)
applicable) 5.6.1(i)
1 2 3 4 5 6
≤6 months 1.75 0.28 1.75 1.75
Applicable Minimum > 6 months
CET1 + Applicable and 7.06 1.13 7.06 7.06
CCB and above ≤ 24 months
>24 months 11.25 1.8 11.25 11.25
Applicable Minimum
CET1 + CCB = 75% All
13.5 4.5 22.5 13.5
and <100% of Maturities
applicable CCB
Applicable Minimum
CET1 + CCB = 50% All
22.5 9 31.5 22.5
and <75% of Maturities
applicable CCB
98Applicable Minimum
CET1 + CCB = 0% All
31.5 13.5 56.25 31.5
and <50% of Maturities
applicable CCB
Minimum CET1 less
All Full
than applicable 56.25 56.25 56.25
Maturities deduction*
minimum
* The deduction should be made from Common Equity Tier 1 Capital.
# refer to para 8.4.4 below for specific risk capital charge on equity instruments.
Notes:
(i) In case of banks where no capital adequacy norms have been prescribed by the RBI, the
lending / investing bank shall calculate the applicable Common Equity Tier 1 and capital
conservation buffer of the bank concerned, notionally, by obtaining necessary information
from the investee bank and using the capital adequacy norms as applicable to the
commercial banks. In case, it is not found feasible to compute applicable Common Equity
Tier 1 and capital conservation buffer on such notional basis, the specific risk capital
charge of 31.5% or 56.25 %, as per the risk perception of the investing bank, shall be
applied uniformly to the investing bank’s entire exposure.
(ii) In case of banks where capital adequacy norms are not applicable at present, the matter
of investments in their capital-eligible instruments would not arise for now. However, this
Table above shall become applicable to them, if in future they issue any capital
instruments where other banks are eligible to invest.
(iii) The existing specific risk capital charges up to 9% have been scaled up to reflect the
application of specific risk charge corresponding to risk weight of 125% instead of 100%.
For instance, the existing specific risk charge for exposure to capital instrument issued by
scheduled banks with applicable Common Equity Tier 1 and capital conservation buffer
more than 9% and instrument having a residual maturity of less than 6 month is 1.4%.
This is scaled up as under:
1.4*125% =1.75
(iv) Till such time the investee banks have not disclosed their Basel III capital ratios publicly,
the risk weights / capital charges may be arrived at based on the tables/paragraph as
contained in the Master Circular DBOD.No.BP.BC.4/21.06.001/2015-16 dated July 1,
2015 on Prudential Guidelines on Capital Adequacy and Market Discipline - New Capital
Adequacy Framework.
99Table 14 – Part C94: Specific Risk Capital Charge for Corporate Bonds (Other than bank
bonds)
* Rating by Residual maturity Specific Risk Capital
the ECAI Charge (in %)
6 months or less 0.28
Greater than 6 months and
AAA to BBB up to and including 24 1.14
months
Exceeding 24 months 1.80
BB and below All maturities 13.5
Unrated (if permitted) All maturities 9
* 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.
Table 14 – Part D: Specific Risk Capital Charge for Securitisation Exposures
For securitisation transactions undertaken subsequent to the issuance of Master
Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021
dated September 24, 2021, the specific risk capital requirement of securitisation
exposures that are held under trading book is to be calculated according to the revised
method as set out in the Master Direction ibid. Accordingly, a bank shall calculate the
specific risk capital requirement applicable to each securitisation exposure in trading
book by dividing the risk weight calculated as if it were held in the banking book by
11.11, subject to a cap on specific risk capital requirement of 100 per cent.
For transactions undertaken before issuance of the aforementioned Directions, i.e.,
prior to September 24, 2021, the treatment of securitisation exposures for capital
adequacy would be as per Table 14 – Part E provided below.
Table 14 – Part E(i): Specific Risk Capital Charge for transactions in
Securitisation Exposures prior to September 24, 2021
Rating by the ECAI* Specific Risk Capital Charge
Securitisation Exposures Securitisation Exposures
(in %) (SDIs) relating to Commercial
Real Estate Exposures (in %)
AAA 1.8 9.0
AA 2.7 9.0
A 4.5 9.0
BBB 9.0 9.0
BB 31.5 (100.0 in the case of 31.5 (100.0 in the case of
originators) originators)
B and below 100.0 100.0
or Unrated
94 Master Circular DBOD.No.BP.BC.73/21.06.001/2009-10 dated Feb 8, 2010.
100* 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.
Table 14 – Part E (ii): Specific Risk Capital Charge for transactions in
Re-securitisation Exposures95
Rating by the ECAI* Specific Risk Capital Charge
Re-Securitisation Re-Securitisation Exposures
Exposures (in %) relating to Commercial Real
Estate Exposures (in %)
AAA 3.6 18.0
AA 5.4 18.0
A 9.0 18.0
BBB 18.0 18.0
BB 63.0 (100.0 in the case of 63.0 (100.0 in the case of
originators) originators)
B and below 100.0 100.0
or Unrated
* 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.
Table 14 - Part F: Specific risk capital charge for non-common equity capital
instruments issued by financial entities other than banks
Residual maturity Specific risk capital charge (%)
1 2 3
≤6 months 1.75
> 6 months and ≤
Specific risk 24 months 7.06
charge >24 months 11.25
8.3.5 Banks shall, in addition to computing the counterparty credit risk (CCR) charge for OTC
derivatives, as part of capital for credit risk as per the Standardised Approach covered in
paragraph 5 above, also compute the specific risk charge for OTC derivatives in the trading book
as required in terms of Annex 9.
95 Re-securitisation Exposures are not allowed in terms of circular DBOD.No.BP.BC-103/21.04.177/2011-12 dated
May 07, 2012 (instructions since consolidated in Master Direction – Reserve Bank of India (Securitisation of Standard
Assets) Directions, 2021 dated September 24, 2021).
101B. General Market Risk
8.3.6 The capital requirements for general market risk are designed to capture the risk of loss
arising from changes in market interest rates. The capital charge is the sum of four components:
(i) the net short (short position is not allowed in India except in derivatives and Central
Government Securities) or long position in the whole trading book;
(ii) a small proportion of the matched positions in each time-band (the “vertical
disallowance”);
(iii) a larger proportion of the matched positions across different time-bands (the “horizontal
disallowance”), and
(iv) a net charge for positions in options, where appropriate.
8.3.7 Separate maturity ladders should be used for each currency and capital charges should
be calculated for each currency separately and then summed with no offsetting between positions
of opposite sign. In the case of those currencies in which business is insignificant (where the
turnover in the respective currency is less than 5 per cent of overall foreign exchange turnover),
separate calculations for each currency are not required. The bank may, instead, slot within each
appropriate time-band, the net long or short position for each currency. However, these individual
net positions are to be summed within each time-band, irrespective of whether they are long or
short positions, to produce a gross position figure. The gross positions in each time-band will be
subject to the assumed change in yield set out in Table-16 with no further offsets.
8.3.8 The Basel Committee has suggested two broad methodologies for computation of capital
charge for market risks. One is the standardised method and the other is the banks’ internal risk
management models method. As banks in India are still in a nascent stage of developing internal
risk management models, it has been decided that, to start with, banks may adopt the
standardised method. Under the standardised method there are two principal methods of
measuring market risk, a “maturity” method and a “duration” method. As “duration” method is a
more accurate method of measuring interest rate risk, it has been decided to adopt standardised
duration method to arrive at the capital charge. Accordingly, banks are required to measure the
general market risk charge by calculating the price sensitivity (modified duration) of each position
separately. Under this method, the mechanics are as follows:
i. first calculate the price sensitivity (modified duration) of each instrument;
ii. next apply the assumed change in yield to the modified duration of each instrument
between 0.6 and 1.0 percentage points depending on the maturity of the instrument (see
Table 15);
iii. slot the resulting capital charge measures into a maturity ladder with the fifteen time
bands as set out in Table 15;
102iv. subject long and short positions (short position is not allowed in India except in
derivatives and Central Government Securities) in each time band to a 5 per cent vertical
disallowance designed to capture basis risk; and
v. carry forward the net positions in each time-band for horizontal offsetting subject to the
disallowances set out in Table 16.
Table 15 - Duration Method – Time Bands and Assumed changes in Yield
Assumed Change Assumed Change
Time Bands Time Bands
in Yield in Yield
Zone 1 Zone 3
1 month or less 1.00 3.6 to 4.3 years 0.75
1 to 3 months 1.00 4.3 to 5.7 years 0.70
3 to 6 months 1.00 5.7 to 7.3 years 0.65
6 to 12 months 1.00 7.3 to 9.3 years 0.60
Zone 2 9.3 to 10.6 years 0.60
1.0 to 1.9 years 0.90 10.6 to 12 years 0.60
1.9 to 2.8 years 0.80 12 to 20 years 0.60
2.8 to 3.6 years 0.75 over 20 years 0.60
Table 16 - Horizontal Disallowances
Within the Between Between zones
Zones Time band zones adjacent zones 1 and 3
1 month or less
1 to 3 months
Zone 1 40%
3 to 6 months
6 to 12 months
40%
1.0 to 1.9 years
Zone 2 1.9 to 2.8 years 30%
2.8 to 3.6 years
40%
3.6 to 4.3 years 100%
4.3 to 5.7 years
5.7 to 7.3 years
7.3 to 9.3 years
Zone 3 30%
9.3 to 10.6 years
10.6 to 12 years
12 to 20 years
over 20 years
8.3.9 The measurement system should include all interest rate derivatives and off balance-sheet
instruments in the trading book which react to changes in interest rates, (e.g. forward rate
agreements (FRAs), other forward contracts, bond futures, interest rate and cross-currency
swaps and forward foreign exchange positions). Options can be treated in a variety of ways as
described in Annex 9.
1038.4 Measurement of Capital Charge for Equity Risk
8.4.1 The capital charge for equities would apply on their fair value in bank’s trading book.
Minimum capital requirement to cover the risk of holding or taking positions in equities in the
trading book is set out below. This is applied to all instruments that exhibit market behaviour
similar to equities but not to non-convertible preference shares (which are covered by the interest
rate risk requirements described earlier). The instruments covered include equity shares96,
whether voting or non-voting, convertible securities that behave like equities, for example: units
of funds97 (other than debt mutual funds/ETFs mentioned in para 8.3.4), and commitments to buy
or sell equity.
Specific and General Market Risk
8.4.2 Capital charge for specific risk (akin to credit risk) will be 11.25 per cent or capital charge in
accordance with the risk warranted by external rating (or lack of it) of the counterparty, whichever
is higher and specific risk is computed on banks' gross equity positions (i.e., the sum of all long
equity positions and of all short equity positions - short equity position is, however, not allowed
for banks in India). In addition, the general market risk charge will also be 9 per cent on the gross
equity positions. These capital charges will also be applicable to all trading book exposures, which
are exempted from capital market exposure ceilings for direct investments.
8.4.3 Specific Risk Capital Charge for banks’ investment in Security Receipts98 will be 13.5 per
cent (equivalent to 150 per cent risk weight).
8.4.4 The specific risk charge for bank’s investments in the equity of other banks / other financial
entities / non-financial entities will be as under:
96 Please refer to Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial
Banks (Directions), 2023 dated September 12, 2023. Accordingly, a) investments in subsidiaries, associates and joint
ventures would be part of banking book; b) unlisted equity would be part of banking book [FVTPL (non-HFT), or
under AFS in terms of clause 6.2(a) of Directions]; and c) listed equity is generally part of trading book (classified
under HFT), unless such investment is classified under AFS in terms of clause 6.2(a) of Directions.
97 Please also refer to paragraph 7(d) and 8(b) of Annex I of Master Direction - Classification, Valuation and Operation
of Investment Portfolio of Commercial Banks (Directions), 2023 dated September 12, 2023.
98 Please refer to Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial
Banks (Directions), 2023 dated September 12, 2023. Accordingly, Security Receipts can be part of banking book
[classified under FVTPL (non-HFT)] or trading book (classified under HFT).
104Table 17 – Part A: Specific risk charge for bank’s investments in the equity of other
banks
Level of Common Equity Tier 1
All Scheduled Banks All Non-scheduled Banks
capital (CET1) including applicable
(Commercial, Regional Rural (Commercial, Local Area
capital conservation buffer (CCB)
Banks, Local Area Banks and Banks and Co-Operative
(%) of the investee bank (where
Co-Operative Banks) Banks) (in %)
applicable)
Equity investments in other Equity investments in other
banks referred to in: banks referred to in:
para 5.6.1(i) Para 5.6.1(ii) para 5.6.1(i) para 5.6.1(ii)
Applicable Minimum CET1 +
11.25 22.5 11.25 27
Applicable CCB and above
Applicable Minimum CET1 + CCB =
13.5 27 22.5 31.5
75% and <100% of applicable CCB
Applicable Minimum CET1 + CCB =
22.5 31.5 31.5 40.5
50% and <75% of applicable CCB
Applicable Minimum CET1 + CCB = Full
31.5 40.5 56.25
0% and <50% of applicable CCB deduction*
Minimum CET1 less than applicable Full Full Full
50
minimum deduction* deduction* deduction*
* Full deduction should be made from Common Equity Tier 1 capital
Note:
Till such time the investee banks have not disclosed their Basel III capital ratios publicly, the
risk weights / capital charges may be arrived at based on the tables/paragraph as contained
in the Master Circular DBOD.No.BP.BC.4/21.06.001/2015-16 dated July 1, 2015 on
Prudential Guidelines on Capital Adequacy and Market Discipline - New Capital Adequacy
Framework.
Table 17 – Part B: Specific risk charge for bank’s investments in the equity of
financial entities other than banks
Equity investments in financial entities other than banks
referred to in:
para 5.6.1(i) para 5.6.1(ii)
Specific risk charge (%) 11.25 22.5
Table 17 – Part C: Specific risk charge for bank’s investments in the equity of
non-financial (commercial) entities
Equity investments in non-financial entities
which are more than 10% of the equity
where a bank does not capital of investee companies or which
own more than 10% of the are affiliates of the bank (these
equity capital of investee exposures need not attract general
companies market risk charge)
Specific risk charge (%) 11.25 100
1058.5 Measurement of Capital Charge for Foreign Exchange Risk
The bank’s net open position in each currency should be calculated by summing:
• The net spot position (i.e., all asset items less all liability items, including accrued
interest, denominated in the currency in question);
• The net forward position (i.e., all amounts to be received less all amounts to be paid
under forward foreign exchange transactions, including currency futures and the
principal on currency swaps not included in the spot position);
• Guarantees (and similar instruments) that are certain to be called and are likely to be
irrecoverable;
• Net future income/expenses not yet accrued but already fully hedged (at the discretion
of the reporting bank);
• Depending on accounting conventions in different countries, any other item
representing a profit or loss in foreign currencies;
• The net delta-based equivalent of the total book of foreign currency options
Foreign exchange open positions and gold open positions are at present risk-weighted at 100 per
cent. Thus, capital charge for market risks in foreign exchange and gold open position is 9 per
cent. These open positions, limits or actual whichever is higher, would continue to attract
capital charge at 9 per cent. This capital charge is in addition to the capital charge for credit risk
on the on-balance sheet and off-balance sheet items pertaining to foreign exchange and gold
transactions.
8.6 Measurement of Capital Charge for Credit Default Swap (CDS) in the Trading Book
8.6.1 General Market Risk
A credit default swap does not normally create a position for general market risk for either the
protection buyer or protection seller. However, the present value of premium payable / receivable
is sensitive to changes in the interest rates. In order to measure the interest rate risk in premium
receivable / payable, the present value of the premium can be treated as a notional position in
Government securities of relevant maturity. These positions will attract appropriate capital charge
for general market risk. The protection buyer / seller will treat the present value of the premium
payable / receivable equivalent to a short / long notional position in Government securities of
relevant maturity.
8.6.2 Specific Risk for Exposure to Reference Entity
A CDS creates a notional long / short position for specific risk in the reference asset / obligation
for protection seller / protection buyer. For calculating specific risk capital charge, the notional
amount of the CDS and its maturity should be used. The specific risk capital charge for CDS
positions will be as per Tables below.
106Table 18: Specific Risk Capital Charges for bought and sold CDS positions
in the Trading Book:
Exposures to entities other than Commercial Real Estate Companies
Upto 90 days After 90 days
Ratings by Residual Maturity of the Capital Ratings by Capital
the ECAI* instrument charge the ECAI* charge
6 months or less 0.28 % AAA 1.8 %
Greater than 6 months and
up to and including 24 1.14% AA 2.7%
AAA to BBB
months
A 4.5%
Exceeding 24 months 1.80%
BBB 9.0%
BB and BB and
All maturities 13.5% 13.5%
below below
Unrated Unrated
All maturities 9.0% 9.0%
(if permitted) (if permitted)
* 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 within the main category.
Table 19: Specific Risk Capital Charges for bought and sold CDS positions in the Trading
Book : Exposures to Commercial Real Estate Companies
Capital
Ratings by the ECAI* Residual Maturity of the instrument
charge
6 months or less 1.4%
Greater than 6 months and up to and
AAA to BBB 7.7%
including 24 months
Exceeding 24 months 9.0%
BB and below All maturities 9.0%
Unrated (if permitted) All maturities 9.0%
# The above table shall be applicable for exposures up to 90 days. Capital charge for exposures
to Commercial Real Estate Companies beyond 90 days shall be taken at 9.0%, regardless of
rating of the reference / deliverable obligation.
* 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 within the main category.
8.6.2.1 Specific Risk Capital Charges for Positions Hedged by CDS99
(i) Banks may fully offset the specific risk capital charges when the values of two legs (i.e.,
long and short in CDS positions) always move in the opposite direction and broadly to the same
extent. This would be the case when the two legs consist of completely identical CDS. In these
cases, no specific risk capital requirement applies to both sides of the CDS positions.
99 Please refer to paragraph 6.2 of Annex 7 of this Master Circular for details.
107(ii) Banks may offset 80 per cent of the specific risk capital charges when the value of two
legs (i.e., long and short) always moves in the opposite direction but not broadly to the same
extent. This would be the case when a long cash position is hedged by a credit default swap and
there is an exact match in terms of the reference / deliverable obligation, and the maturity of both
the reference / deliverable obligation and the CDS. In addition, key features of the CDS (e.g.,
credit event definitions, settlement mechanisms) should not cause the price movement of the
CDS to materially deviate from the price movements of the cash position. To the extent that the
transaction transfers risk, an 80% specific risk offset will be applied to the side of the transaction
with the higher capital charge, while the specific risk requirement on the other side will be zero.
(iii) Banks may offset partially the specific risk capital charges when the value of the two legs
(i.e., long and short) usually moves in the opposite direction. This would be the case in the
following situations:
(a) The position is captured in paragraph 8.6.2.1(ii) but there is an asset mismatch between
the cash position and the CDS. However, the underlying asset is included in the (reference /
deliverable) obligations in the CDS documentation and meets the requirements in paragraph
5.17.1.3(i) above.
(b) The position is captured in paragraph 8.6.2.1(ii) but there is maturity mismatch between
credit protection and the underlying asset. However, the underlying asset is included in the
(reference/ deliverable) obligations in the CDS documentation.
(c) In each of the cases in paragraph (a) and (b) above, rather than applying specific risk
capital requirements on each side of the transaction (i.e., the credit protection and the underlying
asset), only higher of the two capital requirements will apply.
8.6.2.2 Specific Risk Charge in CDS Positions which are not meant for Hedging
In cases not captured in paragraph 8.6.2.1, a specific risk capital charge will be assessed against
both sides of the positions.
8.6.3 Capital Charge for Counterparty Credit Risk
The credit exposure for the purpose of counterparty credit risk on account of CDS transactions in
the Trading Book will be calculated according to the Current Exposure Method100.
100 A CDS contract, which is required to be marked-to-market, creates bilateral exposure for the parties to the
contract. The mark-to-market value of a CDS contract is the difference between the default-adjusted present value
of protection payment (called “protection leg” / “credit leg”) and the present value of premium payable called
(“premium leg”). If the value of credit leg is less than the value of the premium leg, then the marked-to-market value
for the protection seller in positive. Therefore, the protection seller will have exposure to the counterparty
(protection buyer) if the value of premium leg is more than the value of credit leg. In case, no premium is outstanding,
the value of premium leg will be zero and the mark-to-market value of the CDS contract will always be negative for
1088.6.3.1 Protection Seller
A protection seller will have exposure to the protection buyer only if the fee/premia is outstanding.
In such cases, the counterparty credit risk charge for all single name long CDS positions in the
Trading Book will be calculated as the sum of the current marked-to-market value, if positive (zero,
if marked-to-market value is negative) and the potential future exposure add-on factors based on
table given below. However, for protection seller where the CDS positions are outside netting and
margin agreements, the add-on will be capped to the amount of unpaid premia. Banks have the
option to remove such CDS positions from their legal netting sets and treat them as individual
unmargined transactions in order to apply the cap.
Table 20: Add-on Factors for Protection Sellers
(As % of Notional Principal of CDS)
Type of Reference Obligation Add-on Factor
Obligations rated BBB- and above 10%
Below BBB- and unrated 20%
8.6.3.2 Protection Buyer
A CDS contract creates a counterparty exposure on the protection seller on account of the credit
event payment. The counterparty credit risk charge for all short CDS positions in the Trading Book
will be calculated as the sum of the current marked-to-market value, if positive (zero, if marked-
to-market value is negative) and the potential future exposure add-on factors based on table given
below:
Table 21: Add-on Factors for Protection Buyers
(As % of Notional Principal of CDS)
Type of Reference Obligation Add-on Factor
Obligations rated BBB- and above 10%
Below BBB- and unrated 20%
8.6.3.3 Capital Charge for Counterparty Risk for Collateralised Transactions in CDS
As mentioned in paragraph 3.3 of the circular IDMD.PCD.No.5053/14.03.04/2010-11 dated May
23, 2011, collaterals and margins would be maintained by the individual market participants. The
counterparty exposure for CDS traded in the OTC market will be calculated as per the Current
Exposure Method. Under this method, the calculation of the counterparty credit risk charge for an
individual contract, taking into account the collateral, will be as follows:
Counterparty risk capital charge = [(RC + add-on) – CA] x r x 9%
the protection seller and therefore, protection seller will not have any exposure to the protection buyer. In no case,
the protection seller’s exposure on protection buyer can exceed the amount of the premium unpaid. For the purpose
of capital adequacy as well as exposure norms, the measure of counterparty exposures in case of CDS transaction
held in Trading Book is the Potential Future Exposure (PFE) which is measured and recognised as per Current
Exposure Method.
109Where;
RC = the replacement cost,
add-on = the amount for potential future exposure calculated according to paragraph
5.15.3.4 above.
CA = the volatility adjusted amount of eligible collateral under the comprehensive approach
prescribed in paragraph 7.3 on "Credit Risk Mitigation Techniques - Collateralised
Transactions" of these guidelines, or zero if no eligible collateral is applied to the transaction,
and
r = the risk weight of the counterparty.
8.6.4 Treatment of Exposures below Materiality Thresholds of CDS
Materiality thresholds on payments below which no payment is made in the event of loss are
equivalent to retained first loss positions and should be assigned risk weight of 1250 per cent for
capital adequacy purpose by the protection buyer.
8.7 Aggregation of the capital charge for Market Risks
As explained earlier capital charges for specific risk and general market risk are to be computed
separately before aggregation. For computing the total capital charge and Risk Weighted Assets
for market risks, the calculations may be plotted in the following table:
Proforma
(₹ in crore)
Risk Weighted
Risk Category Capital charge
Assets (RWA)
12.5 times the capital
I. Interest Rate (a+b)
charge
a. General market risk
i) Net position (parallel shift)
ii) Horizontal disallowance (curvature)
iii) Vertical disallowance (basis)
iv) Options
b. Specific risk
12.5 times the capital
II. Equity (a+b)
charge
a. General market risk
b. Specific risk
12.5 times the capital
III. Foreign Exchange and Gold
charge
IV. Total capital charge and RWA for
market risks (I+II+III)
1108.8 Treatment for Illiquid Positions
8.8.1 Prudent Valuation Guidance
(i) This section provides banks with guidance on prudent valuation for positions that are
accounted for at fair value. It is especially important for positions without actual market
prices or observable inputs to valuation, as well as less liquid positions which raise
supervisory concerns about prudent valuation. The valuation guidance set forth below
is not intended to require banks to change valuation procedures for financial reporting
purposes.
(ii) A framework for prudent valuation practices should at a minimum include the following:
8.8.1.1 Systems and Controls:
Banks must establish and maintain adequate systems and controls sufficient to give management
and supervisors the confidence that their valuation estimates are prudent and reliable. These
systems must be integrated with other risk management systems within the organisation (such
as credit analysis). Such systems must include:
(i) Documented policies and procedures for the process of valuation. This includes clearly
defined responsibilities of the various areas involved in the determination of the
valuation, sources of market information and review of their appropriateness, guidelines
for the use of unobservable inputs reflecting the bank’s assumptions of what market
participants would use in pricing the position, frequency of independent valuation, timing
of closing prices, procedures for adjusting valuations, end of the month and ad-hoc
verification procedures; and
(ii) Clear and independent (i.e., independent of front office) reporting lines for the
department accountable for the valuation process.
8.8.1.2 Valuation Methodologies:
Marking to Market
(i) Marking-to-market is at least the daily valuation of positions at readily available close out
prices in orderly transactions that are sourced independently. Examples of readily available close
out prices include exchange prices, screen prices, or quotes from several independent reputable
brokers.
(ii) Banks must mark-to-market as much as possible. The more prudent side of bid/offer
should be used unless the institution is a significant market maker in a particular position type and
it can close out at mid-market. Banks should maximise the use of relevant observable inputs and
minimise the use of unobservable inputs when estimating fair value using a valuation technique.
However, observable inputs or transactions may not be relevant, such as in a forced liquidation
111or distressed sale, or transactions may not be observable, such as when markets are inactive. In
such cases, the observable data should be considered, but may not be determinative.
Marking to Model
(iii) Marking-to model is defined as any valuation which has to be benchmarked, extrapolated
or otherwise calculated from a market input. Where marking-to-market is not possible, banks
should follow the guidelines on valuation of investments contained in Master Direction -
Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions),
2023 dated September 12, 2023. For investment and derivative positions other than those
covered in the Master Direction, the valuation model used by banks must be demonstrated to be
prudent. When marking to valuation model other than that prescribed in RBI / FIMMDA guidelines,
an extra degree of conservatism is appropriate. RBI will consider the following in assessing
whether a mark-to-model valuation is prudent:
Senior management should be aware of the elements of the trading book or of other fair-
valued positions which are subject to mark to model and should understand the materiality
of the uncertainty this creates in the reporting of the risk/performance of the business.
Market inputs should be sourced, to the extent possible, in line with market prices (as
discussed above). The appropriateness of the market inputs for the particular position
being valued should be reviewed regularly.
Where available, generally accepted valuation methodologies for particular products
should be used as far as possible.
Where the model is developed by the institution itself, it should be based on appropriate
assumptions, which have been assessed and challenged by suitably qualified parties
independent of the development process. The model should be developed or approved
independently of the front office. It should be independently tested. This includes validating
the mathematics, the assumptions and the software implementation.
There should be formal change control procedures in place and a secure copy of the
model should be held and periodically used to check valuations.
Risk management should be aware of the weaknesses of the models used and how best
to reflect those in the valuation output.
The model should be subject to periodic review to determine the accuracy of its
performance (e.g., assessing continued appropriateness of the assumptions, analysis of
P&L versus risk factors, comparison of actual close out values to model outputs).
Valuation adjustments should be made as appropriate, for example, to cover the
uncertainty of the model valuation (see also valuation adjustments in paragraphs 8.8.1.2
(vi), (vii) and 8.8.2.1 to 8.8.2.4).
112Independent Price Verification
(iv) Independent price verification is distinct from daily mark-to-market. It is the process by
which market prices or model inputs are regularly verified for accuracy. While daily marking-to-
market may be performed by dealers, verification of market prices or model inputs should be
performed by a unit independent of the dealing room, at least monthly (or, depending on the
nature of the market/trading activity, more frequently). It need not be performed as frequently as
daily mark-to-market, since the objective, i.e., independent, marking of positions should reveal
any error or bias in pricing, which should result in the elimination of inaccurate daily marks.
(v) Independent price verification entails a higher standard of accuracy in that the market
prices or model inputs are used to determine profit and loss figures, whereas daily marks are
used primarily for management reporting in between reporting dates. For independent price
verification, where pricing sources are more subjective, e.g., only one available broker quote,
prudent measures such as valuation adjustments may be appropriate.
Valuation Adjustments
(vi) As part of their procedures for marking to market, banks must establish and maintain
procedures for considering valuation adjustments. RBI would particularly expect banks using
third-party valuations to consider whether valuation adjustments are necessary. Such
considerations are also necessary when marking to model.
(vii) At a minimum, banks should consider the following valuation adjustments while valuing
their derivatives portfolios:
• incurred CVA losses101,
• closeout costs,
• operational risks,
• early termination, investing and funding costs, and
• future administrative costs and,
• where appropriate, model risk.
Banks may follow any recognised method/model to compute the above adjustments except
provisions against incurred CVA losses. However, banks may use the following formula to
calculate incurred CVA loss on derivatives transactions:
101 Provisions against incurred CVA losses are akin to specific provisions required on impaired assets and depreciation
in case of investments held in the trading book. These provisions will be in addition to the general provisions @ 0.4%
required on the positive MTM values. The provisions against incurred CVA losses may be netted off from the
exposure value while calculating capital charge for default risk under the Current Exposure Method as required in
terms of paragraph 5.15.3.4 (ii).
113ICVALt = Max [0,{(EEt *RPt) - (EE0 *RP0)}]
Where;
ICVALt = Cumulative Incurred CVA loss at time ‘t’.
EEt = Value of counterparty exposure projected after one year from ‘t’ and
discounted back to ‘t’ using CEM and a risk free discount rate for one year
EE
0
= Counterparty exposure estimated at time ‘0’ using CEM
RP t = Credit spread of the counterparty as reflected in the CDS or bond
In cases where market based credit spreads are not available, risk premium applicable to
the counterparty according to its credit grade as per the internal credit rating system of the
bank used for pricing/loan approval purposes at time ‘t’ may be used.
RP = Credit spread of the counterparty as reflected in the CDS or bond prices.
0
In cases where market based credit spreads are not available, risk premium applicable to
the counterparty according to its credit grade as per the internal credit rating system of the
bank used for pricing / loan approval purposes at time ‘0’ i.e. the date of the transaction.
Note: Some of other terms used above are explained below:
Close-out costs
Close-out costs adjustment factors in the cost of eliminating the market risk of the portfolio.
Investing and Funding costs
The "investing and funding costs adjustment" relating to the cost of funding and investing cash
flow mismatches at rates different from the rate which models typically assume.
Administrative costs adjustment
Administrative costs adjustment relates to the costs that will be incurred to administer the portfolio.
8.8.2 Adjustment to the current valuation of less liquid positions for regulatory capital
purposes:
8.8.2.1 Banks must establish and maintain procedures for judging the necessity of and calculating
an adjustment to the current valuation of less liquid positions for regulatory capital purposes. This
adjustment may be in addition to any changes to the value of the position required for financial
reporting purposes and should be designed to reflect the illiquidity of the position. An adjustment
to a position’s valuation to reflect current illiquidity should be considered whether the position is
marked to market using market prices or observable inputs, third-party valuations or marked to
model.
1148.8.2.2 Bearing in mind that the assumptions made about liquidity in the market risk capital charge
may not be consistent with the bank’s ability to sell or hedge out less liquid positions where
appropriate, banks must take an adjustment to the current valuation of these positions, and review
their continued appropriateness on an on-going basis. Reduced liquidity may have arisen from
market events. Additionally, close-out prices for concentrated positions and/or stale positions
should be considered in establishing the adjustment. RBI has not prescribed any particularly
methodology for calculating the amount of valuation adjustment on account of illiquid positions.
Banks must consider all relevant factors when determining the appropriateness of the adjustment
for less liquid positions. These factors may include, but are not limited to, the amount of time it
would take to hedge out the position/risks within the position, the average volatility of bid/offer
spreads, the availability of independent market quotes (number and identity of market makers),
the average and volatility of trading volumes (including trading volumes during periods of market
stress), market concentrations, the aging of positions, the extent to which valuation relies on
marking-to-model, and the impact of other model risks not included in paragraph 8.8.2.2. The
valuation adjustment on account of illiquidity should be considered irrespective of whether the
guidelines issued by FIMMDA have taken into account the illiquidity premium or not, while fixing
YTM/spreads for the purpose of valuation.
8.8.2.3 For complex products including, but not limited to, securitisation exposures, banks must
explicitly assess the need for valuation adjustments to reflect two forms of model risk:
(i) the model risk associated with using a possibly incorrect valuation methodology; and
(ii) the risk associated with using unobservable (and possibly incorrect) calibration
parameters in the valuation model.
8.8.2.4 The adjustment to the current valuation of less liquid positions made under paragraph
8.8.2.2 will not be debited to P&L Account, but will be deducted from Common Equity Tier 1 capital
while computing CRAR of the bank. The adjustment may exceed those valuation adjustments
made under financial reporting/accounting standards and paragraphs 8.8.1.2 (vi) and (vii).
8.8.2.5 In calculating the eligible capital for market risk, it will be necessary first to calculate the
banks’ minimum capital requirement for credit and operational risk and only afterwards its market
risk requirement to establish how much components of capital are available to support market
risk.
9. Capital Charge for Operational Risk
9.1 Definition of Operational Risk
Operational risk is defined as the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events. This definition includes legal risk, but
excludes strategic and reputational risk. Legal risk includes, but is not limited to, exposure to fines,
penalties, or punitive damages resulting from supervisory actions, as well as private settlements.
1159.2 The Measurement Methodologies
9.2.1 The New Capital Adequacy Framework outlines three methods for calculating operational
risk capital charges in a continuum of increasing sophistication and risk sensitivity: (i) the Basic
Indicator Approach (BIA); (ii) the Standardised Approach (TSA); and (iii) Advanced Measurement
Approaches (AMA).
9.2.2 Banks in India shall compute the capital requirements for operational risk under the Basic
Indicator Approach. Reserve Bank will review the capital requirement produced by the Basic
Indicator Approach for general credibility, especially in relation to a bank’s peers and in the event
that credibility is lacking, appropriate supervisory action under Pillar 2 will be considered.
9.3 The Basic Indicator Approach
9.3.1 Under the Basic Indicator Approach, banks must hold capital for operational risk equal to
the average over the previous three years of a fixed percentage (denoted as alpha) of positive
annual gross income. Figures for any year in which annual gross income is negative or zero
should be excluded from both the numerator and denominator when calculating the average. If
negative gross income distorts a bank’s Pillar 1 capital charge, Reserve Bank will consider
appropriate supervisory action under Pillar 2. The charge may be expressed as follows:
KBIA = [ ∑ (GI x α)]/n
1…n
Where:
KBIA = the capital charge under the Basic Indicator Approach
GI = annual gross income, where positive, over the previous three years
n = number of the previous three years for which gross income is positive
α = 15 per cent, which is set by the BCBS, relating the industry wide level of required
capital to the industry wide level of the indicator.
9.3.2. Gross income is defined as “Net interest income” plus “net non-interest income”. It is
intended that this measure should:
(i) be gross of any provisions (e.g., for unpaid interest) and write-offs made during the year;
(ii) be gross of operating expenses, including fees paid to outsourcing service providers, in
addition to fees paid for services that are outsourced, fees received by banks that
provide outsourcing services shall be included in the definition of gross income;
(iii) exclude reversal during the year in respect of provisions and write-offs made during the
previous year(s);
(iv) exclude income recognised from the disposal of items of movable and immovable
property;
116(v) exclude realised profits/losses from the sale of securities in the “banking book”;
(vi) exclude income from legal settlements in favour of the bank;
(vii) exclude other extraordinary or irregular items of income and expenditure; and
(viii) exclude income derived from insurance activities (i.e., income derived by writing
insurance policies) and insurance claims in favour of the bank.
9.3.3 Banks are advised to compute capital charge for operational risk under the Basic Indicator
Approach as follows:
(a) Average of [Gross Income * alpha(α)] for each of the last three financial years, excluding
years of negative or zero gross income as mentioned in paragraph 9.3.1.
(b) Gross income = Net profit (+) Provisions & contingencies (+) operating expenses
(Schedule 16) (–) items (iii) to (viii) of paragraph 9.3.2.
(c) Alpha (α) = 15 per cent
9.3.4 As a point of entry for capital calculation, no specific criteria for use of the Basic Indicator
Approach are set out in these guidelines. Nevertheless, banks using this approach are
encouraged to comply with the ‘Revisions to the Principles for the Sound Management of
Operational Risk’ and ‘Principles for Operational Resilience’ issued by Basel Committee on
Banking Supervision in March 2021, and the ‘Guidance Note on Management of Operational
Risk’, issued by the Reserve Bank of India in October 2005. Further, banks are also encouraged
to be in readiness for migrating to the new Standardised Approach prescribed in ‘Master Direction
on Minimum Capital Requirements for Operational Risk’ dated June 26, 2023.
9.3.5 Once the bank has calculated the capital charge for operational risk under the Basic
Indicator Approach, it has to multiply this with 12.5 and arrive at the notional risk weighted asset
(RWA) for operational risk.
Part B: Supervisory Review and Evaluation Process (SREP)
10. Introduction to the SREP under Pillar 2
10.1 The New Capital Adequacy Framework (NCAF), based on the Basel II Framework evolved
by the Basel Committee on Banking Supervision, was adapted for India vide Circular
DBOD.No.BP.BC.90/20.06.001/ 2006-07 dated April 27, 2007. In terms of paragraph 2.4 (iii)(c)
of the Annex to the aforesaid circular banks were required to have a Board-approved policy on
Internal Capital Adequacy Assessment Process (ICAAP) and to assess the capital requirement
as per ICAAP. It is presumed that banks would have formulated the policy and also undertaken
the capital adequacy assessment accordingly.
11710.2 The Capital Adequacy Framework rests on three components or three Pillars. Pillar 1 is
the Minimum Capital Ratio while Pillar 2 and Pillar 3 are the Supervisory Review Process (SRP)
and Market Discipline, respectively. The guidelines in regard to the SRP and the ICAAP are
furnished in this Section. An illustrative outline of the format of the ICAAP document, to be
submitted to the RBI, by banks, is furnished at Annex 14.
10.3 The objective of the SRP is to ensure that banks have adequate capital to support all the
risks in their business as also to encourage them to develop and use better risk management
techniques for monitoring and managing their risks. This in turn would require a well-defined
internal assessment process within banks through which they assure the RBI that adequate
capital is indeed held towards the various risks to which they are exposed. The process of
assurance could also involve an active dialogue between the bank and the RBI so that, when
warranted, appropriate intervention could be made to either reduce the risk exposure of the bank
or augment / restore its capital. Thus, ICAAP is an important component of the SRP.
10.4 The main aspects to be addressed under the SRP, and therefore, under the ICAAP, would
include:
(a) the risks that are not fully captured by the minimum capital ratio prescribed under Pillar 1;
(b) the risks that are not at all taken into account by the Pillar 1; and
(c) the factors external to the bank.
Since the capital adequacy ratio prescribed by the RBI under the Pillar 1 of the Framework is only
the regulatory minimum level, addressing only the three specified risks (viz., credit, market and
operational risks), holding additional capital might be necessary for banks, on account of both –
the possibility of some under-estimation of risks under the Pillar 1 and the actual risk exposure of
a bank vis-à-vis the quality of its risk management architecture. Illustratively, some of the risks
that the banks are generally exposed to but which are not captured or not fully captured in the
regulatory CRAR would include:
(a) Interest rate risk in the banking book;
(b) Credit concentration risk;
(c) Liquidity risk;
(d) Settlement risk;
(e) Reputational risk;
(f) Strategic risk;
(g) Risk of under-estimation of credit risk under the Standardised approach;
(h) Model risk i.e., the risk of under-estimation of credit risk under the IRB approaches;
(i) Risk of weakness in the credit-risk mitigants;
(j) Residual risk of securitisation;
(k) Cyber security/IT infrastructure risk;
118(l) Human capital risk;
(m) Group risk;
(n) Outsourcing / vendor management risk;
(o) Collateral risk
The quantification of currency induced credit risk will form a part of banks’ Internal Capital
Adequacy Assessment Programme (ICAAP) and banks are expected to address this risk in a
comprehensive manner. The ICAAP should measure the extent of currency induced credit risk102
the bank is exposed to and also concentration of such exposures. Banks may also like to perform
stress tests under various extreme but plausible exchange rate scenarios under ICAAP. Outcome
of ICAAP may lead a bank to take appropriate risk management actions like risk reduction,
maintenance of more capital or provision, etc.
It is, therefore, only appropriate that the banks make their own assessment of their various risk
exposures, through a well-defined internal process, and maintain an adequate capital cushion for
such risks.
10.5 It is recognised that there is no one single approach for conducting the ICAAP and the
market consensus in regard to the best practice for undertaking ICAAP is yet to emerge. The
methodologies and techniques are still evolving particularly in regard to measurement of non-
quantifiable risks, such as reputational and strategic risks. These guidelines, therefore, seek to
provide only broad principles to be followed by banks in developing their ICAAP.
10.6 Banks were advised to develop and put in place, with the approval of their Boards, an
ICAAP commensurate with their size, level of complexity, risk profile and scope of operations.
The ICAAP would be in addition to a bank’s calculation of regulatory capital requirements under
Pillar 1.
10.7 The ICAAP document should, inter alia, include the capital adequacy assessment and
projections of capital requirement for the ensuing year, along with the plans and strategies for
meeting the capital requirement. An illustrative outline of a format of the ICAAP document is
furnished at Annex 14, for guidance of the banks though the ICAAP documents of the banks
could vary in length and format, in tune with their size, level of complexity, risk profile and scope
of operations.
11. Need for Improved Risk Management103
11.1 While financial institutions have faced difficulties over the years for a multitude of reasons,
the major causes of serious banking problems continue to be lax credit standards for borrowers
102 Please refer to circular DBOD.No.BP.BC.85/21.06.200/2013-14 and DBOD.No.BP.BC.116/ 21.06.200/2013-14
dated January 15, 2014 and June 3, 2014, respectively.
103 Master Circular DBOD.No.BP.BC.73/21.06.001/2009-10 dated Feb 8, 2010.
119and counterparties, poor portfolio risk management, and a lack of attention to changes in
economic or other circumstances that can lead to a deterioration in the credit standing of a bank's
counterparties. This experience is common in both advanced and developing countries.
11.2 The financial market crisis of 2007-08 has underscored the critical importance of effective
credit risk management to the long-term success of any banking organisation and as a key
component to financial stability. It has provided a stark reminder of the need for banks to
effectively identify, measure, monitor and control credit risk, as well as to understand how credit
risk interacts with other types of risk (including market, liquidity and reputational risk). The
essential elements of a comprehensive credit risk management programme include (i)
establishing an appropriate credit risk environment; (ii) operating under a sound credit granting
process; (iii) maintaining an appropriate credit administration, measurement and monitoring
process; and (iv) ensuring adequate controls over credit risk as elaborated in our Guidance note
on Credit Risk issued on October 12, 2002104.
11.3 The financial crisis has emphasised the importance of effective capital planning and long-
term capital maintenance. A bank’s ability to withstand uncertain market conditions is bolstered
by maintaining a strong capital position that accounts for potential changes in the bank’s strategy
and volatility in market conditions over time. Banks should focus on effective and efficient capital
planning, as well as long-term capital maintenance. An effective capital planning process requires
a bank to assess both the risks to which it is exposed and the risk management processes in
place to manage and mitigate those risks; evaluate its capital adequacy relative to its risks; and
consider the potential impact on earnings and capital from economic downturns. A bank’s capital
planning process should incorporate rigorous, forward looking stress testing, as discussed below
in paragraph 12.10.
11.4 Rapid growth in any business activity can present banks with significant risk management
challenges. This was the case with the expanded use of the “originate-to-distribute” business
model, off-balance sheet vehicles, liquidity facilities and credit derivatives. The originate-to-
distribute model and securitisation can enhance credit intermediation and bank profitability, as
well as more widely diversify risk. Managing the associated risks, however, poses significant
challenges. Indeed, these activities create exposures within business lines, across the firm and
across risk factors that can be difficult to identify, measure, manage, mitigate and control. This is
especially true in an environment of declining market liquidity, asset prices and risk appetite. The
inability to properly identify and measure such risks may lead to unintended risk exposures and
concentrations, which in turn can lead to concurrent losses arising in several businesses and risk
dimensions due to a common set of factors. Strong demand for structured products created
incentives for banks using the originate-to-distribute model to originate loans, such as subprime
mortgages, using unsound and unsafe underwriting standards. At the same time, many investors
104 Guidance Notes on Management of Credit Risk and Market Risk issued vide circular
DBOD.No.BP.520/21.04.103/2002-03 dated October 12, 2002.
120relied solely on the ratings of the credit rating agencies (CRAs) when determining whether to
invest in structured credit products. Many investors conducted little or no independent due
diligence on the structured products they purchased. Furthermore, many banks had insufficient
risk management processes in place to address the risks associated with exposures held on their
balance sheet, as well as those associated with off-balance sheet entities, such as asset backed
commercial paper (ABCP) conduits and structured investment vehicles (SIVs).
11.5 Innovation has increased the complexity and potential illiquidity of structured credit
products. This, in turn, can make such products more difficult to value and hedge, and may lead
to inadvertent increases in overall risk. Further, the increased growth of complex investor-specific
products may result in thin markets that are illiquid, which can expose a bank to large losses in
times of stress if the associated risks are not well understood and managed in a timely and
effective manner.
12. Guidelines for the SREP of the RBI and the ICAAP of Banks
12.1 Background
12.1.1 The Basel capital adequacy framework rests on the following three mutually-reinforcing
pillars:
Pillar 1: Minimum Capital Requirements - which prescribes a risk-sensitive calculation of
capital requirements that, for the first time, explicitly includes operational risk in addition
to market and credit risk.
Pillar 2: Supervisory Review Process (SRP) - which envisages the establishment of
suitable risk management systems in banks and their review by the supervisory authority.
Pillar 3: Market Discipline - which seeks to achieve increased transparency through
expanded disclosure requirements for banks.
12.1.2 The Basel Committee also lays down the following four key principles in regard to the SRP
envisaged under Pillar 2:
Principle 1: Banks should have a process for assessing their overall capital adequacy in
relation to their risk profile and a strategy for maintaining their capital levels.
Principle 2: Supervisors should review and evaluate banks’ internal capital adequacy
assessments and strategies, as well as their ability to monitor and ensure their compliance
with the regulatory capital ratios. Supervisors should take appropriate supervisory action if
they are not satisfied with the result of this process.
Principle 3: Supervisors should expect banks to operate above the minimum regulatory
capital ratios and should have the ability to require banks to hold capital in excess of the
minimum.
121Principle 4: Supervisors should seek to intervene at an early stage to prevent capital from
falling below the minimum levels required to support the risk characteristics of a particular
bank and should require rapid remedial action if capital is not maintained or restored.
12.1.3 It would be seen that the principles 1 and 3 relate to the supervisory expectations from
banks while the principles 2 and 4 deal with the role of the supervisors under Pillar 2. Pillar 2
(Supervisory Review Process - SRP) requires banks to implement an internal process, called the
Internal Capital Adequacy Assessment Process (ICAAP), for assessing their capital adequacy in
relation to their risk profiles as well as a strategy for maintaining their capital levels. Pillar 2 also
requires the supervisory authorities to subject all banks to an evaluation process, hereafter called
Supervisory Review and Evaluation Process (SREP), and to initiate such supervisory measures
on that basis, as might be considered necessary. An analysis of the foregoing principles indicates
that the following broad responsibilities have been cast on banks and the supervisors:
Banks’ responsibilities
(a) Banks should have in place a process for assessing their overall capital adequacy in
relation to their risk profile and a strategy for maintaining their capital levels (Principle 1)
(b) Banks should operate above the minimum regulatory capital ratios (Principle 3)
Supervisors’ responsibilities
(a) Supervisors should review and evaluate a bank’s ICAAP. (Principle 2)
(b) Supervisors should take appropriate action if they are not satisfied with the results of
this process. (Principle 2)
(c) Supervisors should review and evaluate a bank’s compliance with the regulatory capital
ratios. (Principle 2)
(d) Supervisors should have the ability to require banks to hold capital in excess of the
minimum. (Principle 3)
(e) Supervisors should seek to intervene at an early stage to prevent capital from falling
below the minimum levels. (Principle 4)
(f) Supervisors should require rapid remedial action if capital is not maintained or restored.
(Principle 4)
12.1.4 Thus, the ICAAP and SREP are the two important components of Pillar 2 and could be
broadly defined as follows:
The ICAAP comprises a bank’s procedures and measures designed to ensure the following:
(a) An appropriate identification and measurement of risks;
122(b) An appropriate level of internal capital in relation to the bank’s risk profile; and
(c) Application and further development of suitable risk management systems in the bank.
The SREP consists of a review and evaluation process adopted by the supervisor, which covers
all the processes and measures defined in the principles listed above. Essentially, these include
the review and evaluation of the bank’s ICAAP, conducting an independent assessment of the
bank’s risk profile, and if necessary, taking appropriate prudential measures and other supervisory
actions.
12.1.5 These guidelines seek to provide broad guidance to banks by outlining the manner in which
the SREP would be carried out by the RBI, the expected scope and design of their ICAAP, and
the expectations of the RBI from banks in regard to implementation of the ICAAP.
12.2 Conduct of the SREP by the RBI
12.2.1 Capital helps protect individual banks from insolvency, thereby promoting safety and
soundness in the overall banking system. Minimum regulatory capital requirements under Pillar 1
establish a threshold below which a sound bank’s regulatory capital must not fall. Regulatory
capital ratios permit some comparative analysis of capital adequacy across regulated banking
entities because they are based on certain common methodology / assumptions. However,
supervisors need to perform a more comprehensive assessment of capital adequacy that
considers risks specific to a bank, conducting analyses that go beyond minimum regulatory capital
requirements.
12.2.2 The RBI generally expects banks to hold capital above their minimum regulatory capital
levels, commensurate with their individual risk profiles, to account for all material risks. Under the
SREP, the RBI will assess the overall capital adequacy of a bank through a comprehensive
evaluation that takes into account all relevant available information. In determining the extent to
which banks should hold capital in excess of the regulatory minimum, the RBI would take into
account the combined implications of a bank’s compliance with regulatory minimum capital
requirements, the quality and results of a bank’s ICAAP, and supervisory assessment of the
bank’s risk management processes, control systems and other relevant information relating to the
bank’s risk profile and capital position.
12.2.3 The SREP of banks would, thus, be conducted as part of the RBI’s Risk Based Supervision
(RBS) of banks and in the light of the data in the off-site returns received from banks in the RBI,
in conjunction with the ICAAP document, which is required to be submitted every year by banks
to the RBI (refer to paragraph 12.3.3.6 below). Through the SREP, the RBI would evaluate the
adequacy and efficacy of the ICAAP of banks and the capital requirements derived by them
therefrom. While in the course of evaluation, there would be no attempt to reconcile the difference
between the regulatory minimum CRAR and the outcome of the ICAAP of a bank (as the risks
covered under the two processes are different), banks would be expected to demonstrate to the
123RBI that the ICAAP adopted by them is fully responsive to their size, level of complexity, scope
and scale of operations and the resultant risk profile / exposures, and adequately captures their
capital requirements. Such an evaluation of the effectiveness of the ICAAP would help the RBI in
understanding the capital management processes and strategies adopted by banks. If considered
necessary, the SREP could also involve a dialogue between the bank’s top management and the
RBI from time to time. In addition to the periodic reviews, independent external experts may also
be commissioned by the RBI, if deemed necessary, to perform ad hoc reviews and comment on
specific aspects of the ICAAP process of a bank; the nature and extent of such a review shall be
determined by the RBI.
12.2.4 Pillar 1 capital requirements will include a buffer for uncertainties surrounding the Pillar 1
regime that affect the banking population as a whole. Bank-specific uncertainties will be treated
under Pillar 2105. It is anticipated that such buffers under Pillar 1 will be set to provide reasonable
assurance that a bank with good internal systems and controls, a well-diversified risk profile and
a business profile well covered by the Pillar 1 regime, and which operates with capital equal to
Pillar 1 requirements, will meet the minimum goals for soundness embodied in Pillar 1. However,
RBI may require particular banks to operate with a buffer, over and above the Pillar 1 standard.
Banks should maintain this buffer for a combination of the following:
(a) Pillar 1 minimums are anticipated to be set to achieve a level of bank creditworthiness
in markets that is below the level of creditworthiness sought by many banks for their own
reasons. For example, most international banks appear to prefer to be highly rated by
internationally recognised rating agencies. Thus, banks are likely to choose to operate
above Pillar 1 minimums for competitive reasons.
(b) In the normal course of business, the type and volume of activities will change, as will
the different risk exposures, causing fluctuations in the overall capital ratio.
(c) It may be costly for banks to raise additional capital, especially if this needs to be done
quickly or at a time when market conditions are unfavourable.
(d) For banks to fall below minimum regulatory capital requirements is a serious matter. It
may place banks in breach of the provisions of the Banking Regulation Act and / or
attract prompt corrective action on the part of RBI.
(e) There may be risks, either specific to individual banks, or more generally to an economy
at large, that are not taken into account in Pillar 1106.
105 Annex 3 of the Guidelines on Implementation of Basel III Capital Regulations in India issued vide circular
DBOD.No.BP.BC.98/21.06.201/2011-2012 dated May 2, 2012.
106 If a bank has identified some capital add-on to take care of an identified Pillar 2 risk or inadequately capitalised
Pillar 1 risk, that add-on can be translated into risk weighted assets as indicated in this paragraph below, which
124As a part of Supervisory Review and Evaluation Process (SREP) under Pillar 2, RBI may review
the risk management measures taken by the bank and its adequacy to manage currency induced
credit risk107, especially if exposure to such risks is assessed to be on higher side.
Under the SREP, the RBI would make an assessment as to whether the bank maintains adequate
capital cushion to take care of the above situations. Such a cushion should be in addition to the
capital conservation buffer and countercyclical capital buffer, if any, required to be maintained by
the bank according to the applicable guidelines. Such cushion would generally be reflected in
more than minimum capital adequacy ratio maintained by the bank after taking into account
capital conservation buffer and countercyclical capital buffer.
Under the SREP, RBI would also seek to determine whether a bank’s overall capital remains
adequate as the underlying conditions change. Generally, material increases in risk that are not
otherwise mitigated should be accompanied by commensurate increases in capital. Conversely,
reductions in overall capital (to a level still above regulatory minima) may be appropriate if the
RBI’s supervisory assessment leads it to a conclusion that risk has materially declined or that it
has been appropriately mitigated. Based on such assessment, the RBI could consider initiating
appropriate supervisory measures to address its supervisory concerns. The measures could
include requiring a modification or enhancement of the risk management and internal control
processes of a bank, a reduction in risk exposures, or any other action as deemed necessary to
address the identified supervisory concerns. These measures could also include the stipulation
of a bank-specific additional capital requirement over and above what has been determined under
Pillar 1.
12.2.5 As and when the advanced approaches envisaged in the Basel capital adequacy
framework are permitted to be adopted in India, the SREP would also assess the ongoing
compliance by banks with the eligibility criteria for adopting the advanced approaches.
12.3 The Structural Aspects of the ICAAP
12.3.1 This section outlines the broad parameters of the ICAAP that banks shall comply with in
designing and implementing their ICAAP.
12.3.2 Every bank shall have an ICAAP
The ICAAP shall be prepared, on a solo basis, at every tier for each banking entity within the
banking group, as also at the level of the consolidated bank. This requirement shall also apply to
should be added to the total risk weighted assets of the bank. No additional Pillar 2 buffer need be maintained for
such identified risks.
107 Please refer to circular DBOD.No.BP.BC.85/21.06.200/2013-14 and DBOD.No.BP.BC.116/ 21.06.200/2013-14
dated January 15, 2014 and June 3, 2014, respectively.
125the foreign banks which have a branch presence in India and their ICAAP should cover their
Indian operations only.
12.3.3 ICAAP to encompass firm-wide risk profile108
12.3.3.1 General firm-wide risk management principles:
Senior management should understand the importance of taking an integrated, firm-wide
perspective of a bank’s risk exposure, in order to support its ability to identify and react to
emerging and growing risks in a timely and effective manner. The purpose of this guidance is the
need to enhance firm-wide oversight, risk management and controls around banks’ capital
markets activities, including securitisation, off-balance sheet exposures, structured credit and
complex trading activities.
A sound risk management system should have the following key features:
Active board and senior management oversight;
Appropriate policies, procedures and limits;
Comprehensive and timely identification, measurement, mitigation, controlling, monitoring
and reporting of risks;
Appropriate management information systems (MIS) at the business and firm-wide level;
and
Comprehensive internal controls.
12.3.3.2 Board and Senior Management Oversight:
The ultimate responsibility for designing and implementation of the ICAAP lies with the board of
directors of the bank (in case of banks incorporated in India including foreign banks operating
under the WOS model) and with the Chief Executive Officer (in the case of the foreign banks with
branch presence in India). It is the responsibility of the board of directors and senior management
to define the institution’s risk appetite and to ensure that the bank’s risk management framework
includes detailed policies that set specific firm-wide prudential limits on the bank’s activities, which
are consistent with its risk taking appetite and capacity. In order to determine the overall risk
appetite, the board and senior management must first have an understanding of risk exposures
on a firm-wide basis. To achieve this understanding, the appropriate members of senior
management must bring together the perspectives of the key business and control functions. In
order to develop an integrated firm-wide perspective on risk, senior management must overcome
organisational silos between business lines and share information on market developments, risks
and risk mitigation techniques. As the banking industry is exhibiting the tendency to move
increasingly towards market-based intermediation, there is a greater probability that many areas
of a bank may be exposed to a common set of products, risk factors or counterparties. Senior
108 Master Circular DBOD.No.BP.BC.73/21.06.001/2009-10 dated Feb 8, 2010.
126management should establish a risk management process that is not limited to credit, market,
liquidity and operational risks, but incorporates all material risks. This includes reputational and
strategic risks, as well as risks that do not appear to be significant in isolation, but when combined
with other risks could lead to material losses.
The Board of Directors and senior management should possess sufficient knowledge of all major
business lines to ensure that appropriate policies, controls and risk monitoring systems are
effective. They should have the necessary expertise to understand the capital markets activities
in which the bank is involved – such as securitisation and off-balance sheet activities – and the
associated risks. The board and senior management should remain informed on an on-going
basis about these risks as financial markets, risk management practices and the bank’s activities
evolve. In addition, the board and senior management should ensure that accountability and lines
of authority are clearly delineated. With respect to new or complex products and activities, senior
management should understand the underlying assumptions regarding business models,
valuation and risk management practices. In addition, senior management should evaluate the
potential risk exposure if those assumptions fail. Before embarking on new activities or introducing
products new to the institution, the board and senior management should identify and review the
changes in firm-wide risks arising from these potential new products or activities and ensure that
the infrastructure and internal controls necessary to manage the related risks are in place. In this
review, a bank should also consider the possible difficulty in valuing the new products and how
they might perform in a stressed economic environment. The Board should ensure that the senior
management of the bank:
(i) establishes a risk framework in order to assess and appropriately manage the various
risk exposures of the bank;
(ii) develops a system to monitor the bank's risk exposures and to relate them to the bank's
capital and reserve funds;
(iii) establishes a method to monitor the bank's compliance with internal policies, particularly
in regard to risk management; and
(iv) effectively communicates all relevant policies and procedures throughout the bank.
A bank’s risk function and its chief risk officer (CRO) or equivalent position should be independent
of the individual business lines and report directly to the chief executive officer (CEO) / Managing
Director and the institution’s board of directors. In addition, the risk function should highlight to
senior management and the board risk management concerns, such as risk concentrations and
violations of risk appetite limits. Banks may refer to circular no.
DBR.BP.BC.No.65/21.04.103/2016-17 dated April 27, 2017 on Risk Management Systems –
Role of the Chief Risk Officer (CRO), as amended from time to time, for, inter alia, the guidelines
on the Role of CRO.
12712.3.3.3 Policies, procedures, limits and controls:
The structure, design and contents of a bank's ICAAP should be approved by the Board of
Directors to ensure that the ICAAP forms an integral part of the management process and
decision making culture of the bank. Firm-wide risk management programmes should include
detailed policies that set specific firm-wide prudential limits on the principal risks relevant to a
bank’s activities. A bank’s policies and procedures should provide specific guidance for the
implementation of broad business strategies and should establish, where appropriate, internal
limits for the various types of risks to which the bank may be exposed. These limits should
consider the bank’s role in the financial system and be defined in relation to the bank’s capital,
total assets, earnings or, where adequate measures exist, its overall risk level.
A bank’s policies, procedures and limits shall:
Provide for adequate and timely identification, measurement, monitoring, control and
mitigation of the risks posed by its lending, investing, trading, securitisation, off-balance
sheet, fiduciary and other significant activities at the business line and firm-wide levels;
Ensure that the economic substance of a bank’s risk exposures, including reputational risk
and valuation uncertainty, are fully recognised and incorporated into the bank’s risk
management processes;
Be consistent with the bank’s stated goals and objectives, as well as its overall financial
strength;
Clearly delineate accountability and lines of authority across the bank’s various business
activities, and ensure there is a clear separation between business lines and the risk
function;
Escalate and address breaches of internal position limits;
Provide for the review of new businesses and products by bringing together all relevant
risk management, control and business lines to ensure that the bank is able to manage
and control the activity prior to it being initiated; and
Include a schedule and process for reviewing the policies, procedures and limits and for
updating them as appropriate.
12.3.3.4 Identifying, measuring, monitoring and reporting of risk:
(i) A bank’s MIS should provide the board and senior management in a clear and concise
manner with timely and relevant information concerning their institutions’ risk profile. This
information should include all risk exposures, including those that are off-balance sheet.
Management should understand the assumptions behind and limitations inherent in specific risk
measures.
(ii) The key elements necessary for the aggregation of risks are an appropriate infrastructure
and MIS that (i) allow for the aggregation of exposures and risk measures across business lines
128and (ii) support customised identification of concentrations and emerging risks. MIS developed to
achieve this objective should support the ability to evaluate the impact of various types of
economic and financial shocks that affect the whole of the financial institution. Further, a bank’s
systems should be flexible enough to incorporate hedging and other risk mitigation actions to be
carried out on a firm-wide basis while taking into account the various related basis risks.
(iii) To enable proactive management of risk, the board and senior management need to
ensure that MIS is capable of providing regular, accurate and timely information on the bank’s
aggregate risk profile, as well as the main assumptions used for risk aggregation. MIS should be
adaptable and responsive to changes in the bank’s underlying risk assumptions and should
incorporate multiple perspectives of risk exposure to account for uncertainties in risk
measurement. In addition, it should be sufficiently flexible so that the institution can generate
forward-looking bank-wide scenario analyses that capture management’s interpretation of
evolving market conditions and stressed conditions. Third-party inputs or other tools used within
MIS (e.g., credit ratings, risk measures, models) should be subject to initial and ongoing
validation.
(iv) A bank’s MIS should be capable of capturing limit breaches and there should be
procedures in place to promptly report such breaches to senior management, as well as to ensure
that appropriate follow-up actions are taken. For instance, similar exposures should be
aggregated across business platforms (including the banking and trading books) to determine
whether there is a concentration or a breach of an internal position limit.
12.3.3.5 Internal controls:
Risk management processes should be frequently monitored and tested by independent control
areas and internal, as well as external, auditors. The aim is to ensure that the information on
which decisions are based is accurate so that processes fully reflect management policies and
that regular reporting, including the reporting of limit breaches and other exception-based
reporting, is undertaken effectively. The risk management function of banks must be independent
of the business lines in order to ensure an adequate separation of duties and to avoid conflicts of
interest.
Since a sound risk management process provides the basis for ensuring that a bank maintains
adequate capital, the board of directors of a bank shall set the tolerance level for risk.
12.3.3.6 Submission of the outcome of the ICAAP to the Board and the RBI
As the ICAAP is an ongoing process, a written record on the outcome of the ICAAP should be
periodically submitted by banks to their board of directors. Such written record of the internal
assessment of its capital adequacy should include, inter alia, the risks identified, the manner in
which those risks are monitored and managed, the impact of the bank’s changing risk profile on
the bank’s capital position, details of stress tests/scenario analysis conducted and the resultant
129capital requirements. The reports shall be sufficiently detailed to allow the Board of Directors to
evaluate the level and trend of material risk exposures, whether the bank maintains adequate
capital against the risk exposures and in case of additional capital being needed, the plan for
augmenting capital. The board of directors would be expected make timely adjustments to the
strategic plan, as necessary.
Based on the outcome of the ICAAP as submitted to and approved by the Board, the ICAAP
Document, in the format furnished at Annex 14, should be furnished to the RBI (i.e., to the CGM-
in-Charge, Department of Supervision, Central Office, Reserve Bank of India, World Trade
Centre, Centre I, Colaba, Cuffe Parade, Mumbai – 400 005, with a copy addressed to Senior
Supervisory Manager of the bank). The document should reach the RBI latest by end of the first
quarter (i.e., April-June) of the relevant financial year.
12.4 Review of the ICAAP Outcomes
The board of directors shall, at least once a year, assess and document whether the processes
relating to the ICAAP implemented by the bank successfully achieve the objectives envisaged by
the board. The senior management should also receive and review the reports regularly to
evaluate the sensitivity of the key assumptions and to assess the validity of the bank’s estimated
future capital requirements. In the light of such an assessment, appropriate changes in the ICAAP
should be instituted to ensure that the underlying objectives are effectively achieved.
12.5 ICAAP to be an Integral part of the Management and Decision-making Culture
The ICAAP should from an integral part of the management and decision-making culture of a
bank. This integration could range from using the ICAAP to internally allocate capital to various
business units, to having it play a role in the individual credit decision process and pricing of
products or more general business decisions such as expansion plans and budgets. The
integration would also mean that ICAAP should enable the bank management to assess, on an
ongoing basis, the risks that are inherent in their activities and material to the institution.
12.6 The Principle of Proportionality
The implementation of ICAAP should be guided by the principle of proportionality. Though banks
are encouraged to migrate to and adopt progressively sophisticated approaches in designing their
ICAAP, the RBI would expect the degree of sophistication adopted in the ICAAP in regard to risk
measurement and management to be commensurate with the nature, scope, scale and the
degree of complexity in the bank’s business operations. The following paragraphs illustratively
enumerate the broad approach which could be considered by banks with varying levels of
complexity in their operations, in formulating their ICAAP.
(A) In relation to a bank that defines its activities and risk management practices as simple,
in carrying out its ICAAP, that bank could:
130(a) identify and consider that bank’s largest losses over the last 3 to 5 years and whether
those losses are likely to recur;
(b) prepare a short list of the most significant risks to which that bank is exposed;
(c) consider how that bank would act, and the amount of capital that would be absorbed in
the event that each of the risks identified were to materialise;
(d) consider how that bank’s capital requirement might alter under the scenarios in (c) and
how its capital requirement might alter in line with its business plans for the next 3 to 5
years; and
(e) document the ranges of capital required in the scenarios identified above and form an
overall view on the amount and quality of capital which that bank should hold, ensuring
that its senior management is involved in arriving at that view.
(B) In relation to a bank that define its activities and risk management practices as moderately
complex, in carrying out its ICAAP, that bank could:
(a) having consulted the operational management in each major business line, prepare a
comprehensive list of the major risks to which the business is exposed;
(b) estimate, with the aid of historical data, where available, the range and distribution of
possible losses which might arise from each of those risks and consider using shock
stress tests to provide risk estimates;
(c) consider the extent to which that bank’s capital requirement adequately captures the
risks identified in (a) and (b) above;
(d) for areas in which the capital requirement is either inadequate or does not address a
risk, estimate the additional capital needed to protect that bank and its customers, in
addition to any other risk mitigation action that bank plans to take;
(e) consider the risk that the bank’s own analyses of capital adequacy may be inaccurate
and that it may suffer from management weaknesses which affect the effectiveness of
its risk management and mitigation;
(f) project that bank’s business activities forward in detail for one year and in less detail for
the next 3 to 5 years, and estimate how that bank’s capital and capital requirement would
alter, assuming that business develops as expected;
(g) assume that business does not develop as expected and consider how that bank’s
capital and capital requirement would alter and what that bank’s reaction to a range of
adverse economic scenarios might be;
131(h) document the results obtained from the analyses in (b), (d), (f), and (g) above in a
detailed report for that bank’s top management / board of directors; and
(i) ensure that systems and processes are in place to review the accuracy of the estimates
made in (b), (d), (f) and (g) (i.e., systems for back testing) vis-à-vis the performance /
actuals.
(C) In relation to a bank that define its activities and risk management practices as complex,
in carrying out its ICAAP, that bank could follow a proportional approach to that bank’s ICAAP
which should cover the issues identified at (a) to (d) in paragraph (B) above but is likely also to
involve the use of models, most of which will be integrated into its day-to-day management and
operations.
Models of the kind referred to above may be linked so as to generate an overall estimate of the
amount of capital that a bank considers appropriate to hold for its business needs. A bank may
also link such models to generate information on the economic capital considered desirable for
that bank. A model which a bank uses to generate its target amount of economic capital is known
as an economic capital model (ECM). Economic capital is the target amount of capital which
optimises the return for a bank’s stakeholders for a desired level of risk. For example, a bank is
likely to use value-at-risk (VaR) models for market risk and advanced modelling approaches for
credit risk. A bank might also use economic scenario generators to model stochastically its
business forecasts and risks. However, banks shall take prior approval of the RBI for migrating to
the advanced approaches.
Such a bank is also likely to be part of a group and to be operating internationally. There is likely
to be centralised control over the models used throughout the group, the assumptions made and
their overall calibration.
12.7 Regular Independent Review and Validation
The ICAAP should be subject to regular and independent review through an internal or external
audit process, separately from the SREP conducted by the RBI, to ensure that the ICAAP is
comprehensive and proportionate to the nature, scope, scale and level of complexity of the bank’s
activities so that it accurately reflects the major sources of risk that the bank is exposed to. A bank
shall ensure appropriate and effective internal control structures, particularly in regard to the risk
management processes, in order to monitor the bank’s continued compliance with internal policies
and procedures. As a minimum, a bank shall conduct periodic reviews of its risk management
processes, which should ensure:
(a) the integrity, accuracy, and reasonableness of the processes;
(b) the appropriateness of the bank’s capital assessment process based on the nature,
scope, scale and complexity of the bank’s activities;
132(c) the timely identification of any concentration risk;
(d) the accuracy and completeness of any data inputs into the bank’s capital assessment
process;
(e) the reasonableness and validity of any assumptions and scenarios used in the capital
assessment process; and
(f) that the bank conducts appropriate stress testing;
12.8 ICAAP to be a Forward-looking Process
The ICAAP should be forward looking in nature, and thus, should take into account the expected
/ estimated future developments such as strategic plans, macro-economic factors, etc., including
the likely future constraints in the availability and use of capital. As a minimum, the management
of a bank shall develop and maintain an appropriate strategy that would ensure that the bank
maintains adequate capital commensurate with the nature, scope, scale, complexity and risks
inherent in the bank’s on-balance-sheet and off-balance-sheet activities, and should demonstrate
as to how the strategy dovetails with the macro-economic factors.
Thus, banks shall have an explicit, Board-approved capital plan which should spell out the
institution's objectives in regard to level of capital, the time horizon for achieving those objectives,
and in broad terms, the capital planning process and the allocated responsibilities for that process.
12.9 ICAAP to be a Risk-based Process
The adequacy of a bank’s capital is a function of its risk profile. Banks shall, therefore, set their
capital targets which are consistent with their risk profile and operating environment. As a
minimum, a bank shall have in place a sound ICAAP, which shall include all material risk
exposures incurred by the bank. There are some types of risks (such as reputation risk and
strategic risk) which are less readily quantifiable; for such risks, the focus of the ICAAP should be
more on qualitative assessment, risk management and mitigation than on quantification of such
risks. Banks’ ICAAP document shall clearly indicate for which risks a quantitative measure is
considered warranted, and for which risks a qualitative measure is considered to be the correct
approach.
12.10 ICAAP to Include Stress Tests and Scenario Analyses
As part of the ICAAP, the management of a bank shall, as a minimum, conduct relevant stress
tests periodically, particularly in respect of the bank’s material risk exposures, in order to evaluate
the potential vulnerability of the bank to some unlikely but plausible events or movements in the
market conditions that could have an adverse impact on the bank. The use of stress testing
framework can provide a bank’s management a better understanding of the bank’s likely exposure
in extreme circumstances. In this context, the attention is also invited to the RBI circulars
DBOD.No.BP.BC.101/21.04.103/2006-07 and DBOD.BP.BC.No.75/21.04.103/2013-14 dated
133June 26, 2007 and December 2, 2013, respectively on stress testing. The banks are urged to take
necessary measures for implementing an appropriate formal stress testing framework by the date
specified which would also meet the stress testing requirements under the ICAAP of the banks.
12.11 Use of Capital Models for ICAAP
While the RBI does not expect the banks to use complex and sophisticated econometric models
for internal assessment of their capital requirements, and there is no RBI-mandated requirement
for adopting such models, the banks, with international presence, were required109 to develop
suitable methodologies, by March 31, 2001, for estimating and maintaining economic capital.
However, some of the banks, which have relatively complex operations and are adequately
equipped in this regard, may like to place reliance on such models as part of their ICAAP. While
there is no single prescribed approach as to how a bank should develop its capital model, a bank
adopting a model-based approach to its ICAAP shall be able to, inter alia, demonstrate:
(a) Well documented model specifications, including the methodology / mechanics and the
assumptions underpinning the working of the model;
(b) The extent of reliance on the historical data in the model and the system of back testing
to be carried out to assess the validity of the outputs of the model vis-à-vis the actual
outcomes;
(c) A robust system for independent validation of the model inputs and outputs;
(d) A system of stress testing the model to establish that the model remains valid even
under extreme conditions / assumptions;
(e) The level of confidence assigned to the model outputs and its linkage to the bank’s
business strategy;
(f) The adequacy of the requisite skills and resources within the banks to operate, maintain
and develop the model.
13. Select Operational Aspects of the ICAAP
This Section outlines in somewhat greater detail the scope of the risk universe expected to be
normally captured by the banks in their ICAAP.
13.1 Identifying and Measuring Material Risks in ICAAP
(i) The first objective of an ICAAP is to identify all material risks. Risks that can be reliably
measured and quantified should be treated as rigorously as data and methods allow. The
appropriate means and methods to measure and quantify those material risks are likely to
vary across banks.
109 In terms of paragraph 17 of our Circular DBOD.No.BP(SC).BC. 98 / 21.04.103 / 99 dated October 7, 1999
134(ii) Some of the risks to which banks are exposed include credit risk, market risk, operational
risk, interest rate risk in the banking book, credit concentration risk and liquidity risk (as
briefly outlined below). The RBI has issued guidelines to the banks on asset liability
management, management of country risk, credit risk, operational risk, etc., from time to
time. A bank’s risk management processes, including its ICAAP, should, therefore, be
consistent with this existing body of guidance. However, certain other risks, such as
reputational risk and business or strategic risk, may be equally important for a bank and, in
such cases, should be given same consideration as the more formally defined risk types.
For example, a bank may be engaged in businesses for which periodic fluctuations in activity
levels, combined with relatively high fixed costs, have the potential to create unanticipated
losses that must be supported by adequate capital. Additionally, a bank might be involved
in strategic activities (such as expanding business lines or engaging in acquisitions) that
introduce significant elements of risk and for which additional capital would be appropriate.
(iii) Additionally, if banks employ risk mitigation techniques, they should understand the risk to
be mitigated and the potential effects of that mitigation, reckoning its enforceability and
effectiveness, on the risk profile of the bank.
13.2 Credit Risk110
13.2.1 Banks should have methodologies that enable them to assess the credit risk involved in
exposures to individual borrowers or counterparties as well as at the portfolio level. Banks should
be particularly attentive to identifying credit risk concentrations and ensuring that their effects are
adequately assessed. This should include consideration of various types of dependence among
exposures, incorporating the credit risk effects of extreme outcomes, stress events, and shocks
to the assumptions made about the portfolio and exposure behaviour. Banks should also carefully
assess concentrations in counterparty credit exposures, including counterparty credit risk
exposures emanating from trading in less liquid markets, and determine the effect that these might
have on the bank’s capital adequacy.
13.2.2 Banks should assess exposures, regardless of whether they are rated or unrated111, and
determine whether the risk weights applied to such exposures, under the Standardised Approach,
are appropriate for their inherent risk. In those instances where a bank determines that the
inherent risk of such an exposure, particularly if it is unrated, is significantly higher than that
implied by the risk weight to which it is assigned, the bank should consider the higher degree of
credit risk in the evaluation of its overall capital adequacy. For more sophisticated banks, the
credit review assessment of capital adequacy, at a minimum, should cover four areas: risk rating
110 Annex 3 of the Guidelines on Implementation of Basel III Capital Regulations in India issued vide circular
DBOD.No.BP.BC.98/21.06.201/2011-2012 dated May 2, 2012.
111 In such cases it would be in order for banks to derive notional external ratings of the unrated exposure by mapping
their internal credit risk ratings / grades of the exposure used for pricing purposes with the external ratings scale.
135systems, portfolio analysis/aggregation, securitisation/complex credit derivatives, and large
exposures and risk concentrations.
13.2.3 Counterparty credit risk (CCR)
(i) The bank must have counterparty credit risk management policies, processes and systems
that are conceptually sound and implemented with integrity relative to the sophistication and
complexity of a bank’s holdings of exposures that give rise to counterparty credit risk (CCR).
A sound counterparty credit risk management framework shall include the identification,
measurement, management, approval and internal reporting of CCR.
(ii) The bank’s risk management policies must take account of the market, liquidity and
operational risks that can be associated with CCR and, to the extent practicable,
interrelationships among those risks. The bank must not undertake business with a
counterparty without assessing its creditworthiness and must take due account of both
settlement and pre-settlement credit risk. These risks must be managed as comprehensively
as practicable at the counterparty level (aggregating counterparty exposures with other
credit exposures) and at the enterprise-wide level.
(iii) The Board of directors and senior management must be actively involved in the CCR control
process and must regard this as an essential aspect of the business to which significant
resources need to be devoted. The daily reports prepared on a firm’s exposures to CCR
must be reviewed by a level of management with sufficient seniority and authority to enforce
both reductions of positions taken by individual credit managers or traders and reductions
in the bank’s overall CCR exposure.
(iv) The bank’s CCR management system must be used in conjunction with internal credit and
trading limits.
(v) The measurement of CCR must include monitoring daily and intra-day usage of credit lines.
The bank must measure current exposure gross and net of collateral held where such
measures are appropriate and meaningful (e.g. OTC derivatives, margin lending, etc.).
Measuring and monitoring peak exposure or potential future exposure (PFE), both the
portfolio and counterparty levels is one element of a robust limit monitoring system. Banks
must take account of large or concentrated positions, including concentrations by groups of
related counterparties, by industry, by market, customer investment strategies, etc.
(vi) The bank must have an appropriate stress testing methodology in place to assess the
impact on the counterparty credit risk of abnormal volatilities in market variables driving the
counterparty exposures and changes in the creditworthiness of the counterparty. The results
of this stress testing must be reviewed periodically by senior management and must be
reflected in the CCR policies and limits set by management and the board of directors.
Where stress tests reveal particular vulnerability to a given set of circumstances,
136management should explicitly consider appropriate risk management strategies (e.g. by
hedging against that outcome, or reducing the size of the firm’s exposures).
(vii) The bank must have a routine in place for ensuring compliance with a documented set of
internal policies, controls and procedures concerning the operation of the CCR management
system. The firm’s CCR management system must be well documented, for example,
through a risk management manual that describes the basic principles of the risk
management system and that provides an explanation of the empirical techniques used to
measure CCR.
(viii) The bank must conduct an independent review of the CCR management system regularly
through its own internal auditing process. This review must include both the activities of the
business credit and trading units and of the independent CCR control unit. A review of the
overall CCR management process must take place at regular intervals (ideally not less than
once a year) and must specifically address, at a minimum:
the adequacy of the documentation of the CCR management system and process;
the organisation of the collateral management unit;
the organisation of the CCR control unit;
the integration of CCR measures into daily risk management;
the approval process for risk pricing models and valuation systems used by front and back-
office personnel;
the validation of any significant change in the CCR measurement process;
the scope of counterparty credit risks captured by the risk measurement model;
the integrity of the management information system;
the accuracy and completeness of CCR data;
the accurate reflection of legal terms in collateral and netting agreements into exposure
measurements; the verification of the consistency, timeliness and reliability of data
sources used to run internal models, including the independence of such data sources;
the accuracy and appropriateness of volatility and correlation assumptions;
the accuracy of valuation and risk transformation calculations; and
the verification of the model’s accuracy through frequent back-testing.
(ix) Banks should make an assessment as part of their ICAAP as to whether the bank’s
evaluation of the risks contained in the transactions that give rise to CCR and the bank’s
assessment of whether the Current Exposure Method (CEM) captures those risks
appropriately and satisfactorily. In cases where, under SREP, it is determined that CEM
does not capture the risk inherent in the bank’s relevant transactions (as could be the case
with structured, more complex OTC derivatives), RBI may require the bank to apply the CEM
on a transaction-by-transaction basis (i.e., no netting will be recognized even if it is
permissible legally).
13713.3 Market Risk: A bank should be able to identify risks in trading activities resulting from a
movement in market prices. This determination should consider factors such as illiquidity of
instruments, concentrated positions, one-way markets, non-linear/deep out-of-the money
positions, and the potential for significant shifts in correlations. Exercises that incorporate extreme
events and shocks should also be tailored to capture key portfolio vulnerabilities to the relevant
market developments.
13.4 Operational Risk: A bank should be able to assess the potential risks resulting from
inadequate or failed internal processes, people, and systems, as well as from events external to
the bank. This assessment should include the effects of extreme events and shocks relating to
operational risk. Events could include a sudden increase in failed processes across business units
or a significant incidence of failed internal controls.
13.5 Interest Rate Risk in the Banking Book (IRRBB): A bank should identify the risks
associated with the changing interest rates on its on-balance sheet and off-balance sheet
exposures in the banking book from both, a short-term and long-term perspective. This might
include the impact of changes due to parallel shocks, yield curve twists, yield curve inversions,
changes in the relationships of rates (basis risk), and other relevant scenarios. The bank should
be able to support its assumptions about the behavioural characteristics of its non-maturity
deposits and other assets and liabilities, especially those exposures characterised by embedded
optionality. Given the uncertainty in such assumptions, stress testing and scenario analysis
should be used in the analysis of interest rate risks. While there could be several approaches to
measurement of IRRBB, an illustrative approach for measurement of IRRBB is furnished at
Annex 10. The banks would, however, be free to adopt any other variant of these approaches or
entirely different methodology for computing / quantifying the IRRBB provided the technique is
based on objective, verifiable and transparent methodology and criteria.
Reference is also invited to the updated guidelines on IRRBB issued vide circular no.
DOR.MRG.REC.102/00-00-009/2022-23 dated February 17, 2023 on ‘Governance,
measurement and management of Interest Rate Risk in Banking Book’. As mentioned in the
circular ibid, the date for implementation will be communicated in due course. Banks are advised
to be in preparedness for measuring, monitoring, and disclosing their exposure to interest rate
risk in the banking book in terms of the circular ibid. Meanwhile, banks shall submit the disclosures
as advised in the circular ibid.
13.6 Credit Concentration Risk: A risk concentration is any single exposure or a group of
exposures with the potential to produce losses large enough (relative to a bank’s capital, total
assets, or overall risk level) to threaten a bank’s health or ability to maintain its core operations.
Risk concentrations have arguably been the single most important cause of major problems in
banks. Concentration risk resulting from concentrated portfolios could be significant for most of
the banks.
138The following qualitative criteria could be adopted by banks to demonstrate that the credit
concentration risk is being adequately addressed:
(a) While assessing the exposure to concentration risk, a bank should keep in view that the
calculations of Basel capital adequacy framework are based on the assumption that a bank is
well diversified.
(b) While the banks’ single borrower exposures, the group borrower exposures112 and capital
market exposures are regulated by the exposure norms prescribed by the RBI, there could be
concentrations in these portfolios as well. In assessing the degree of credit concentration,
therefore, a bank shall consider not only the foregoing exposures but also consider the degree of
credit concentration in a particular economic sector or geographical area. Banks with operational
concentration in a few geographical regions, by virtue of the pattern of their branch network, shall
also consider the impact of adverse economic developments in that region, and their impact on
the asset quality.
(c) The performance of specialised portfolios may, in some instances, also depend on key
individuals / employees of the bank. Such a situation could exacerbate the concentration risk
because the skills of those individuals, in part, limit the risk arising from a concentrated portfolio.
The impact of such key employees / individuals on the concentration risk is likely to be
correspondingly greater in smaller banks. In developing its stress tests and scenario analyses, a
bank shall, therefore, also consider the impact of losing key personnel on its ability to operate
normally, as well as the direct impact on its revenues.
As regards the quantitative criteria to be used to ensure that credit concentration risk is being
adequately addressed, the credit concentration risk calculations shall be performed at the
counterparty level (i.e., large exposures), at the portfolio level (i.e., sectoral and geographical
concentrations) and at the asset class level (i.e., liability and assets concentrations). In this
regard, a reference is invited to paragraph 3.2.2 (c) of the Annex to our Circular
DBOD.No.BP.(SC).BC.98/21.04.103/ 99 dated October 7, 1999 regarding Risk Management
System in Banks in terms of which certain prudential limits have been stipulated in regard to
‘substantial exposures’ of banks. As a prudent practice, banks may like to ensure that their
aggregate exposure (including non-funded exposures) to all ‘large borrowers’ does not exceed at
any time, 800 per cent of their ‘capital funds’ (as defined for the purpose of extant exposure norms
of the RBI). The ‘large borrower’ for this purpose could be taken to mean as one to whom the
bank’s aggregate exposure (funded as well as non-funded) exceeds 10 per cent of the bank’s
capital funds. The banks would also be well advised to pay special attention to their industry-wise
112 Banks may refer to circular no. DBR.No.BP.BC.43/21.01.003/2016-17 dated December 1, 2016 on Large Exposures
Framework, as amended from time to time, for guidelines on, inter alia, large exposure limits on single counterparty
and group of connected counterparties.
139exposures where their exposure to a particular industry exceeds 10 per cent of their aggregate
credit exposure (including investment exposure) to the industrial sector as a whole.
There could be several approaches to the measurement of credit concentration the banks’
portfolio. One of the approaches commonly used for the purpose involves computation of
Herfindahl-Hirshman Index (HHI). It may please be noted that the HHI as a measure of
concentration risk is only one of the possible methods and the banks would be free to adopt any
other appropriate method for the purpose, which has objective and transparent criteria for such
measurement.
Risk concentrations should be analysed on both solo and consolidated basis113. Risk
concentrations should be viewed in the context of a single or a set of closely related risk-drivers
that may have different impacts on a bank. These concentrations should be integrated when
assessing a bank’s overall risk exposure. A bank should consider concentrations that are based
on common or correlated risk factors that reflect more subtle or more situation-specific factors
than traditional concentrations, such as correlations between market, credit risks and liquidity risk.
The growth of market-based intermediation has increased the possibility that different areas of a
bank are exposed to a common set of products, risk factors or counterparties. This has created
new challenges for risk aggregation and concentration management. Through its risk
management processes and MIS, a bank should be able to identify and aggregate similar risk
exposures across the firm, including across legal entities, asset types (e.g., loans, derivatives and
structured products), risk areas (e.g., the trading book) and geographic regions. In addition to the
situations described in para 13.6 (b) above, risk concentrations can arise include:
exposures to a single counterparty, or group of connected counterparties;
exposures to both regulated and non-regulated financial institutions such as hedge funds
and private equity firms;
trading exposures/market risk;
o exposures to counterparties (e.g., hedge funds and hedge counterparties) through
the execution or processing of transactions (either product or service);
o funding sources;
o assets that are held in the banking book or trading book, such as loans, derivatives
and structured products; and
o off-balance sheet exposures, including guarantees, liquidity lines and other
commitments.
Risk concentrations can also arise through a combination of exposures across these broad
categories. A bank should have an understanding of its firm-wide risk concentrations resulting
from similar exposures across its different business lines. Examples of such business lines
113 Master Circular DBOD.No.BP.BC.73/21.06.001/2009-10 dated Feb 8, 2010.
140include subprime exposure in lending books; counterparty exposures; conduit exposures and
SIVs; contractual and non-contractual exposures; trading activities; and underwriting pipelines.
While risk concentrations often arise due to direct exposures to borrowers and obligors, a bank
may also incur a concentration to a particular asset type indirectly through investments backed
by such assets (e.g., collateralised debt obligations – CDOs), as well as exposure to protection
providers guaranteeing the performance of the specific asset type (e.g., monoline insurers). In
this context, it may be noted that while banks in India are presently not allowed to pursue most of
such business lines/assume most of such exposures without RBI’s permission, their foreign
branches may have such exposures booked before issuance of circular
DBOD.No.BP.BC.89/21.04.141/2008-09 dated December 1, 2008. A bank should have in place
adequate, systematic procedures for identifying high correlation between the creditworthiness of
a protection provider and the obligors of the underlying exposures due to their performance being
dependent on common factors beyond systematic risk (i.e., “wrong way risk”).
Procedures should be in place to communicate risk concentrations to the board of directors and
senior management in a manner that clearly indicates where in the organisation each segment of
a risk concentration resides. A bank should have credible risk mitigation strategies in place that
have senior management approval. This may include altering business strategies, reducing limits
or increasing capital buffers in line with the desired risk profile. While it implements risk mitigation
strategies, the bank should be aware of possible concentrations that might arise as a result of
employing risk mitigation techniques.
Banks should employ a number of techniques, as appropriate, to measure risk concentrations.
These techniques include shocks to various risk factors; use of business level and firm-wide
scenarios; and the use of integrated stress testing and economic capital models. Identified
concentrations should be measured in a number of ways, including for example consideration of
gross versus net exposures, use of notional amounts, and analysis of exposures with and without
counterparty hedges. A bank should establish internal position limits for concentrations to which
it may be exposed. When conducting periodic stress tests a bank should incorporate all major
risk concentrations and identify and respond to potential changes in market conditions that could
adversely impact their performance and capital adequacy.
The assessment of such risks under a bank’s ICAAP and the supervisory review process should
not be a mechanical process, but one in which each bank determines, depending on its business
model, its own specific vulnerabilities. An appropriate level of capital for risk concentrations should
be incorporated in a bank’s ICAAP, as well as in Pillar 2 assessments. Each bank should discuss
such issues with its supervisor.
A bank should have in place effective internal policies, systems and controls to identify, measure,
monitor, manage, control and mitigate its risk concentrations in a timely manner. Not only should
normal market conditions be considered, but also the potential build-up of concentrations under
stressed market conditions, economic downturns and periods of general market illiquidity. In
141addition, the bank should assess scenarios that consider possible concentrations arising from
contractual and non-contractual contingent claims. The scenarios should also combine the
potential build-up of pipeline exposures together with the loss of market liquidity and a significant
decline in asset values.
13.7 Liquidity Risk: A bank should understand the risks resulting from its inability to meet its
obligations as they come due, because of difficulty in liquidating assets (market liquidity risk) or
in obtaining adequate funding (funding liquidity risk). This assessment should include analysis of
sources and uses of funds, an understanding of the funding markets in which the bank operates,
and an assessment of the efficacy of a contingency funding plan for events that could arise.
The financial market crisis underscores the importance of assessing the potential impact of
liquidity risk on capital adequacy in a bank’s ICAAP114. Senior management should consider the
relationship between liquidity and capital since liquidity risk can impact capital adequacy which,
in turn, can aggravate a bank’s liquidity profile.
In September 2008, the Basel Committee on Banking Supervision published Principles for Sound
Liquidity Risk Management and Supervision, which stresses that banks need to have strong
liquidity cushions in order to weather prolonged periods of financial market stress and illiquidity.
The standards address many of the shortcomings experienced by the banking sector during the
market turmoil that began in mid-2007, including those related to stress testing practices
contingency funding plans, management of on- and off-balance sheet activity and contingent
commitments.
This liquidity guidance outlines requirements for sound practices for the liquidity risk management
of banks. The fundamental principle is that a bank should both assiduously manage its liquidity
risk and also maintain sufficient liquidity to withstand a range of stress events. Liquidity is a critical
element of a bank’s resilience to stress, and as such, a bank should maintain a liquidity cushion,
made up of unencumbered, high quality liquid assets, to protect against liquidity stress events,
including potential losses of unsecured and typically available secured funding sources.
A key element in the management of liquidity risk is the need for strong governance of liquidity
risk, including the setting of a liquidity risk tolerance by the board. The risk tolerance should be
communicated throughout the bank and reflected in the strategy and policies that senior
management set to manage liquidity risk. Another facet of liquidity risk management is that a bank
should appropriately price the costs, benefits and risks of liquidity into the internal pricing,
performance measurement, and new product approval process of all significant business
activities.
A bank is expected to be able to thoroughly identify, measure and control liquidity risks, especially
with regard to complex products and contingent commitments (both contractual and non-
114 Master Circular DBOD.No.BP.BC.73/21.06.001/2009-10 dated Feb 8, 2010.
142contractual). This process should involve the ability to project cash flows arising from assets,
liabilities and off-balance sheet items over various time horizons, and should ensure
diversification in both the tenor and source of funding. A bank should utilise early warning
indicators to identify the emergence of increased risk or vulnerabilities in its liquidity position or
funding needs. It should have the ability to control liquidity risk exposure and funding needs,
regardless of its organisation structure, within and across legal entities, business lines, and
currencies, taking into account any legal, regulatory and operational limitations to the
transferability of liquidity.
A bank’s failure to effectively manage intraday liquidity could leave it unable to meet its payment
obligations at the time expected, which could lead to liquidity dislocations that cascade quickly
across many systems and institutions. As such, the bank’s management of intraday liquidity risks
should be considered as a crucial part of liquidity risk management. It should also actively manage
its collateral positions and have the ability to calculate all of its collateral positions.
While banks typically manage liquidity under “normal” circumstances, they should also be
prepared to manage liquidity under “stressed” conditions. A bank should perform stress tests or
scenario analyses on a regular basis in order to identify and quantify their exposures to possible
future liquidity stresses, analysing possible impacts on the institutions’ cash flows, liquidity
positions, profitability, and solvency. The results of these stress tests should be discussed
thoroughly by management, and based on this discussion, should form the basis for taking
remedial or mitigating actions to limit the bank’s exposures, build up a liquidity cushion, and adjust
its liquidity profile to fit its risk tolerance. The results of stress tests should also play a key role in
shaping the bank’s contingency funding planning, which should outline policies for managing a
range of stress events and clearly sets out strategies for addressing liquidity shortfalls in
emergency situations.
As public disclosure increases certainty in the market, improves transparency, facilitates
valuation, and strengthens market discipline, it is important that banks publicly disclose
information on a regular basis that enables market participants to make informed decisions about
the soundness of their liquidity risk management framework and liquidity position.
13.8 Off-Balance Sheet Exposures and Securitisation Risk
Banks’ use of securitisation has grown dramatically over the last several years. It has been used
as an alternative source of funding and as a mechanism to transfer risk to investors. While the
risks associated with securitisation are not new to banks, the global financial crisis of 2008
highlighted unexpected aspects of credit risk, concentration risk, market risk, liquidity risk, legal
risk and reputational risk, which banks failed to adequately address. For instance, a number of
banks that were not contractually obligated to support sponsored securitisation structures were
unwilling to allow those structures to fail due to concerns about reputational risk and future access
to capital markets. The support of these structures exposed the banks to additional and
143unexpected credit, market and liquidity risk as they brought assets onto their balance sheets,
which put significant pressure on their financial profile and capital ratios.
Weaknesses in banks’ risk management of securitisation and off-balance sheet exposures
resulted in large unexpected losses during the financial crisis. To help mitigate these risks, a
bank’s on- and off-balance sheet securitisation activities should be included in its risk
management disciplines, such as product approval, risk concentration limits, and estimates of
market, credit and operational risk.
In light of the wide range of risks arising from securitisation activities, which can be compounded
by rapid innovation in securitisation techniques and instruments, minimum capital requirements
calculated under Pillar 1 are often insufficient. All risks arising from securitisation, particularly
those that are not fully captured under Pillar 1, should be addressed in a bank’s ICAAP. These
risks include:
Credit, market, liquidity and reputational risk of each exposure;
Potential delinquencies and losses on the underlying securitised exposures;
Exposures from credit lines or liquidity facilities to special purpose entities;
Exposures from guarantees provided by monolines and other third parties.
Securitisation exposures should be included in the bank’s MIS to help ensure that senior
management understands the implications of such exposures for liquidity, earnings, risk
concentration and capital. More specifically, a bank should have the necessary processes in place
to capture in a timely manner, updated information on securitisation transactions including market
data, if available, and updated performance data from the securitisation trustee or servicer.
13.9 Reputational Risk and Implicit Support115
13.9.1 Provision of Implicit Support for Securitisation Transactions
(i) Provision of implicit support to a transaction, whether contractual (i.e., credit
enhancements provided at the inception of a securitised transaction) or non-contractual (implicit
support) can take numerous forms. For instance, contractual support can include over
collateralisation, credit derivatives, spread accounts, contractual recourse obligations,
subordinated notes, credit risk mitigants provided to a specific tranche, the subordination of fee
or interest income or the deferral of margin income, and clean-up calls that exceed 10 percent of
the initial issuance. Examples of implicit support include the purchase of deteriorating credit risk
exposures from the underlying pool, the sale of discounted credit risk exposures into the pool of
securitised credit risk exposures, the purchase of underlying exposures at above market price or
an increase in the first loss position according to the deterioration of the underlying exposures.
115 Annex 3 of the Guidelines on Implementation of Basel III Capital Regulations in India issued vide circular
DBOD.No.BP.BC.98/21.06.201/2011-2012 dated May 2, 2012.
144(ii) The provision of implicit (or non-contractual) support, as opposed to contractual credit
support (i.e., credit enhancements), raises significant supervisory concerns. For traditional
securitisation structures the provision of implicit support undermines the clean break criteria,
which when satisfied would allow banks to exclude the securitised assets from regulatory capital
calculations. For synthetic securitisation structures, it negates the significance of risk
transference. By providing implicit support, banks signal to the market that the risk is still with the
bank and has not in effect been transferred. The institution’s capital calculation therefore
understates the true risk. Accordingly, national supervisors are expected to take appropriate
action when a banking organisation provides implicit support.
(iii) When a bank has been found to provide implicit support to a securitisation, it will be
required to hold capital against all of the underlying exposures associated with the structure as if
they had not been securitised. It will also be required to disclose publicly that it was found to have
provided non-contractual support, as well as the resulting increase in the capital charge (as noted
above). The aim is to require banks to hold capital against exposures for which they assume the
credit risk, and to discourage them from providing non-contractual support.
(iv) If a bank is found to have provided implicit support on more than one occasion, the bank
is required to disclose its transgression publicly and the Reserve Bank will take appropriate action
that may include, but is not limited to, one or more of the following:
The bank may be prevented from gaining favourable capital treatment on securitised
assets for a period of time to be determined by the Reserve Bank;
The bank may be required to hold capital against all securitised assets as though the bank
had created a commitment to them, by applying a conversion factor to the risk weight of
the underlying assets;
For purposes of capital calculations, the bank may be required to treat all securitised
assets as if they remained on the balance sheet; and
The bank may be required by the Reserve Bank to hold regulatory capital in excess of the
minimum risk-based capital ratios.
(v) During the SREP, Reserve Bank will determine implicit support and may take appropriate
supervisory action to mitigate the effects. Pending any investigation, the bank may be prohibited
from any capital relief for planned securitisation transactions (moratorium). The action of Reserve
Bank will be aimed at changing the bank’s behaviour with regard to the provision of implicit
support, and to correct market perception as to the willingness of the bank to provide future
recourse beyond contractual obligations.
13.9.2 Reputational Risk on Account of Implicit Support
(i) Reputational risk can be defined as the risk arising from negative perception on the part
of customers, counterparties, shareholders, investors, debt-holders, market analysts, other
relevant parties or regulators that can adversely affect a bank's ability to maintain existing, or
145establish new, business relationships and continued access to sources of funding (e.g. through
the interbank or securitisation markets). Reputational risk is multidimensional and reflects the
perception of other market participants. Furthermore, it exists throughout the organisation and
exposure to reputational risk is essentially a function of the adequacy of the bank's internal risk
management processes, as well as the manner and efficiency with which management responds
to external influences on bank-related transactions.
(ii) Reputational risk can lead to the provision of implicit support, which may give rise to credit,
liquidity, market and legal risk - all of which can have a negative impact on a bank's earnings,
liquidity and capital position. A bank should identify potential sources of reputational risk to which
it is exposed. These include the bank's business lines, liabilities, affiliated operations, off-balance
sheet vehicles and the markets in which it operates. The risks that arise should be incorporated
into the bank's risk management processes and appropriately addressed in its ICAAP and liquidity
contingency plans.
(iii) Prior to the 2007 upheaval, many banks failed to recognise the reputational risk associated
with their off-balance sheet vehicles. In stressed conditions some firms went beyond their
contractual obligations to support their sponsored securitisations and off balance sheet vehicles.
A bank should incorporate the exposures that could give rise to reputational risk into its
assessments of whether the requirements under the securitisation framework have been met and
the potential adverse impact of providing implicit support.
(iv) Reputational risk may arise, for example, from a bank's sponsorship of securitisation
structures such as ABCP conduits and SIVs, as well as from the sale of credit exposures to
securitisation trusts. It may also arise from a bank's involvement in asset or funds management,
particularly when financial instruments are issued by owned or sponsored entities and are
distributed to the customers of the sponsoring bank. In the event that the instruments were not
correctly priced or the main risk drivers not adequately disclosed, a sponsor may feel some
responsibility to its customers, or be economically compelled, to cover any losses. Reputational
risk also arises when a bank sponsors activities such as money market mutual funds, in-house
hedge funds and real estate investment trusts. In these cases, a bank may decide to support the
value of shares / units held by investors even though is not contractually required to provide the
support.
(v) The financial market crisis has provided several examples of banks providing financial
support that exceeded their contractual obligations. In order to preserve their reputation, some
banks felt compelled to provide liquidity support to their SIVs, which was beyond their contractual
obligations. In other cases, banks purchased ABCP issued by vehicles they sponsored in order
to maintain market liquidity. As a result, these banks assumed additional liquidity and credit risks,
and also put pressure on capital ratios.
146(vi) Reputational risk also may affect a bank's liabilities, since market confidence and a bank's
ability to fund its business are closely related to its reputation. For instance, to avoid damaging its
reputation, a bank may call its liabilities even though this might negatively affect its liquidity profile.
This is particularly true for liabilities that are components of regulatory capital, such as hybrid /
subordinated debt. In such cases, a bank's capital position is likely to suffer.
(vii) Bank management should have appropriate policies in place to identify sources of
reputational risk when entering new markets, products or lines of activities. In addition, a bank's
stress testing procedures should take account of reputational risk so management has a firm
understanding of the consequences and second round effects of reputational risk.
(viii) Once a bank identifies potential exposures arising from reputational concerns, it should
measure the amount of support it might have to provide (including implicit support of
securitisations) or losses it might experience under adverse market conditions. In particular, in
order to avoid reputational damages and to maintain market confidence, a bank should develop
methodologies to measure as precisely as possible the effect of reputational risk in terms of other
risk types (e.g., credit, liquidity, market or operational risk) to which it may be exposed. This could
be accomplished by including reputational risk scenarios in regular stress tests. For instance,
non-contractual off-balance sheet exposures could be included in the stress tests to determine
the effect on a bank's credit, market and liquidity risk profiles. Methodologies also could include
comparing the actual amount of exposure carried on the balance sheet versus the maximum
exposure amount held off-balance sheet, that is, the potential amount to which the bank could be
exposed.
(ix) A bank should pay particular attention to the effects of reputational risk on its overall
liquidity position, taking into account both possible increases in the asset side of the balance sheet
and possible restrictions on funding, should the loss of reputation result in various counterparties'
loss of confidence.
(x) In contrast to contractual credit exposures, such as guarantees, implicit support is a more
subtle form of exposure. Implicit support arises when a bank provides post-sale support to a
securitisation transaction in excess of any contractual obligation. Implicit support may include any
letter of comfort provided by the originator in respect of the present or future liabilities of the SPV.
Such non-contractual support exposes a bank to the risk of loss, such as loss arising from
deterioration in the credit quality of the securitisation's underlying assets.
(xi) By providing implicit support, a bank signals to the market that all of the risks inherent in
the securitised assets are still held by the organisation and, in effect, had not been transferred.
Since the risk arising from the potential provision of implicit support is not captured ex ante under
Pillar 1, it must be considered as part of the Pillar 2 process. In addition, the processes for
approving new products or strategic initiatives should consider the potential provision of implicit
support and should be incorporated in a bank's ICAAP.
14713.10 Risk Evaluation and Management
A bank should conduct analyses of the underlying risks when investing in the structured products
(permitted by RBI) and must not solely rely on the external credit ratings assigned to securitisation
exposures by the credit rating agencies. A bank should be aware that external ratings are a useful
starting point for credit analysis, but are no substitute for full and proper understanding of the
underlying risk, especially where ratings for certain asset classes have a short history or have
been shown to be volatile. Moreover, a bank also should conduct credit analysis of the
securitisation exposure at acquisition and on an ongoing basis. It should also have in place the
necessary quantitative tools, valuation models and stress tests of sufficient sophistication to
reliably assess all relevant risks.
When assessing securitisation exposures, a bank should ensure that it fully understands the credit
quality and risk characteristics of the underlying exposures in structured credit transactions,
including any risk concentrations. In addition, a bank should review the maturity of the exposures
underlying structured credit transactions relative to the issued liabilities in order to assess
potential maturity mismatches.
A bank should track credit risk in securitisation exposures at the transaction level and across
securitisations exposures within each business line and across business lines. It should produce
reliable measures of aggregate risk. A bank also should track all meaningful concentrations in
securitisation exposures, such as name, product or sector concentrations, and feed this
information to firm-wide risk aggregation systems that track, for example, credit exposure to a
particular obligor.
A bank’s own assessment of risk needs to be based on a comprehensive understanding of the
structure of the securitisation transaction. It should identify the various types of triggers, credit
events and other legal provisions that may affect the performance of its on- and off-balance sheet
exposures and integrate these triggers and provisions into its funding/liquidity, credit and balance
sheet management. The impact of the events or triggers on a bank’s liquidity and capital position
should also be considered.
Banks globally, either underestimated or did not anticipate that a market-wide disruption could
prevent them from securitising warehoused or pipeline exposures and did not anticipate the effect
this could have on liquidity, earnings and capital adequacy. As part of its risk management
processes, a bank should consider and, where appropriate, mark-to-market warehoused
positions, as well as those in the pipeline, regardless of the probability of securitising the
exposures. It should consider scenarios which may prevent it from securitising its assets as part
of its stress testing and identify the potential effect of such exposures on its liquidity, earnings and
capital adequacy.
A bank should develop prudent contingency plans specifying how it would respond to funding,
capital and other pressures that arise when access to securitisation markets is reduced. The
148contingency plans should also address how the bank would address valuation challenges for
potentially illiquid positions held for sale or for trading. The risk measures, stress testing results
and contingency plans should be incorporated into the bank’s risk management processes and
its ICAAP, and should result in an appropriate level of capital under Pillar 2 in excess of the
minimum requirements.
A bank that employs risk mitigation techniques should fully understand the risks to be mitigated,
the potential effects of that mitigation and whether or not the mitigation is fully effective. This is to
help ensure that the bank does not understate the true risk in its assessment of capital. In
particular, it should consider whether it would provide support to the securitisation structures in
stressed scenarios due to the reliance on securitisation as a funding tool.
13.11 Valuation Practices
The characteristics of complex structured products, including securitisation transactions, make
their valuation inherently difficult due, in part, to the absence of active and liquid markets, the
complexity and uniqueness of the cash waterfalls, and the links between valuations and
underlying risk factors. As mentioned earlier, banks in India are presently not allowed to assume
such exposures without RBI’s permission. However, their foreign branches may have such
exposures booked before issuance of circular DBOD.No. BP.BC.89/21.04.141/2008-09 dated
December 1, 2008. The absence of a transparent price from a liquid market means that the
valuation must rely on models or proxy-pricing methodologies, as well as on expert judgment. The
outputs of such models and processes are highly sensitive to the inputs and parameter
assumptions adopted, which may themselves be subject to estimation error and uncertainty.
Moreover, calibration of the valuation methodologies is often complicated by the lack of readily
available benchmarks. Therefore, a bank is expected to have adequate governance structures
and control processes for fair valuing exposures for risk management and financial reporting
purposes. The valuation governance structures and related processes should be embedded in
the overall governance structure of the bank, and consistent for both risk management and
reporting purposes. The governance structures and processes are expected to explicitly cover
the role of the board and senior management. In addition, the board should receive reports from
senior management on the valuation oversight and valuation model performance issues that are
brought to senior management for resolution, as well as all significant changes to valuation
policies.
A bank should also have clear and robust governance structures for the production, assignment
and verification of financial instrument valuations. Policies should ensure that the approvals of all
valuation methodologies are well documented. In addition, policies and procedures should set
forth the range of acceptable practices for the initial pricing, marking-to-market/model, valuation
adjustments and periodic independent revaluation. New product approval processes should
include all internal stakeholders relevant to risk measurement, risk control, and the assignment
and verification of valuations of financial instruments.
149A bank’s control processes for measuring and reporting valuations should be consistently applied
across the firm and integrated with risk measurement and management processes. In particular,
valuation controls should be applied consistently across similar instruments (risks) and consistent
across business lines (books). These controls should be subject to internal audit. Regardless of
the booking location of a new product, reviews and approval of valuation methodologies must be
guided by a minimum set of considerations. Furthermore, the valuation/new product approval
process should be supported by a transparent, well-documented inventory of acceptable valuation
methodologies that are specific to products and businesses.
In order to establish and verify valuations for instruments and transactions in which it engages, a
bank must have adequate capacity, including during periods of stress. This capacity should be
commensurate with the importance, riskiness and size of these exposures in the context of the
business profile of the institution. In addition, for those exposures that represent material risk, a
bank is expected to have the capacity to produce valuations using alternative methods in the
event that primary inputs and approaches become unreliable, unavailable or not relevant due to
market discontinuities or illiquidity. A bank must test and review the performance of its models
under stress conditions so that it understands the limitations of the models under stress
conditions.
The relevance and reliability of valuations is directly related to the quality and reliability of the
inputs. A bank is expected to apply the accounting guidance provided to determine the relevant
market information and other factors likely to have a material effect on an instrument's fair value
when selecting the appropriate inputs to use in the valuation process. Where values are
determined to be in an active market, a bank should maximise the use of relevant observable
inputs and minimise the use of unobservable inputs when estimating fair value using a valuation
technique. However, where a market is deemed inactive, observable inputs or transactions may
not be relevant, such as in a forced liquidation or distress sale, or transactions may not be
observable, such as when markets are inactive. In such cases, accounting fair value guidance
provides assistance on what should be considered, but may not be determinative. In assessing
whether a source is reliable and relevant, a bank should consider, among other things:
the frequency and availability of the prices/quotes;
whether those prices represent actual regularly occurring transactions on an arm's length
basis;
the breadth of the distribution of the data and whether it is generally available to the
relevant participants in the market;
the timeliness of the information relative to the frequency of valuations;
the number of independent sources that produce the quotes/prices;
whether the quotes/prices are supported by actual transactions;
the maturity of the market; and
150 the similarity between the financial instrument sold in a transaction and the instrument
held by the institution.
A bank’s external reporting should provide timely, relevant, reliable and decision useful
information that promotes transparency. Senior management should consider whether
disclosures around valuation uncertainty can be made more meaningful. For instance, the bank
may describe the modelling techniques and the instruments to which they are applied; the
sensitivity of fair values to modelling inputs and assumptions; and the impact of stress scenarios
on valuations. A bank should regularly review its disclosure policies to ensure that the information
disclosed continues to be relevant to its business model and products and to current market
conditions.
13.12 Sound Stress Testing Practices
Stress testing is an important tool that is used by banks as part of their internal risk management
that alerts bank management to adverse unexpected outcomes related to a broad variety of risks,
and provides an indication to banks of how much capital might be needed to absorb losses should
large shocks occur. Moreover, stress testing supplements other risk management approaches
and measures. It plays a particularly important role in:
providing forward looking assessments of risk,
overcoming limitations of models and historical data,
supporting internal and external communication,
feeding into capital and liquidity planning procedures,
informing the setting of a banks’ risk tolerance,
addressing existing or potential, firm-wide risk concentrations, and
facilitating the development of risk mitigation or contingency plans across a range of
stressed conditions.
Stress testing is especially important after long periods of benign risk, when the fading memory
of negative economic conditions can lead to complacency and the underpricing of risk, and when
innovation leads to the rapid growth of new products for which there is limited or no loss data.
It should be recognised that improvements in stress testing alone cannot address all risk
management weaknesses, but as part of a comprehensive approach, stress testing has a leading
role to play in strengthening bank corporate governance and the resilience of individual banks
and the financial system.
Stress testing should form an integral part of the overall governance and risk management culture
of the bank. Board and senior management involvement in setting stress testing objectives,
defining scenarios, discussing the results of stress tests, assessing potential actions and decision
making is critical in ensuring the appropriate use of stress testing in banks’ risk governance and
capital planning. Senior management should take an active interest in the development in, and
151operation of, stress testing. The results of stress tests should contribute to strategic decision
making and foster internal debate regarding assumptions, such as the cost, risk and speed with
which new capital could be raised or that positions could be hedged or sold. Board and senior
management involvement in the stress testing program is essential for its effective operation.
A bank’s capital planning process should incorporate rigorous; forward looking stress testing that
identifies possible events or changes in market conditions that could adversely impact the bank.
Banks, under their ICAAPs should examine future capital resources and capital requirements
under adverse scenarios. In particular, the results of forward-looking stress testing should be
considered when evaluating the adequacy of a bank’s capital buffer. Capital adequacy should be
assessed under stressed conditions against a variety of capital ratios, including regulatory ratios,
as well as ratios based on the bank’s internal definition of capital resources. In addition, the
possibility that a crisis impairs the ability of even very healthy banks to raise funds at reasonable
cost should be considered.
A bank should develop methodologies to measure the effect of reputational risk in terms of other
risk types, namely credit, liquidity, market and other risks that they may be exposed to in order to
avoid reputational damages and in order to maintain market confidence. This could be done by
including reputational risk scenarios in regular stress tests. For instance, including non-
contractual off-balance sheet exposures in the stress tests to determine the effect on a bank’s
credit, market and liquidity risk profiles.
A bank should carefully assess the risks with respect to commitments to off-balance sheet
vehicles and third-party firms related to structured credit securities and the possibility that assets
will need to be taken on balance sheet for reputational reasons. Therefore, in its stress testing
programme, a bank should include scenarios assessing the size and soundness of such vehicles
and firms relative to its own financial, liquidity and regulatory capital positions. This analysis
should include structural, solvency, liquidity and other risk issues, including the effects of
covenants and triggers.
13.13 Sound Compensation Practices
Risk management must be embedded in the culture of a bank. It should be a critical focus of the
CEO/Managing Director, Chief Risk Officer (CRO), senior management, trading desk and other
business line heads and employees in making strategic and day-to-day decisions. For a broad
and deep risk management culture to develop and be maintained over time, compensation
policies must not be unduly linked to short-term accounting profit generation. Compensation
policies should be linked to longer-term capital preservation and the financial strength of the firm,
and should consider risk-adjusted performance measures. In addition, a bank should provide
adequate disclosure regarding its compensation policies to stakeholders. Each bank’s board of
directors and senior management have the responsibility to mitigate the risks arising from
remuneration policies in order to ensure effective firm-wide risk management.
152Compensation practices at large financial institutions are one factor among many that contributed
to the financial crisis that began in 2007. High short-term profits led to generous bonus payments
to employees without adequate regard to the longer-term risks they imposed on their firms. These
incentives amplified the excessive risk-taking that has threatened the global financial system and
left firms with fewer resources to absorb losses as risks materialised. The lack of attention to risk
also contributed to the large, in some cases extreme absolute level of compensation in the
industry. As a result, to improve compensation practices and strengthen supervision in this area,
particularly for systemically important firms, the Financial Stability Board (formerly the Financial
Stability Forum) published its Principles for Sound Compensation Practices in April 2009.
A bank’s board of directors must actively oversee the compensation system’s design and
operation, which should not be controlled primarily by the chief executive officer and management
team. Relevant board members and employees must have independence and expertise in risk
management and compensation. In addition, the board of directors must monitor and review the
compensation system to ensure the system includes adequate controls and operates as intended.
The practical operation of the system should be regularly reviewed to ensure compliance with
policies and procedures. Compensation outcomes, risk measurements, and risk outcomes should
be regularly reviewed for consistency with intentions.
Staff that are engaged in the financial and risk control areas must be independent, have
appropriate authority, and be compensated in a manner that is independent of the business areas
they oversee and commensurate with their key role in the firm. Effective independence and
appropriate authority of such staff is necessary to preserve the integrity of financial and risk
management’s influence on incentive compensation.
Compensation must be adjusted for all types of risk so that remuneration is balanced between
the profit earned and the degree of risk assumed in generating the profit. In general, both
quantitative measures and human judgment should play a role in determining the appropriate risk
adjustments, including those that are difficult to measure such as liquidity risk and reputation risk.
Compensation outcomes must be symmetric with risk outcomes and compensation systems
should link the size of the bonus pool to the overall performance of the firm. Employees’ incentive
payments should be linked to the contribution of the individual and business to the firm’s overall
performance.
Compensation payout schedules must be sensitive to the time horizon of risks. Profits and losses
of different activities of a financial firm are realised over different periods of time. Variable
compensation payments should be deferred accordingly. Payments should not be finalised over
short periods where risks are realised over long periods. Management should question payouts
for income that cannot be realised or whose likelihood of realisation remains uncertain at the time
of payout.
153The mix of cash, equity and other forms of compensation must be consistent with risk alignment.
The mix will vary depending on the employee’s position and role. The firm should be able to
explain the rationale for its mix.
RBI will review compensation practices in a rigorous and sustained manner and deficiencies, if
any, will be addressed promptly with the appropriate supervisory action.
13.14 The risk factors discussed above should not be considered an exhaustive list of those
affecting any given bank. All relevant factors that present a material source of risk to capital should
be incorporated in a well-developed ICAAP. Furthermore, banks should be mindful of the capital
adequacy effects of concentrations that may arise within each risk type.
13.15 Quantitative and Qualitative Approaches in ICAAP
(a) All measurements of risk incorporate both quantitative and qualitative elements, but to the
extent possible, a quantitative approach should form the foundation of a bank’s measurement
framework. In some cases, quantitative tools can include the use of large historical databases;
when data are more scarce, a bank may choose to rely more heavily on the use of stress testing
and scenario analyses. Banks should understand when measuring risks that measurement error
always exists, and in many cases the error is itself difficult to quantify. In general, an increase in
uncertainty related to modeling and business complexity should result in a larger capital cushion.
(b) Quantitative approaches that focus on most likely outcomes for budgeting, forecasting, or
performance measurement purposes may not be fully applicable for capital adequacy because
the ICAAP should also take less likely events into account. Stress testing and scenario analysis
can be effective in gauging the consequences of outcomes that are unlikely but would have a
considerable impact on safety and soundness.
(c) To the extent that risks cannot be reliably measured with quantitative tools – for example,
where measurements of risk are based on scarce data or unproven quantitative methods –
qualitative tools, including experience and judgment, may be more heavily utilised. Banks should
be cognisant that qualitative approaches have their own inherent biases and assumptions that
affect risk assessment; accordingly, banks should recognise the biases and assumptions
embedded in, and the limitations of, the qualitative approaches used.
13.16 Risk Aggregation and Diversification Effects
(a) An effective ICAAP should assess the risks across the entire bank. A bank choosing to
conduct risk aggregation among various risk types or business lines should understand the
challenges in such aggregation. In addition, when aggregating risks, banks should ensure that
any potential concentrations across more than one risk dimension are addressed, recognising
that losses could arise in several risk dimensions at the same time, stemming from the same
event or a common set of factors. For example, a localised natural disaster could generate losses
from credit, market, and operational risks at the same time.
154(b) In considering the possible effects of diversification, management should be systematic
and rigorous in documenting decisions, and in identifying assumptions used in each level of risk
aggregation. Assumptions about diversification should be supported by analysis and evidence.
The bank should have systems capable of aggregating risks based on the bank’s selected
framework. For example, a bank calculating correlations within or among risk types should
consider data quality and consistency, and the volatility of correlations over time and under
stressed market conditions.
Part C: Market Discipline
14. Guidelines for Market Discipline
14.1 General
14.1.1 The purpose of Market discipline is to complement the minimum capital requirements
(detailed under Pillar 1) and the supervisory review process (detailed under Pillar 2). The aim is
to encourage market discipline by developing a set of disclosure requirements which will allow
market participants to assess key pieces of information on the scope of application, capital, risk
exposures, risk assessment processes and hence, the capital adequacy of the institution.
14.1.2 In principle, banks’ disclosures should be consistent with how senior management and the
Board of Directors assess and manage the risks of the bank. Under Pillar 1, banks use specified
approaches / methodologies for measuring the various risks they face and the resulting capital
requirements. It is believed that providing disclosures that are based on a common framework is
an effective means of informing the market about a bank’s exposure to those risks and provides
a consistent and comprehensive disclosure framework that enhances comparability.
14.2 Achieving Appropriate Disclosure
14.2.1 Market discipline can contribute to a safe and sound banking environment. Hence, non-
compliance with the prescribed disclosure requirements would attract a penalty, including
financial penalty. However, it is not intended that direct additional capital requirements would be
a response to non-disclosure, except as indicated below.
14.2.2 In addition to the general intervention measures, the Basel Capital Adequacy Framework
also anticipates a role for specific measures. Where disclosure is a qualifying criterion under Pillar
1 to obtain lower risk weightings and/or to apply specific methodologies, there would be a direct
sanction (not being allowed to apply the lower risk weighting or the specific methodology).
14.3 Interaction with Accounting Disclosures
It is recognised that the Pillar 3 disclosure framework does not conflict with requirements under
accounting standards, which are broader in scope. The BCBS has taken considerable efforts to
see that the narrower focus of Pillar 3, which is aimed at disclosure of bank capital adequacy,
does not conflict with the broader accounting requirements. The Reserve Bank will consider future
155modifications to the Market Discipline disclosures as necessary in light of its ongoing monitoring
of this area and industry developments.
14.4 Validation
The disclosures in this manner should be subjected to adequate validation. For example, since
information in the annual financial statements would generally be audited, the additional material
published with such statements must be consistent with the audited statements. In addition,
supplementary material (such as Management’s Discussion and Analysis) that is published
should also be subjected to sufficient scrutiny (e.g., internal control assessments, etc.) to satisfy
the validation issue. If material is not published under a validation regime, for instance in a stand-
alone report or as a section on a website, then management should ensure that appropriate
verification of the information takes place, in accordance with the general disclosure principle set
out below. In the light of the above, Pillar 3 disclosures will not be required to be audited by an
external auditor, unless specified.
14.5 Materiality
A bank should decide which disclosures are relevant for it based on the materiality concept.
Information would be regarded as material if its omission or misstatement could change or
influence the assessment or decision of a user relying on that information for the purpose of
making economic decisions. This definition is consistent with International Accounting Standards
and with the national accounting framework. The Reserve Bank recognises the need for a
qualitative judgment of whether, in light of the particular circumstances, a user of financial
information would consider the item to be material (user test). The Reserve Bank does not
consider it necessary to set specific thresholds for disclosure as the user test is a useful
benchmark for achieving sufficient disclosure. However, with a view to facilitate smooth transition
to greater disclosures as well as to promote greater comparability among the banks’ Pillar 3
disclosures, the materiality thresholds have been prescribed for certain limited disclosures.
Notwithstanding the above, banks are encouraged to apply the user test to these specific
disclosures and where considered necessary make disclosures below the specified thresholds
also.
14.6 Proprietary and Confidential Information
Proprietary information encompasses information (for example on products or systems), that if
shared with competitors would render a bank’s investment in these products/systems less
valuable, and hence would undermine its competitive position. Information about customers is
often confidential, in that it is provided under the terms of a legal agreement or counterparty
relationship. This has an impact on what banks should reveal in terms of information about their
customer base, as well as details on their internal arrangements, for instance methodologies
used, parameter estimates, data etc. The Reserve Bank believes that the requirements set out
156below strike an appropriate balance between the need for meaningful disclosure and the
protection of proprietary and confidential information.
14.7 General Disclosure Principle
Banks should have a formal disclosure policy approved by the Board of directors that addresses
the bank’s approach for determining what disclosures it will make and the internal controls over
the disclosure process. In addition, banks should implement a process for assessing the
appropriateness of their disclosures, including validation and frequency.
14.8 Implementation Date
In terms of Guidelines on Composition of Capital Disclosure Requirements issued vide circular
DBOD.No.BP.BC.98/21.06.201/2012-13 dated May 28, 2013, Pillar 3 disclosures as introduced
under Basel III have become effective from July 1, 2013. The first set of disclosures as required
by these guidelines was to be made by banks as on September 30, 2013.
14.9 Scope and Frequency of Disclosures
14.9.1 Pillar 3 applies at the top consolidated level of the banking group to which the Capital
Adequacy Framework applies. Disclosures related to individual banks within the groups would not
generally be required to be made by the parent bank. An exception to this arises in the disclosure
of capital ratios by the top consolidated entity where an analysis of significant bank subsidiaries
within the group is appropriate, in order to recognise the need for these subsidiaries to comply
with the Framework and other applicable limitations on the transfer of funds or capital within the
group. Pillar 3 disclosures will be required to be made by the individual banks on a stand-alone
basis when they are not the top consolidated entity in the banking group.
14.9.2 Banks are required to make Pillar 3 disclosures116 at least on a half yearly basis,
irrespective of whether financial statements are audited, with the exception of following
disclosures:
(i) Table DF-2: Capital Adequacy;
(ii) Table DF-3: Credit Risk: General Disclosures for All Banks; and
(iii) Table DF-4: Credit Risk: Disclosures for Portfolios Subject to the Standardised
Approach.
The disclosures as indicated at (i), (ii) and (iii) above will be made at least on a quarterly basis by
banks.
14.9.3 All disclosures must either be included in a bank’s published financial results / statements
or, at a minimum, must be disclosed on bank’s website. If a bank finds it operationally inconvenient
116 Please refer to Annex 17 for detailed Pillar 3 disclosure templates.
157to make these disclosures along with published financial results / statements, the bank must
provide in these financial results / statements, a direct link to where the Pillar 3 disclosures can
be found on the bank’s website. The Pillar 3 disclosures should be made concurrent with
publication of financial results / statements117.
14.9.4 However, banks may note that in the case of main features template (as indicated in
paragraph 14.13.7) and provision of the full terms and conditions of capital instruments (as
indicated in paragraph 14.13.8), banks are required to update these disclosures concurrently
whenever a new capital instrument is issued and included in capital or whenever there is a
redemption, conversion / write-down or other material change in the nature of an existing capital
instrument.
14.10 Regulatory Disclosure Section
14.10.1 Banks are required to make disclosures in the format as specified in Annex 17 of this
Master Circular. Banks have to maintain a ‘Regulatory Disclosures Section’ on their websites,
where all the information relating to disclosures will be made available to the market participants.
The direct link to this page should be prominently provided on the home page of a bank’s website
and it should be easily accessible. This requirement is essentially to ensure that the relevance /
benefit of Pillar 3 disclosures is not diminished by the challenge of finding the disclosure in the
first place.
14.10.2 An archive for at least three years of all templates relating to prior reporting periods should
be made available by banks on their websites.
14.11 Pillar 3 under Basel III Framework118
14.11.1 The Pillar 3 disclosure requirements as introduced under Basel III along with previous
disclosure requirements with suitable modifications / enhancements are detailed in the
subsequent paragraphs.
14.11.2 In order to ensure comparability of the capital adequacy of banks across jurisdictions, it
is important to disclose details of items of regulatory capital and various regulatory adjustments
to it. Further, to improve consistency and ease of use of disclosures relating to the composition
of capital and to mitigate the risk of inconsistent reporting format undermining the objective of
enhanced disclosures, banks across Basel member jurisdictions are required to publish their
117 It may be noted that Pillar 3 disclosures are required to be made by all banks including those which are not listed
on stock exchanges and / or not required to publish financial results / statement. Therefore, such banks are also
required to make Pillar 3 disclosures at least on their websites within reasonable period.
118Pillar 3 requirements as introduced vide circular DBOD.No.BP.BC.98/21.06.201/2012-13 dated May 28, 2013 on
Guidelines on Composition of Capital Disclosure Requirements. These guidelines became effective from July 1, 2013.
The new disclosure requirements are in addition to the Pillar 3 guidance contained in NCAF.
158capital positions according to common templates. The disclosure requirements are set out in the
form of following templates:
(i) Disclosure Template
A common template which will be used by banks to report the details of their regulatory capital. It
is designed to meet the Basel III requirement to disclose all regulatory adjustments. The template
enhances consistency and comparability in the disclosure of the elements of capital between
banks and across jurisdictions.
(ii) Reconciliation Requirements
In order to meet the reconciliation requirements as envisaged under Basel III, a three-step
approach has been devised. This step-by-step approach to reconciliation ensures that the Basel
III requirement to provide a full reconciliation of all regulatory capital elements back to the
published financial statements is met in a consistent manner.
(iii) Main Features Template
A common template has been designed to capture the main features of all regulatory capital
instruments issued by a bank at one place. This disclosure requirement is intended to meet the
Basel III requirement to provide a description of the main features of capital instruments.
(iv) Other Disclosure Requirements
This disclosure enables banks in meeting the Basel III requirement to provide the full terms and
conditions of capital instruments on their websites.
(v) Pillar 3 disclosure requirements also include certain aspects that are not specifically
required to compute capital requirements under Pillar 1119. It may be noted that beyond disclosure
requirements as set forth in these guidelines, banks are responsible for conveying their actual
risk profile to market participants. The information banks disclose must be adequate to fulfill this
objective. In addition to the specific disclosure requirements as set out in the guidelines, banks
operating in India should also make additional disclosures in the following areas:
(i) Securitisation exposures in the trading book;
(ii) Sponsorship of off-balance sheet vehicles;
(iii) Valuation with regard to securitisation exposures; and
(iv) Pipeline and warehousing risks with regard to securitisation exposures.
119 Master Circular DBOD.No.BP.BC.73/21.06.001/2009-10 dated Feb 8, 2010.
15914.12 Disclosure Template
14.12.1 The common template which banks should use is set out in Table DF-11 of Annex 17,
along with explanations.
14.12.2 It may be noted that banks should not add or delete any rows / columns from the common
reporting template. This is essential to ensure that there is no divergence in reporting templates
across banks and across jurisdictions which could undermine the objectives of consistency and
comparability of a bank’s regulatory capital. The template will retain the same row numbering
used in its first column such that market participants can easily map the Indian version of
templates to the common version designed by the Basel Committee.
14.12.3 The Basel Committee has suggested that in cases where the national implementation of
Basel III rules120 applies a more conservative definition of an element (e.g., components and
criteria of regulatory capital, regulatory adjustments etc.), national authorities may choose
between one of two approaches listed below for the purpose of disclosure:
Approach 1: In the national version of the template, banks are required to maintain the same
definitions121of all rows. Further, banks will have to report the impact of the more conservative
national definition in the rows exclusively designated for national specific adjustments.
Approach 2: In the national version of the template, banks are required to use the definitions of
elements as implemented in that jurisdiction122, clearly labelling them as being different from the
Basel III minimum definition123, and banks are required to separately disclose the impact of each
of these different definitions in the notes to the template.
14.12.4 The aim of both the approaches is to provide all the information necessary to
enable market participants to calculate the capital of banks on a common basis. In the Indian
context, Approach 2 appears to be more practical and less burdensome for banks than the
Approach 1. Under the Approach 2, banks have to furnish data based on the definition of capital
/ regulatory adjustments as implemented in India. The difference with the Basel III minimum can
be separately disclosed and explained in notes to the templates. This way of disclosure will be
more relevant and comprehensible to a larger number of users of disclosures more specifically,
the domestic users. At the same time, information provided in the notes to the templates to
indicate differences from Basel III minimum will help facilitate cross-jurisdictional comparison of
120 As defined in the DBOD.No.BP.BC.98/21.06.201/2011-12 dated May 2, 2012 on Guidelines on Implementation of
Basel III Capital Regulations in India.
121 Basel III: A global regulatory framework for more resilient banks and banking systems, December 2010 (rev June
2011).
122 As defined in the DBOD.No.BP.BC.98/21.06.201/2011-12 dated May 2, 2012 on Guidelines on Implementation of
Basel III Capital Regulations in India.
123 Basel III: A global regulatory framework for more resilient banks and banking systems, December 2010 (rev June
2011).
160banks’ capital, should users desire. Accordingly, the disclosure templates have been customised,
keeping in view the consistency and comparability of disclosures.
14.13 Reconciliation Requirements
14.13.1 Banks will be required to disclose a full reconciliation of all regulatory capital elements
back to the balance sheet in the audited (or unaudited) financial statements. This requirement
aims to address disconnect, if any, present in a bank’s disclosure between the numbers used for
the calculation of regulatory capital and the numbers used in the balance sheet.
14.13.2 Banks will have to follow a three step approach to show the link between their balance
sheet and the numbers which are used in the composition of capital disclosure template set out
in Annex 17 (Table DF-11 whichever applicable). The three steps are explained below and also
illustrated in Table DF-12 of Annex 17:
Step 1: banks are required to disclose the reported balance sheet under the regulatory scope of
consolidation124 (Table DF-12 of Annex 17);
Step 2: banks will have to expand the lines of the balance sheet under regulatory scope of
consolidation (Table DF-12 of Annex 17) to display all components which are used in the
composition of capital disclosure template (Table DF-11 of Annex 17); and
Step 3: finally, banks will have to map each of the components that are disclosed in Step 2 to the
composition of capital disclosure template set out in Table DF-11 of Annex 17 whichever,
applicable.
14.13.3 Step 1: Disclose the reported balance sheet under the regulatory scope of
consolidation
(i) The scope of consolidation for accounting purposes is often different from that applied for the
regulatory purposes. Usually, there will be difference between the financial statements of a bank
specifically, the bank’s balance sheet in published financial statements and the balance sheet
considered for the calculation of regulatory capital. Therefore, the reconciliation process involves
disclosing how the balance sheet changes when the regulatory scope of consolidation is applied
for the purpose of calculation of regulatory capital on a consolidated basis.
(ii) Accordingly, banks are required to disclose the list of the legal entities which have been
included within accounting scope of consolidation but excluded from the regulatory scope of
consolidation. This is intended to enable market participants and supervisors to investigate the
risks posed by unconsolidated entities (e.g., unconsolidated subsidiaries). Similarly, banks are
required to list the legal entities which have been included in the regulatory consolidation but not
in the accounting scope of consolidation. Finally, it is possible that some entities are included in
124 Regulatory scope of consolidation is explained in paragraph 3 of this Master Circular.
161both the regulatory scope of consolidation and accounting scope of consolidation, but the method
of consolidation differs between these two scopes. In such cases, banks are required to list these
legal entities and explain the differences in the consolidation methods.
(iii) If the scope of regulatory consolidation and accounting consolidation is identical for a
particular banking group, it would not be required to undertake Step 1. The banking group would
state that there is no difference between the regulatory consolidation and the accounting
consolidation and move to Step 2.
(iv) In addition to the above requirements, banks must disclose for each legal entity, its total
balance sheet assets, total balance sheet equity (as stated on the accounting balance sheet of
the legal entity), method of consolidation and a description of the principle activities of the entity.
These disclosures are required to be made as indicated in the revised templates namely Table
DF-1: Scope of Application of Annex 17.
14.13.4 Step 2: Expand the lines of the regulatory balance sheet to display all of the
components used in the definition of capital disclosure template (Table DF-11 of Annex 17)
(i) Many of the elements used in the calculation of regulatory capital may not be readily identified
from the face of the balance sheet. This requires that banks should expand the rows of the
balance sheet under regulatory scope of consolidation such that all the components used in the
definition of capital disclosure template (Table DF-11 of Annex 17) are displayed separately.
(ii) For example, paid-up share capital may be reported as one line on the balance sheet.
However, some elements of this may meet the requirements for inclusion in Common Equity Tier
1 (CET1) capital and other elements may only meet the requirements for Additional Tier 1 (AT1)
or Tier 2 (T2) capital, or may not meet the requirements for inclusion in regulatory capital at all.
Therefore, if a bank has some amount of paid-up capital which goes into the calculation of CET1
and some amount which goes into the calculation of AT1, it should expand the ‘paid-up share
capital’ line of the balance sheet in the following way:
Paid-up share capital Ref
of which amount eligible for CET1 e
of which amount eligible for AT1 f
(iii) In addition, as illustrated above, each element of the expanded balance sheet must be given
a reference number / letter for use in Step 3.
(iv) Another example is regulatory adjustments of the deduction of intangible assets. Firstly, there
could be a possibility that the intangible assets may not be readily identifiable in the balance sheet.
There is a possibility that the amount on the balance sheet may combine goodwill and other
intangibles. Secondly, the amount to be deducted is net of any related deferred tax liability. This
deferred tax liability is likely to be reported in combination with other deferred tax liabilities which
162have no relation to goodwill or intangibles. Therefore, the bank should expand the balance sheet
in the following way:
Goodwill and intangible assets Ref
of which goodwill a
of which other intangibles b
Current and deferred tax liabilities (DTLs) Ref
of which DTLs related to goodwill c
of which DTLs related to other intangible assets d
(v) Banks will need to expand elements of the balance sheet only to the extent required to
reach the components which are used in the definition of capital disclosure template. For example,
if entire paid-up capital of the bank met the requirements to be included in CET1, the bank would
not need to expand this line.
14.13.5 Step 3: Map each of the components that are disclosed in Step 2 to the
composition of capital disclosure templates
(i) When reporting the disclosure template (i.e., Table DF-11 of Annex 17), a bank is
required to use the reference numbers / letters from Step 2 to show the source of every input.
(ii) For example, if the composition of capital disclosure template includes the line ‘goodwill
net of related deferred tax liability’, then next to this item the bank should put ‘a - c’. This is required
to illustrate that how these components of the balance sheet under the regulatory scope of
consolidation have been used to calculate this item in the disclosure template.
14.13.6 The three step approach is flexible and offers the following benefits:
(i) the level of disclosure is proportionate, varying with the complexity of the balance
sheet of the reporting bank (i.e., banks are not subject to a fixed template. A bank
may skip a step if there is no further information added by that step);
(ii) supervisors and market participants can trace the origin of the elements of the
regulatory capital back to their exact location on the balance sheet under the
regulatory scope of consolidation; and
(iii) the approach is flexible enough to be used under any accounting standards. Banks
are required to map all the components of the regulatory capital disclosure templates
back to the balance sheet under the regulatory scope of consolidation, regardless of
where the accounting standards require the source to be reported on the balance
sheet.
16314.13.7 Main Features Template
14.13.7.1 Banks are required to complete a ‘main features template’ to ensure consistency
and comparability of disclosures of the main features of capital instruments. Banks are required
to disclose a description of the main features of capital instruments issued by them. Besides,
banks will also be required to make available the full terms and conditions of their capital
instruments (paragraph 14.13.8 below). The requirement of separately disclosing main features
of capital instruments is intended to provide an overview of the capital structure of a bank. Many
times, it may not be possible for the users to extract key features of capital instruments with ease
from the full disclosure of terms and conditions of capital instruments made by banks.
14.13.7.2 This template represents the minimum level of summary disclosure which banks
are required to report in respect of each regulatory capital instrument issued. The main feature
disclosure template is set out in Table DF-13 of Annex 17 along with a description of each of the
items to be reported. Some of the key aspects of the ‘Main Features Template’ are as under:
(i) it is designed to be completed by banks from when the Basel III capital regulations
come into effect i.e., as on April 1, 2013. Therefore, it includes disclosure relating to
instruments which are subject to the transitional arrangements.
(ii) banks are required to report each capital instrument (including common shares) in a
separate column of the template, such that the completed template would provide a
‘main features report’ that summarises all of the regulatory capital instruments of the
banking group.
14.13.7.3 Banks are required to keep the completed main features report up-to-date. Banks
should ensure that the report is updated and made publicly available, whenever a bank issues or
repays a capital instrument and whenever there is redemption, conversion / write-down or other
material change in the nature of an existing capital instrument.
14.13.8 Other Disclosure Requirements
In addition to the disclosure requirements set out in above paragraphs, banks are required to
make the following disclosure in respect of the composition of capital:
(i) Full Terms and Conditions: banks are required to make available on their websites125
the full terms and conditions of all instruments included in regulatory capital. The
requirement for banks to make available the full terms and conditions of instruments
on their websites will allow supervisors and market participants to investigate the
specific features of individual capital instruments.
125 Please refer to paragraph 14.10 of this Master Circular.
164(ii) Banks are required to keep the terms and conditions of all capital instruments up-to-
date (Table DF-14 of Annex 17). Whenever there is a change in the terms and
conditions of a capital instrument, banks should update them promptly and make
publicly available such updated disclosure.
14.14 Format of Disclosure Template
All Pillar 3 disclosure templates as set out in these guidelines are furnished in tabular form in
Annex 17. Additional relevant definitions and explanations are also provided for the Pillar 3
disclosures.
Part D: Capital Conservation Buffer Framework126
15. Capital Conservation Buffer
15.1 Objective
15.1.1 The capital conservation buffer (CCB) is designed to ensure that banks build up capital
buffers during normal times (i.e., outside periods of stress) which can be drawn down as losses
are incurred during a stressed period. The requirement is based on simple capital conservation
rules designed to avoid breaches of minimum capital requirements.
15.1.2 Outside the period of stress, banks should hold buffers of capital above the regulatory
minimum. When buffers have been drawn down, one way banks should look to rebuild them is
through reducing discretionary distributions of earnings. This could include reducing dividend
payments, share buybacks and staff bonus payments. Banks may also choose to raise new
capital from the market as an alternative to conserving internally generated capital. However, if a
bank decides to make payments in excess of the constraints imposed as explained above, the
bank, with the prior approval of RBI, would have to use the option of raising capital from the market
equal to the amount above the constraint which it wishes to distribute.
15.1.3 In the absence of raising capital from the market, the share of earnings retained by banks
for the purpose of rebuilding their capital buffers should increase the nearer their actual capital
levels are to the minimum capital requirement. It will not be appropriate for banks which have
depleted their capital buffers to use future predictions of recovery as justification for maintaining
generous distributions to shareholders, other capital providers and employees. It is also not
acceptable for banks which have depleted their capital buffers to try and use the distribution of
capital as a way to signal their financial strength. Not only is this irresponsible from the perspective
of an individual bank, putting shareholders’ interests above depositors, it may also encourage
other banks to follow suit. As a consequence, banks in aggregate can end up increasing
distributions at the exact point in time when they should be conserving earnings.
126 Annex 4 of Guidelines on Implementation of Basel III Capital Regulations in India issued vide circular
DBOD.No.BP.BC.98/21.06.201/2011-12 dated May 2, 2012.
16515.1.4 The capital conservation buffer can be drawn down only when a bank faces a systemic or
idiosyncratic stress. A bank should not choose in normal times to operate in the buffer range
simply to compete with other banks and win market share. This aspect would be specifically
looked into by Reserve Bank of India during the Supervisory Review and Evaluation Process. If,
at any time, a bank is found to have allowed its capital conservation buffer to fall in normal times,
particularly by increasing its risk weighted assets without a commensurate increase in the
Common Equity Tier 1 Ratio (although adhering to the restrictions on distributions), this would be
viewed seriously. In addition, such a bank will be required to bring the buffer to the desired level
within a time limit prescribed by Reserve Bank of India. The banks which draw down their capital
conservation buffer during a stressed period should also have a definite plan to replenish the
buffer as part of its Internal Capital Adequacy Assessment Process and strive to bring the buffer
to the desired level within a time limit agreed to with Reserve Bank of India during the Supervisory
Review and Evaluation Process.
15.1.5 The framework of capital conservation buffer will strengthen the ability of banks to
withstand adverse economic environment conditions, will help increase banking sector resilience
both going into a downturn, and provide the mechanism for rebuilding capital during the early
stages of economic recovery. Thus, by retaining a greater proportion of earnings during a
downturn, banks will be able to help ensure that capital remains available to support the ongoing
business operations / lending activities during the period of stress. Therefore, this framework is
expected to help reduce pro-cyclicality.
15.2 The Framework
15.2.1 Banks are required to maintain a capital conservation buffer of 2.5%, comprised of
Common Equity Tier 1 capital, above the regulatory minimum capital requirement127 of 9%.
Capital distribution constraints will be imposed on a bank when capital level falls within this range.
However, they will be able to conduct business as normal when their capital levels fall into the
conservation range as they experience losses. Therefore, the constraints imposed are related to
the distributions only and are not related to the operations of banks. The distribution constraints
imposed on banks when their capital levels fall into the range increase as the banks’ capital levels
approach the minimum requirements. The Table 22 below shows the minimum capital
conservation ratios a bank must meet at various levels of the Common Equity Tier 1 capital ratios.
127 Common Equity Tier 1 must first be used to meet the minimum capital requirements (including the 7% Tier 1 and
9% Total capital requirements, if necessary), before the remainder can contribute to the capital conservation buffer
requirement.
166Table 22: Minimum capital conservation standards for individual bank
Common Equity Tier 1
Ratio after including the Minimum Capital Conservation Ratios
current periods retained (expressed as a percentage of earnings)
earnings
5.5% - 6.125% 100%
>6.125% - 6.75% 80%
>6.75% - 7.375% 60%
>7.375% - 8.0% 40%
>8.0% 0%
For example, a bank with a Common Equity Tier 1 capital ratio in the range of 6.125% to 6.75%
is required to conserve 80% of its earnings in the subsequent financial year (i.e., payout no more
than 20% in terms of dividends, share buybacks and discretionary bonus payments is allowed).
15.2.2 The Common Equity Tier 1 ratio includes amounts used to meet the minimum Common
Equity Tier 1 capital requirement of 5.5%, but excludes any additional Common Equity Tier 1
needed to meet the 7% Tier 1 and 9% Total Capital requirements. For example, a bank maintains
Common Equity Tier 1 capital of 9% and has no Additional Tier 1 or Tier 2 capital. Therefore, the
bank would meet all minimum capital requirements, but would have a zero conservation buffer
and therefore, the bank would be subjected to 100% constraint on distributions of capital by way
of dividends, share-buybacks and discretionary bonuses.
15.2.3 The following represents other key aspects of the capital conservation buffer
requirements:
(i) Elements subject to the restriction on distributions: Dividends and share buybacks,
discretionary payments on other Tier 1 capital instruments and discretionary bonus payments to
staff would constitute items considered to be distributions. Payments which do not result in
depletion of Common Equity Tier 1 capital, (for example certain scrip dividends128) are not
considered distributions.
(ii) Definition of earnings: Earnings are defined as distributable profits before the deduction
of elements subject to the restriction on distributions mentioned at (i) above. Earnings are
calculated after the tax which would have been reported had none of the distributable items been
paid. As such, any tax impact of making such distributions are reversed out. If a bank does not
have positive earnings and has a Common Equity Tier 1 ratio less than 8%, it should not make
positive net distributions.
(iii) Solo or consolidated application: Capital conservation buffer is applicable both at the
solo level (global position) as well as at the consolidated level, i.e., restrictions would be imposed
128 A scrip dividend is a scrip issue made in lieu of a cash dividend. The term ‘scrip dividends’ also includes bonus
shares.
167on distributions at the level of both the solo bank and the consolidated group. In all cases where
the bank is the parent of the group, it would mean that distributions by the bank can be made only
in accordance with the lower of its Common Equity Tier 1 Ratio at solo level or consolidated
level129. For example, if a bank’s Common Equity Tier 1 ratio at solo level is 6.8% and that at
consolidated level is 7.4%. It will be subject to a capital conservation requirement of 60%
consistent with the Common Equity Tier 1 range of >6.75% - 7.375% as per Table 22 in paragraph
15.2.1 above. Suppose a bank’s Common Equity Tier 1 ratio at solo level is 6.6% and that at
consolidated level is 6%. It will be subject to a capital conservation requirement of 100%
consistent with the Common Equity Tier 1 range of >5.5% - 6.125% as per Table 22 on minimum
capital conservation standards for individual bank.
Part E: Leverage Ratio Framework130
16. Leverage Ratio
16.1 Rationale and Objective
An underlying cause of the global financial crisis was the build-up of excessive on- and off-balance
sheet leverage in the banking system. In many cases, banks built up excessive leverage while
apparently maintaining strong risk-based capital ratios. During the most severe part of the crisis,
the banking sector was forced by the market to reduce its leverage in a manner that amplified
downward pressure on asset prices. This deleveraging process exacerbated the feedback loop
between losses, falling bank capital and contraction in credit availability. Therefore, under Basel
III, a simple, transparent, non-risk based leverage ratio has been introduced. The leverage ratio
is calibrated to act as a credible supplementary measure to the risk based capital requirements
and is intended to achieve the following objectives:
(a) constrain the build-up of leverage in the banking sector to avoid destabilising deleveraging
processes which can damage the broader financial system and the economy; and
(b) reinforce the risk-based requirements with a simple, non-risk based “backstop” measure.
16.2 Definition, Minimum Requirement and Scope of Application of the Leverage Ratio
Definition and minimum requirement
16.2.1 The Basel III leverage ratio is defined as the capital measure (the numerator) divided by
the exposure measure (the denominator), with this ratio expressed as a percentage.
129 If a subsidiary is a bank, it will naturally be subject to the provisions of capita conservation buffer. If it is not a
bank, even then the parent bank should not allow the subsidiary to distribute dividend which are inconsistent with
the position of CCB at the consolidated level.
130 Please refer to Annex 5 of Guidelines on Implementation of Basel III Capital Regulations in India issued vide
circular DBOD.No.BP.BC.98/21.06.201/2011-12 dated May 2, 2012.
16816.2.2 The minimum Leverage Ratio shall be 4% for Domestic Systemically Important Banks (D-
SIBs) and 3.5% for other banks131. Both the capital measure and the exposure measure along
with Leverage Ratio are to be disclosed on a quarter-end basis. However, banks must meet the
minimum Leverage Ratio requirement at all times.
Scope of consolidation
16.2.3 The Basel III leverage ratio framework follows the same scope of regulatory consolidation
as is used for the risk-based capital framework132.
16.2.4 Treatment of investments in the capital of banking, financial, insurance and commercial
entities that are outside the regulatory scope of consolidation: in cases where a banking, financial,
insurance or commercial entity is outside the scope of regulatory consolidation, only the
investment in the capital of such entities (i.e. only the carrying value of the investment, as opposed
to the underlying assets and other exposures of the investee) is to be included in the leverage
ratio exposure measure. However, investments in the capital of such entities that are deducted
from Tier 1 capital (i.e., either deduction from Common Equity Tier 1 capital or deduction from
Additional Tier 1 capital following corresponding deduction approach) as set out in paragraph 4.4
- Regulatory Adjustments / Deductions133 of this Master Circular may be excluded from the
leverage ratio exposure measure.
16.3 Capital Measure
The capital measure for the leverage ratio is the Tier 1 capital of the risk-based capital
framework134, taking into account various regulatory adjustments / deductions and the transitional
arrangements. In other words, the capital measure used for the leverage ratio at any particular
point in time is the Tier 1 capital measure applying at that time under the risk-based framework.
16.4 Exposure Measure
16.4.1 General Measurement Principles
(i) The exposure measure for the leverage ratio should generally follow the accounting value,
subject to the following:
131 Please refer to circular no. DBR.BP.BC.No.49/21.06.201/2018-19 dated June 28, 2019 on Basel III Capital
Regulations- Implementation of Leverage Ratio.
132 Please refer to paragraph 3: Scope of Application of Capital Adequacy Framework. Please also refer to circulars
DBOD.No.BP.BC.72/21.04.018/2001-02 dated February 25, 2003 and DBOD.No.FSD.BC.46/24.01.028/2006-07 dated
December 12, 2006.
133 Regulatory adjustments / deductions as indicated in paragraph 4.4.
134 Tier 1 capital as defined in paragraph 4: Composition of regulatory capital.
169 on-balance sheet, non-derivative exposures are included in the exposure measure net of
specific provisions or accounting valuation adjustments (e.g. accounting credit valuation
adjustments, prudent valuation adjustments);
netting of loans and deposits is not allowed.
(ii) Unless specified differently below, banks must not take account of physical or financial
collateral, guarantees or other credit risk mitigation techniques to reduce the exposure measure.
(iii) A bank’s total exposure measure is the sum of the following exposures:
(a) on-balance sheet exposures;
(b) derivative exposures;
(c) securities financing transaction (SFT) exposures; and
(d) off- balance sheet (OBS) items.
The specific treatments for these four main exposure types are defined in paragraphs 16.4.2 to
16.4.5 below.
16.4.2 On-balance sheet exposures
16.4.2.1 Banks must include all balance sheet assets in their exposure measure, including on-
balance sheet derivatives collateral and collateral for SFTs, with the exception of on-balance
sheet derivative and SFT assets that are covered in paragraph 16.4.3 and 16.4.4 below135.
16.4.2.2 However, to ensure consistency, balance sheet assets deducted from Tier 1 capital as
set out in paragraph 4.4 - Regulatory Adjustments / Deductions may be deducted from the
exposure measure. Following are the two examples:
• Where a banking, financial or insurance entity is not included in the regulatory scope
of consolidation (as set out in paragraph 16.2.3), the amount of any investment in the
capital of that entity that is totally or partially deducted from CET1 capital or from
Additional Tier 1 capital of the bank (in terms of paragraphs 3.4.2 and 4.4.9.2(C)) may
also be deducted from the exposure measure.
• For banks using the internal ratings-based (IRB) approach to determining capital
requirements for credit risk, paragraph 4.4.4 requires any shortfall in the stock of
eligible provisions relative to expected losses to be deducted from CET1 capital. The
same amount may be deducted from the exposure measure.
135 Where a bank according to its operative accounting framework recognises fiduciary assets on the balance sheet,
these assets can be excluded from the leverage ratio exposure measure provided that the assets meet the IAS 39
criteria for derecognition and, where applicable, IFRS 10 for deconsolidation. When disclosing the leverage ratio,
banks must also disclose the extent of such de-recognised fiduciary items as set out in paragraph 16.7.4.
17016.4.2.3 Liability items must not be deducted from the exposure measure. For example,
gains/losses on fair valued liabilities or accounting value adjustments on derivative liabilities due
to changes in the bank’s own credit risk as described in paragraph 4.4.6 must not be deducted
from the exposure measure.
16.4.3 Derivative exposures
16.4.3.1 Treatment of derivatives: Derivatives create two types of exposure:
(a) an exposure arising from the underlying of the derivative contract; and
(b) a counterparty credit risk (CCR) exposure.
The leverage ratio framework uses the method set out below to capture both of these exposure
types.
16.4.3.2 Banks must calculate their derivative exposures136, including where a bank sells
protection using a credit derivative, as the replacement cost (RC)137 for the current exposure plus
an add-on for potential future exposure (PFE), as described in paragraph 16.4.3.3 below. If the
derivative exposure is covered by an eligible bilateral netting contract as specified in the Annex
18 (part B), an alternative treatment as indicated in paragraph 16.4.3.4 below may be applied138.
Written credit derivatives are subject to an additional treatment, as set out in paragraphs 16.4.3.11
to 16.4.3.14 below.
16.4.3.3 For a single derivative contract, not covered by an eligible bilateral netting contract as
specified in Annex 18 (part B), the amount to be included in the exposure measure is determined
as follows:
exposure measure = replacement cost (RC) + add-on
where;
RC = the replacement cost of the contract (obtained by marking to market), where the
contract has a positive value.
136 This approach makes reference to the Current Exposure Method (CEM) to calculate CCR exposure amounts
associated with derivative exposures. The Basel Committee will consider whether the recently released Standardised
Approach for measuring exposure at default (EAD) for CCR known as SA-CCR is appropriate in the context of the
need to capture both types of exposures created by derivatives as described in paragraph 16.4.3.1. Banks operating
in India may continue to use CEM until advised otherwise by the Reserve Bank
137 If, under the relevant accounting standards, there is no accounting measure of exposure for certain derivative
instruments because they are held (completely) off-balance sheet, the bank must use the sum of positive fair values
of these derivatives as the replacement cost.
138 These netting rules are with the exception of cross-product netting i.e. cross-product netting is not permitted in
determining the leverage ratio exposure measure. However, where a bank has a cross-product netting agreement
in place that meets the eligibility criteria of Annex 20 (part B) it may choose to perform netting separately in each
product category provided that all other conditions for netting in this product category that are applicable to the
Basel III leverage ratio are met.
171add-on = an amount for PFE over the remaining life of the contract calculated by applying
an add-on factor to the notional principal amount of the derivative. The add-on factors are
given in Table 9 of paragraph 5.15.3.4 and Tables 20 & 21 of paragraph 8.6.3.
16.4.3.4 Bilateral netting: when an eligible bilateral netting contract is in place as specified in
Annex 18 (part B), the RC for the set of derivative exposures covered by the contract will be the
sum of net replacement cost and the add-on factors as described in paragraph 16.4.3.3 above
will be A as calculated below:
Net
(a) Credit exposure on bilaterally netted forward transactions will be calculated as the sum of the
net mark-to-market replacement cost, if positive, plus an add-on based on the notional underlying
principal. The add-on for netted transactions (A ) will equal the weighted average of the gross
Net
add-on (A ) and the gross add-on adjusted by the ratio of net current replacement cost to gross
Gross
current replacement cost (NGR). This is expressed through the following formula:
A = 0.4 · A + 0.6 · NGR · A
Net Gross Gross
where:
NGR = level of net replacement cost / level of gross replacement cost for transactions
subject to legally enforceable netting agreements139
A = sum of individual add-on amounts (calculated by multiplying the notional principal
Gross
amount by the appropriate add-on factors set out in Table 9 of paragraph 5.15.3.4 and
Tables 20 & 21 of paragraph 8.6.3) of all transactions subject to legally enforceable netting
agreements with one counterparty.
(b) For the purposes of calculating potential future credit exposure to a netting counterparty for
forward foreign exchange contracts and other similar contracts in which the notional principal
amount is equivalent to cash flows, the notional principal is defined as the net receipts falling due
on each value date in each currency. The reason for this is that offsetting contracts in the same
currency maturing on the same date will have lower potential future exposure as well as lower
current exposure.
16.4.3.5 Treatment of related collateral: collateral received in connection with derivative
contracts has two countervailing effects on leverage:
• it reduces counterparty exposure; but
• it can also increase the economic resources at the disposal of the bank, as the bank
can use the collateral to leverage itself.
139 Banks must calculate NGR on a counterparty by counterparty basis for all transactions that are subject to legally
enforceable netting agreements.
17216.4.3.6 Collateral received in connection with derivative contracts does not necessarily reduce
the leverage inherent in a bank’s derivatives position, which is generally the case if the settlement
exposure arising from the underlying derivative contract is not reduced. As a general rule,
collateral received may not be netted against derivative exposures whether or not netting is
permitted under the bank’s operative accounting or risk-based framework. Therefore, it is advised
that when calculating the exposure amount by applying paragraphs 16.4.3.2 to 16.4.3.4 above, a
bank must not reduce the exposure amount by any collateral received from the counterparty.
16.4.3.7 Similarly, with regard to collateral provided, banks must gross up their exposure measure
by the amount of any derivatives collateral provided where the effect of providing collateral has
reduced the value of their balance sheet assets under their operative accounting framework.
16.4.3.8 Treatment of cash variation margin: in the treatment of derivative exposures for the
purpose of the leverage ratio, the cash portion of variation margin exchanged between
counterparties may be viewed as a form of pre-settlement payment, if the following conditions are
met:
(i) For trades not cleared through a qualifying central counterparty (QCCP)140, the cash
received by the recipient counterparty is not segregated141.
(ii) Variation margin is calculated and exchanged on a daily basis based on mark-to-market
valuation of derivatives positions142.
(iii) The cash variation margin is received in the same currency as the currency of settlement
of the derivative contract143.
(iv) Variation margin exchanged is the full amount that would be necessary to fully extinguish
the mark-to-market exposure of the derivative subject to the threshold and minimum transfer
amounts applicable to the counterparty144.
140 A QCCP is as defined in the paragraph 5.15.3.2.
141 Cash variation margin would satisfy the non-segregation criterion if the recipient counterparty has no restrictions
on the ability to use the cash received (i.e., the cash variation margin received is used as its own cash). Further, this
criterion would be met if the cash received by the recipient counterparty is not required to be segregated by law,
regulation, or any agreement with the counterparty.
142 To meet this criterion, derivative positions must be valued daily and cash variation margin must be transferred
daily to the counterparty or to the counterparty’s account, as appropriate.
143 For this paragraph, currency of settlement means any currency of settlement specified in the derivative contract,
governing qualifying master netting agreement (MNA), or the credit support annex (CSA) to the qualifying MNA. The
Basel Committee will review the issue further for an appropriate treatment in this regard.
144 Cash variation margin exchanged on the morning of the subsequent trading day based on the previous, end-of-
day market values would meet this criterion, provided that the variation margin exchanged is the full amount that
would be necessary to fully extinguish the mark-to-market exposure of the derivative subject to applicable threshold
and minimum transfer amounts.
173(v) Derivatives transactions and variation margins are covered by a single master netting
agreement (MNA)145,146 between the legal entities that are the counterparties in the derivatives
transaction. The MNA must explicitly stipulate that the counterparties agree to settle net any
payment obligations covered by such a netting agreement, taking into account any variation
margin received or provided if a credit event occurs involving either counterparty. The MNA must
be legally enforceable and effective147 in all relevant jurisdictions, including in the event of default
and bankruptcy or insolvency.
16.4.3.9 If the conditions in paragraph 16.4.3.8 are met, the cash portion of variation margin
received may be used to reduce the replacement cost portion of the leverage ratio exposure
measure, and the receivables assets from cash variation margin provided may be deducted from
the leverage ratio exposure measure as follows:
In the case of cash variation margin received, the receiving bank may reduce the
replacement cost (but not the add-on portion) of the exposure amount of the derivative
asset by the amount of cash received if the positive mark-to-market value of the derivative
contract(s) has not already been reduced by the same amount of cash variation margin
received under the bank’s operative accounting standard.
In the case of cash variation margin provided to a counterparty, the posting bank may
deduct the resulting receivable from its leverage ratio exposure measure, where the cash
variation margin has been recognised as an asset under the bank’s operative accounting
framework.
Cash variation margin may not be used to reduce the PFE amount (including the calculation of
the net-to-gross ratio (NGR) as defined in para 16.4.3.4).
16.4.3.10 Treatment of clearing services: where a bank acting as clearing member (CM)148
offers clearing services to clients, the clearing member’s trade exposures149 to the central
counterparty (CCP) that arise when the clearing member is obligated to reimburse the client for
any losses suffered due to changes in the value of its transactions in the event that the CCP
defaults, must be captured by applying the same treatment that applies to any other type of
derivatives transactions. However, if the clearing member, based on the contractual
arrangements with the client, is not obligated to reimburse the client for any losses suffered due
145 A Master MNA may be deemed to be a single MNA for this purpose.
146 To the extent that the criteria in this paragraph include the term “master netting agreement”, this term should
be read as including any “netting agreement” that provides legally enforceable rights of offsets. This is to take
account of the fact that no standardisation has currently emerged for netting agreements employed by CCPs
147 A master netting agreement (MNA) is deemed to meet this criterion if it satisfies the conditions as specified in
Annex 20 (part B).
148 A Clearing Member (CM) is as defined in the paragraph 5.15.3.2.
149 For the purposes of paragraphs 16.4.3.9 and 16.4.3.10, “trade exposures” includes initial margin irrespective of
whether or not it is posted in a manner that makes it remote from the insolvency of the CCP.
174to changes in the value of its transactions in the event that a QCCP defaults, the clearing member
need not recognise the resulting trade exposures to the QCCP in the leverage ratio exposure
measure150.
16.4.3.11 Where a client enters directly into a derivatives transaction with the CCP and the CM
guarantees the performance of its clients’ derivative trade exposures to the CCP, the bank acting
as the clearing member for the client to the CCP must calculate its related leverage ratio exposure
resulting from the guarantee as a derivative exposure as set out in paragraphs 16.4.3.2 to
16.4.3.9, as if it had entered directly into the transaction with the client, including with regard to
the receipt or provision of cash variation margin.
16.4.3.12 Additional treatment for written credit derivatives: in addition to the CCR exposure
arising from the fair value of the contracts, written credit derivatives create a notional credit
exposure arising from the creditworthiness of the reference entity. It is therefore appropriate to
treat written credit derivatives consistently with cash instruments (e.g., loans, bonds) for the
purposes of the exposure measure.
16.4.3.13 In order to capture the credit exposure to the underlying reference entity, in addition to
the above CCR treatment for derivatives and related collateral, the effective notional amount151
referenced by a written credit derivative is to be included in the exposure measure. The effective
notional amount of a written credit derivative may be reduced by any negative change in fair value
amount that has been incorporated into the calculation of Tier 1 capital with respect to the written
150 An affiliated entity to the bank acting as a clearing member (CM) may be considered a client for the purpose of
this paragraph of the Basel III leverage ratio framework if it is outside the relevant scope of regulatory consolidation
at the level at which the Basel III leverage ratio is applied. In contrast, if an affiliate entity falls within the regulatory
scope of consolidation, the trade between the affiliate entity and the CM is eliminated in the course of consolidation,
but the CM still has a trade exposure to the qualifying central counterparty (QCCP), which will be considered
proprietary and the exemption in this paragraph no longer applies.
151 The effective notional amount is obtained by adjusting the notional amount to reflect the true exposure of
contracts that are leveraged or otherwise enhanced by the structure of the transaction.
175credit derivative152. The resulting amount may be further reduced by the effective notional amount
of a purchased credit derivative on the same reference name provided153154:
the credit protection purchased is on a reference obligation which ranks pari passu with
or is junior to the underlying reference obligation of the written credit derivative in the case
of single name credit derivatives155; and
the remaining maturity of the credit protection purchased is equal to or greater than the
remaining maturity of the written credit derivative.
16.4.3.14 Since written credit derivatives are included in the exposure measure at their effective
notional amounts, and are also subject to add-on amounts for PFE, the exposure measure for
written credit derivatives may be overstated. Banks may therefore choose to deduct the individual
PFE add-on amount relating to a written credit derivative (which is not offset according to
paragraph 16.4.3.13 and whose effective notional amount is included in the exposure measure)
from their gross add-on in paragraphs 16.4.3.2 to 16.4.3.4156.
16.4.4 Securities financing transaction exposures
16.4.4.1 SFTs157 are included in the exposure measure according to the treatment described in
the following paragraphs. The treatment recognises that secured lending and borrowing in the
152 A negative change in fair value is meant to refer to a negative fair value of a credit derivative that is recognised
in Tier 1 capital. This treatment is consistent with the rationale that the effective notional amounts included in the
exposure measure may be capped at the level of the maximum potential loss, which means the maximum potential
loss at the reporting date is the notional amount of the credit derivative minus any negative fair value that has
already reduced Tier 1 capital. For example, if a written credit derivative had a positive fair value of 20 on one date
and has a negative fair value of 10 on a subsequent reporting date, the effective notional amount of the credit
derivative may be reduced by 10. The effective notional amount cannot be reduced by 30. However, if at the
subsequent reporting date the credit derivative has a positive fair value of 5, the effective notional amount cannot
be reduced at all.
153 Two reference names are considered identical only if they refer to the same legal entity. For single-name credit
derivatives, protection purchased that references a subordinated position may offset protection sold on a more
senior position of the same reference entity as long as a credit event on the senior reference asset would result in a
credit event on the subordinated reference asset.
154 The effective notional amount of a written credit derivative may be reduced by any negative change in fair value
reflected in the bank’s Tier 1 capital provided the effective notional amount of the offsetting purchased credit
protection is also reduced by any resulting positive change in fair value reflected in Tier 1 capital.
155 For tranched products if applicable, the purchased protection must be on a reference obligation with the same
level of seniority.
156 In these cases, where effective bilateral netting contracts are in place, and when calculating A = 0.4·A +
Net Gross
0.6·NGR·A as per paragraphs 16.4.3.2 to 16.4.3.4, A may be reduced by the individual add-on amounts (i.e.,
Gross Gross
notionals multiplied by the appropriate add-on factors) which relate to written credit derivatives whose notional
amounts are included in the leverage ratio exposure measure. However, no adjustments must be made to NGR.
Where effective bilateral netting contracts are not in place, the PFE add-on may be set to zero in order to avoid the
double-counting described in this paragraph.
157 SFTs are transactions such as repurchase agreements, reverse repurchase agreements, security lending and
borrowing, and margin lending transactions, where the value of the transactions depends on market valuations and
the transactions are often subject to margin agreements.
176form of SFTs is an important source of leverage and ensures consistent international
implementation by providing a common measure for dealing with the main differences in the
operative accounting frameworks.
16.4.4.2 General treatment (bank acting as principal): the sum of the amounts in sub-
paragraphs (A) and (B) below are to be included in the leverage ratio exposure measure:
(A) Gross SFT assets158 recognised for accounting purposes (i.e., with no recognition of
accounting netting)159, adjusted as follows:
(i) excluding from the exposure measure the value of any securities received under an
SFT, where the bank has recognised the securities as an asset on its balance sheet160;
and
(ii) cash payables and cash receivables in SFTs with the same counterparty may be
measured net if all the following criteria are met:
(a) Transactions have the same explicit final settlement date;
(b) The right to set off the amount owed to the counterparty with the amount owed by
the counterparty is legally enforceable both currently in the normal course of business
and in the event of: (i) default; (ii) insolvency; and (iii) bankruptcy; and
(c) The counterparties intend to settle net, settle simultaneously, or the transactions
are subject to a settlement mechanism that results in the functional equivalent of net
settlement, that is, the cash flows of the transactions are equivalent, in effect, to a single
net amount on the settlement date. To achieve such equivalence, both transactions are
settled through the same settlement system and the settlement arrangements are
supported by cash and/or intraday credit facilities intended to ensure that settlement of
both transactions will occur by the end of the business day and the linkages to collateral
flows do not result in the unwinding of net cash settlement161,162.
158 For SFT assets subject to novation and cleared through QCCPs, “gross SFT assets recognised for accounting
purposes” are replaced by the final contractual exposure, given that pre-existing contracts have been replaced by
new legal obligations through the novation process.
159 Gross SFT assets recognised for accounting purposes must not recognise any accounting netting of cash payables
against cash receivables (e.g., as currently permitted under the IFRS and US GAAP accounting frameworks). This
regulatory treatment has the benefit of avoiding inconsistencies from netting which may arise across different
accounting regimes.
160 This may apply, for example, under US GAAP where securities received under an SFT may be recognised as assets
if the recipient has the right to rehypothecate but has not done so.
161 This latter condition ensures that any issues arising from the securities leg of the SFTs do not interfere with the
completion of the net settlement of the cash receivables and payables.
162 To achieve functional equivalence, all transactions must be settled through the same settlement mechanism. The
failure of any single securities transaction in the settlement mechanism should delay settlement of only the matching
177(B) A measure of CCR calculated as the current exposure without an add-on for PFE,
calculated as follows:
(i) Where a qualifying MNA163 is in place, the current exposure (E*) is the greater of zero
and the total fair value of securities and cash lent to a counterparty for all transactions
included in the qualifying MNA (∑Ei), less the total fair value of cash and securities
received from the counterparty for those transactions (∑Ci). This is illustrated in the
following formula:
E* = max {0, [∑E – ∑C]}
i i
(ii) Where no qualifying MNA is in place, the current exposure for transactions with a
counterparty must be calculated on a transaction by transaction basis: that is, each
transaction is treated as its own netting set, as shown in the following formula:
Ei* = max {0, [E – C]}
i i
16.4.4.3 Sale accounting transactions: leverage may remain with the lender of the security in
an SFT whether or not sale accounting is achieved under the operative accounting framework.
As such, where sale accounting is achieved for an SFT under the bank’s operative accounting
framework, the bank must reverse all sales-related accounting entries, and then calculate its
exposure as if the SFT had been treated as a financing transaction under the operative accounting
framework (i.e., the bank must include the sum of amounts in sub-paragraphs (A) and (B) of
paragraph 16.4.4.2 for such an SFT) for the purposes of determining its exposure measure.
16.4.4.4 Bank acting as agent: a bank acting as agent in an SFT generally provides an
indemnity or guarantee to only one of the two parties involved, and only for the difference between
the value of the security or cash its customer has lent and the value of collateral the borrower has
provided. In this situation, the bank is exposed to the counterparty of its customer for the
difference in values rather than to the full exposure to the underlying security or cash of the
transaction (as is the case where the bank is one of the principals in the transaction). Where the
cash leg or create an obligation to the settlement mechanism, supported by an associated credit facility. Further, if
there is a failure of the securities leg of a transaction in such a mechanism at the end of the window for settlement
in the settlement mechanism, then this transaction and its matching cash leg must be split out from the netting set
and treated gross for the purposes of the Basel III leverage ratio exposure measure. Specifically, the criteria in this
paragraph are not intended to preclude a Delivery-versus-Payment (DVP) settlement mechanism or other type of
settlement mechanism, provided that the settlement mechanism meets the functional requirements set out in this
paragraph. For example, a settlement mechanism may meet these functional requirements if any failed transaction
(that is, the securities that failed to transfer and the related cash receivable or payable) can be re-entered in the
settlement mechanism until they are settled.
163 A “qualifying” MNA is one that meets the requirements under Annex 20 - Part A.
178bank does not own/control the underlying cash or security resource, that resource cannot be
leveraged by the bank.
16.4.4.5 Where a bank acting as agent in an SFT provides an indemnity or guarantee to a
customer or counterparty for any difference between the value of the security or cash the
customer has lent and the value of collateral the borrower has provided, then the bank will be
required to calculate its exposure measure by applying only subparagraph (B) of paragraph
16.4.4.2164.
16.4.4.6 A bank acting as agent in an SFT and providing an indemnity or guarantee to a customer
or counterparty will be considered eligible for the exceptional treatment set out in paragraph
16.4.4.5 only if the bank’s exposure to the transaction is limited to the guaranteed difference
between the value of the security or cash its customer has lent and the value of the collateral the
borrower has provided. In situations where the bank is further economically exposed (i.e., beyond
the guarantee for the difference) to the underlying security or cash in the transaction165, a further
exposure equal to the full amount of the security or cash must be included in the exposure
measure.
16.4.4.7 An illustrative example of exposure measure for SFT transactions are furnished in Annex
13.
16.4.5 Off-balance sheet items
16.4.5.1 This paragraph explains the treatment of off-balance sheet (OBS) items into the leverage
ratio exposure measure. OBS items include commitments (including liquidity facilities), whether
or not unconditionally cancellable, direct credit substitutes, acceptances, standby letters of credit,
trade letters of credit, etc.
16.4.5.2 In the risk-based capital framework, OBS items are converted under the standardised
approach into credit exposure equivalents through the use of credit conversion factors (CCFs)166.
For the purpose of determining the exposure amount of OBS items for the leverage ratio, the
CCFs set out in the following paragraphs must be applied to the notional amount167.
164 Where, in addition to the conditions in paragraphs 16.4.4.4 to 16.4.4.6, a bank acting as an agent in an SFT does
not provide an indemnity or guarantee to any of the involved parties, the bank is not exposed to the SFT and
therefore need not recognise those SFTs in its exposure measure.
165 For example, due to the bank managing collateral received in the bank’s name or on its own account rather than
on the customer’s or borrower’s account (e.g., by on-lending or managing unsegregated collateral, cash or
securities).
166 Please refer to paragraph 5.15.1.
167 These correspond to the CCFs of the standardised approach for credit risk under paragraph 5.15.2 (including Table
8), subject to a floor of 10%. The floor of 10% will affect commitments that are unconditionally cancellable at any
time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in
a borrower’s creditworthiness. These may receive a 0% CCF under the risk-based capital framework. For any OBS
item not specifically mentioned under paragraph 16.4.5.2, the applicable CCF for that item will be as indicated in the
paragraph 5.15.2 above.
179(i) Commitments other than securitisation liquidity facilities with an original maturity up to one
year and commitments with an original maturity over one year shall receive a CCF of 20% and
50%, respectively. However, any commitments that are unconditionally cancellable at any time
by the bank without prior notice, or that effectively provide for automatic cancellation due to
deterioration in a borrower’s creditworthiness, will receive a 10% CCF.
(ii) Direct credit substitutes, e.g., general guarantees of indebtedness (including standby
letters of credit serving as financial guarantees for loans and securities) and acceptances
(including endorsements with the character of acceptances) will receive a CCF of 100%.
(iii) Forward asset purchases, forward forward deposits and partly paid shares and securities,
which represent commitments with certain drawdown, will receive a CCF of 100%.
(iv) Certain transaction-related contingent items (e.g., performance bonds, bid bonds,
warranties and standby letters of credit related to particular transactions) will receive a CCF of
50%.
(v) Note issuance facilities (NIFs) and revolving underwriting facilities (RUFs) will receive a
CCF of 50%.
(vi) For short-term self-liquidating trade letters of credit arising from the movement of goods
(e.g. documentary credits collateralised by the underlying shipment), a 20% CCF will be applied
to both issuing and confirming banks.
(vii) Where there is an undertaking to provide a commitment on an OBS item, banks should
apply the lower of the two applicable CCFs.
(viii) All off-balance sheet securitisation exposures will receive a CCF of 100% conversion
factor.
16.5 Disclosure and Reporting requirements
16.5.1 Banks are required to publicly disclose their Basel III leverage ratio on a consolidated
basis.
16.5.2 To enable market participants to reconcile leverage ratio disclosures with banks’ published
financial statements from period to period, and to compare the capital adequacy of banks, it is
important that banks adopt a consistent and common disclosure of the main components of the
leverage ratio, while also reconciling these disclosures with their published financial statements.
16.5.3 To facilitate consistency and ease of use of disclosures relating to the composition of the
leverage ratio, and to mitigate the risk of inconsistent formats undermining the objective of
enhanced disclosure, banks shall publish their leverage ratio according to a common set of
templates.
16.5.4 The public disclosure requirements include:
180 a summary comparison table that provides a comparison of banks’ total accounting
assets amounts and leverage ratio exposures;
a common disclosure template that provides a breakdown of the
main leverage ratio regulatory elements;
a reconciliation requirement that details the source(s) of material differences between
banks’ total balance sheet assets in their financial statements and on-balance sheet
exposures in the common disclosure template; and
other disclosures as set out below.
16.5.5 Banks should also report their leverage ratio to the RBI (Department of Banking
Supervision) along with detailed calculations of capital and exposure measures on a quarterly
basis.
16.5.6 Implementation date, frequency and location of disclosure
16.5.6.1 Banks operating in India are required to make disclosure of the leverage ratio and its
components from the date of publication of their first set of financial statements / results on or
after April 1, 2015. Accordingly, the first such disclosure was to be made for the quarter ending
June 30, 2015.
16.5.6.2 With the exception of the mandatory quarterly frequency requirement in paragraph
16.5.6.3 below, detailed disclosures required according to paragraphs 16.6 must be made by
banks, irrespective of whether financial statements are audited, at least on a half yearly basis (i.e.
as on September 30 and March 31 of a financial year), along with other Pillar 3 disclosures as
required in terms of paragraph 14.9.
16.5.6.3 As the leverage ratio is an important supplementary measure to the risk-based capital
requirements, the same Pillar 3 disclosure requirement also applies to the leverage ratio.
Therefore, banks, at a minimum, must disclose the following three items on a quarterly basis,
irrespective of whether financial statements are audited:
(i) Tier 1 capital (as per paragraph 16.3);
(ii) Exposure measure (as per paragraph 16.4); and
(iii) Leverage ratio (as per paragraph 16.2).
At a minimum, these disclosures should be made on a quarter-end basis (i.e., as on June 30,
September 30, December 31 and March 31 of a financial year), along with the figures of the prior
three quarter-ends.
16.5.6.4 The location of leverage ratio disclosures should be as stipulated for Pillar 3 disclosures
in terms of paragraphs 14.9.3 and 14.10. However, specific to leverage ratio disclosures, banks
have to make available on their websites, an ongoing archive of all reconciliation templates,
181disclosure templates and explanatory tables relating to prior reporting periods, instead of an
archive for at least three years as required in case of Pillar 3 disclosures.
16.6 Disclosure templates
16.6.1 The summary comparison table (Table: DF-17), common disclosure template (Table: DF-
18) and explanatory table, qualitative reconciliation and other requirements are set out in the
Annex 17: Pillar 3 disclosure requirements. Together, these ensure transparency between the
values used for the calculation of the Basel III leverage ratio and the values used in banks’
published financial statements.
Part F: Countercyclical Capital Buffer Framework
17. Countercyclical Capital Buffer
17.1 Objective
The aim of the Countercyclical Capital Buffer (CCCB) regime is twofold. Firstly, it requires banks
to build up a buffer of capital in good times which may be used to maintain flow of credit to the
real sector in difficult times. Secondly, it achieves the broader macro-prudential goal of restricting
the banking sector from indiscriminate lending in the periods of excess credit growth that have
often been associated with the building up of system-wide risk.
17.2 The Framework
17.2.1 The CCCB may be maintained in the form of Common Equity Tier 1 (CET 1) capital only,
and the amount of the CCCB may vary from 0 to 2.5% of total risk weighted assets (RWA) of the
banks. If, as per the Reserve Bank of India directives, banks are required to hold CCCB at a given
point in time, the same may be disclosed at table DF-11 of Annex 17 as indicated in Basel III
Master Circular.
17.2.2 The CCCB decision would normally be pre-announced with a lead time of 4 quarters.
However, depending on the CCCB indicators, the banks may be advised to build up requisite
buffer in a shorter span of time.
17.2.3 The credit-to-GDP gap168 shall be the main indicator in the CCCB framework in India.
However, it shall not be the only reference point and shall be used in conjunction with GNPA
growth. The Reserve Bank of India shall also look at other supplementary indicators for CCCB
decision such as incremental C-D ratio for a moving period of three years (along with its
correlation with credit-to-GDP gap and GNPA growth), Industry Outlook (IO) assessment index
(along with its correlation with GNPA growth) and interest coverage ratio (along with its correlation
168 Credit-to-GDP gap is the difference between credit-to-GDP ratio and the long term trend value of credit-to-GDP
ratio at any point in time.
182with credit-to-GDP gap). While taking the final decision on CCCB, the Reserve Bank of India may
use its discretion to use all or some of the indicators along with the credit-to-GDP gap.
17.2.4 The CCCB framework shall have two thresholds, viz., lower threshold and upper threshold,
with respect to credit-to-GDP gap.
a. The lower threshold (L) of the credit-to-GDP gap where the CCCB is activated shall be set
at 3 percentage points, provided its relationship with GNPA remains significant. The buffer
activation decision will also depend upon other supplementary indicators as detailed in
paragraph 4.
b. The upper threshold (H) where the CCCB reaches its maximum shall be kept at 15
percentage points of the credit-to-GDP gap. Once the upper threshold of the credit-to-
GDP gap is reached, the CCCB shall remain at its maximum value of 2.5 per cent of RWA,
till the time a withdrawal is signalled by the Reserve Bank of India.
c. In between 3 and 15 percentage points of credit-to-GDP gap, the CCCB shall increase
gradually from 0 to 2.5 per cent of the RWA of the bank but the rate of increase would be
different based on the level/position169 of credit-to-GDP gap between 3 and 15 percentage
points. If the credit-to-GDP gap is below 3 percentage points then there will not be any
CCCB requirement.
17.2.5 The same set of indicators that are used for activating CCCB (as mentioned in paragraph
4) may be used to arrive at the decision for the release phase of the CCCB. However, discretion
shall be with the Reserve Bank of India for operating the release phase of CCCB. Further, the
entire CCCB accumulated may be released at a single point in time but the use of the same by
banks will not be unfettered and will need to be decided only after discussion with the Reserve
Bank of India.
17.2.6 For all banks operating in India, CCCB shall be maintained on a solo basis as well as on
consolidated basis.
17.2.7 All banks operating in India (both foreign and domestic banks) should maintain capital for
Indian operations under CCCB framework based on their exposures in India.
17.2.8 Banks incorporated in India having international presence shall maintain adequate capital
under CCCB as prescribed by the host supervisors in respective jurisdictions. The banks, based
on the geographic location of their private sector credit exposures (including non-bank financial
169 The CCCB requirement shall increase linearly from 0 to 20 basis points when credit-to-GDP gap moves from 3 to
7 percentage points. Similarly, for above 7 and up to 11 percentage points range of credit-to-GDP gap, CCCB
requirement shall increase linearly from above 20 to 90 basis points. Finally, for above 11 and up to 15 percentage
points range of credit-to-GDP gap, the CCCB requirement shall increase linearly from above 90 to 250 basis points.
However, if the credit-to-GDP gap exceeds 15 percentage points, the buffer shall remain at 2.5 per cent of the RWA.
183sector exposures), shall calculate their bank specific CCCB requirement as a weighted170 average
of the requirements that are being applied in respective jurisdictions. The Reserve Bank of India
may also ask Indian banks to keep excess capital under CCCB framework for exposures in any
of the host countries they are operating if it feels the CCCB requirement in host country is not
adequate.
17.2.9 Banks will be subject to restrictions on discretionary distributions (may include dividend
payments, share buybacks and staff bonus payments) if they do not meet the requirement on
countercyclical capital buffer which is an extension of the requirement for capital conservation
buffer (CCB). Assuming a concurrent requirement of CCB of 2.5% and CCCB of 2.5% of total
RWAs, the required conservation ratio (restriction on discretionary distribution) of a bank, at
various levels of CET1 capital held is illustrated in Table-23.
Table 23: Individual bank minimum capital conservation ratios, assuming a
requirement of 2.5% each of capital conservation buffer and CCCB
Common Equity Tier 1 Ratio bands Minimum Capital Conservation Ratios
(expressed as % of earnings)
>5.5%-6.75% 100%
>6.75%-8.0% 80%
>8.0%-9.25% 60%
>9.25%-10.50% 40%
>10.50% 0%
The CET 1 ratio bands are structured in increments of 25% of the required CCB and CCCB
prescribed by the Reserve Bank of India at that point in time171. A separate illustrative table is
given below with an assumption of CCCB requirement at 1%.
Table 24: Individual bank minimum capital conservation standards, when a bank is
subject to a 2.5% CCB and 1% CCCB
Minimum Capital Conservation Ratios
Common Equity Tier 1 Ratio bands
(expressed as % of earnings)
> 5.5% - 6.375%* 100%
> 6.375% - 7.25% 80%
> 7.25% - 8.125% 60%
170 Weight = (bank’s total credit risk charge that relates to private sector credit exposures in that jurisdiction/ bank’s
total credit risk charge that relates to private sector credit exposures across all jurisdictions), where credit includes
all private sector credit exposures that attract a credit risk capital charge, or the risk weighted equivalent trading
book capital charges for specific risk, IRC and securitisation.
171 First CET 1 ratio band = Minimum CET 1 ratio + 25% of CCB + 25% of applicable CCCB. For subsequent bands,
starting point will be the upper limit of previous band. However, it may be mentioned that CET 1 ratio band may
change depending on various capital/buffer requirements (e.g., D-SIB buffer) as prescribed by the Reserve Bank of
India from time to time. Accordingly, lower and upper values of the bands as given in Table-25 will undergo changes.
184> 8.125% - 9.00% 40%
> 9.00% 0%
*(6.375=5.50+0.625+0.250)
As the total requirement of CCB and CCCB is 2.5% and 1% respectively, at each band, 0.625%
and 0.250% of RWA are being added for CCB and CCCB respectively.
17.2.10 Banks must ensure that their CCCB requirements are calculated and publicly disclosed
with at least the same frequency as their minimum capital requirements as applicable in various
jurisdictions. The buffer should be based on the latest relevant jurisdictional CCCB requirements
that are applicable on the date that they calculate their minimum capital requirement. In addition,
when disclosing their buffer requirement, banks must also disclose the geographic breakdown of
their private sector credit exposures used in the calculation of the buffer requirement.
17.3 The CCCB decisions may form a part of the first bi-monthly monetary policy statement of the
Reserve Bank of India for the year. However, more frequent communications in this regard may
be made by the Reserve Bank of India, if warranted by changes in economic conditions.
17.4 The indicators and thresholds for CCCB decisions mentioned above shall be subject to
continuous review and empirical testing for their usefulness and other indicators may also be used
by the Reserve Bank of India to support CCCB decisions.
185Annex 1
(cf. para 4.2.3.1)
Criteria for Classification as Common Shares (Paid-up Equity Capital) for Regulatory
Purposes – Indian Banks
1. All common shares should ideally be the voting shares. However, in rare cases, where
banks need to issue non-voting common shares as part of Common Equity Tier 1 capital, they
must be identical to voting common shares of the issuing bank in all respects except the absence
of voting rights. Limit on voting rights will be applicable based on the provisions of respective
statutes governing individual banks {i.e., Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970 / 1980 in case of nationalized banks; SBI Act, 1955 in case of State Bank
of India; State Bank of India (Subsidiary Banks) Act, 1959 in case of associate banks of State
Bank of India; Banking Regulation Act, 1949 in case of Private Sector Banks, etc.}
2. Represents the most subordinated claim in liquidation of the bank.
3. Entitled to a claim on the residual assets which is proportional to its share of paid up
capital, after all senior claims have been repaid in liquidation (i.e. has an unlimited and variable
claim, not a fixed or capped claim).
4. Principal is perpetual and never repaid outside of liquidation (except discretionary
repurchases / buy backs or other means of effectively reducing capital in a discretionary manner
that is allowable under relevant law as well as guidelines, if any, issued by RBI in the matter).
5. The bank does nothing to create an expectation at issuance that the instrument will be
bought back, redeemed or cancelled nor do the statutory or contractual terms provide any feature
which might give rise to such an expectation.
6. Distributions are paid out of distributable items. The level of distributions is not in any way
tied or linked to the amount paid up at issuance and is not subject to a contractual cap (except to
the extent that a bank is unable to pay distributions that exceed the level of distributable items).
As regards ‘distributable items’, it is clarified that the dividend on common shares will be paid out
of current year’s profit only.
7. There are no circumstances under which the distributions are obligatory. Non-payment is
therefore not an event of default.
8. Distributions are paid only after all legal and contractual obligations have been met and
payments on more senior capital instruments have been made. This means that there are no
preferential distributions, including in respect of other elements classified as the highest quality
issued capital.
1869. It is the paid-up capital that takes the first and proportionately greatest share of any losses
as they occur172. Within the highest quality capital, each instrument absorbs losses on a going
concern basis proportionately and pari passu with all the others.
10. The paid up amount is classified as equity capital (i.e. not recognised as a liability) for
determining balance sheet insolvency.
11. The paid up amount is classified as equity under the relevant accounting standards.
12. It is directly issued and paid up and the bank cannot directly or indirectly have funded the
purchase of the instrument173. Banks should also not extend loans against their own shares.
13. The paid up amount is neither secured nor covered by a guarantee of the issuer or related
entity174 nor subject to any other arrangement that legally or economically enhances the seniority
of the claim.
14. Paid up capital is only issued with the approval of the owners of the issuing bank, either
given directly by the owners or, if permitted by applicable law, given by the Board of Directors or
by other persons duly authorised by the owners.
15. Paid up capital is clearly and separately disclosed in the bank’s balance sheet.
172 In cases where capital instruments have a permanent write-down feature, this criterion is still deemed to be met
by common shares.
173 Banks should not grant advances against its own shares as this would be construed as indirect funding of its own
capital.
174 A related entity can include a parent company, a sister company, a subsidiary or any other affiliate. A holding
company is a related entity irrespective of whether it forms part of the consolidated banking group.
187Annex 2
(cf. para 4.2.3.2)
Criteria for Classification as Common Equity for Regulatory Purposes – Foreign Banks
1. Represents the most subordinated claim in liquidation of the Indian operations of the bank.
2. Entitled to a claim on the residual assets which is proportional to its share of paid up
capital, after all senior claims have been repaid in liquidation (i.e. has an unlimited and variable
claim, not a fixed or capped claim).
3. Principal is perpetual and never repaid outside of liquidation (except with the approval of
RBI).
4. Distributions to the Head Office of the bank are paid out of distributable items. The level
of distributions is not in any way tied or linked to the amount paid up at issuance and is not subject
to a contractual cap (except to the extent that a bank is unable to pay distributions that exceed
the level of distributable items). As regards ‘distributable items’, it is clarified that: the dividend on
common shares/ equity will be paid out of current year’s profit only.
5. Distributions to the Head Office of the bank are paid only after all legal and contractual
obligations have been met and payments on more senior capital instruments have been made.
This means that there are no preferential distributions, including in respect of other elements
classified as the highest quality issued capital.
6. This capital takes the first and proportionately greatest share of any losses as they
occur175.
7. It is clearly and separately disclosed in the bank’s balance sheet.
175 In cases where capital instruments have a permanent write-down feature, this criterion is still deemed to be met
by common shares
188Annex 3
(cf. para 4.2.4.1)
Criteria for Inclusion of Perpetual Non-cumulative Preference Shares (PNCPS) in
Additional Tier 1 Capital
The PNCPS will be issued by Indian banks, subject to extant legal provisions, only in Indian
rupees and should meet the following terms and conditions to qualify for inclusion in Additional
Tier 1 Capital for capital adequacy purposes:
1. Terms of Issue of Instruments
1.1 Paid up Status
The instruments should be issued by the bank (i.e., not by any ‘SPV’ etc. set up by the bank for
this purpose) and fully paid up.
1.2 Amount
The amount of PNCPS to be raised may be decided by the Board of Directors of banks.
1.3 Limits
While complying with minimum Tier 1 of 7% of risk weighted assets, a bank cannot admit,
Perpetual Non-Cumulative Preference Shares (PNCPS) together with Perpetual Debt
Instruments (PDI) in Additional Tier 1 Capital, more than 1.5% of risk weighted assets. However,
once this minimum total Tier 1 capital has been complied with, any additional PNCPS and PDI
issued by the bank can be included in Total Tier 1 capital reported. Excess PNCPS and PDI can
be reckoned to comply with Tier 2 capital if the latter is less than 2% of RWAs i.e., while complying
with minimum Total Capital of 9% of risk weighted assets.
1.4 Maturity Period
The PNCPS shall be perpetual i.e., there is no maturity date and there are no step-ups or other
incentives to redeem.
1.5 Rate of Dividend
The rate of dividend payable to the investors may be either a fixed rate or a floating rate
referenced to a market determined rupee interest benchmark rate.
1.6 Optionality
PNCPS shall not be issued with a 'put option'. However, banks may issue the instruments with a
call option at a particular date subject to following conditions:
(a) The call option on the instrument is permissible after the instrument has run for at least
five years;
189(b) To exercise a call option a bank shall receive prior approval of RBI (Department of
Regulation);
(c) A bank must not do anything which creates an expectation that the call will be exercised176.
For example, to preclude such expectation of the instrument being called, the dividend /
coupon reset date need not be co-terminus with the call date. Banks may, at their
discretion, consider having an appropriate gap between dividend / coupon reset date and
call date; and
(d) Banks must not exercise a call unless:
(i) They replace the called instrument with capital of the same or better quality and
the replacement of this capital is done at conditions which are sustainable for the income
capacity of the bank177; or
(ii) The bank demonstrates that its capital position is well above the minimum capital
requirements after the call option is exercised178.
The use of tax event and regulatory event calls may be permitted. However, exercise of the calls
on account of these events is subject to the requirements set out in points (b) to (d) of criterion
1.6. RBI will permit the bank to exercise the call only if the RBI is convinced that the bank was not
in a position to anticipate these events at the time of issuance of PNCPS.
To illustrate, if there is a change in tax treatment which makes the capital instrument with tax
deductible coupons into an instrument with non-tax deductible coupons, then the bank would have
the option (not obligation) to repurchase the instrument. In such a situation, a bank may be
allowed to replace the capital instrument with another capital instrument that perhaps does have
tax deductible coupons. Similarly, if there is a downgrade of the instrument in regulatory
classification (e.g., if it is decided by the RBI to exclude an instrument from regulatory capital) the
bank has the option to call the instrument and replace it with an instrument with a better regulatory
classification, or a lower coupon with the same regulatory classification with prior approval of RBI.
However, banks may not create an expectation / signal an early redemption / maturity of the
regulatory capital instrument.
1.7 Repurchase / Buy-back / Redemption
(i) Principal of the instruments may be repaid (e.g., through repurchase or redemption) only
with prior approval of RBI and banks should not assume or create market expectations that
176 If a bank were to call a capital instrument and replace it with an instrument that is more costly (e.g. has a higher
credit spread) this might create an expectation that the bank will exercise calls on its other capital instruments.
Therefore, bank may not be permitted to call an instrument if the bank intends to replace it with an instrument
issued at a higher credit spread. This is applicable in cases of all Additional Tier 1 and Tier 2 instruments.
177 Replacement issues can be concurrent with but not after the instrument is called.
178 Here, minimum refers to Common Equity Tier 1 of 8% of RWAs (including capital conservation buffer of 2.5% of
RWAs) and Total Capital of 11.5% of RWAs including any additional capital requirement identified under Pillar 2.
190supervisory approval will be given (this repurchase / buy-back /redemption of the principal is in a
situation other than in the event of exercise of call option by the bank. One of the major differences
is that in the case of the former, the option to offer the instrument for repayment on announcement
of the decision to repurchase / buy-back /redeem the instrument, would lie with the investors
whereas, in case of the latter, it lies with the bank).
(ii) Banks may repurchase / buy-back / redeem the instruments only if:
(a) They replace such instrument with capital of the same or better quality and the
replacement of this capital is done at conditions which are sustainable for the income
capacity of the bank; or
(b) The bank demonstrates that its capital position is well above the minimum capital
requirements after the repurchase / buy-back / redemption.
1.8 Dividend Discretion
(i) The bank must have full discretion at all times to cancel distributions/payments179;
(ii) Cancellation of discretionary payments must not be an event of default;
(iii) Banks must have full access to cancelled payments to meet obligations as they fall due;
(iv) Cancellation of distributions/payments must not impose restrictions on the bank except in
relation to distributions to common stakeholders; and
(v) Dividends must be paid out of distributable items only. As regards ‘distributable items’, it
is clarified that the dividend on perpetual non-cumulative preference shares (PNCPS) will be paid
out of current year’s profit only.
Note: As provided in clause 13(d) of Master Direction - Classification, Valuation and
Operation of Investment Portfolio of Commercial Banks (Directions), 2023 dated September
12, 2023, the unrealised gains transferred to AFS-Reserve shall not be available for any
distribution such as dividend and coupon on Additional Tier 1. Further, clause 28 and 41 of
the Directions ibid provide that banks shall not pay dividends out of net unrealised gains
recognised in the Profit and Loss Account arising on fair valuation of Level 3 financial
instruments on their Balance Sheet.
(vi) The dividend shall not be cumulative. i.e., dividend missed in a year will not be paid in
future years, even if adequate profit is available and the level of CRAR conforms to the regulatory
179 Consequence of full discretion at all times to cancel distributions / payments is that “dividend pushers” are
prohibited. An instrument with a dividend pusher obliges the issuing bank to make a dividend/coupon payment on
the instrument if it has made a payment on another (typically more junior) capital instrument or share. This
obligation is inconsistent with the requirement for full discretion at all times. Furthermore, the term “cancel
distributions/payments” means extinguish these payments. It does not permit features that require the bank to
make distributions/payments in kind.
191minimum. When dividend is paid at a rate lesser than the prescribed rate, the unpaid amount will
not be paid in future years, even if adequate profit is available and the level of CRAR conforms to
the regulatory minimum.
(vii) The instrument cannot not have a credit sensitive coupon feature, i.e., a dividend that is
reset periodically based in whole or in part on the banks’ credit standing. For this purpose, any
reference rate including a broad index which is sensitive to changes to the bank’s own
creditworthiness and / or to changes in the credit worthiness of the wider banking sector will be
treated as a credit sensitive reference rate. Banks desirous of offering floating reference rate may
take prior approval of the RBI (DOR) as regard permissibility of such reference rates.
(viii) In general, it may be in order for banks to have dividend stopper arrangement that stop
dividend payments on common shares in the event the holders of AT1 instruments are not paid
dividend/coupon. However, dividend stoppers must not impede the full discretion that bank must
have at all times to cancel distributions/payments on the Additional Tier 1 instrument, nor must
they act in a way that could hinder the re-capitalisation of the bank. For example, it would not be
permitted for a stopper on an Additional Tier 1 instrument to:
attempt to stop payment on another instrument where the payments on this other
instrument were not also fully discretionary;
prevent distributions to shareholders for a period that extends beyond the point in time
that dividends/coupons on the Additional Tier 1 instrument are resumed;
impede the normal operation of the bank or any restructuring activity (including
acquisitions/disposals).
A stopper may act to prohibit actions that are equivalent to the payment of a dividend, such as
the bank undertaking discretionary share buybacks, if otherwise permitted.
1.9 Treatment in Insolvency
The instrument cannot contribute to liabilities exceeding assets if such a balance sheet test forms
part of a requirement to prove insolvency under any law or otherwise.
1.10 Loss Absorption Features
PNCPS should have principal loss absorption through either (i) conversion to common shares at
an objective pre-specified trigger point or (ii) a write-down mechanism which allocates losses to
the instrument at a pre-specified trigger point. The write-down will have the following effects:
a) Reduce the claim of the instrument in liquidation;
b) Reduce the amount re-paid when a call is exercised; and
c) Partially or fully reduce dividend payments on the instrument.
Various criteria for loss absorption through conversion / write-down / write-off on breach of pre-
specified trigger and at the point of non-viability are furnished in Annex 15.
1921.11 Prohibition on Purchase / Funding of PNCPS
Neither the bank nor a related party over which the bank exercises control or significant influence
(as defined under relevant Accounting Standards) should purchase PNCPS, nor can the bank
directly or indirectly should fund the purchase of the instrument. Banks should also not grant
advances against the security of PNCPS issued by them.
1.12 Re-capitalisation
The instrument cannot have any features that hinder re-capitalisation, such as provisions which
require the issuer to compensate investors if a new instrument is issued at a lower price during a
specified time frame.
1.13 Reporting of Non-payment of Dividends and Non-exercise of Call Option
All instances of non-payment of dividends and non-exercise of call option shall be notified by the
issuing banks to the Chief General Managers-in-Charge of Department of Regulation and
Department of Supervision of the Reserve Bank of India, Mumbai.
1.14 Seniority of Claim
The claims of the investors in instruments shall be
(i) Superior to the claims of investors in equity shares;
(ii) Subordinated to the claims of PDIs, all Tier 2 regulatory capital instruments,
depositors and general creditors of the bank; and
(iii) is neither secured nor covered by a guarantee of the issuer nor related entity or
other arrangement that legally or economically enhances the seniority of the claim vis-à-vis
bank creditors.
1.15 Investment in Instruments Raised in Indian Rupees by Foreign Entities/NRIs
(i) Investment by FIIs and NRIs shall be within an overall limit of 49% and 24% of the issue
respectively, subject to the investment by each FII not exceeding 10% of the issue, and
investment by each NRI not exceeding 5% of the issue. Investment by FIIs in these instruments
shall be outside the ECB limit for rupee-denominated corporate debt, as fixed by Government of
India from time to time. The overall non-resident holding of Preference Shares and equity shares
in public sector banks will be subject to the statutory / regulatory limit.
(ii) Banks should comply with the terms and conditions, if any, stipulated by SEBI / other
regulatory authorities in regard to issue of the instruments.
1931.16 Compliance with Reserve Requirements
(i) The funds collected by various branches of the bank or other banks for the issue and held
pending finalisation of allotment of the Additional Tier 1 Preference Shares will have to be taken
into account for the purpose of calculating reserve requirements.
(ii) However, the total amount raised by the bank by issue of PNCPS shall not be reckoned
as liability for calculation of net demand and time liabilities for the purpose of reserve requirements
and, as such, will not attract CRR / SLR requirements.
1.17 Reporting of Issuances
(i) Banks issuing PNCPS shall submit a report to the Chief General Manager-in-charge,
Department of Regulation, Reserve Bank of India, Mumbai giving details of the instrument as per
the format prescribed in Annex 22 duly certified by the compliance officer of the bank, soon after
the issue is completed.
(ii) The issue-wise details of amount raised as PNCPS qualifying for Additional Tier 1 capital
by the bank from FIIs / NRIs are required to be reported within 30 days of the issue to the Chief
General Manager, Reserve Bank of India, Foreign Exchange Department, Foreign Investment
Division, Central Office, Mumbai 400 001 in the proforma given at the end of this Annex. The
details of the secondary market sales / purchases by FIIs and the NRIs in these instruments on
the floor of the stock exchange shall be reported by the custodians and designated banks,
respectively, to the Reserve Bank of India through the soft copy of the LEC Returns, on a daily
basis, as prescribed in Schedule 2 and 3 of the FEMA Notification No.20 dated 3rd May 2000, as
amended from time to time.
1.18 Investment in Additional Tier 1 Capital Instruments (PNCPS) Issued by Other Banks/
FIs
(i) A bank's investment in PNCPS issued by other banks and financial institutions will be
reckoned along with the investment in other instruments eligible for capital status while computing
compliance with the overall ceiling of 10% of investing banks' capital funds as prescribed vide
circular DBOD.BP.BC.No.3/21.01.002/2004-05 dated July 6, 2004.
(ii) Bank's investments in PNCPS issued by other banks / financial institutions will attract risk
weight as provided in paragraphs 5.6 and 8.3.4 of this Master Circular, whichever applicable for
capital adequacy purposes.
(iii) A bank's investments in the PNCPS of other banks will be treated as exposure to capital
market and be reckoned for the purpose of compliance with the prudential ceiling for capital
market exposure as fixed by RBI.
1941.19 Classification in the Balance Sheet
PNCPS will be classified as capital and shown under 'Schedule I - Capital' of the Balance sheet.
1.20 PNCPS to Retail Investors180
With a view to enhancing investor education relating to risk characteristics of regulatory capital
requirements, banks issuing PNCPS to retail investors, subject to approval of their Board, should
adhere to the following conditions:
(a) The requirement for specific sign-off as quoted below, from the investors for having
understood the features and risks of the instrument may be incorporated in the common
application form of the proposed issue.
"By making this application, I / We acknowledge that I / We have understood the terms
and conditions of the Issue of [insert the name of the instruments being issued] of
[Name of The Bank] as disclosed in the Draft Shelf Prospectus, Shelf Prospectus and
Tranche Document".
(b) All the publicity material, application form and other communication with the investor shall
clearly state in bold letters (with font size 14) how PNCPS is different from common shares. In
addition, the loss absorbency features of the instrument should be clearly explained and the
investor’s sign-off for having understood these features and other terms and conditions of the
instrument should be obtained.
Reporting Format
Details of Investments by FIIs and NRIs in Perpetual Non-Cumulative Preference Shares
qualifying as Additional Tier 1 capital
(a) Name of the bank:
(b) Total issue size / amount raised (in Rupees):
(c) Date of issue:
FIIs NRIs
No Amount raised No. Amount raised
of in Rupees as a percentage of in Rupees as a percentage
FIIs of the total issue NRIs of the total issue
size size
It is certified that
180 Please refer to circular DBOD.BP.BC.38/21.06.201/2014-15 dated September 1, 2014 on Implementation of Basel
III Capital Regulations in India – Amendments.
195(i) the aggregate investment by all FIIs does not exceed 49 % of the issue size and
investment by no individual FII exceeds 10 % of the issue size.
(ii) It is certified that the aggregate investment by all NRIs does not exceed 24 % of the issue
size and investment by no individual NRI exceeds 5 % of the issue size.
Authorised Signatory
Date
Seal of the bank
196Annex 4
(cf. para 4.2.4)
Criteria for Inclusion of Perpetual Debt Instruments (PDI)
in Additional Tier 1 Capital
The Perpetual Debt Instruments that may be issued as bonds or debentures by Indian banks
should meet the following terms and conditions to qualify for inclusion in Additional Tier 1 Capital
for capital adequacy purposes:
1. Terms of Issue of Instruments Denominated in Indian Rupees
1.1 Paid-in Status
The instruments should be issued by the bank (i.e., not by any ‘SPV’ etc. set up by the bank for
this purpose) and fully paid-in.
1.2 Amount
The amount of PDI to be raised may be decided by the Board of Directors of banks.
1.3 Limits
While complying with minimum Tier 1 of 7% of risk weighted assets, a bank cannot admit,
Perpetual Debt Instruments (PDI) together with Perpetual Non-Cumulative Preference Shares
(PNCPS) in Additional Tier 1 Capital, more than 1.5% of risk weighted assets. However, once this
minimum total Tier 1 capital has been complied with, any additional PNCPS and PDI issued by
the bank can be included in Total Tier 1 capital reported. Excess PNCPS and PDI can be
reckoned to comply with Tier 2 capital if the latter is less than 2% of RWAs i.e., while complying
with minimum Total Capital of 9% of risk weighted assets.
1.4 Maturity Period
The PDIs shall be perpetual i.e., there is no maturity date and there are no step-ups or other
incentives to redeem.
1.5 Rate of Interest
The interest payable to the investors may be either at a fixed rate or at a floating rate referenced
to a market determined rupee interest benchmark rate.
1.6 Optionality
PDIs shall not have any ‘put option’. However, banks may issue the instruments with a call option
at a particular date subject to following conditions:
a. The call option on the instrument is permissible after the instrument has run for at least
five years;
197b. To exercise a call option a bank must receive prior approval of RBI (Department of
Regulation);
c. A bank must not do anything which creates an expectation that the call will be exercised.
For example, to preclude such expectation of the instrument being called, the dividend /
coupon reset date need not be co-terminus with the call date. Banks may, at their
discretion, consider having an appropriate gap between dividend / coupon reset date and
call date; and
d. Banks must not exercise a call unless:
(i) They replace the called instrument with capital of the same or better quality and
the replacement of this capital is done at conditions which are sustainable for the income
capacity of the bank181; or
(ii) The bank demonstrates that its capital position is well above the minimum capital
requirements after the call option is exercised182.
The use of tax event and regulatory event calls may be permitted. However, exercise of the calls
on account of these events is subject to the requirements set out in points (b) to (d) of criterion
1.6. RBI will permit the bank to exercise the call only if the RBI is convinced that the bank was not
in a position to anticipate these events at the time of issuance of PDIs.
To illustrate, if there is a change in tax treatment which makes the capital instrument with tax
deductible coupons into an instrument with non-tax deductible coupons, then the bank would have
the option (not obligation) to repurchase the instrument. In such a situation, a bank may be
allowed to replace the capital instrument with another capital instrument that perhaps does have
tax deductible coupons. Similarly, if there is a downgrade of the instrument in regulatory
classification (e.g., if it is decided by the RBI to exclude an instrument from regulatory capital) the
bank has the option to call the instrument and replace it with an instrument with a better regulatory
classification, or a lower coupon with the same regulatory classification with prior approval of RBI.
However, banks may not create an expectation / signal an early redemption / maturity of the
regulatory capital instrument.
1.7 Repurchase / Buy-back / Redemption
(i) Principal of the instruments may be repaid (e.g., through repurchase or redemption) only
with prior approval of RBI and banks should not assume or create market expectations that
supervisory approval will be given (this repurchase / buy-back /redemption of the principal is in a
situation other than in the event of exercise of call option by the bank. One of the major differences
181 Replacement issues can be concurrent with but not after the instrument is called.
182 Minimum refers to Common Equity Tier 1 of 8% of RWAs (including capital conservation buffer of 2.5% of RWAs)
and Total capital of 11.5% of RWAs including additional capital requirements identified under Pillar 2.
198is that in the case of the former, the option to offer the instrument for repayment on announcement
of the decision to repurchase / buy-back /redeem the instrument, would lie with the investors
whereas, in case of the latter, it lies with the bank).
(ii) Banks may repurchase / buy-back / redemption only if:
(a) They replace such instrument with capital of the same or better quality and the
replacement of this capital is done at conditions which are sustainable for the income
capacity of the bank; or
(b) The bank demonstrates that its capital position is well above the minimum capital
requirements after the repurchase / buy-back / redemption.
1.8 Coupon Discretion
(a) The bank must have full discretion at all times to cancel distributions/payments183
(b) Cancellation of discretionary payments must not be an event of default
(c) Banks must have full access to cancelled payments to meet obligations as they fall due
(d) Cancellation of distributions/payments must not impose restrictions on the bank except
in relation to distributions to common stakeholders.
(e) Coupons must be paid out of ‘distributable items’184. In this context, coupon may be paid
out of current year profits. However, if current year profits are not sufficient, coupon may
be paid subject to availability of:
(i) Profits brought forward from previous years, and/or
(ii) Reserves representing appropriation of net profits, including statutory reserves,
and excluding share premium, revaluation reserve, foreign currency translation
reserve, investment reserve, unrealised gains transferred to AFS reserve185 and
reserves created on amalgamation.
The accumulated losses and deferred revenue expenditure, if any, shall be netted off
from (i) and (ii) to arrive at the available balances for payment of coupon.
183 Consequence of full discretion at all times to cancel distributions/payments is that “dividend pushers” are
prohibited. An instrument with a dividend pusher obliges the issuing bank to make a dividend/coupon payment on
the instrument if it has made a payment on another (typically more junior) capital instrument or share. This
obligation is inconsistent with the requirement for full discretion at all times. Furthermore, the term “cancel
distributions/payments” means extinguish these payments. It does not permit features that require the bank to
make distributions/payments in kind.
184 Please refer circular no. DBR.BP.BC.No.50/21.06.201/2016-17 dated February 02, 2017 on 'Basel III Capital
Regulations- Additional Tier 1 Capital'.
185 Please refer to clause 13(d) of Master Direction - Classification, Valuation and Operation of Investment Portfolio
of Commercial Banks (Directions), 2023 dated September 12, 2023.
199If the aggregate of: (a) profits in the current year; (b) profits brought forward from the
previous years and (c) permissible reserves as at (ii) above, excluding statutory reserves,
net of accumulated losses and deferred revenue expenditure are less than the amount
of coupon, only then the bank shall make appropriation from the statutory reserves. In
such cases, banks are required to report to the Reserve Bank within twenty-one days
from the date of such appropriation in compliance with Section 17(2) of the Banking
Regulation Act 1949.
It may be noted that prior approval of the Reserve Bank for appropriation of reserves as
above, in terms of the circular, DBOD.BP.BC No.31/21.04.018/2006-07 dated
September 20, 2006 on ‘Section 17 (2) of Banking Regulation Act, 1949 - Appropriation
from Reserve Fund’ is not required in this regard.
However, payment of coupons on PDIs from the reserves is subject to the issuing bank
meeting minimum regulatory requirements for CET1, Tier 1 and Total Capital ratios
including the additional capital requirements for Domestic Systemically Important Banks
at all times and subject to the restrictions under the capital buffer frameworks (i.e. capital
conservation buffer and counter cyclical capital buffer in terms of paras 15 and 17 of this
Master Circular).
In order to meet the eligibility criteria for perpetual debt instruments, banks must ensure
and indicate in their offer documents that they have full discretion at all times to cancel
distributions / payments.
(f) the interest shall not be cumulative.
(g) The instrument cannot have a credit sensitive coupon feature, i.e., a dividend that is reset
periodically based in whole or in part on the banks’ credit standing. For this purpose, any
reference rate including a broad index which is sensitive to changes to the bank’s own
creditworthiness and / or to changes in the credit worthiness of the wider banking sector
will be treated as a credit sensitive reference rate. Banks desirous of offering floating
reference rate may take prior approval of the RBI (DOR) as regard permissibility of such
reference rates.
(h) In general, it may be in order for banks to have dividend stopper arrangement that stop
dividend payments on common shares in the event the holders of AT1 instruments are
not paid dividend/coupon. However, dividend stoppers must not impede the full discretion
that bank must have at all times to cancel distributions/payments on the Additional Tier 1
instrument, nor must they act in a way that could hinder the re-capitalisation of the bank.
For example, it would not be permitted for a stopper on an Additional Tier 1 instrument
to:
200• attempt to stop payment on another instrument where the payments on this other
instrument were not also fully discretionary;
• prevent distributions to shareholders for a period that extends beyond the point in time
that dividends/coupons on the Additional Tier 1 instrument are resumed;
• impede the normal operation of the bank or any restructuring activity (including
acquisitions/disposals).
A stopper may act to prohibit actions that are equivalent to the payment of a dividend, such as
the bank undertaking discretionary share buybacks, if otherwise permitted.
1.9 Treatment in Insolvency
The instrument cannot contribute to liabilities exceeding assets if such a balance sheet test forms
part of a requirement to prove insolvency under any law or otherwise.
1.10 Loss Absorption Features
PDIs may be classified as liabilities for accounting purposes (not for the purpose of insolvency as
indicated in paragraph 1.9 above). In such cases, these instruments must have principal loss
absorption through either (i) conversion to common shares at an objective pre-specified trigger
point or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified
trigger point. The write-down will have the following effects:
a) Reduce the claim of the instrument in liquidation;
b) Reduce the amount re-paid when a call is exercised; and
c) Partially or fully reduce coupon payments on the instrument.
Various criteria for loss absorption through conversion / write-down / write-off on breach of pre-
specified trigger and at the point of non-viability are furnished in Annex 15.
1.11 Prohibition on Purchase / Funding of Instruments
Neither the bank nor a related party over which the bank exercises control or significant influence
(as defined under relevant Accounting Standards) should purchase the instrument, nor can the
bank directly or indirectly fund the purchase of the instrument. Banks should also not grant
advances against the security of the debt instruments issued by them.
1.12 Re-capitalisation
The instrument cannot have any features that hinder re-capitalisation, such as provisions which
require the issuer to compensate investors if a new instrument is issued at a lower price during a
specified time frame.
2011.13 Reporting of Non-payment of Coupons and Non-exercise of Call Option
All instances of non-payment of coupon and non-exercise of call option should be notified by the
issuing banks to the Chief General Managers-in-Charge of Department of Regulation and
Department of Supervision of the Reserve Bank of India, Mumbai.
1.14 Seniority of Claim
The claims of the investors in instruments shall be
(i) superior to the claims of investors in equity shares and perpetual non-cumulative
preference shares;
(ii) subordinated to the claims of depositors, general creditors and subordinated debt
of the bank;
(iii) is neither secured nor covered by a guarantee of the issuer nor related entity or
other arrangement that legally or economically enhances the seniority of the claim vis-à-vis
bank creditors.
1.15 Investment in Instruments Raised in Indian Rupees by Foreign Entities/NRIs
(i) Investment by FIIs in instruments raised in Indian Rupees shall be outside the ECB limit
for rupee denominated corporate debt, as fixed by the Govt. of India from time to time, for
investment by FIIs in corporate debt instruments. Investment in these instruments by FIIs and
NRIs shall be within an overall limit of 49% and 24% of the issue, respectively, subject to the
investment by each FII not exceeding 10% of the issue and investment by each NRI not exceeding
5% of the issue.
(ii) Banks should comply with the terms and conditions, if any, stipulated by SEBI / other
regulatory authorities in regard to issue of the instruments.
1.16 Terms of Issue of Instruments Denominated in Foreign Currency/ Rupee
Denominated Bonds Overseas
Banks may augment their capital funds through the issue of PDIs in foreign currency/ rupee
denominated bonds overseas without seeking the prior approval of the Reserve Bank of India,
subject to compliance with the FEMA guidelines as applicable and the requirements mentioned
below:
(i) These instruments shall comply with all terms and conditions as applicable to the
instruments issued in Indian Rupees.
202(ii) Not more than 49% of the eligible amount can be issued in foreign currency186 and/or in
rupee denominated bonds overseas187.
“Eligible amount” in this context shall mean the higher of:
(a) 1.5% of RWA and
(b) Total Additional Tier 1 capital
as on March 31 of the previous financial year.
An illustration of the above limit is provided in Annex 4A.
(iii) Instruments issued in foreign currency shall be outside the existing limit for foreign
currency borrowings by Authorised Dealers, stipulated in terms of Master Direction - Risk
Management and Inter-Bank Dealings dated July 5, 2016 as updated from time to time.
(iv) Banks, other than foreign bank branches, raising PDIs overseas should obtain and keep
on record a legal opinion from an advocate/ attorney practising in the relevant legal jurisdiction,
that the terms and conditions of issue of the instrument are in conformity with this Master Circular,
as amended from to time, can be enforced in the concerned legal jurisdiction and the applicable
laws there do not stand in the way of enforcement of those conditions.
1.17 Compliance with Reserve Requirements
The total amount raised by a bank through debt instruments shall not be reckoned as liability for
calculation of net demand and time liabilities for the purpose of reserve requirements and, as
such, will not attract CRR / SLR requirements.
1.18 Reporting of Issuances
Banks issuing PDIs shall submit a report to the Chief General Manager-in-charge, Department of
Regulation, Reserve Bank of India, Mumbai giving details of the instrument as per the format
prescribed in Annex 22 duly certified by the compliance officer of the bank, soon after the issue
is completed.
1.19 Investment in Additional Tier 1 Debt Capital Instruments (PDIs) Issued by Other
Banks/ FIs
(i) A bank's investment in debt instruments issued by other banks and financial institutions
will be reckoned along with the investment in other instruments eligible for capital status while
186 Not applicable to foreign banks’ branches. The limit for PDIs eligible for inclusion in AT1 capital, denominated in
foreign currency/rupee denominated bonds, as prescribed in para 1.16(ii) above, is also applicable to foreign banks
operating under the Wholly Owned Subsidiary (WOS) model
187 Please refer to circular no. DOR.CAP.REC.No.56/21.06.201/2021-22 dated October 4, 2021 on Basel III Capital
Regulations - Perpetual Debt Instruments (PDI) in Additional Tier 1 Capital – Eligible Limit for Instruments
Denominated in Foreign Currency/Rupee Denominated Bonds Overseas.
203computing compliance with the overall ceiling of 10% for cross holding of capital among banks/FIs
prescribed vide circular DBOD.BP.BC.No.3/ 21.01.002/ 2004-05 dated July 6, 2004 and also
subject to cross holding limits.
(ii) Bank's investments in debt instruments issued by other banks will attract risk weight for
capital adequacy purposes, as prescribed in paragraphs 5.6 and 8.3.4 of this Master Circular,
whichever applicable.
1.20 Classification in the Balance Sheet
The amount raised by way of issue of debt capital instrument may be classified under ‘Schedule
4 – Borrowings’ in the Balance Sheet 188.
1.21 Raising of Instruments for Inclusion as Additional Tier 1 Capital by Foreign Banks
in India
Foreign banks in India may raise Head Office (HO) borrowings in foreign currency for inclusion
as Additional Tier 1 capital subject to the same terms and conditions as mentioned in items 1.1
to 1.18 above for Indian banks. In addition, the following terms and conditions would also be
applicable:
a) Maturity period: If the amount of Additional Tier 1 capital raised as Head Office borrowings
shall be retained in India on a perpetual basis.
b) Rate of interest: Rate of interest on Additional Tier 1 capital raised as HO borrowings
should not exceed the on-going market rate. Interest should be paid at half yearly rests.
c) Withholding tax: Interest payments to the HO will be subject to applicable withholding tax.
d) Documentation: The foreign bank raising Additional Tier 1 capital as HO borrowings
should obtain a letter from its HO agreeing to give the loan for supplementing the capital base for
the Indian operations of the foreign bank. The loan documentation should confirm that the loan
given by HO shall be eligible for the same level of seniority of claim as the investors in debt capital
instruments issued by Indian banks. The loan agreement will be governed by and construed in
accordance with the Indian law.
e) Disclosure: The total eligible amount of HO borrowings shall be disclosed in the balance
sheet under the head ‘Additional Tier 1 capital raised in the form of Head Office borrowings in
foreign currency.
f) Hedging: The total eligible amount of HO borrowing should remain fully swapped in Indian
Rupees with the bank at all times.
188 Please refer to circular DBOD.No.BP.BC.81/21.01.002/2009-10 dated March 30, 2010.
204g) Reporting and certification: Details regarding the total amount of Additional Tier 1 capital
raised as HO borrowings, along with a certification to the effect that the borrowing is in accordance
with these guidelines, should be advised to the Chief General Managers-in-Charge of the
Department of Regulation, Department of External Investments and Operations and Financial
Markets Regulation Department, Reserve Bank of India, Mumbai.
1.22 Perpetual Debt Instruments to Retail Investors189
With a view to enhancing investor education relating to risk characteristics of regulatory capital
requirements, banks issuing Perpetual Debt Instruments to retail investors, subject to approval of
their Board, shall adhere to the following conditions:
(a) For floating rate instruments, banks should not use its Fixed Deposit rate as benchmark.
(b) The requirement for specific sign-off as quoted below, from the investors for having
understood the features and risks of the instrument may be incorporated in the common
application form of the proposed debt issue.
"By making this application, I / We acknowledge that I/We have understood the terms
and conditions of the Issue of [insert the name of the instruments being issued ] of
[Name of The Bank ] as disclosed in the Draft Shelf Prospectus, Shelf Prospectus and
Tranche Document ".
(c) All the publicity material, application form and other communication with the investor
should clearly state in bold letters (with font size 14) how a Perpetual Debt Instrument is different
from fixed deposit particularly that it is not covered by deposit insurance. In addition, the loss
absorbency features of the instrument should be clearly explained and the investor’s sign-off for
having understood these features and other terms and conditions of the instrument should be
obtained.
189 Please refer to circular DBOD.BP.BC.38/21.06.201/2014-15 dated September 1, 2014 on Implementation of Basel
III Capital Regulations in India – Amendments.
205Annex 4A
Illustration on the “eligible amount” that can be raised as per
paragraph 1.16 (ii) of Annex 4
We consider the RWAs of the bank as on March 31 of previous financial year as ₹ 1000 crore.
Scenario Maximum amount of AT1 bonds that
can be raised overseas (in foreign
currency and/or in rupee
denominated bonds overseas)
Case I The bank had AT1 capital of less than or Equals ₹ 7.35 crore (49% of 1.5% of
equal to 1.5% of RWAs as on March 31 RWAs).
of the previous financial year.
Illustratively, the bank did not have any
AT1 capital as on March 31 of the
previous financial year.
Case II The bank had AT1 capital more than Equals 49% of ₹ 50 crore i.e., ₹ 24.5
1.5% of RWAs as on March 31 of crore (49% of total AT1 capital as it is
previous financial year. more than 1.5% of RWAs).
Illustratively, the bank had AT1 capital of
₹ 50 crore as on March 31 of the
previous financial year.
Note: The amount of AT1 capital recognised for inclusion in Tier 1 capital will be subject to the limits
mentioned in para 4.2.2 and para 1.3 of Annex 4 of the Master Circular.
206Annex 5
(cf. para 4.2.5)
Criteria for Inclusion of Debt Capital Instruments as Tier 2 Capital
The Tier 2 debt capital instruments that may be issued as bonds / debentures by Indian banks
should meet the following terms and conditions to qualify for inclusion as Tier 2 Capital for capital
adequacy purposes190:
1. Terms of Issue of Instruments Denominated in Indian Rupees
1.1 Paid-in Status
The instruments should be issued by the bank (i.e., not by any ‘SPV’ etc. set up by the bank for
this purpose) and fully paid-in.
1.2 Amount
The amount of these debt instruments to be raised may be decided by the Board of Directors of
banks.
1.3 Maturity Period
The debt instruments should have a minimum maturity of five years and there are no step-ups or
other incentives to redeem.
1.4 Discount
The debt instruments shall be subjected to a progressive discount for capital adequacy purposes.
As they approach maturity these instruments should be subjected to progressive discount as
indicated in the table below for being eligible for inclusion in Tier 2 capital.
Remaining Maturity of Instruments Rate of Discount (%)
Less than one year 100
One year and more but less than two years 80
Two years and more but less than three years 60
Three years and more but less than four years 40
Four years and more but less than five years 20
1.5 Rate of Interest
(i) The interest payable to the investors may be either at a fixed rate or at a floating rate
referenced to a market determined rupee interest benchmark rate.
(ii) The instrument cannot have a credit sensitive coupon feature, i.e., a coupon that is reset
periodically based in whole or in part on the banks’ credit standing. Banks desirous of offering
190 The criteria relating to loss absorbency through conversion / write-down / write-off at the point of non-viability
are furnished in Annex 16.
207floating reference rate may take prior approval of the RBI (DOR) as regard permissibility of such
reference rates.
1.6 Optionality
The debt instruments shall not have any ‘put option’. However, it may be callable at the initiative
of the issuer only after a minimum of five years:
(a) To exercise a call option a bank must receive prior approval of RBI (Department of
Regulation); and
(b) A bank must not do anything which creates an expectation that the call will be exercised.
For example, to preclude such expectation of the instrument being called, the dividend / coupon
reset date need not be co-terminus with the call date. Banks may, at their discretion, consider
having an appropriate gap between dividend / coupon reset date and call date; and
(c) Banks must not exercise a call unless:
(i) They replace the called instrument with capital of the same or better quality and
the replacement of this capital is done at conditions which are sustainable for the income
capacity of the bank191; or
(ii) The bank demonstrates that its capital position is well above the minimum capital
requirements after the call option is exercised192.
The use of tax event and regulatory event calls may be permitted. However, exercise of the calls
on account of these events is subject to the requirements set out in points (a) to (c) of criterion
1.6. RBI will permit the bank to exercise the call only if the RBI is convinced that the bank was not
in a position to anticipate these events at the time of issuance of these instruments as explained
in case of Additional Tier 1 instruments.
1.7 Treatment in Bankruptcy / Liquidation
The investor must have no rights to accelerate the repayment of future scheduled payments
(coupon or principal) except in bankruptcy and liquidation.
1.8 Prohibition on Purchase / Funding of Instruments
Neither the bank nor a related party over which the bank exercises control or significant influence
(as defined under relevant Accounting Standards) should purchase the instrument, nor can the
bank directly or indirectly should fund the purchase of the instrument. Banks should also not grant
advances against the security of the debt instruments issued by them.
191 Replacement issues can be concurrent with but not after the instrument is called.
192 Minimum refers to Common Equity ratio of 8% of RWAs (including capital conservation buffer of 2.5% of RWAs)
and Total capital ratio of 11.5% of RWAs including any additional capital requirement identified under Pillar 2.
2081.9 Reporting of Non-payment of Coupons and Non-exercise of Call Option
All instances of non-payment of coupon and non-exercise of call option should be notified by the
issuing banks to the Chief General Managers-in-Charge of Department of Regulation and
Department of Supervision of the Reserve Bank of India, Mumbai.
1.10 Seniority of Claim
The claims of the investors in instruments shall be
(i) senior to the claims of investors in instruments eligible for inclusion in Tier 1 capital;
(ii) subordinate to the claims of all depositors and general creditors of the bank; and
(iii) is neither secured nor covered by a guarantee of the issuer or related entity or other
arrangement that legally or economically enhances the seniority of the claim vis-à-vis
bank creditors.
1.11 Investment in Instruments Raised in Indian Rupees by Foreign Entities/NRIs
(i) Investment by FIIs in Tier 2 instruments raised in Indian Rupees shall be outside the limit
for investment in corporate debt instruments, as fixed by the Govt. of India from time to time.
However, investment by FIIs in these instruments will be subject to a separate ceiling of USD 500
million. In addition, NRIs shall also be eligible to invest in these instruments as per existing policy.
(ii) Banks should comply with the terms and conditions, if any, stipulated by SEBI / other
regulatory authorities in regard to issue of the instruments.
1.11A Issuance of rupee denominated bonds overseas by Indian banks
Banks are permitted to raise funds through issuance of rupee denominated bonds overseas for
qualification as debt capital instruments eligible for inclusion as Tier 2 capital, subject to
compliance with all the terms and conditions applicable to instruments issued in Indian Rupees
and FEMA guidelines, as applicable.
1.12 Terms of Issue of Tier 2 Debt Capital Instruments in Foreign Currency
Banks may issue Tier 2 Debt Instruments in Foreign Currency without seeking the prior approval
of the Reserve Bank of India, subject to compliance with the requirements mentioned below:
(i) Tier 2 Instruments issued in foreign currency should comply with all terms and conditions
applicable to instruments issued in Indian Rupees.
(ii) The total outstanding amount of Tier 2 Instruments in foreign currency shall not exceed
25% of the unimpaired Tier 1 capital193. This eligible amount will be computed with reference to
the amount of Tier 1 capital as on March 31 of the previous financial year, after deduction of
193 Not applicable to foreign banks’ branches.
209goodwill and other intangible assets but before the deduction of investments, as per paragraph
4.4.9 of this Master Circular.
(iii) This will be in addition to the existing limit for foreign currency borrowings by Authorised
Dealers stipulated in terms of Master Direction - Risk Management and Inter-Bank Dealings dated
July 5, 2016 as updated from time to time.
(iv) Banks, other than foreign bank branches, raising Tier 2 bonds overseas194 should obtain
and keep on record a legal opinion from an advocate/ attorney practising in the relevant legal
jurisdiction, that the terms and conditions of issue of the instrument are in conformity with this
Master Circular, as amended from to time, can be enforced in the concerned legal jurisdiction and
the applicable laws there do not stand in the way of enforcement of those conditions.
1.13 Compliance with Reserve Requirements
(i) The funds collected by various branches of the bank or other banks for the issue and held
pending finalisation of allotment of the Tier 2 Capital instruments will have to be taken into account
for the purpose of calculating reserve requirements.
(ii) The total amount raised by a bank through Tier 2 instruments shall be reckoned as liability
for the calculation of net demand and time liabilities for the purpose of reserve requirements and,
as such, will attract CRR/SLR requirements.
1.14 Reporting of Issuances
Banks issuing debt instruments shall submit a report to the Chief General Manager-in-charge,
Department of Regulation, Reserve Bank of India, Mumbai giving details of the instrument as per
the format prescribed in Annex 22 duly certified by the compliance officer of the bank, soon after
the issue is completed.
1.15 Investment in Tier 2 Debt Capital Instruments Issued by Other Banks/ FIs
(i) A bank's investment in Tier 2 debt instruments issued by other banks and financial
institutions will be reckoned along with the investment in other instruments eligible for capital
status while computing compliance with the overall ceiling of 10% for cross holding of capital
among banks/FIs prescribed vide circular DBOD.BP.BC.No.3/ 21.01.002/ 2004-05 dated 6th July
2004 and also subject to cross holding limits.
(ii) Bank's investments in Tier 2 instruments issued by other banks/ financial institutions will
attract risk weight as per paragraphs 5.6 and 8.3.4 of this Master Circular, whichever applicable
for capital adequacy purposes.
194 Includes both foreign currency and rupee denominated bonds raised overseas.
2101.16 Classification in the Balance Sheet
The amount raised by way of issue of Tier 2 debt capital instrument may be classified under
‘Schedule 4 – Borrowings’ in the Balance Sheet.
1.17 Debt Capital Instruments to Retail Investors195,196
With a view to enhancing investor education relating to risk characteristics of regulatory capital
requirements, banks issuing subordinated debt to retail investors, subject to approval of their
Board, should adhere to the following conditions:
(a) For floating rate instruments, banks should not use its Fixed Deposit rate as
benchmark.
(b) The requirement for specific sign-off as quoted below, from the investors for having
understood the features and risks of the instrument may be incorporated in the common
application form of the proposed debt issue.
"By making this application, I / We acknowledge that I/We have understood the terms
and conditions of the Issue of [insert the name of the instruments being issued] of
[Name of The Bank ] as disclosed in the Draft Shelf Prospectus, Shelf Prospectus and
Tranche Document ".
(c) All the publicity material, application form and other communication with the investor
should clearly state in bold letters (with font size 14) how a subordinated bond is different from
fixed deposit particularly that it is not covered by deposit insurance. In addition, the loss
absorbency features of the instrument should be clearly explained and the investor’s sign-off for
having understood these features and other terms and conditions of the instrument should be
obtained.
1.18 Raising of Instruments for Inclusion as Tier 2 Capital by Foreign Banks in India
Foreign banks in India may raise Head Office (HO) borrowings in foreign currency for inclusion
as Tier 2 capital subject to the same terms and conditions as mentioned in items 1.1 to 1.17 above
for Indian banks. In addition, the following terms and conditions would also be applicable:
(a) Maturity period: If the amount of Tier 2 debt capital raised as HO borrowings is in tranches,
each tranche shall be retained in India for a minimum period of five years.
195 Please refer to circular DBOD.BP.BC.No.69 / 21.01.002/ 2009-10 dated January 13, 2010.
196 Please also refer to the circular DBOD.BP.BC.No.72/21.01.002/2012-13 dated January 24, 2013 on ‘Retail Issue of
Subordinated Debt for Raising Tier 2 Capital’, in terms of which banks were advised that with a view to deepening
the corporate bond market in India through enhanced retail participation, banks, while issuing subordinated debt
for raising Tier 2 capital, are encouraged to consider the option of raising such funds through public issue to retail
investors. However, while doing so banks are advised to adhere to the conditions prescribed in circular dated January
13, 2010 so as to ensure that the investor is aware of the risk characteristics of regulatory capital instruments.
211(b) Rate of interest: Rate of interest on Tier 2 capital raised as HO borrowings should not
exceed the on-going market rate. Interest should be paid at half yearly rests.
(c) Withholding tax: Interest payments to the HO will be subject to applicable withholding tax.
(d) Documentation: The foreign bank raising Tier 2 debt capital as HO borrowings should
obtain a letter from its HO agreeing to give the loan for supplementing the capital base for the
Indian operations of the foreign bank. The loan documentation should confirm that the loan given
by HO shall be eligible for the same level of seniority of claim as the investors in debt capital
instruments issued by Indian banks. The loan agreement will be governed by and construed in
accordance with the Indian law.
(e) Disclosure: The total eligible amount of HO borrowings shall be disclosed in the balance
sheet under the head ‘Tier 2 debt capital raised in the form of Head Office borrowings in foreign
currency.
(f) Hedging: The total eligible amount of HO borrowing should remain fully swapped in Indian
Rupees with the bank at all times.
(g) Reporting and certification: Details regarding the total amount of Tier 2 debt capital raised
as HO borrowings, along with a certification to the effect that the borrowing is in accordance with
these guidelines, should be advised to the Chief General Managers-in-Charge of the Department
of Regulation, Department of External Investments and Operations and Financial Markets
Regulation Department , Reserve Bank of India, Mumbai..
(h) Features: The HO borrowings should be fully paid up, i.e. the entire borrowing or each
tranche of the borrowing should be available in full to the branch in India. It should be unsecured,
subordinated to the claims of other creditors of the foreign bank in India, free of restrictive clauses
and should not be redeemable at the instance of the HO.
(i) Rate of discount: The HO borrowings will be subjected to progressive discount as they
approach maturity at the rates indicated below:
Remaining maturity of borrowing Rate of discount (%)
Not Applicable
More than 5 years (the entire amount can be included as
subordinated debt in Tier 2 capital)
More than 4 years and less than 5 years
20
More than 3 years and less than 4 years
40
More than 2 years and less than 3 years
60
More than 1 year and less than 2 years
80
100
Less than 1 year (No amount can be treated as subordinated
debt for Tier 2 capital)
2121.19 Requirements
The total amount of HO borrowings is to be reckoned as liability for the calculation of net demand
and time liabilities for the purpose of reserve requirements and, as such, will attract CRR/SLR
requirements.
1.20 Hedging
The entire amount of HO borrowing should remain fully swapped with banks at all times. The
swap should be in Indian rupees.
1.21 Reporting and Certification
Such borrowings done in compliance with the guidelines set out above would not require prior
approval of Reserve Bank of India. However, information regarding the total amount of borrowing
raised from Head Office under this Annex, along with a certification to the effect that the borrowing
is as per the guidelines, should be advised to the Chief General Managers-in-Charge of the
Department of Regulation, Department of External Investments and Operations and Financial
Markets Regulation Department, Reserve Bank of India, Mumbai.
213Annex 6
(cf. para 4.2.5.1.A(iii))
Criteria for Inclusion of Perpetual Cumulative Preference Shares (PCPS)/ Redeemable
Non-Cumulative Preference Shares (RNCPS) / Redeemable Cumulative Preference
Shares (RCPS) as Part of Tier 2 Capital
1 Terms of Issue of Instruments197
1.1 Paid-in Status
The instruments should be issued by the bank (i.e., not by any ‘SPV’ etc. set up by the bank for
this purpose) and fully paid-in.
1.2 Amount
The amount to be raised may be decided by the Board of Directors of banks.
1.3 Maturity Period
These instruments could be either perpetual (PCPS) or dated (RNCPS and RCPS) instruments
with a fixed maturity of minimum five years and there should be no step-ups or other incentives
to redeem. The perpetual instruments shall be cumulative. The dated instruments could be
cumulative or non-cumulative.
1.4 Amortisation
The Redeemable Preference Shares (both cumulative and non-cumulative) shall be subjected to
a progressive discount for capital adequacy purposes over the last five years of their tenor, as
they approach maturity as indicated in the table below for being eligible for inclusion in Tier 2
capital.
Remaining Maturity of Instruments Rate of Discount (%)
Less than one year 100
One year and more but less than two years 80
Two years and more but less than three years 60
Three years and more but less than four years 40
Four years and more but less than five years 20
1.5 Coupon
The coupon payable to the investors may be either at a fixed rate or at a floating rate referenced
to a market determined rupee interest benchmark rate. Banks desirous of offering floating
197 The criteria relating to loss absorbency through conversion / write-down / write-off at the point of non-viability
are furnished in Annex 16.
214reference rate may take prior approval of the RBI (DOR) as regard permissibility of such reference
rates.
1.6 Optionality
These instruments shall not be issued with a 'put option'. However, banks may issue the
instruments with a call option at a particular date subject to following conditions:
(a) The call option on the instrument is permissible after the instrument has run for at least
five years; and
(b) To exercise a call option a bank must receive prior approval of RBI (Department of
Regulation); and
(c) A bank must not do anything which creates an expectation that the call will be exercised.
For example, to preclude such expectation of the instrument being called, the dividend / coupon
reset date need not be co-terminus with the call date. Banks may, at their discretion, consider
having an appropriate gap between dividend / coupon reset date and call date; and
(d) Banks must not exercise a call unless:
(i) They replace the called instrument with capital of the same or better quality and the
replacement of this capital is done at conditions which are sustainable for the income
capacity of the bank198; or
(ii) The bank demonstrates that its capital position is well above the minimum capital
requirements after the call option is exercised199.
The use of tax event and regulatory event calls may be permitted. However, exercise of the calls
on account of these events is subject to the requirements set out in points (b) to (d) of criterion
1.6. RBI will permit the bank to exercise the call only if the RBI is convinced that the bank was not
in a position to anticipate these events at the time of issuance of these instruments as explained
in case of Additional Tier 1 instruments.
1.7 Treatment in Bankruptcy / Liquidation
The investor must have no rights to accelerate the repayment of future scheduled payments
(coupon or principal) except in bankruptcy and liquidation.
1.8 Prohibition on Purchase / Funding
Neither the bank nor a related party over which the bank exercises control or significant influence
(as defined under relevant Accounting Standards) should purchase these instruments, nor can
198 Replacement issues can be concurrent with but not after the instrument is called.
199 Minimum refers to Common Equity Tier 1 of 8% of RWAs (including capital conservation buffer of 2.5% of RWAs)
and Total Capital of 11.5% of RWAs including and additional capital identifies under Pillar 2.
215the bank directly or indirectly should fund the purchase of the instrument. Banks should also not
grant advances against the security of these instruments issued by them.
1.9 Reporting of Non-payment of Coupon and Non-exercise of Call Option
All instances of non-payment of coupon and non-exercise of call option should be notified by the
issuing banks to the Chief General Managers-in-Charge of Department of Regulation and
Department of Supervision of the Reserve Bank of India, Mumbai.
1.10 Seniority of Claim
The claims of the investors in instruments shall be:
(i) senior to the claims of investors in instruments eligible for inclusion in Tier 1 capital;
(ii) subordinate to the claims of all depositors and general creditors of the bank; and
(iii) is neither secured nor covered by a guarantee of the issuer or related entity or other
arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank
creditors.
1.11 Investment in Instruments Raised in Indian Rupees by Foreign Entities/NRIs
(i) Investment by FIIs and NRIs shall be within an overall limit of 49% and 24% of the issue
respectively, subject to the investment by each FII not exceeding 10% of the issue and investment
by each NRI not exceeding 5% of the issue. Investment by FIIs in these instruments shall be
outside the ECB limit for rupee denominated corporate debt as fixed by Government of India from
time to time. However, investment by FIIs in these instruments will be subject to separate ceiling
of USD 500 million. The overall non-resident holding of Preference Shares and equity shares in
public sector banks will be subject to the statutory / regulatory limit.
(ii) Banks should comply with the terms and conditions, if any, stipulated by SEBI / other
regulatory authorities in regard to issue of the instruments.
1.12 Compliance with Reserve Requirements
(a) The funds collected by various branches of the bank or other banks for the issue and held
pending finalization of allotment of these instruments will have to be taken into account for the
purpose of calculating reserve requirements.
(b) The total amount raised by a bank through the issue of these instruments shall be
reckoned as liability for the calculation of net demand and time liabilities for the purpose of reserve
requirements and, as such, will attract CRR / SLR requirements.
1.13 Reporting of Issuances
Banks issuing these instruments shall submit a report to the Chief General Manager-in-charge,
Department of Regulation, Reserve Bank of India, Mumbai giving details of the instrument as per
216the format prescribed in Annex 22 duly certified by the compliance officer of the bank, soon after
the issue is completed.
1.14 Investment in these Instruments Issued by other Banks/ FIs
(i) A bank's investment in these instruments issued by other banks and financial institutions
shall be reckoned along with the investment in other instruments eligible for capital status while
computing compliance with the overall ceiling of 10% of investing banks' total capital funds
prescribed vide circular DBOD.BP.BC.No.3/21.01.002/ 2004-05 dated July 6, 2004 and also
subject to cross holding limits.
(ii) Bank's investments in these instruments issued by other banks / financial institutions shall
attract risk weight for capital adequacy purposes as provided vide paragraphs 5.6 and 8.3.4 of
this Master Circular, whichever applicable.
1.15 Classification in the Balance Sheet
These instruments will be classified as ‘Borrowings’ under Schedule 4 of the Balance Sheet under
item No. I (i.e., Borrowings).
1.16 PCPS/RNCPS/RCPS to Retail Investors200
With a view to enhancing investor education relating to risk characteristics of regulatory capital
requirements, banks issuing PCPS/RNCPS/RCPS to retail investors, subject to approval of their
Board, should adhere to the following conditions:
(a) The requirement for specific sign-off as quoted below, from the investors for having
understood the features and risks of the instrument may be incorporated in the common
application form of the proposed issue.
"By making this application, I / We acknowledge that I/We have understood the terms
and conditions of the Issue of [insert the name of the instruments being issued] of
[Name of The Bank] as disclosed in the Draft Shelf Prospectus, Shelf Prospectus and
Tranche Document ".
(b) All the publicity material, application form and other communication with the investor
should clearly state in bold letters (with font size 14) how a PCPS/RNCPS/RCPS is different
from common shares / fixed deposit particularly that it is not covered by deposit insurance. In
addition, the loss absorbency features of the instrument should be clearly explained and the
investor’s sign-off for having understood these features and other terms and conditions of the
instrument should be obtained.
200 Please refer to circular DBOD.BP.BC.38/21.06.201/2014-15 dated September 1, 2014 on Implementation of Basel
III Capital Regulations in India – Amendments.
217Annex 7
(cf para 5.17)
Prudential Guidelines on Credit Default Swaps (CDS)
1. Introduction
Banks can undertake transactions in CDS in terms of Master Direction – Reserve Bank of India
(Credit Derivatives) Directions, 2022. As users, banks can buy CDS to hedge a Banking Book or
Trading Book exposure. The prudential guidelines dealing with CDS are dealt with in the following
paragraphs.
2. Definitions
The expressions/definitions unless defined in this Master Circular shall have the same meaning
as have been assigned to them under Master Direction – Reserve Bank of India (Credit
Derivatives) Directions, 2022.
3. Classification of CDS into Trading Book and Banking Book Positions
Banks should refer to paragraph 8.2.1 of the Master Circular for classifying CDS into trading book
and banking book. All CDS positions should meet the operational requirements indicated in
paragraph 4 below.
4. Operational requirements for CDS to be recognised as eligible External / Third-party
hedges for Trading Book and Banking Book
(a) A CDS contract should represent a direct claim on the protection provider and should be
explicitly referenced to specific exposure, so that the extent of the cover is clearly defined
and incontrovertible.
(b) Other than non-payment by a protection purchaser of premium in respect of the credit
protection contract it should be irrevocable.
(c) There should be no clause in the contract that would allow the protection provider
unilaterally to cancel the credit cover or that would increase the effective cost of cover
as a result of deteriorating credit quality in the hedged exposure.
(d) The CDS contract should be unconditional; there should be no clause in the protection
contract outside the direct control of the bank (protection buyer) that could prevent the
protection provider from being obliged to pay out in a timely manner in the event that the
original counterparty fails to make the payment(s) due.
(e) The credit events specified by the contracting parties should at a minimum cover:
218(i) failure to pay the amounts due under terms of the underlying obligation that are in
effect at the time of such failure (with a grace period that is closely in line with the
grace period in the underlying obligation);
(ii) bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or
admission in writing of its inability generally to pay its debts as they become due,
and analogous events; and
(iii) restructuring of the underlying obligation involving forgiveness or postponement
of principal, interest or fees that results in a credit loss event (i.e. charge-off,
specific provision or other similar debit to the profit and loss account);
(iv) when the restructuring of the underlying obligation is not covered by the CDS, but
the other requirements in paragraph 4 are met, partial recognition of the CDS will
be allowed. If the amount of the CDS is less than or equal to the amount of the
underlying obligation, 60% of the amount of the hedge can be recognised as
covered. If the amount of the CDS is larger than that of the underlying obligation,
then the amount of eligible hedge is capped at 60% of the amount of the underlying
obligation.
(f) If the CDS specifies deliverable obligations that are different from the underlying
obligation, the resultant asset mismatch will be governed under paragraph (k) below.
(g) The CDS shall not terminate prior to expiration of any grace period required for a default
on the underlying obligation to occur as a result of a failure to pay201.
(h) The CDS allowing for cash settlement are recognised for capital purposes insofar as a
robust valuation process is in place in order to estimate loss reliably. There should be a
clearly specified period for obtaining post-credit event valuations of the underlying
obligation. If the reference obligation specified in the CDS for purposes of cash
settlement is different than the underlying obligation, the resultant asset mismatch will
be governed under paragraph (k) below.
(i) If the protection purchaser’s right/ability to transfer the underlying obligation to the
protection provider is required for settlement, the terms of the underlying obligation
should provide that any required consent to such transfer may not be unreasonably
withheld.
(j) The identity of the parties responsible for determining whether a credit event has
occurred should be clearly defined. This determination should not be the sole
201 The maturity of the underlying exposure and the maturity of the hedge should be defined conservatively. The
effective maturity of the underlying should be gauged as the longest possible remaining time before the
counterparty is scheduled to fulfill its obligation, taking into account any applicable grace period.
219responsibility of the protection seller. The protection buyer should have the right/ability
to inform the protection provider of the occurrence of a credit event.
(k) A mismatch between the underlying obligation and the reference obligation or deliverable
obligation under the CDS (i.e. the obligation used for purposes of determining cash
settlement value or the deliverable obligation) is permissible if (1) the reference obligation
or deliverable obligation ranks pari passu with or is junior to the underlying obligation,
and (2) the underlying obligation and reference obligation or deliverable obligation share
the same obligor (i.e. the same legal entity) and legally enforceable cross-default or
cross-acceleration clauses are in place.
(l) A mismatch between the underlying obligation and the obligation used for purposes of
determining whether a credit event has occurred is permissible if (1) the latter obligation
ranks pari passu with or is junior to the underlying obligation, and (2) the underlying
obligation and reference obligation share the same obligor (i.e. the same legal entity)
and legally enforceable cross-default or cross acceleration clauses are in place.
5. Capital Adequacy Requirement for CDS Positions in the Banking Book
5.1 Recognition of External/Third-party CDS Hedges
5.1.1 In case of Banking Book positions hedged by bought CDS positions, no exposure will be
reckoned against the reference entity / underlying asset in respect of the hedged exposure, and
exposure will be deemed to have been substituted by the protection seller, if the following
conditions are satisfied:
(a) Operational requirements mentioned in paragraph 4 are met;
(b) The risk weight applicable to the protection seller under the Basel II202 Standardised
Approach for credit risk is lower than that of the underlying asset; and
(c) There is no maturity mismatch between the underlying asset and the reference /
deliverable obligation. If this condition is not satisfied, then the amount of credit protection
to be recognised should be computed as indicated in paragraph 5.1.3 (ii) below.
5.1.2 If the conditions (a) and (b) above are not satisfied or the bank breaches any of these
conditions subsequently, the bank shall reckon the exposure on the underlying asset; and the
CDS position will be transferred to Trading Book where it will be subject to specific risk,
counterparty credit risk and general market risk (wherever applicable) capital requirements as
applicable to Trading Book.
202 Basel II Framework has been modified and enhanced by Basel III capital regulations. Therefore, a reference to
Basel II Framework in this Annex should now be construed as reference to Basel III guidelines as contained in this
Master Circular
2205.1.3 The unprotected portion of the underlying exposure should be risk-weighted as applicable
under Basel II framework. The amount of credit protection shall be adjusted if there are any
mismatches between the underlying asset/ obligation and the reference / deliverable asset /
obligation with regard to asset or maturity. These are dealt with in detail in the following
paragraphs.
(i) Asset mismatches
Asset mismatch will arise if the underlying asset is different from the reference asset or deliverable
obligation. Protection will be reckoned as available by the protection buyer only if the mismatched
assets meet the requirements specified in paragraph 4 (k) above.
(ii) Maturity mismatches
The protection buyer would be eligible to reckon the amount of protection if the maturity of the
credit derivative contract were to be equal or more than the maturity of the underlying asset. If,
however, the maturity of the CDS contract is less than the maturity of the underlying asset, then
it would be construed as a maturity mismatch. In case of maturity mismatch the amount of
protection will be determined in the following manner:
a. If the residual maturity of the credit derivative product is less than three months no
protection will be recognized.
b. If the residual maturity of the credit derivative contract is three months or more
protection proportional to the period for which it is available will be recognised. When
there is a maturity mismatch the following adjustment will be applied.
Pa = P x (t- .25) ÷ (T- .25)
Where:
Pa = value of the credit protection adjusted for maturity mismatch
P = credit protection
t = min (T, residual maturity of the credit protection arrangement) expressed in years
T = min (5, residual maturity of the underlying exposure) expressed in years
Example: Suppose the underlying asset is a corporate bond of Face Value of Rs. 100
where the residual maturity is of 5 years and the residual maturity of the CDS is 4 years.
The amount of credit protection is computed as under:
100 * {(4-.25) ÷ (5-.25)} = 100*(3.75÷ 4.75) = 78.95
c. Once the residual maturity of the CDS contract reaches three months, protection
ceases to be recognised.
2215.2 Internal Hedges
Banks can use CDS contracts to hedge against the credit risk in their existing corporate bonds
portfolios. A bank can hedge a Banking Book credit risk exposure either by an internal hedge (the
protection purchased from the trading desk of the bank and held in the Trading Book) or an
external hedge (protection purchased from an eligible third party protection provider). When a
bank hedges a Banking Book credit risk exposure (corporate bonds) using a CDS booked in its
Trading Book (i.e. using an internal hedge), the Banking Book exposure is not deemed to be
hedged for capital purposes unless the bank transfers the credit risk from the Trading Book to an
eligible third party protection provider through a CDS meeting the requirements of paragraph 5.1
vis-à-vis the Banking Book exposure. Where such third party protection is purchased and is
recognised as a hedge of a Banking Book exposure for regulatory capital purposes, no capital is
required to be maintained on internal and external CDS hedge. In such cases, the external CDS
will act as indirect hedge for the Banking Book exposure and the capital adequacy in terms of
paragraph 5.1, as applicable for external / third party hedges, will be applicable.
6. Capital Adequacy for CDS in the Trading Book
6.1 General Market Risk
A credit default swap does not normally create a position for general market risk for either the
protection buyer or protection seller. However, the present value of premium payable / receivable
is sensitive to changes in the interest rates. In order to measure the interest rate risk in premium
receivable/payable, the present value of the premium can be treated as a notional position in
Government securities of relevant maturity. These positions will attract appropriate capital charge
for general market risk. The protection buyer / seller will treat the present value of the premium
payable / receivable equivalent to a short / long notional position in Government securities of
relevant maturity.
6.2 Specific Risk for Exposure to Reference Entity
A CDS creates a notional long / short position for specific risk in the reference asset / obligation
for protection seller / protection buyer. For calculating specific risk capital charge, the notional
amount of the CDS and its maturity should be used. The specific risk capital charge for CDS
positions will be as per Table-1 and Table-2 below.
222Table-1: Specific risk capital charges for bought and sold CDS positions in the
Trading Book: Exposures to entities other than
Commercial Real Estate Companies/ NBFC-ND-SI
Upto 90 days After 90 days203
Ratings by the Residual Capital charge Ratings by the Capital charge
ECAI* Maturity of the ECAI
*
instrument
AAA to BBB 6 months or 0.28 % AAA 1.8 %
less
Greater than 6 1.14% AA 2.7%
months and up
to and including
24 months
Exceeding 24 1.80% A 4.5%
months BBB 9.0%
BB and below All maturities 13.5% BB and below 13.5%
Unrated (if All maturities 9.0% Unrated (if 9.0%
permitted) permitted)
* 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 within the main category.
Table-2: Specific risk capital charges for bought and sold CDS positions in the Trading
Book: Exposures to Commercial Real Estate
Companies/ NBFC-ND-SI#
Ratings by the ECAI* Residual Maturity of the Capital charge
instrument
AAA to BBB 6 months or less 1.4%
Greater than 6 months and 7.7%
up to and including 24
months
Exceeding 24 months 9.0%
BB and below All maturities 9.0%
Unrated (if permitted) All maturities 9.0%
# The above table will be applicable for exposures upto 90 days. Capital charge for exposures to
Commercial Real Estate Companies / NBFC-ND-SI beyond 90 days shall be taken at 9.0%,
regardless of rating of the reference /deliverable obligation.
203 Under Basel II, the specific risk capital charge for risk exposures to corporate bonds, CDS contracts, etc., held in
Trading Book have been calibrated, keeping in view the generally short time horizon of the Trading Book. In case
such positions remain in the Trading Book for longer time horizons, these are exposed to higher credit risk. In such
cases, the normal specific risk capital charge will be inadequate. Hence, the specific risk capital charges on exposures
remaining in Trading Book beyond 90 days have been suitably increased.
223* 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 within the main category.
6.2.1 Specific Risk Capital Charges for Positions Hedged by CDS204
(i) Banks may fully offset the specific risk capital charges when the values of two legs (i.e.
long and short in CDS positions) always move in the opposite direction and broadly to the same
extent. This would be the case when the two legs consist of completely identical CDS. In these
cases, no specific risk capital requirement applies to both sides of the CDS positions.
(ii) Banks may offset 80 per cent of the specific risk capital charges when the value of two
legs (i.e., long and short) always moves in the opposite direction but not broadly to the same
extent205. This would be the case when a long cash position is hedged by a credit default swap
and there is an exact match in terms of the reference / deliverable obligation, and the maturity of
both the reference / deliverable obligation and the CDS. In addition, key features of the CDS (e.g.,
credit event definitions, settlement mechanisms) should not cause the price movement of the
CDS to materially deviate from the price movements of the cash position. To the extent that the
transaction transfers risk, an 80% specific risk offset will be applied to the side of the transaction
with the higher capital charge, while the specific risk requirement on the other side will be zero206.
(iii) Banks may offset partially the specific risk capital charges when the value of the two legs
(i.e., long and short) usually moves in the opposite direction. This would be the case in the
following situations:
(a) The position is captured in paragraph 6.2.1 (ii) but there is an asset mismatch between
the cash position and the CDS. However, the underlying asset is included in the
(reference / deliverable) obligations in the CDS documentation and meets the
requirements of paragraph 4 (k).
(b) The position is captured in paragraph 6.2.1 (ii) but there is maturity mismatch between
credit protection and the underlying asset. However, the underlying asset is included
in the (reference / deliverable) obligations in the CDS documentation.
204 This paragraph will be applicable only in those cases where a CDS position is explicitly meant for hedging a Trading
Book exposure. In other words, a bank cannot treat a CDS position as a hedge against any other Trading Book
exposure if it was not intended to be as such ab initio.
205 A cash position in corporate bond in Trading Book hedged by a CDS position, even where the reference obligation
and the underlying bonds are the same, will not qualify for 100% offset because a CDS cannot guarantee a 100%
match between the market value of CDS and the appreciation / depreciation in the underlying bond at all times. This
paragraph will apply only when two legs consist of completely identical CDS instruments.
206 For example, if specific risk charge on long position (corporate bond) comes to Rs.1000 and that on the short
position (credit protection bought through CDS) comes to Rs.700, there will be no capital change on the short
position and the long position will attract specific risk capital charge of Rs.200 (1000-80% of 1000). Banks will not be
allowed to offset specific risk charges between two opposite CDS positions which are not completely identical.
224(c) In each of the cases in paragraph (a) and (b) above, rather than applying specific risk
capital requirements on each side of the transaction (i.e., the credit protection and the
underlying asset), only higher of the two capital requirements will apply.
6.2.2 Specific Risk Charge in CDS Positions which are not meant for Hedging
In cases not captured in paragraph 6.2.1, a specific risk capital charge will be assessed against
both sides of the positions.
7 Capital Charge for Counterparty Credit Risk
The credit exposure for the purpose of counterparty credit risk on account of CDS transactions in
the Trading Book will be calculated according to the Current Exposure Method207 under Basel
framework.
7.1 Protection Seller
A protection seller will have exposure to the protection buyer only if the fee / premia are
outstanding. In such cases, the counterparty credit risk charge for all single name long CDS
positions in the Trading Book will be calculated as the sum of the current marked-to-market value,
if positive (zero, if marked-to-market value is negative) and the potential future exposure add-on
factors based on Table 3 given below. However, for protection seller where the CDS positions are
outside netting and margin agreements, the add-on will be capped to the amount of unpaid
premia. Banks have the option to remove such CDS positions from their legal netting sets and
treat them as individual unmargined transactions in order to apply the cap.
Table 3: Add-on factors for Protection sellers
(As % of Notional Principal of CDS)
Type of Reference Obligation208 Add-on factor
Obligations rated BBB- and above 10%
Below BBB- and unrated 20%
207 A CDS contract, which is required to be marked-to-market, creates bilateral exposure for the parties to the
contract. The mark-to-market value of a CDS contract is the difference between the default-adjusted present value
of protection payment (called “protection leg” / “credit leg”) and the present value of premium payable called
(“premium leg”). If the value of credit leg is less than the value of the premium leg, then the marked-to-market value
for the protection seller in positive. Therefore, the protection seller will have exposure to the counterparty
(protection buyer) if the value of premium leg is more than the value of credit leg. In case, no premium is outstanding,
the value of premium leg will be zero and the mark-to-market value of the CDS contract will always be negative for
the protection seller and therefore, protection seller will not have any exposure to the protection buyer. In no case,
the protection seller’s exposure on protection buyer can exceed the amount of the premium unpaid. For the purpose
of capital adequacy as well as exposure norms, the measure of counterparty exposures in case of CDS transaction
held in Trading Book is the Potential Future Exposure (PFE) which is measured and recognised as per Current
Exposure Method.
208 The add-on factors will be the same regardless of maturity of the reference obligations or CDS contract.
2257.2 Protection Buyer
A CDS contract creates a counterparty exposure on the protection seller on account of the credit
event payment. The counterparty credit risk charge for all short CDS positions in the Trading Book
will be calculated as the sum of the current marked-to-market value, if positive (zero, if marked-
to-market value is negative) and the potential future exposure add-on factors based on Table 4
given below:
Table 4: Add-on factors for Protection Buyers
(As % of Notional Principal of CDS)
Type of Reference Obligation209 Add-on factor
Obligations rated BBB- and above 10%
Below BBB- and unrated 20%
7.3 Capital Charge for Counterparty risk for Collateralised Transactions in CDS
The counterparty exposure for CDS traded in the OTC market will be calculated as per the Current
Exposure Method. Under this method, the calculation of the counterparty credit risk charge for an
individual contract, taking into account the collateral, will be as follows:
Counterparty risk capital charge = [(RC + add-on) – CA] x r x 9%
where:
RC = the replacement cost,
add-on = the amount for potential future exposure calculated according to paragraph 7
above.
CA = the volatility adjusted amount of eligible collateral under the comprehensive approach
prescribed in paragraphs 7.3 “Credit Risk Mitigation Techniques- Collateralised
Transactions” of these guidelines, or zero if no eligible collateral is applied to the transaction,
and
r = the risk weight of the counterparty.
8. Treatment of Exposures Below Materiality Thresholds
Materiality thresholds on payments below which no payment is made in the event of loss are
equivalent to retained first loss positions and should be assigned risk weight of 1250% for capital
adequacy purpose by the protection buyer.
209 The add-on factors will be the same regardless of maturity of the reference obligations or CDS contract.
2269. General Provisions Requirements
At present, general provisions (standard asset provisions) are required only for Loans and
Advances and the positive marked-to-market values of derivatives contracts. For all CDS
positions including the hedged positions, both in the Banking Book and Trading Book, banks
should hold general provisions for gross positive marked-to-market values of the CDS contracts.
10. Prudential Treatment Post-Credit Event
10.1 Protection Buyer
In case the credit event payment is not received within the period as stipulated in the CDS
contract, the protection buyer shall ignore the credit protection of the CDS and reckon the credit
exposure on the underlying asset and maintain appropriate level of capital and provisions as
warranted for the exposure. On receipt of the credit event payment, (a) the underlying asset shall
be removed from the books if it has been delivered to the protection seller or (b) the book value
of the underlying asset shall be reduced to the extent of credit event payment received if the credit
event payment does not fully cover the book value of the underlying asset and appropriate
provisions shall be maintained for the reduced value.
10.2 Protection Seller
10.2.1 From the date of credit event and until the credit event payment in accordance with the
CDS contract, the protection seller shall debit the Profit and Loss account and recognise a liability
to pay to the protection buyer, for an amount equal to fair value of the contract (notional of credit
protection less expected recovery value). In case, the fair value of the deliverable obligation (in
case of physical settlement) / reference obligation (in case of cash settlement) is not available
after the date of the credit event, then until the time that value is available, the protection seller
should debit the Profit and Loss account for the full amount of the protection sold and recognise
a liability to pay to the protection buyer equal to that amount.
10.2.2 In case of physical settlement, after the credit event payment, the protection seller shall
recognise the assets received, if any, from the protection buyer at the fair value. These
investments will be classified as non-performing investments and valued in terms of paragraph
19 of the Master Direction – Classification, Valuation and Operation of Investment Portfolio of
Commercial Banks (Directions), 2021. Thereafter, the protection seller shall subject these assets
to the appropriate prudential treatment as applicable to corporate bonds.
11. Exposure Norms
11.1 For the present, the CDS is primarily intended to provide an avenue to investors for
hedging credit risk in the corporate bonds, after they have invested in the bonds. It should,
therefore, not be used as a substitute for a bank guarantee. Accordingly, a bank should not sell
credit protection by writing a CDS on a corporate bond on the date of its issuance in the primary
227market or undertake, before or at the time of issuance of the bonds, to write such protection in
future210.
11.2 Exposure on account of all CDS contracts will be aggregated and combined with other on-
balance sheet and off-balance sheet exposures against the reference entity for the purpose of
complying with the exposure norms.
11.3 Protection Seller
(i) A protection seller will recognise an exposure to the reference entity of the CDS
contract equal to the amount of credit protection sold, subject to paragraph (ii) below.
(ii) If a market maker has two completely identical opposite positions in CDS forming a
hedged position which qualifies for capital adequacy treatment in terms of paragraph
6.2.1(i), no exposure would be reckoned against the reference entity.
(iii) Protection seller will also recognise an exposure to the counterparty equal to the total
credit exposure calculated under Current Exposure Method as prescribed in Basel II
framework in the case of all CDS positions held in the Trading Book.
11.4 Protection Buyer
(i) In respect of obligations hedged in the Banking Book as indicated in paragraph 5.1
and Trading Book as indicated in paragraph 6.2.1 (ii), the protection buyer will not
reckon any exposure on the reference entity. The exposure will be deemed to have
been transferred on the protection seller to the extent of protection available.
(ii) In all other cases where the obligations in Banking Book or Trading Book are hedged
by CDS positions, the protection buyer will continue to reckon the exposure on the
reference entity equal to the outstanding position of the underlying asset.
(iii) For all bought CDS positions (hedged and un-hedged) held in Trading Book, the
protection buyer will also reckon exposure on the counterparties to the CDS contracts
as measured by the Current Exposure Method.
(iv) The protection buyer needs to adhere to all the criteria required for transferring the
exposures fully to the protection seller in terms of paragraph (i) above on an on-going
basis so as to qualify for exposure relief on the underlying asset. In case any of these
criteria are not met subsequently, the bank will have to reckon the exposure on the
underlying asset. Therefore, banks should restrict the total exposure to an obligor
including that covered by way of various unfunded credit protections (guarantees,
210 As per extant instructions issued by RBI, banks are not permitted to guarantee the repayment of principal and/or
interest due on corporate bonds. Considering this restriction, writing credit protection through CDS on a corporate
bond on the date of its issuance or undertaking, before or at the time of issuance, to write such protection in future,
will be deemed to be a violation of the said instructions.
228LCs, standby LCs, CDS, etc.) within an internal exposure ceiling considered
appropriate by the Board of the bank in such a way that it does not breach the single
/ group borrower exposure limit prescribed by RBI. In case of the event of any breach
in the single / group borrower exposure limit, the entire exposure in excess of the limit
will be risk weighted at 1250%. In order to ensure that consequent upon such a
treatment, the bank does not breach the minimum capital requirement prescribed by
RBI, it should keep sufficient cushion in capital in case it assumes exposures in
excess of normal exposure limit.
(v) In respect of bought CDS positions held in Trading Book which are not meant for
hedging, the protection buyer will not reckon any exposure against the reference
entity211.
12. Reporting Requirements
Banks should report “total exposure” in all cases where they have assumed exposures against
borrowers in excess of the normal single / group exposure limits due to the credit protections
obtained by them through CDS, guarantees or any other instruments of credit risk transfer, to the
Department of Supervision (DOS) on a quarterly basis.
211 In a CDS transaction, the protection buyer does not suffer a loss when reference entity defaults; it rather gains in
such a situation.
229Annex 8
(Cf. para 7.3.6)
Part – A
Illustrations on Credit Risk Mitigation (Loan- Exposures)
Calculation of Exposure amount for collateralised transactions
E * = Max { 0, [ E x (1 + H ) – C x ( 1 – H – H ) ] }
e c FX
Where,
E* = Exposure value after risk mitigation
E = Current value of the exposure
H = Haircut appropriate to the exposure
e
C = Current value of the collateral received
H = Haircut appropriate to the collateral
c
H = Haircut appropriate for currency mismatch between the collateral and exposure
FX
Sl. No. Particulars Case I Case 2 Case 3 Case 4 Case 5
(1) (2) (3) (4) (5) (6) (7)
1 Exposure 100 100 100 100 100
Maturity of
2 the 2 3 6 3 3
exposure
Nature of
Corporate Corporate Corporate Corporate Corporate
3 the
Loan Loan Loan Loan Loan
exposure
4 Currency INR INR USD INR INR
4000
Exposure in (Row 1 x
5 100 100 100 100
rupees exch.
rate##)
Rating of
BB A BBB- AA B-
exposure
6
Applicable
150 50 100@ 30 150
Risk weight
Haircut for
7 0 0 0 0 0
exposure*
8 Collateral 100 100 4000 2 100
9 Currency INR INR INR USD INR
80
Collateral
10 100 100 4000 (Row 1 x 100
in Rs.
Exch. Rate)
Residual
maturity of
11 2 3 6 3 5
collateral
(years)
Sovereign Foreign Units of
Nature of Bank Corporate
12 (GoI) Corporate Mutual
collateral Bonds Bonds
Security Bonds Funds
230Rating of
13 NA Unrated BBB AAA (S & P) AA
Collateral
Haircut for
14 collateral 0.02 0.06 0.12 0.04 0.08
(%)
Haircut for
currency
mismatches
15 ( %) 0 0 0.08 0.08 0
[cf. para
7.3.7 (vi) of
the circular]
Total
Haircut on
collateral
16 2 6 800 9.6 8.0
[Row 10 x
(row
14+15)]
Collateral
after haircut
17 98 94 3200 70.4 92
(Row 10 -
Row 16)
Net
Exposure
18 2 6 800 29.6 8
(Row 5 –
Row 17)
Risk weight
19 150 50 100@ 30 150
(%)
RWA
20 (Row 18 x 3 3 800 8.88 12
19)
## Exchange rate assumed to be 1 USD = Rs.40
# Not applicable
@ In case of long term ratings, as per para 6.4.2 of the circular, where “+” or “-”
notation is attached to the rating, the corresponding main rating category risk
weight is to be used. Hence risk weight is 100 per cent.
( * ) Haircut for exposure is taken as zero because the loans are not marked to
market and hence are not volatile
Case 4: Haircut applicable as per Table – 12 of Basel III Capital Regulations
Case 5: It is assumed that the Mutual Fund meets the criteria specified in paragraph
7.3.5(viii) and has investments in the securities all of which have residual maturity
of more than five years are rated AA and above – which would attract a haircut of
eight per cent in terms of Table 12.
231Part - B
Illustrations on computation of capital charge for Counterparty Credit Risk (CCR) – Repo
Transactions
An illustration showing computation of total capital charge for a repo transaction comprising the
capital charge for CCR and Credit/Market risk for the underlying security, under Basel-II is
furnished below:
A. Particulars of a Repo Transaction:
Let us assume the following parameters of a hypothetical repo transaction:
Type of the Security GOI security
Residual Maturity 5 years
Coupon 6 %
Current Market Value Rs.1050
Cash borrowed Rs.1000
Modified Duration of the security 4.5 years
Assumed frequency of margining Daily
Haircut for security 2%
(Cf. Item A(i), Table 12 of the Circular)
Haircut on cash Zero
(Cf. Item C in Table 12 of the Circular)
Minimum holding period 5 business-days
(Cf. para 7.3.7 (ix) of the Circular)
Change in yield for computing the 0.7 % p.a.
capital charge for general market risk (Cf. Zone 3 in Table 15 of the Circular)
B. Computation of total capital charge comprising the capital charge for Counterparty
Credit Risk (CCR) and Credit / Market risk for the underlying security
B.1 In the books of the borrower of funds (for the off-balance sheet exposure due to
lending of the security under repo)
(In this case, the security lent is the exposure of the security lender while cash borrowed is
the collateral)
Sl.No. Items Particulars Amount (in Rs.)
A. Capital Charge for CCR
1. Exposure MV of the security 1050
2. CCF for Exposure 100 %
3. On-Balance Sheet Credit Equivalent 1050 * 100 % 1050
4. Haircut 1.4 % @
5. Exposure adjusted for haircut as per 1050 * 1.014 1064.70
Table 12 of the Circular
6. Collateral for the security lent Cash 1000
7. Haircut for exposure 0 %
8. Collateral adjusted for haircut 1000 * 1.00 1000
9. Net Exposure ( 5- 8) 1064.70 – 1000 64.70
10. Risk weight (for a Scheduled CRAR- 20 %
compliant bank)
23211. Risk weighted assets for CCR (9 x 10) 64.70 * 20 % 12.94
12. Capital Charge for CCR (11 x 9%) 12.94 * 0.09 1.16
B. Capital for Credit/ market Risk of the security
Capital for credit risk Zero
1. (if the security is held under Credit risk (Being Govt.
banking book) security)
Zero
Specific Risk (Being Govt.
security)
Capital for market risk General Market Risk
2. (if the security is held under trading (4.5 * 0.7 % * 1050)
book) {Modified duration *
33.07
assumed yield
change (%) * market
value of security}
Total capital required
34.23
(for CCR + credit risk + specific risk + general market risk)
@ The supervisory haircut of 2 per cent has been scaled down using the formula indicated in
paragraph 7.3.7 of the Circular.
B.2 In the books of the lender of funds (for the on-balance sheet exposure due to lending
of funds under repo)
(In this case, the cash lent is the exposure and the security borrowed is collateral)
Sl.No Items Particulars Amount (in Rs.)
A. Capital Charge for CCR
1. Exposure Cash 1000
2. Haircut for exposure 0 %
3. Exposure adjusted for haircut as per 1000 * 1.00 1000
Table 12 of the Circular
4. Collateral for the cash lent Market value of the 1050
security
5. Haircut for collateral 1.4 % @
6. Collateral adjusted for haircut 1050 * 0.986 1035.30
7. Net Exposure (3 - 6) Max {1000 - 0
1035.30}
8. Risk weight (for a Scheduled 20 %
CRAR-compliant bank)
9. Risk weighted assets for CCR (7 x 0 * 20 % 0
8)
10. Capital Charge for CCR 0 0
B. Capital for Credit/ market Risk of the security
1. Capital for credit risk Credit Risk Not applicable, as it
(if the security is held under banking is maintained by the
book) borrower of funds
2332. Capital for market risk Specific Risk Not applicable, as it
(if the security is held under trading is maintained by the
book) borrower of funds
General Market Risk Not applicable, as it
is maintained by the
borrower of funds
@ The supervisory haircut of 2 per cent has been scaled down using the formula indicated in
paragraph 7.3.7 of the Circular.
234Annex 9
(cf. para 8.3.9)
Measurement of capital charge for Market Risks in respect of
Interest Rate Derivatives and Options
A. Interest Rate Derivatives
The measurement system should include all interest rate derivatives and off-balance-sheet
instruments in the trading book, which react to changes in interest rates, (e.g., forward rate
agreements (FRAs), other forward contracts, bond futures, interest rate and cross-currency
swaps and forward foreign exchange positions). Options can be treated in a variety of ways as
described in para B.1 below. A summary of the rules for dealing with interest rate derivatives is
set out in the Table at the end of this section.
1. Calculation of positions
The derivatives should be converted into positions in the relevant underlying and be subjected to
specific and general market risk charges as described in the guidelines. In order to calculate the
capital charge, the amounts reported should be the market value of the principal amount of the
underlying or of the notional underlying. For instruments where the apparent notional amount
differs from the effective notional amount, banks must use the effective notional amount.
(a) Futures and Forward Contracts, including Forward Rate Agreements
These instruments are treated as a combination of a long and a short position in a notional
government security. The maturity of a future or a FRA will be the period until delivery or exercise
of the contract, plus - where applicable - the life of the underlying instrument. For example, a long
position in a June three-month interest rate future (taken in April) is to be reported as a long
position in a government security with a maturity of five months and a short position in a
government security with a maturity of two months. Where a range of deliverable instruments may
be delivered to fulfill the contract, the bank has flexibility to elect which deliverable security goes
into the duration ladder but should take account of any conversion factor defined by the exchange.
(b) Swaps
Swaps will be treated as two notional positions in government securities with relevant maturities.
For example, an interest rate swap under which a bank is receiving floating rate interest and
paying fixed will be treated as a long position in a floating rate instrument of maturity equivalent
to the period until the next interest fixing and a short position in a fixed-rate instrument of maturity
equivalent to the residual life of the swap. For swaps that pay or receive a fixed or floating interest
rate against some other reference price, e.g., a stock index, the interest rate component should
be slotted into the appropriate repricing maturity category, with the equity component being
included in the equity framework.
235Separate legs of cross-currency swaps are to be reported in the relevant maturity ladders for the
currencies concerned.
2. Calculation of capital charges for derivatives under the Standardised Methodology
(a) Allowable offsetting of Matched Positions
Banks may exclude the following from the interest rate maturity framework altogether (for both
specific and general market risk);
Long and short positions (both actual and notional) in identical instruments with exactly
the same issuer, coupon, currency and maturity.
A matched position in a future or forward and its corresponding underlying may also be
fully offset, (the leg representing the time to expiry of the future should however be
reported) and thus excluded from the calculation.
When the future or the forward comprises a range of deliverable instruments, offsetting of
positions in the future or forward contract and its underlying is only permissible in cases where
there is a readily identifiable underlying security which is most profitable for the trader with a short
position to deliver. The price of this security, sometimes called the "cheapest-to-deliver", and the
price of the future or forward contract should in such cases move in close alignment.
No offsetting will be allowed between positions in different currencies; the separate legs of cross-
currency swaps or forward foreign exchange deals are to be treated as notional positions in the
relevant instruments and included in the appropriate calculation for each currency.
In addition, opposite positions in the same category of instruments can in certain circumstances
be regarded as matched and allowed to offset fully. To qualify for this treatment the positions must
relate to the same underlying instruments, be of the same nominal value and be denominated in
the same currency. In addition:
for Futures: offsetting positions in the notional or underlying instruments to which the
futures contract relates must be for identical products and mature within seven days of
each other;
for Swaps and FRAs: the reference rate (for floating rate positions) must be identical and
the coupon closely matched (i.e. within 15 basis points); and
for Swaps, FRAs and Forwards: the next interest fixing date or, for fixed coupon positions
or forwards, the residual maturity must correspond within the following limits:
o less than one month hence: same day;
o between one month and one year hence: within seven days;
o over one year hence: within thirty days.
Banks with large swap books may use alternative formulae for these swaps to calculate the
positions to be included in the duration ladder. The method would be to calculate the sensitivity
of the net present value implied by the change in yield used in the duration method and allocate
236these sensitivities into the time-bands set out in Table 15 in paragraph 8.3.8 of this Master
Circular.
(b) Specific Risk
Interest rate and currency swaps, FRAs, forward foreign exchange contracts and interest rate
futures will not be subject to a specific risk charge. This exemption also applies to futures on an
interest rate index (e.g., LIBOR). However, in the case of futures contracts where the underlying
is a debt security, or an index representing a basket of debt securities, a specific risk charge will
apply according to the credit risk of the issuer as set out in paragraphs above.
(c) General Market Risk
General market risk applies to positions in all derivative products in the same manner as for cash
positions, subject only to an exemption for fully or very closely matched positions in identical
instruments as defined in paragraphs above. The various categories of instruments should be
slotted into the maturity ladder and treated according to the rules identified earlier.
Table A - Summary of Treatment of Interest Rate Derivatives
Instrument Specific risk General Market risk charge
charge
Exchange-traded Future
- Government debt security No Yes, as two positions
- Corporate debt security Yes Yes, as two positions
- Index on interest rates (e.g., MIBOR) No Yes, as two positions
OTC Forward
- Government debt security No Yes, as two positions
- Corporate debt security Yes Yes, as two positions
- Index on interest rates (e.g., MIBOR) No Yes, as two positions
FRAs, Swaps No Yes, as two positions
Forward Foreign Exchange No Yes, as one position in each
currency
Options
- Government debt security No
- Corporate debt security Yes
- Index on interest rates (e.g., MIBOR) No
- FRAs, Swaps No
B. Treatment of Options
1. In recognition of the wide diversity of banks’ activities in options and the difficulties of
measuring price risk for options, alternative approaches are permissible as under:
237• those banks which solely use purchased options212 shall be free to use the simplified
approach described in Section I below;
• those banks which also write options shall be expected to use one of the intermediate
approaches as set out in Section II below.
2. In the simplified approach, the positions for the options and the associated underlying,
cash or forward, are not subject to the standardised methodology but rather are "carved-out" and
subject to separately calculated capital charges that incorporate both general market risk and
specific risk. The risk numbers thus generated are then added to the capital charges for the
relevant category, i.e., interest rate related instruments, equities, and foreign exchange as
described in paragraph 8.3 to 8.5 of this Master Circular. The delta-plus method uses the
sensitivity parameters or "Greek letters" associated with options to measure their market risk and
capital requirements. Under this method, the delta-equivalent position of each option becomes
part of the standardised methodology set out in paragraph 8.3 to 8.5 of this Master Circular with
the delta-equivalent amount subject to the applicable general market risk charges. Separate
capital charges are then applied to the gamma and Vega risks of the option positions. The
scenario approach uses simulation techniques to calculate changes in the value of an options
portfolio for changes in the level and volatility of its associated underlyings. Under this approach,
the general market risk charge is determined by the scenario "grid" (i.e., the specified combination
of underlying and volatility changes) that produces the largest loss. For the delta-plus method and
the scenario approach the specific risk capital charges are determined separately by multiplying
the delta-equivalent of each option by the specific risk weights set out in paragraph 8.3 to 8.4 of
this Master Circular.
I. Simplified Approach
3. Banks which handle a limited range of purchased options only will be free to use the
simplified approach set out in Table B below, for particular trades. As an example of how the
calculation would work, if a holder of 100 shares currently valued at Rs.10 each holds an
equivalent put option with a strike price of Rs.11, the capital charge would be: Rs.1,000 x 18 per
cent (i.e., 9 per cent specific plus 9 per cent general market risk) = Rs.180, less the amount the
option is in the money (Rs.11 – Rs.10) x 100 = Rs.100, i.e., the capital charge would be Rs.80. A
similar methodology applies for options whose underlying is a foreign currency or an interest rate
related instrument.
212 Unless all their written option positions are hedged by perfectly matched long positions in exactly the same
options, in which case no capital charge for market risk is required.
238Table B - Simplified approach: capital charges
Capital charges Position Treatment
The capital charge will be the market value of the
Long cash and Long put underlying security213 multiplied by the sum of
Or specific and general market risk charges214 for the
Short cash and Long call underlying less the amount the option is in the
money (if any) bounded at zero 215.
The capital charge will be the lesser of:
(i) the market value of the underlying security
Long call
multiplied by the sum of specific and general market
Or
risk charges 204 for the underlying
Long put
(ii) the market value of the option216
II. Intermediate Approaches
(a) Delta-plus Method
4. Banks which write options will be allowed to include delta-weighted options positions
within the standardised methodology set out in paragraph 8.3 to 8.5 of this Master Circular. Such
options should be reported as a position equal to the market value of the underlying multiplied by
the delta.
However, since delta does not sufficiently cover the risks associated with options positions, banks
will also be required to measure gamma (which measures the rate of change of delta) and Vega
(which measures the sensitivity of the value of an option with respect to a change in volatility)
sensitivities in order to calculate the total capital charge. These sensitivities will be calculated
according to an approved exchange model or to the bank’s proprietary options pricing model
subject to oversight by the Reserve Bank of India 217.
213 In some cases, such as foreign exchange, it may be unclear which side is the "underlying security"; this should be
taken to be the asset which would be received if the option were exercised. In addition, the nominal value should
be used for items where the market value of the underlying instrument could be zero, e.g., caps and floors, swaptions
etc.
214 Some options (e.g., where the underlying is an interest rate or a currency) bear no specific risk, but specific risk
shall be present in the case of options on certain interest rate-related instruments (e.g., options on a corporate debt
security or corporate bond index; see Section B for the relevant capital charges) and for options on equities and
stock indices (see Section C). The charge under this measure for currency options will be 9 per cent.
215 For options with a residual maturity of more than six months, the strike price should be compared with the
forward, not current, price. A bank unable to do this must take the "in-the-money" amount to be zero.
216 Where the position does not fall within the trading book (i.e., options on certain foreign exchange or commodities
positions not belonging to the trading book), it may be acceptable to use the book value instead.
217 Reserve Bank of India may wish to require banks doing business in certain classes of exotic options (e.g., barriers,
digitals) or in options "at-the-money" that are close to expiry to use either the scenario approach or the internal
models’ alternative, both of which can accommodate more detailed revaluation approaches.
2395. Delta-weighted positions with debt securities or interest rates as the underlying will be
slotted into the interest rate time-bands, as set out in Table 15 of paragraph 8.3 of this Master
Circular, under the following procedure. A two-legged approach should be used as for other
derivatives, requiring one entry at the time the underlying contract takes effect and a second at
the time the underlying contract matures. For instance, a bought call option on a June three-month
interest-rate future will in April be considered, on the basis of its delta-equivalent value, to be a
long position with a maturity of five months and a short position with a maturity of two months 218.
The written option will be similarly slotted as a long position with a maturity of two months and a
short position with a maturity of five months. Floating rate instruments with caps or floors will be
treated as a combination of floating rate securities and a series of European-style options. For
example, the holder of a three-year floating rate bond indexed to six month LIBOR with a cap of
15 per cent will treat it as:
(i) a debt security that reprices in six months; and
(ii) a series of five written call options on a FRA with a reference rate of 15 per cent, each
with a negative sign at the time the underlying FRA takes effect and a positive sign at
the time the underlying FRA matures219.
6. The capital charge for options with equities as the underlying will also be based on the
delta-weighted positions which will be incorporated in the measure of market risk described in
paragraph 8.4 of this Master Circular. For purposes of this calculation each national market is to
be treated as a separate underlying. The capital charge for options on foreign exchange and gold
positions will be based on the method set out in paragraph 8.5 of this Master Circular. For delta
risk, the net delta-based equivalent of the foreign currency and gold options will be incorporated
into the measurement of the exposure for the respective currency (or gold) position.
7. In addition to the above capital charges arising from delta risk, there will be further capital
charges for gamma and for Vega risk. Banks using the delta-plus method will be required to
calculate the gamma and Vega for each option position (including hedge positions) separately.
The capital charges should be calculated in the following way:
(i) for each individual option a "gamma impact" should be calculated according to a Taylor
series expansion as:
Gamma impact = ½ x Gamma x VU²
where VU = Variation of the underlying of the option.
218 Two-months call option on a bond future, where delivery of the bond takes place in September, would be
considered in April as being long the bond and short a five-month deposit, both positions being delta-weighted.
219 The rules applying to closely-matched positions set out in paragraph 2 (a) of this Annex shall also apply in this
respect.
240(ii) VU will be calculated as follows:
for interest rate options if the underlying is a bond, the price sensitivity should be worked
out as explained. An equivalent calculation should be carried out where the underlying
is an interest rate.
for options on equities and equity indices; which are not permitted at present, the
market value of the underlying should be multiplied by 9 per cent220;
for foreign exchange and gold options: the market value of the underlying should be
multiplied by 9 per cent;
(iii) For the purpose of this calculation the following positions should be treated as the same
underlying:
for interest rates221, each time-band as set out in Table 15 of this Master Circular222;
for equities and stock indices, each national market;
for foreign currencies and gold, each currency pair and gold;
(iv) Each option on the same underlying will have a gamma impact that is either positive or
negative. These individual gamma impacts will be summed, resulting in a net gamma impact
for each underlying that is either positive or negative. Only those net gamma impacts that
are negative will be included in the capital calculation.
(v) The total gamma capital charge will be the sum of the absolute value of the net negative
gamma impacts as calculated above.
(vi) For volatility risk, banks will be required to calculate the capital charges by multiplying the
sum of the Vegas for all options on the same underlying, as defined above, by a proportional
shift in volatility of ± 25 per cent.
(vii) The total capital charge for Vega risk will be the sum of the absolute value of the individual
capital charges that have been calculated for Vega risk.
(b) Scenario Approach
8. More sophisticated banks will also have the right to base the market risk capital charge
for options portfolios and associated hedging positions on scenario matrix analysis. This will be
accomplished by specifying a fixed 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". For the
purpose of calculating the capital charge, the bank will revalue the option portfolio using matrices
for simultaneous changes in the option’s underlying rate or price and in the volatility of that rate
220 The basic rules set out here for interest rate and equity options do not attempt to capture specific risk when
calculating gamma capital charges. However, Reserve Bank may require specific banks to do so.
221 Positions have to be slotted into separate maturity ladders by currency.
222 Banks using the duration method should use the time-bands as set out in Table 16 of this Master Circular.
241or price. A different matrix will be set up for each individual underlying as defined in paragraph 7
above. As an alternative, at the discretion of each national authority, banks which are significant
traders in options for interest rate options will be permitted to base the calculation on a minimum
of six sets of time-bands. When using this method, not more than three of the time-bands as
defined in paragraph 8.3 of this Master Circular should be combined into any one set.
9. The options and related hedging positions will be evaluated over a specified range above
and below the current value of the underlying. The range for interest rates is consistent with the
assumed changes in yield in Table-15 of paragraph 8.3 of this Master Circular. Those banks using
the alternative method for interest rate options set out in paragraph 8 above should use, for each
set of time-bands, the highest of the assumed changes in yield applicable to the group to which
the time-bands belong 223. The other ranges are ±9 per cent for equities and ±9 per cent for foreign
exchange and gold. For all risk categories, at least seven observations (including the current
observation) should be used to divide the range into equally spaced intervals.
10. The second dimension of the matrix entails a change in the volatility of the underlying rate
or price. A single change in the volatility of the underlying rate or price equal to a shift in volatility
of + 25 per cent and - 25 per cent is expected to be sufficient in most cases. As circumstances
warrant, however, the Reserve Bank may choose to require that a different change in volatility be
used and / or that intermediate points on the grid be calculated.
11. After calculating the matrix, each cell contains the net profit or loss of the option and the
underlying hedge instrument. The capital charge for each underlying will then be calculated as
the largest loss contained in the matrix.
12. In drawing up these intermediate approaches it has been sought to cover the major risks
associated with options. In doing so, it is conscious that so far as specific risk is concerned, only
the delta-related elements are captured; to capture other risks would necessitate a much more
complex regime. On the other hand, in other areas the simplifying assumptions used have
resulted in a relatively conservative treatment of certain options positions.
13. Besides the options risks mentioned above, the RBI is conscious of the other risks also
associated with options, e.g., rho (rate of change of the value of the option with respect to the
interest rate) and theta (rate of change of the value of the option with respect to time). While not
proposing a measurement system for those risks at present, it expects banks undertaking
significant options business at the very least to monitor such risks closely. Additionally, banks will
be permitted to incorporate rho into their capital calculations for interest rate risk, if they wish to
do so.
223 If, for example, the time-bands 3 to 4 years, 4 to 5 years and 5 to 7 years are combined, the highest assumed
change in yield of these three bands would be 0.75.
242Annex 10
(cf. para 13.5)
An Illustrative Approach for Measurement of
Interest Rate Risk in the Banking Book (IRRBB) under Pillar 2
The Basel-II Framework224(Paragraphs 739 and 762 to 764) require the banks to measure the
interest rate risk in the banking book (IRRBB) and hold capital commensurate with it. If supervisors
determine that banks are not holding capital commensurate with the level of interest rate risk, they
must require the bank to reduce its risk, to hold a specific additional amount of capital or some
combination of the two. To comply with the requirements of Pillar 2 relating to IRRBB, the
guidelines on Pillar 2 issued by many regulators contain definite provisions indicating the
approach adopted by the supervisors to assess the level of interest rate risk in the banking book
and the action to be taken in case the level of interest rate risk found is significant.
In terms of para 764 of the Basel II framework, the banks can follow the indicative methodology
prescribed in the supporting document "Principles for the Management and Supervision of
Interest Rate Risk" issued by BCBS for assessment of sufficiency of capital for IRRBB.
2. The approach prescribed in the BCBS Paper on “Principles for the Management and
Supervision of Interest Rate Risk"
The main components of the approach prescribed in the above mentioned supporting document
are as under:
a) The assessment should take into account both the earnings perspective and economic
value perspective of interest rate risk.
b) The impact on income or the economic value of equity should be calculated by applying a
notional interest rate shock of 200 basis points.
c) The usual methods followed in measuring the interest rate risk are:
a) Earnings perspective
Gap Analysis, simulation techniques and Internal Models based on VaR
b) Economic perspective
Gap analysis combined with duration gap analysis, simulation techniques and
Internal Models based on VaR
3. Methods for measurement of the IRRBB
3.1 Impact on Earnings
224 International Convergence of Capital Measurement and Capital Standards (June 2006) released by the Basel
Committee on Banking Supervision.
243The major methods used for computing the impact on earnings are the gap Analysis, Simulations
and VaR based Techniques. Banks in India have been using the Gap Reports to assess the
impact of adverse movements in the interest rate on income through gap method. The banks may
continue with the same. However, the banks may use the simulations also. The banks may
calculate the impact on the earnings by gap analysis or any other method with the assumed
change in yield on 200 bps over one year. However, no capital needs to be allocated for the
impact on the earnings.
3.2 Impact of IRRBB on the Market Value of Equity (MVE)
The banks may use the Method indicated in the Basel Committee on Banking Supervision (BCBS)
Paper "Principles for the Management and Supervision of Interest rate Risk" (July 2004) for
computing the impact of the interest rate shock on the MVE.
3.2.1 Method indicated in the BCBS Paper on "Principles for the Management and Supervision
of Interest Rate Risk"
The following steps are involved in this approach:
a) The variables such as maturity/re-pricing date, coupon rate, frequency, principal
amount for each item of asset/liability (for each category of asset / liability) are
generated.
b) The longs and shorts in each time band are offset.
c) The resulting short and long positions are weighted by a factor that is designed to
reflect the sensitivity of the positions in the different time bands to an assumed change
in interest rates. These factors are based on an assumed parallel shift of 200 basis
points throughout the time spectrum, and on a proxy of modified duration of positions
situated at the middle of each time band and yielding 5 per cent.
d) The resulting weighted positions are summed up, offsetting longs and shorts, leading
to the net short- or long-weighted position.
e) The weighted position is seen in relation to capital.
For details banks may refer to the Annex 3 and 4 of captioned paper issued by the BCBS225.
3.2.2 Other techniques for Interest rate risk measurement
The banks can also follow different versions / variations of the above techniques or entirely
different techniques to measure the IRRBB if they find them conceptually sound. In this context,
Annex 1 and 2 of the BCBS paper referred to above provide broad details of interest rate risk
measurement techniques and overview of some of the factors which the supervisory authorities
225 Principles for the Management and Supervision of Interest Rate Risk (July 2004).
244might consider in obtaining and analysing the information on individual bank’s exposures to
interest rate risk.
4. Suggested approach for measuring the impact of IRRBB on capital
4.1 As per Basel II Framework, if the supervisor feels that the bank is not holding capital
commensurate with the level of IRRBB, it may either require the bank to reduce the risk or allocate
additional capital or a combination of the two.
4.2 The banks can decide, with the approval of the Board, on the appropriate level of interest
rate risk in the banking book which they would like to carry keeping in view their capital level,
interest rate management skills and the ability to re-balance the banking book portfolios quickly
in case of adverse movement in the interest rates. In any case, a level of interest rate risk which
generates a drop in the MVE of more than 20 per cent with an interest rate shock of 200 basis
points, will be treated as excessive and such banks would normally be required by the RBI to hold
additional capital against IRRBB as determined during the SREP. The banks which have IRRBB
exposure equivalent to less than 20 per cent drop in the MVE may also be required to hold
additional capital if the level of interest rate risk is considered, by the RBI, to be high in relation to
their capital level or the quality of interest rate risk management framework obtaining in the bank.
While the banks may on their own decide to hold additional capital towards IRRBB keeping in
view the potential drop in their MVE, the IRR management skills and the ability to re-balance the
portfolios quickly in case of adverse movement in the interest rates, the amount of exact capital
add-on, if considered necessary, will be decided by the RBI as part of the SREP, in consultation
with the bank.
5. Limit setting
The banks would be well advised to consider setting the internal limits for controlling their IRRBB.
The following are some of the indicative ways for setting the limits:
a) Internal limits could be fixed in terms of the maximum decline in earnings (as a
percentage of the base-scenario income) or decline in capital (as a percentage of the
base-scenario capital position) as a result of 200 or 300 basis point interest-rate
shock.
b) The limits could also be placed in terms of PV01 value (present value of a basis point)
of the net position of the bank as a percentage of net worth/capital of the bank.
245Annex 11
(cf para 4.4.9.2)
Investments in the Capital of Banking, Financial and Insurance Entities which are
Outside the Scope of Regulatory Consolidation
PART A: Details of Regulatory Capital Structure of a Bank
(Rs. crore)
Paid-up equity capital 300
Eligible Reserve and Surplus 100
Total common equity 400
Eligible Additional Tier 1 capital 15
Total Tier 1 capital 415
Eligible Tier 2 capital 135
Total Eligible capital 550
PART B: Details of Capital Structure and Bank's Investments in Unconsolidated Entities
Entity Total Capital of the Investee entities Investments of bank in these entities
Common Additional Tier Total Common Additional Tier Total
equity Tier 1 2 capital Equity Tier 1 2 investment
Investments in the capital of banking, financial and insurance entities which are outside the
scope of regulatory consolidation and where the bank does not own more than 10% of the
issued common share capital of the entity
A 250 0 80 330 12 0 15 27
B 300 10 0 310 14 10 0 24
Total 550 10 80 640 26 10 15 51
Significant investments in the capital of banking, financial and insurance entities which are
outside the scope of regulatory consolidation
C 150 20 10 180 20 10 0 30
D 200 10 5 215 25 5 5 35
Total 350 30 15 395 45 15 5 65
246PART C: Regulatory Adjustments on Account of Investments
in Entities where Bank Does not own more than 10%
of the Issued Common Share Capital of the Entity
C-1: Bifurcation of Investments of bank into Trading and Banking Book
Common Additional Tier Total
Equity Tier 1 2 investments
Total investments in A & B held in Banking Book 11 6 10 27
Total investments in A & B held in Trading Book 15 4 5 24
Total of Banking and Trading Book Investments in A & B 26 10 15 51
C-2: Regulatory adjustments
Bank's aggregate investment in Common Equity of A & B 26
Bank's aggregate investment in Additional Tier 1 capital of A & B 10
Bank's aggregate investment in Tier 2 capital of A & B 15
Total of bank's investment in A and B 51
Bank common equity 400
10% of bank's common equity 40
Bank's total holdings in capital instruments of A & B in excess of 10%
of banks common equity (51-40) 11
Note: Investments in both A and B will qualify for this treatment as individually, both of them are less than
10% of share capital of respective entity. Investments in C & D do not qualify; as bank's investment is more
than 10% of their common shares capital.
C-3: Summary of Regulatory Adjustments Banking Trading Book
Book
Amount to be deducted from common equity of 5.60
the bank (26/51)*11
Amount to be deducted from Additional Tier 1
2.16
of the bank (10/51)*11
Amount to be deducted from Tier 2 of the bank
3.24
(15/51)*11
Total Deduction 11.00
Common equity investments of the bank in A & 20.40 8.63
11.77
B to be risk weighted (26-5.60) (11/26)*20.40
Additional Tier 1 capital investments of the 7.84
4.70 3.14
bank in A & B to be risk weighted (10-2.16)
Tier 2 capital investments of the bank in A & B 11.76
7.84 3.92
to be risk weighted (15-3.24)
Total allocation for risk weighting 40.00 21.17 18.83
247PART D: Regulatory Adjustments on Account of Significant
Investments in the Capital of Banking, Financial and Insurance
Entities which are outside the Scope of Regulatory Consolidation
Bank aggregate investment in Common Equity of C & D 45
Bank's aggregate investment in Additional Tier 1 capital
15
of C & D
Bank's aggregate investment in Tier 2 capital of C & D 5
Total of bank's investment in C and D 65
Bank's common equity 400
10% of bank's common equity 40
Bank's investment in equity of C & D in excess of 10%
5
of its common equity (45-40)
D-1: Summary of regulatory adjustments
Amount to be deducted from common equity of the bank (excess
5
over 10%)
Amount to be deducted from Additional Tier 1 of the bank (all
15
Additional Tier 1 investments to be deducted)
Amount to be deducted from Tier 2 of the bank (all Tier 2
5
investments to be deducted)
Total deduction 25
Common equity investments of the bank in C & D to be risk weighted
40
(upto 10%)
PART E: Total Regulatory Capital of the Bank after Regulatory Adjustments
Before Deductions as Deductions as After
deduction per Table C-3 per Table D-1 deductions
Common
400.00 5.61 5.00 387.24*
Equity
Additional Tier
15.00 2.16 15.00 0.00
1 capital
Tier 2 capital 135.00 3.24 5.00 126.76
Total
Regulatory 550.00 11.00 25.00 514.00
capital
*Since there is a shortfall of 2.16 in the Additional Tier 1 capital of the bank after
deduction, which has to be deducted from the next higher category of capital i.e.,
common equity.
248Annex 12
(cf para 5.15.3.5)
CALCULATION OF CVA RISK CAPITAL CHARGE
(Rs. in crore)
Derivativ Counter Notional Notional Total Weighted Positive PFE Total External
es party principal principal Notional average MTM current rating of
of trades of trades Principal residual value of credit counter
whose whose (column maturity trades exposur party
MTM is MTM is 3+4) (column e as per
negative positive 4) CEM
1 2 3 4 5 6 7 8 9 10
A
Interest
1.85 (risk
rate A 150 150 300 1.5 1% 4.5
years weight
swaps
50%)
AAA
Currency 5.01 (risk
B 300 200 500 2.8 10% 52.8
swaps years weight
20%)
Formula to be used for calculation of capital charge for CVA risk:
Bi is the notional of purchased single name CDS hedges - nil
Bind is the full notional of one or more index CDS of purchased protection, used to
hedge CVA risk. - nil
wind is the weight applicable to index hedges - nil
hedge
Mi is the maturity of the hedge instrument with notional Bi
Mi is the effective maturity of the transactions with counterparty ‘i’
total
EADi is the exposure at default of counterparty ‘i’ (summed across its netting sets).
For non-IMM banks the exposure should be discounted by applying the factor: (1-
exp(-0.05*Mi))/(0.05*Mi).
h = 1 year
Assumptions:
• Applicable coupon rate on both legs of swap with exchange of coupon at yearly
intervals for swap with counterparty A = 6% p.a.
• Applicable coupon rate on both legs of swap with exchange of coupon at yearly
intervals for swap with counterparty =7% p.a.
249Calculation:
Discount factor to be applied to counterparty A: (1-exp (-0.05*M ))/(0.05*M ) = 0.95551
A A
Discounted EAD = 4.5*0.95551=4.2981
A
Discount factor to be applied to counterparty B: (1-exp (-0.05*M ))/(0.05*M ) =0.8846
B B
Discounted EAD = 52.8*0.8846=46.7061
B
K= 2.33*1*[{(0.5*.008*(1.85*4.2981-0) + (0.5*0.007*(5.01*46.7061-0))-0}2+
(0.75*0.0082*(1.85*4.2981-0)2+ (0.75*0.0072*(5.01*46.7061-0)2]1/2
= 2.33*1.66 = 3.86
Therefore, total capital charge for CVA risk on portfolio basis = Rs. 3.86 crore
250Annex 13
(cf para 16.4.4)
Calculation of SFT Exposure for the Purpose of Leverage Ratio
Illustrative Balance Sheet of Banks
Bank A Bank B
Liabilities Assets Liabilities Assets
Item Amount Item Amount Item Amount Item Amount
Cash 100 Cash 0
Capital 153 Securities 53 Capital 104 Securities 104
Total 153 Total 153 Total 104 Total 104
SFT Transactions
Reverse Repo
of Bank A with Bank A lends cash of 100 to Bank B against security of 104
Bank B
Capital 153 Cash 0 Capital 104 Cash 100
Securities 53 Securities 104
Receivable 100 Payable 100
SFT SFT
Total 153 Total 153 Total 204 Total 204
Repo of Bank
Bank A borrows cash of 50 from Bank B against security of 53
A with Bank B
Capital 153 Cash 50 Capital 104 Cash 50
Securities 53 Securities 104
Payable 50 Receivable 100 Payable 100 Receivable 50
SFT SFT SFT SFT
Total 203 Total 203 Total 204 Total 204
Leverage Ratio Exposure
Bank A Bank B
Item Exposure where Exposure where Exposure where Exposure where
netting of SFT netting of SFT netting of SFT netting of SFT
exposures is not exposures is exposures is not exposures is
permissible permissible permissible permissible
On-balance sheet items 103 103 154 154
Gross SFT assets 100 100 50 50
Netted amount of Gross - 50* - 0*
SFT assets
CCR exposure for SFT 3 0# 4 1#
assets
Total SFT exposures 103 50 54 1
Total Exposures 206 153 208 155
* Max ((SFT receivable -SFT payable), 0)
# CCR exposure = Max ((total cash / securities receivable - total cash / securities payable), 0)
251Annex 14
(cf. para 12.3.3.6)
An illustrative outline of the ICAAP Document
1. What is an ICAAP document?
The ICAAP Document would be a comprehensive Paper furnishing detailed information on the
ongoing assessment of the bank’s entire spectrum of risks, how the bank intends to mitigate those
risks and how much current and future capital is necessary for the bank, reckoning other mitigating
factors. The purpose of the ICAAP document is to apprise the Board of the bank on these aspects
as also to explain to the RBI the bank’s internal capital adequacy assessment process and the
banks’ approach to capital management. The ICAAP could also be based on the existing internal
documentation of the bank.
The ICAAP document submitted to the RBI should be formally approved by the bank’s Board. It
is expected that the document would be prepared in a format that would be easily understood at
the senior levels of management and would contain all the relevant information necessary for the
bank and the RBI to make an informed judgment as to the appropriate capital level of the bank
and its risk management approach. Where appropriate, technical information on risk
measurement methodologies, capital models, if any, used and all other work carried out to
validate the approach (e.g., board papers and minutes, internal or external reviews) could be
furnished to the RBI as appendices to the ICAAP Document.
2. Contents
The ICAAP Document should contain the following sections:
I. Executive Summary
II. Background
III. Summary of current and projected financial and capital positions
IV. Capital Adequacy
V. Key sensitivities and future scenarios
VI. Aggregation and diversification
VII. Testing and adoption of the ICAAP
VIII. Use of the ICAAP within the bank
I. Executive Summary
The purpose of the Executive Summary is to present an overview of the ICAAP methodology and
results. This overview would typically include:
a) the purpose of the report and the regulated entities within a banking group that are
covered by the ICAAP;
b) the main findings of the ICAAP analysis:
252i how much and what composition of internal capital the bank considers it should hold
as compared with the minimum CRAR requirement (CRAR) under ‘Pillar 1’ calculation,
and
ii the adequacy of the bank’s risk management processes;
c) a summary of the financial position of the bank, including the strategic position of the
bank, its balance sheet strength, and future profitability;
d) brief descriptions of the capital raising and dividend plan including how the bank intends
to manage its capital in the days ahead and for what purposes;
e) commentary on the most material risks to which the bank is exposed, why the level of
risk is considered acceptable or, if it is not, what mitigating actions are planned;
f) commentary on major issues where further analysis and decisions are required; and
g) who has carried out the assessment, how it has been challenged / validated / stress
tested, and who has approved it.
II. Background
This section would cover the relevant organisational and historical financial data for the bank.
e.g., group structure (legal and operational), operating profit, profit before tax, profit after tax,
dividends, shareholders’ funds, capital funds held vis-à-vis the regulatory requirements, customer
deposits, deposits by banks, total assets, and any conclusions that can be drawn from trends in
the data which may have implications for the bank’s future.
III. Summary of current and projected financial and capital positions
This section would explain the present financial position of the bank and expected changes to the
current business profile, the environment in which it expects to operate, its projected business
plans (by appropriate lines of business), projected financial position, and future planned sources
of capital.
The starting balance sheet used as reference and date as of which the assessment is carried out
should be indicated.
The projected financial position could reckon both the projected capital available and projected
capital requirements based on envisaged business plans. These might then provide a basis
against which adverse scenarios might be compared.
IV. Capital Adequacy
This section might start with a description of the bank’s risk appetite, in quantitative terms, as
approved by the bank’s Board and used in the ICAAP. It would be necessary to clearly spell out
in the document whether what is being presented represents the bank’s view of the amount of
253capital required to meet minimum regulatory needs or whether represents the amount of capital
that a bank believes it would need to meet its business plans. For instance, it should be clearly
brought out whether the capital required is based on a particular credit rating desired by the bank
or includes buffers for strategic purposes or seeks to minimise the chance of breaching regulatory
requirements. Where economic capital models are used for internal capital assessment, the
confidence level, time horizon, and description of the event to which the confidence level relates,
should also be enumerated. Where scenario analyses or other means are used for capital
assessment, then the basis / rationale for selecting the chosen severity of scenarios used, should
also be included.
The section would then include a detailed review of the capital adequacy of the bank.
The information provided would include the following elements:
Timing
the effective date of the ICAAP calculations together with details of any events between
this date and the date of submission to the Board / RBI which would materially impact the
ICAAP calculations together with their effects; and
details of, and rationale for, the time period selected for which capital requirement has
been assessed.
Risks Analysed
an identification of the major risks faced by the bank in each of the following categories:
a) credit risk
b) market risk
c) operational risk
d) liquidity risk
e) concentration risk
f) interest rate risk in the banking book
g) residual risk of securitisation
h) strategic risk
i) business risk
j) reputation risk
k) group risk
l) pension obligation risk
m) other residual risk; and
n) any other risks that might have been identified
for each of these risks, an explanation of how the risk has been assessed and to the extent
possible, the quantitative results of that assessment;
254 where some of these risks have been highlighted in the report of the RBI’s on-site
inspection of the bank, an explanation of how the bank has mitigated these;
where relevant, a comparison of the RBI-assessed CRAR during on-site inspection with
the results of the CRAR calculations of the bank under the ICAAP;
a clear articulation of the bank’s risk appetite, in quantitative terms, by risk category and
the extent of its consistency (its ‘fit’) with the overall assessment of bank’s various risks;
and
where relevant, an explanation of any other methods, apart from capital, used by the bank
to mitigate the risks.
Methodology and Assumptions
A description of how assessments for each of the major risks have been approached and the
main assumptions made.
For instance, banks may choose to base their ICAAP on the results of the CRAR calculation with
the capital for additional risks (e.g., concentration risk, interest rate risk in the banking book, etc.)
assessed separately and added to the Pillar 1 computations. Alternatively, banks could choose
to base their ICAAP on internal models for all risks, including those covered under the CRAR (i.e.,
Credit, Market and Operational Risks).
The description here would make clear which risks are covered by which modelling or calculation
approach. This would include details of the methodology and process used to calculate risks in
each of the categories identified and reason for choosing the method used in each case.
Where the bank uses an internal model for the quantification of its risks, this section should explain
for each of those models:
the key assumptions and parameters within the capital modelling work and background
information on the derivation of any key assumptions;
how parameters have been chosen, including the historical period used and the calibration
process;
the limitations of the model;
the sensitivity of the model to changes in those key assumptions or parameters chosen;
and
the validation work undertaken to ensure the continuing adequacy of the model.
Where stress tests or scenario analyses have been used to validate, supplement, or probe the
results of other modelling approaches, then this section should provide:
details of simulations to capture risks not well estimated by the bank’s internal capital
model (e.g., non-linear products, concentrations, illiquidity and shifts in correlations in a
crisis period);
255 details of the quantitative results of stress tests and scenario analyses the bank carried
out and the confidence levels and key assumptions behind those analyses, including, the
distribution of outcomes obtained for the main individual risk factors;
details of the range of combined adverse scenarios which have been applied, how these
were derived and the resulting capital requirements; and
where applicable, details of any additional business-unit-specific or business-plan-specific
stress tests selected.
Capital Transferability
In case of banks with conglomerate structure, details of any restrictions on the management’s
ability to transfer capital into or out of the banking business(es) arising from, for example, by
contractual, commercial, regulatory or statutory constraints that apply, should be furnished. Any
restrictions applicable and flexibilities available for distribution of dividend by the entities in the
Group could also be enumerated. In case of overseas banking subsidiaries of the banks, the
regulatory restrictions would include the minimum regulatory capital level acceptable to the host-
country regulator of the subsidiary, after declaration of dividend.
V. Firm-wide risk oversight and specific aspects of risk management226
V.1 Risk Management System in the bank
This section would describe the risk management infrastructure within the bank along the
following lines:
The oversight of board and senior management
Policies, Procedures and Limits
identification, measurement, mitigation, controlling and reporting of risks
MIS at the firm wide level
Internal controls
V.2 Off-balance Sheet Exposures with a focus on Securitisation
This section would comprehensively discuss and analyse underlying risks inherent in the off-
balance sheet exposures particularly its investment in structured products. When assessing
securitisation exposures, bank should thoroughly analyse the credit quality and risk
characteristics of the underlying exposures. This section should also comprehensively explain the
maturity of the exposures underlying securitisation transactions relative to issued liabilities in
order to assess potential maturity mismatches.
V.3 Assessment of Reputational Risk and Implicit Support
226 Master Circular DBOD.No.BP.BC.73/21.06.001/2009-10 dated Feb 8, 2010.
256This section should discuss the possibilities of reputational risk leading to provision of implicit
support, which might give rise to credit, market and legal risks. This section should thoroughly
discuss potential sources of reputational risk to the bank.
V. 4 Assessment of valuation and Liquidity Risk
This section would describe the governance structures and control processes for valuing
exposures for risk management and financial reporting purposes, with a special focus on valuation
of illiquid positions. This section will have relevant details leading to establishment and verification
of valuations for instruments and transactions in which it engages.
V. 5 Stress Testing practices
This section would explain the role of board and senior management in setting stress testing
objectives, defining scenarios, discussing the results of stress tests, assessing potential actions
and decision making on the basis of results of stress tests. This section would also describe the
rigorous and forward-looking stress testing that identifies possible events or changes in market
conditions that could adversely the bank. RBI would assess the effectiveness of banks’ stress
testing programme in identifying relevant vulnerabilities.
V. 6 Sound compensation practices
This section should describe the compensation practices followed by the bank and how far the
compensation practices are linked to long-term capital preservation and the financial strength of
the firm. The calculation of risk-adjusted performance measure for the employees and its link, if
any, with the compensation should clearly be disclosed in this section.
VI. Key sensitivities and future scenarios
This section would explain how a bank would be affected by an economic recession or
downswings in the business cycle or markets relevant to its activities. The RBI would like to be
apprised as to how a bank would manage its business and capital so as to survive a recession
while meeting the minimum regulatory standards. The analysis would include future financial
projections for, say, three to five years based on business plans and solvency calculations.
For the purpose of this analysis, the severity of the recession reckoned should typically be one
that occurs only once in a 25 year period. The time horizon would be from the day of the ICAAP
calculation to at least the deepest part of the recession envisaged.
Typical scenarios would include:
how an economic downturn would affect:
the bank’s capital funds and future earnings; and
the bank’s CRAR taking into account future changes in its projected balance sheet.
257 In both cases, it would be helpful if these projections show separately the effects of
management actions to change the bank’s business strategy and the implementation of
contingency plans.
projections of the future CRAR would include the effect of changes in the credit quality of
the bank’s credit risk counterparties (including migration in their ratings during a recession)
and the bank’s capital and its credit risk capital requirement;
an assessment by the bank of any other capital planning actions to enable it to continue
to meet its regulatory capital requirements throughout a recession such as new capital
injections from related companies or new share issues;
This section would also explain which key macroeconomic factors are being stressed, and
how those have been identified as drivers of the bank’s earnings. The bank would also
explain how the macroeconomic factors affect the key parameters of the internal model
by demonstrating, for instance, how the relationship between the two has been
established.
Management Actions
This section would elaborate on the management actions assumed in deriving the ICAAP, in
particular:
the quantitative impact of management actions – sensitivity testing of key management
actions and revised ICAAP figures with management actions excluded.
evidence of management actions implemented in the past during similar periods of
economic stress.
VII. Aggregation and Diversification
This section would describe how the results of the various separate risk assessments are brought
together and an overall view taken on capital adequacy. At a technical level, this would, therefore,
require some method to be used to combine the various risks using some appropriate quantitative
techniques. At the broader level, the overall reasonableness of the detailed quantification
approaches might be compared with the results of an analysis of capital planning and a view
taken by senior management as to the overall level of capital that is considered appropriate.
In enumerating the process of technical aggregation, the following aspects could be
covered:
i. any allowance made for diversification, including any assumed correlations within risks
and between risks and how such correlations have been assessed, including in
stressed conditions;
ii. the justification for any credit taken for diversification benefits between legal entities,
and the justification for the free movement of capital, if any assumed, between them
in times of financial stress;
258iii. the impact of diversification benefits with management actions excluded. It might be
helpful to work out revised ICAAP figures with all correlations set to ‘1’ i.e., no
diversification; and similar figures with all correlations set to ‘0’ i.e., assuming all risks
are independent i.e., full diversification.
As regards the overall assessment, this should describe how the bank has arrived at its
overall assessment of the capital it needs taking into account such matters as:
i) the inherent uncertainty in any modelling approach;
ii) weaknesses in the bank’s risk management procedures, systems or controls;
iii) the differences between regulatory capital and internal capital; and
iv) the differing purposes that capital serves: shareholder returns, rating objectives for
the bank as a whole or for certain debt instruments the bank has issued, avoidance of
regulatory intervention, protection against uncertain events, depositor protection,
working capital, capital held for strategic acquisitions, etc.
VIII. Testing and Adoption of the ICAAP
This section would describe the extent of challenging and testing that the ICAAP has been
subjected to. It would thus include the testing and control processes applied to the ICAAP models
and calculations. It should also describe the process of review of the test results by the senior
management or the Board and the approval of the results by them. A copy of any relevant report
placed before the senior management or the Board of the bank in this regard, along with their
response, could be attached to the ICAAP Document sent to the RBI.
Details of the reliance placed on any external service providers or consultants in the testing
process, for instance, for generating economic scenarios, could also be detailed here.
In addition, a copy of any report obtained from an external reviewer or internal audit should also
be sent to the RBI.
IX. Use of the ICAAP within the bank
This section would contain information to demonstrate the extent to which the concept of capital
management is embedded within the bank, including the extent and use of capital modelling or
scenario analyses and stress testing within the bank’s capital management policy. For instance,
use of ICAAP in setting pricing and charges and the level and nature of future business, could be
an indicator in this regard.
This section could also include a statement of the bank’s actual operating philosophy on capital
management and how this fits in to the ICAAP Document submitted. For instance, differences in
259risk appetite used in preparing the ICAAP Document vis-à-vis that used for business decisions
might be discussed.
Lastly, the banks may also furnish the details of any anticipated future refinements envisaged in
the ICAAP (highlighting those aspects which are work-in-progress) apart from any other
information that the bank believes would be helpful to the RBI in reviewing the ICAAP Document.
260Annex 15
(cf para 4.2)
Minimum Requirements to Ensure Loss Absorbency of Additional Tier 1 Instruments
at Pre-specified Trigger and of All Non-equity Regulatory Capital Instruments
at the Point of Non-viability227
1. INTRODUCTION
1.1 As indicated in paragraph 4.2.4 of this Master Circular, under Basel III non-common equity
elements to be included in Tier 1 capital should absorb losses while the bank remains a going
concern. Towards this end, one of the important criteria for Additional Tier 1 instruments is that
these instruments should have principal loss absorption through either (i) conversion into common
shares or (ii) a write-down mechanism, which allocates losses to the instrument at an objective
pre-specified trigger point.
1.2 During the financial crisis a number of distressed banks were rescued by the public sector
injecting funds in the form of common equity and other forms of Tier 1 capital. While this had the
effect of supporting depositors it also meant that Tier 2 capital instruments (mainly subordinated
debt), and in some cases Tier 1 instruments, did not absorb losses incurred by certain large
internationally-active banks that would have failed had the public sector not provided support.
Therefore, Basel III requires that the terms and conditions of all non-common Tier 1 and Tier 2
capital instruments issued by a bank must have a provision that requires such instruments, at the
option of the relevant authority, to either be written off or converted into common equity upon the
occurrence of the trigger event.
1.3 Therefore, in order for an instrument issued by a bank to be included in Additional (i.e.
non-common) Tier 1 or in Tier 2 capital, in addition to criteria for individual types of non-equity
regulatory capital instruments mentioned in Annex 3, 4, 5 and 6, it must also meet or exceed
minimum requirements set out in the following paragraphs.
2. LOSS ABSORPTION OF ADDITIONAL TIER 1 (AT1) INSTRUMENTS AT THE PRE-
SPECIFIED TRIGGER
I. Loss Absorption Features
2.1 One of the criteria for AT1 capital instruments228 requires that these instruments should
have principal loss absorption at an objective pre-specified trigger point through either:
(i) conversion to common shares, or
227 Please refer to paragraph 2 of the circular DBOD.No.BP.BC.38/21.06.201/2014-15 dated September 1, 2014 on
Implementation of Basel III Capital Regulations in India-Amendments.
228 Please refer to the Appendices 4 & 5 of the circular DBOD.No.BP.BC.98 /21.06.201/2011-12 dated May 2, 2012
on ‘Guidelines on Implementation of Basel III Capital Regulations in India’.
261(ii) a write-down mechanism which allocates losses to the instrument.
The write-down shall have the following effects:
(a) reduce the claim of the instrument in liquidation;
(b) reduce the amount re-paid when a call is exercised; and
(c) partially or fully reduce coupon/dividend payments on the instrument.
2.2 Accordingly, banks may issue AT1 instruments with either conversion229 or write-down
(temporary or permanent)230 mechanism.
II. Level of Pre-specified Trigger and Amount of Equity to be Created by Conversion /
Write-down
2.3 The pre-specified trigger for loss absorption through conversion / write-down of Additional
Tier 1 instruments (PNCPS and PDI) must be at least Common Equity Tier 1 capital of 6.125% of
RWAs. The Write-down of any Common Equity Tier 1 capital shall not be required before a write-
down of any Additional Tier 1 capital instrument.
2.4 The conversion / write-down mechanism (temporary or permanent) which allocates losses
to the Additional Tier 1 instruments (AT1) instruments must generate Common Equity Tier 1
(CET1) under applicable Indian Accounting Standards. The instrument will receive recognition in
AT1 capital only upto the extent of minimum level of CET1 generated (i.e., net of contingent
liability recognised under the Indian Accounting Standards, potential tax liabilities, etc., if any) by
a full write-down / conversion of the instrument.
2.5 Banks must obtain and keep on their records a certificate from the statutory auditors
clearly stating that the conversion / write-down mechanism chosen by the bank for a particular
AT1 issuance is able to generate CET1 under the prevailing accounting standards231. Further,
banks must also obtain and keep on their records an external legal opinion confirming that the
conversion or write-down of Additional Tier 1 capital instrument at the pre -specified trigger by the
issuing bank is legally enforceable.
229 Conversion means conversion to common shares.
230 When a paid-up instrument is fully and permanently written-down, it ceases to exist resulting in extinguishment
of a liability of a bank (a non-common equity instrument) and creates CET1. A temporary write-down is different
from a conversion and a permanent write-down i.e., the original instrument may not be fully extinguished. Generally,
the par value of the instrument is written-down (decrease) on the occurrence of the trigger event and which may be
written-up (increase) back to its original value in future depending upon the conditions prescribed in the terms and
conditions of the instrument. The amount shown on the balance sheet subsequent to temporary write-down may
depend on the precise features of the instrument and the prevailing accounting standards.
231 Auditors certificate would be required not only at the time of issuance of the instruments, but also whenever
there is a change in accounting norms / standards which may affect the ability of the loss absorbency mechanism of
the instrument to create CET1
2622.6 The aggregate amount to be written-down / converted for all AT1 instruments on breaching
the trigger level must be at least the amount needed to immediately return the bank’s CET1 ratio
to the trigger level or, if this is not possible, the full principal value of the instruments. Further, the
issuer should have full discretion to determine the amount of AT1 instruments to be converted /
written-down subject to the amount of conversion/write-down not exceeding the amount which
would be required to bring the CET1 ratio to 8% of RWAs (minimum CET1 of 5.5% + capital
conservation buffer of 2.5%).
2.7 When a bank breaches the pre-specified trigger of loss absorbency of AT1 and the equity
is replenished either through conversion or write-down, such replenished amount of equity will be
excluded from the total equity of the bank for the purpose of determining the proportion of earnings
to be paid out as dividend in terms of rules laid down for maintaining capital conservation buffer.
However, once the bank has attained total Common Equity ratio of 8% without counting the
replenished equity capital, that point onwards, the bank may include the replenished equity capital
for all purposes232.
2.8 The conversion / write-down may be allowed more than once in case a bank hits the pre-
specified trigger level subsequent to the first conversion / write-down which was partial.
2.9 The conversion / write-down of AT1 instruments are primarily intended to replenish the
equity in the event it is depleted by losses. Therefore, banks should not use conversion / write-
down of AT1 instruments to support expansion of balance sheet by incurring further obligations /
booking assets. Accordingly, a bank whose Common Equity ratio slips below 8% due to losses
and is still above 6.125% i.e., trigger point, should seek to expand its balance sheet further only
by raising fresh equity from its existing shareholders or market and the internal accruals. However,
fresh exposures can be taken to the extent of amortization of the existing ones. If any expansion
in exposures, such as due to draw down of sanctioned borrowing limits, is inevitable, this should
be compensated within the shortest possible time by reducing other exposures233. The bank
should maintain proper records to facilitate verification of these transactions by its internal
auditors, statutory auditors and Inspecting Officers of RBI.
III. Treatment of AT1 Instruments in the event of Winding-Up, Amalgamation,
Acquisition, Re-Constitution etc. of the Bank
2.10 If a bank goes into liquidation before the AT1 instruments have been written-down/
converted, these instruments will absorb losses in accordance with the order of seniority indicated
in the offer document and as per usual legal provisions governing priority of charges.
232 If the total CET1 ratio of the bank falls again below the 8%, it would include the replenished capital for the purpose
of applying the capital conservation buffer framework.
233 For the purpose of determination of breach of trigger, the fresh equity, if any, raised after slippage of CET1 below
8% will not be subtracted. In other words, if CET1 of the bank now is above the trigger level though it would have
been below the trigger had it not raised the fresh equity which it did, the trigger will not be treated as breached.
2632.11 If a bank goes into liquidation after the AT1 instruments have been written-down, the
holders of these instruments will have no claim on the proceeds of liquidation.
(a) Amalgamation of a banking company: (Section 44 A of BR Act, 1949)
2.12 If a bank is amalgamated with any other bank before the AT1 instruments have been
written-down/converted, these instruments will become part of the corresponding categories of
regulatory capital of the new bank emerging after the merger.
2.13 If a bank is amalgamated with any other bank after the AT1 instruments have been written-
down temporarily, the amalgamated entity can write-up these instruments as per its discretion.
2.14 If a bank is amalgamated with any other bank after the non-equity regulatory capital
instruments have been written-down permanently, these cannot be written-up by the
amalgamated entity.
(b) Scheme of reconstitution or amalgamation of a banking company: (Section 45 of BR Act,
1949)
2.15 If the relevant authorities decide to reconstitute a bank or amalgamate a bank with any
other bank under the Section 45 of BR Act, 1949, such a bank will be deemed as non-viable or
approaching non-viability and both the pre-specified trigger and the trigger at the point of non-
viability234 for conversion / write-down of AT1 instruments will be activated. Accordingly, the AT1
instruments will be fully converted / written-down permanently before amalgamation /
reconstitution in accordance with these rules.
IV. Fixation of Conversion Price, Capping of Number of Shares / Voting Rights
2.16 Banks may issue AT1 instruments with conversion features either based on price fixed at
the time of issuance or based on the market price prevailing at the time of conversion235.
2.17 There will be possibility of the debt holders receiving a large number of shares in the event
the share price is very low at the time of conversion. Thus, debt holders will end up holding the
number of shares and attached voting rights exceeding the legally permissible limits. Banks
should therefore, always keep sufficient headroom to accommodate the additional equity due to
conversion without breaching any of the statutory / regulatory ceilings especially that for maximum
private shareholdings and maximum voting rights per investors / group of related investors. In
order to achieve this, banks should cap the number of shares and / or voting rights in accordance
with relevant laws and regulations on Ownership and Governance of banks. Banks should
adequately incorporate these features in the terms and conditions of the instruments in the offer
document. In exceptional circumstances, if the breach is inevitable, the bank should immediately
234 As described in subsequent paragraph 3 of this Annex.
235 Market price here does not mean the price prevailing on the date of conversion; banks can use any pricing formula
such as weighted average price of shares during a particular period before conversion.
264inform the Reserve Bank of India (Department of Regulation) about it. The investors will be
required to bring the shareholdings below the statutory / regulatory ceilings within the specific time
frame as determined by the Reserve Bank of India.
2.18 In the case of unlisted banks, the conversion price should be determined based on the fair
value of the bank’s common shares to be estimated according to a mutually acceptable
methodology which should be in conformity with the standard market practice for valuation of
shares of unlisted companies.
2.19 In order to ensure the criteria that the issuing bank must maintain at all times all prior
authorisation necessary to immediately issue the relevant number of shares specified in the
instrument's terms and conditions should the trigger event occur, the capital clause of each bank
will have to be suitably modified to take care of conversion aspects.
V. Order of Conversion / Write-down of Various Types of AT1 Instruments
2.20 Banks should clearly indicate in the offer document, the order of conversion / write-down
of the instrument in question vis-à-vis other capital instruments which the bank has already issued
or may issue in future, based on the advice of its legal counsels.
3. Minimum Requirements to Ensure Loss Absorbency of Non-equity Regulatory
Capital Instruments at the Point of Non-Viability
I. Mode of Loss Absorption and Trigger Event
3.1 The terms and conditions of all non-common equity Tier 1 and Tier 2 capital instruments
issued by banks in India must have a provision that requires such instruments, at the option of
the Reserve Bank of India, to either be written off or converted into common equity upon the
occurrence of the trigger event, called the ‘Point of Non-Viability (PONV) Trigger’ stipulated below:
(i) The PONV Trigger event is the earlier of:
a. a decision that a conversion236 or write-off237, without which the firm would become
non-viable, is necessary, as determined by the Reserve Bank of India; and
b. the decision to make a public sector injection of capital, or equivalent support,
without which the firm would have become non-viable, as determined by the relevant
authority.
The Write-off of any Common Equity Tier 1 capital shall not be required before the write-off of any
Non-equity (Additional Tier 1 and Tier 2) regulatory capital instrument.
236 Conversion means full conversion to common shares.
237 Write-off means fully and permanently write-off.
265(ii) Such a decision would invariably imply that the write-off or issuance of any new shares as
a result of conversion consequent upon the trigger event must occur prior to any public sector
injection of capital so that the capital provided by the public sector is not diluted. As such, the
contractual terms and conditions of an instrument must not provide for any residual claims on the
issuer which are senior to ordinary shares of the bank (or banking group entity where applicable),
following a trigger event and when conversion or write-off is undertaken.
(iii) Any compensation paid to the instrument holders as a result of the write-off238 must be
paid immediately in the form of common shares.
(iv) The issuing bank must maintain at all times all prior authorisation necessary to
immediately issue the relevant number of shares specified in the instrument’s terms and
conditions should the trigger event occur.
(v) In order to ensure that these requirements are met, banks should obtain and keep on their
records an external legal opinion confirming that the conversion or write-off feature of non-equity
capital instruments (Additional Tier 1 or Tier 2) by the RBI at the point of non-viability is legally
enforceable. Further, the legal opinion should also confirm that there are no legal impediments to
the conversion of the instrument into ordinary shares of the bank (or a banking group entity, where
applicable) or write-off upon a trigger event. The RBI may also require the bank to submit
additional information in order to ensure that such instruments are eligible for inclusion into
regulatory capital.
II. A Non-viable Bank
3.2 For the purpose of these guidelines, a non-viable bank will be:
A bank which, owing to its financial and other difficulties, may no longer remain a going concern
on its own in the opinion of the Reserve Bank unless appropriate measures are taken to revive
its operations and thus, enable it to continue as a going concern. The difficulties faced by a bank
should be such that these are likely to result in financial losses and raising the Common Equity
Tier 1 capital of the bank should be considered as the most appropriate way to prevent the bank
from turning non-viable. Such measures would include write-off / conversion of non-equity
regulatory capital into common shares in combination with or without other measures as
considered appropriate by the Reserve Bank239.
238 Compensation in the form of common shares may be viewed as the simultaneous occurrence of (a) permanent
write-off of the original instrument; and (b) creation of new common shares issued in lieu of non-equity capital
instrument which is written-off, as compensation for its extinguishment. The precise mechanism may vary under the
accounting standards. No compensation (i.e., zero common shares) is paid in case of full and permanent write-off.
239 In rare situations, a bank may also become non-viable due to non-financial problems, such as conduct of affairs
of the bank in a manner which is detrimental to the interest of depositors, serious corporate governance issues, etc.
In such situations raising capital is not considered a part of the solution and therefore, may not attract provisions of
this framework.
266III. Restoring Viability
3.3 A bank facing financial difficulties and approaching a PONV will be deemed to achieve
viability if within a reasonable time in the opinion of Reserve Bank, it will be able to come out of
the present difficulties if appropriate measures are taken to revive it. The measures including
augmentation of equity capital through write-off/conversion/public sector injection of funds are
likely to:
a. Restore depositors’/investors’ confidence;
b. Improve rating /creditworthiness of the bank and thereby improve its borrowing capacity
and liquidity and reduce cost of funds; and
c. Augment the resource base to fund balance sheet growth in the case of fresh injection of
funds.
IV. Other Requirements to be met by the Non-common Equity Capital Instruments so
as to Absorb Losses at the PONV
3.4 Instruments may be issued with either of the following feature:
a. conversion; or
b. permanent write-off
3.5 The amount of non-equity capital to be converted / written-off will be determined by RBI.
3.6 When a bank breaches the PONV trigger and the equity is replenished either through
conversion or write-off, such replenished amount of equity will be excluded from the total equity
of the bank for the purpose of determining the proportion of earnings to be paid out as dividend
in terms of rules laid down for maintaining capital conservation buffer. However, once the bank
has attained total Common Equity ratio of 8% without counting the replenished equity capital, that
point onwards, the bank may include the replenished equity capital for all purposes240.
3.7 The provisions regarding treatment of AT1 instruments in the event of winding-up,
amalgamation, acquisition, re-constitution etc. of the bank as given in paragraphs 2.10 to 2.15
will also be applicable to all non-common equity capital instruments (AT1 and Tier 2 capital
instruments) when these events take place after conversion/write-off at the PONV.
3.8 The provisions regarding fixation of conversion price, capping of number of shares/voting
rights applicable to AT1 instruments in terms of paragraphs 2.16 to 2.19 above will also be
applicable for conversion of all non-common equity capital instruments (AT1 and Tier 2 capital
instruments) at the PONV.
240 If the total CET1 ratio of the bank falls again below the total Common Equity ratio of 8%, it would include the
replenished capital for the purpose of applying the capital conservation buffer framework.
2673.9 The provisions regarding order of conversion/write-down of AT1 instruments as given in
paragraph 2.20 above will also be applicable for conversion/ write-off of all non-common equity
capital instruments (AT1 and Tier 2 capital instruments) at the PONV.
V. Criteria to Determine the PONV
3.10 The above framework will be invoked when a bank is adjudged by Reserve Bank of India
to be approaching the point of non-viability, or has already reached the point of non-viability, but
in the views of RBI:
a) there is a possibility that a timely intervention in form of capital support, with or without
other supporting interventions, is likely to rescue the bank; and
b) if left unattended, the weaknesses would inflict financial losses on the bank and, thus,
cause decline in its common equity level.
3.11 The purpose of write-off and / or conversion of non-equity regulatory capital elements will
be to shore up the capital level of the bank. RBI would follow a two- stage approach to determine
the non-viability of a bank. The Stage 1 assessment would consist of purely objective and
quantifiable criteria to indicate that there is a prima facie case of a bank approaching non-viability
and, therefore, a closer examination of the bank’s financial situation is warranted. The Stage 2
assessment would consist of supplementary subjective criteria which, in conjunction with the
Stage 1 information, would help in determining whether the bank is about to become non-viable.
These criteria would be evaluated together and not in isolation.
3.12 Once the PONV is confirmed, the next step would be to decide whether rescue of the bank
would be through write-off/conversion alone or write-off/conversion in conjunction with a public
sector injection of funds.
3.13 The trigger at PONV will be evaluated both at consolidated and solo level and breach at
either level will trigger conversion / write-off.
3.14 As the capital adequacy is applicable both at solo and consolidated levels, the minority
interests in respect of capital instruments issued by subsidiaries of banks including overseas
subsidiaries can be included in the consolidated capital of the banking group only if these
instruments have pre-specified triggers (in case of AT1 capital instruments) / loss absorbency at
the PONV241 (for all non-common equity capital instruments). In addition, where a bank wishes
the instrument issued by its subsidiary to be included in the consolidated group’s capital in addition
241 The cost to the parent of its investment in each subsidiary and the parent’s portion of equity of each subsidiary,
at the date on which investment in each subsidiary is made, is eliminated as per AS-21. So, in case of wholly-owned
subsidiaries, it would not matter whether or not it has same characteristics as the bank’s capital. However, in the
case of less than wholly owned subsidiaries (or in the case of non-equity regulatory capital of the wholly owned
subsidiaries, if issued to the third parties), minority interests constitute additional capital for the banking group over
and above what is counted at solo level; therefore, it should be admitted only when it (and consequently the entire
capital in that category) has the same characteristics as the bank’s capital.
268to its solo capital, the terms and conditions of that instrument must specify an additional trigger
event.
This additional trigger event is the earlier of:
(1) a decision that a conversion or write-off, without which the bank or the subsidiary would
become non-viable, is necessary, as determined by the Reserve Bank of India; and
(2) the decision to make a public sector injection of capital, or equivalent support, without
which the bank or the subsidiary would have become non-viable, as determined by the
Reserve Bank of India. Such a decision would invariably imply that the write-off or
issuance of any new shares as a result of conversion consequent upon the trigger event
shall occur prior to any public sector injection of capital so that the capital provided by
the public sector is not diluted.
3.15 In such cases, the subsidiary should obtain its regulator’s approval/no-objection for
allowing the capital instrument to be converted/written-off at the additional trigger point referred
to in paragraph 3.14 above.
3.16 Any common shares paid as compensation to the holders of the instrument must be
common shares of either the issuing subsidiary or the parent bank (including any successor in
resolution).
269Annex 16
(cf para 4.3.5)
Calculation of Minority Interest - Illustrative Example
This Annex illustrates the treatment of minority interest and other capital issued out of subsidiaries
to third parties, which is set out in paragraph 4.3 of this Master Circular.
A banking group for this purpose consists of two legal entities that are both banks. Bank P is the
parent and Bank S is the subsidiary and their unconsolidated balance sheets are set out below:
Bank P Balance Sheet Bank S Balance Sheet
Assets Assets
Loans to customers 100 Loans to customers 150
Investment in CET1 of Bank S 7
Investment in the AT1 of Bank S 4
Investment in the T2 of Bank S 2
Total 113 Total 150
Liabilities and equity Liabilities and equity
Depositors 70 Depositors 127
Tier 2 10 Tier 2 8
Additional Tier 1 7 Additional Tier 1 5
Common equity 26 Common equity 10
Total 113 Total 150
The balance sheet of Bank P shows that in addition to its loans to customers, it owns 70% of the
common shares of Bank S, 80% of the Additional Tier 1 of Bank S and 25% of the Tier 2 capital
of Bank S.
The ownership of the capital of Bank S is therefore as follows:
Capital issued by Bank S
Amount issued to Amount
parent issued to
(Bank P) third parties Total
Common Equity Tier 1 (CET1) 7 3 10
Additional Tier 1 (AT1) 4 1 5
Tier 1 (T1) 11 4 15
Tier 2 (T2) 2 6 8
Total capital (TC) 13 10 23
270Consolidated Balance Sheet
Assets Remarks
Investments of P in S aggregating
Loans to customers 250 Rs.13 will be cancelled during
accounting consolidation.
Liabilities and equity
Depositors 197
Tier 2 issued by subsidiary to third
6 (8-2)
Parties
Tier 2 issued by parent 10
Additional Tier 1 issued by subsidiary
1 (5-4)
to third parties
Additional Tier 1 issued by parent 7
Common equity issued by subsidiary
3 (10-7)
to third parties (i.e. minority interest)
Common equity issued by parent 26
Total 250
For illustrative purposes Bank S is assumed to have risk weighted assets of 100 against the actual
value of assets of 150. In this example, the minimum capital requirements of Bank S and the
subsidiary’s contribution to the consolidated requirements are the same. This means that it is
subject to the following minimum plus capital conservation buffer requirements and has the
following surplus capital:
Minimum and surplus capital of Bank S
Minimum plus capital Actual
Surplus
conservation buffer capital
(3-2)
required242 available
1 2 3 4
Common Equity 7.0
10 3.0
Tier 1 capital (= 7.0% of 100)
8.5 15
Tier 1 capital 6.5
(= 8.5% of 100) (10+5)
10.5 23
Total capital 12.5
(= 10.5% of 100) (10+5+8)
The following table illustrates how to calculate the amount of capital issued by Bank S to include
in consolidated capital, following the calculation procedure set out in paragraph 4.3.4 of this
Master Circular:
242 Illustration is based on Basel III minima as indicated in the BCBS document ‘Basel III: A global regulatory
framework for more resilient banks and banking systems issued in December 2010 (rev June 2011)’ The Common
Equity Tier 1 in the example should be read to include issued common shares plus retained earnings and reserves in
Bank S.
271Bank S: Amount of capital issued to third parties included in consolidated capital
Amount
Surplus attributable to
Amount
Total issued third parties (i.e., included in
amount to third amount excluded from consolidated
issued parties Surplus consolidated capital) capital
(a) (b) (c) (d) = (c) * (b)/(a) (e) = (b) – (d)
Common
Equity
10 3 3.0 0.90 2.10
Tier 1
capital
Tier 1
15 4 6.5 1.73 2.27
capital
Total
23 10 12.5 5.43 4.57
capital
The following table summarises the components of capital for the consolidated group based on
the amounts calculated in the table above. Additional Tier 1 is calculated as the difference
between Common Equity Tier 1 and Tier 1 and Tier 2 is the difference between Total Capital and
Tier 1.
Total amount Amount issued by Total amount
issued by parent subsidiaries to third issued by parent
(all of which is to parties to be and subsidiary to
be included in included in be included in
consolidated consolidated consolidated
capital) capital capital
Common Equity
26 2.10 28.10
Tier 1 capital
Additional Tier 1
7 0.17 7.17
capital
Tier 1 capital 33 2.27 35.27
Tier 2 capital 10 2.30 12.30
Total capital 43 4.57 47.57
272Annex 17
(cf para 14.14 & 16.6)
Pillar 3 Disclosure Requirements
1. Scope of Application and Capital Adequacy
Table DF-1: Scope of Application
Name of the head of the banking group to which the framework applies_________
Name of the Whether the Explain the Whether the Explain the Explain the Explain the
entity / entity is method of entity is method of reasons for reasons if
Country of included consolidation included under consolidation difference in consolidated
incorporation under regulatory the method under only one
accounting scope of of of the scopes
scope of consolidation243 consolidation of
consolidation (yes / no) consolidation244
(yes / no)
(i) Qualitative Disclosures:
a. List of group entities considered for consolidation
b. List of group entities not considered for consolidation both under the accounting
and regulatory scope of consolidation
Name of the Principle Total % of bank’s Regulatory Total
entity / activity of the balance holding in treatment of balance
country of entity sheet equity the total bank’s sheet assets
incorporation (as stated in equity investments (as stated in
the in the capital the
accounting instruments accounting
balance of the entity balance
sheet of the sheet of the
legal entity) legal entity)
(ii) Quantitative Disclosures:
c. List of group entities considered for consolidation
243 If the entity is not consolidated in such a way as to result in its assets being included in the calculation of
consolidated risk-weighted assets of the group, then such an entity is considered as outside the regulatory scope of
consolidation
244 Also explain the treatment given i.e., deduction or risk weighting of investments under regulatory scope of
consolidation.
273Name of the entity / Principle activity of Total balance sheet Total balance sheet
country of the entity equity (as stated in assets (as stated in
incorporation the accounting the accounting
(as indicated in (i)a. balance sheet of the balance sheet of the
above) legal entity) legal entity)
d. The aggregate amount of capital deficiencies245in all subsidiaries which are not
included in the regulatory scope of consolidation i.e., that are deducted:
Name of the Principle activity Total balance % of bank’s Capital
subsidiaries / of the entity sheet equity holding in the deficiencies
country of (as stated in the total equity
incorporation accounting
balance sheet
of the legal
entity)
e. The aggregate amounts (e.g., current book value) of the bank’s total interests in
insurance entities, which are risk-weighted:
Name of the Principle activity Total balance % of bank’s Quantitative
insurance of the entity sheet equity holding in the impact on
entities / (as stated in the total equity / regulatory
country of accounting proportion of capital of using
incorporation balance sheet voting power risk weighting
of the legal method versus
entity) using the full
deduction
method
f. Any restrictions or impediments on transfer of funds or regulatory capital within
the banking group:
245 A capital deficiency is the amount by which actual capital is less than the regulatory capital requirement. Any
deficiencies which have been deducted on a group level in addition to the investment in such subsidiaries are not to
be included in the aggregate capital deficiency.
274Table DF-2: Capital Adequacy
Qualitative disclosures
(a) A summary discussion of the bank's approach to assessing the adequacy of its capital
to support current and future activities
Quantitative disclosures
(b) Capital requirements for credit risk:
• Portfolios subject to standardised approach
• Securitisation exposures
(c) Capital requirements for market risk:
• Standardised duration approach;
- Interest rate risk
- Foreign exchange risk (including gold)
- Equity risk
(d) Capital requirements for operational risk:
• Basic Indicator Approach
(e) Common Equity Tier 1, Tier 1and Total Capital ratios:
• For the top consolidated group; and
• For significant bank subsidiaries (stand alone or sub-consolidated depending on how the
Framework is applied)
2. Risk exposure and assessment
The risks to which banks are exposed and the techniques that banks use to identify, measure,
monitor and control those risks are important factors market participants consider in their
assessment of an institution. In this section, several key banking risks are considered: credit risk,
market risk, and interest rate risk in the banking book and operational risk. Also included in this
section are disclosures relating to credit risk mitigation and asset securitisation, both of which
alter the risk profile of the institution. Where applicable, separate disclosures are set out for banks
using different approaches to the assessment of regulatory capital.
2.1 General qualitative disclosure requirement
For each separate risk area (e.g., credit, market, operational, banking book interest rate risk)
banks must describe their risk management objectives and policies, including:
(i) strategies and processes;
(ii) the structure and organisation of the relevant risk management function;
(iii) the scope and nature of risk reporting and/or measurement systems;
(iv) policies for hedging and/or mitigating risk and strategies and processes for monitoring
the continuing effectiveness of hedges/mitigants.
Credit risk
General disclosures of credit risk provide market participants with a range of information about
overall credit exposure and need not necessarily be based on information prepared for regulatory
purposes. Disclosures on the capital assessment techniques give information on the specific
275nature of the exposures, the means of capital assessment and data to assess the reliability of the
information disclosed.
Table DF-3: Credit Risk: General Disclosures for All Banks
Qualitative Disclosures
(a) The general qualitative disclosure requirement with respect to credit risk, including:
Definitions of past due and impaired (for accounting purposes);
Discussion of the bank’s credit risk management policy;
Quantitative Disclosures
(b) Total gross credit risk exposures246, Fund based and Non-fund based separately.
(c) Geographic distribution of exposures247, Fund based and Non-fund based separately
Overseas
Domestic
(d) Industry248type distribution of exposures, fund based and non-fund based separately
(e) Residual contractual maturity breakdown of assets,249
(f) Amount of NPAs (Gross)
Substandard
Doubtful 1
Doubtful 2
Doubtful 3
Loss
(g) Net NPAs
(h) NPA Ratios
Gross NPAs to gross advances
Net NPAs to net advances
(i) Movement of NPAs (Gross)
o Opening balance
o Additions
o Reductions
o Closing balance
(j) Movement of provisions (Separate disclosure shall be made for specific provisions and
general provisions held by the bank with a description of each type of provisions held)
Opening balance
Provisions made during the period
Write-off
Write-back of excess provisions
Any other adjustments, including transfers between provisions
Closing balance
In addition, write-offs and recoveries that have been booked directly to the income
statement should be disclosed separately.
246 That is after accounting offsets in accordance with the applicable accounting regime and without taking into
account the effects of credit risk mitigation techniques, e.g., collateral and netting.
247 That is, on the same basis as adopted for Segment Reporting adopted for compliance with AS 17.
248 The industries break-up may be provided on the same lines as prescribed for DSB returns. If the exposure to any
particular industry is more than 5 per cent of the gross credit exposure as computed under (b) above it should be
disclosed separately.
249 Banks shall use the same maturity bands as used for reporting positions in the ALM returns.
276(k) Amount of Non-Performing Investments
(l) Amount of provisions held for non-performing investments
(m) Movement of provisions for depreciation on investments
Opening balance
Provisions made during the period
Write-off
Write-back of excess provisions
Closing balance
(n) By major industry or counterparty type:
Amount of NPAs and if available, past due loans, provided separately;
Specific and general provisions; and
Specific provisions and write-offs during the current period.
In addition, banks are encouraged also to provide an analysis of the ageing of past-due
loans.
(o) Amount of NPAs and, if available, past due loans provided separately broken down by
significant geographic areas including, if practical, the amounts of specific and general
provisions related to each geographical area. The portion of general provisions that is not
allocated to a geographical area should be disclosed separately.
Table DF-4 - Credit Risk: Disclosures for Portfolios Subject to the
Standardised Approach
Qualitative Disclosures
(a) For portfolios under the standardised approach:
Names of credit rating agencies used, plus reasons for any changes;
Types of exposure for which each agency is used; and
A description of the process used to transfer public issue ratings onto comparable
assets in the banking book;
Quantitative Disclosures
(b) For exposure250 amounts after risk mitigation subject to the standardised approach,
amount of a bank’s outstandings (rated and unrated) in the following three major risk
buckets as well as those that are deducted;
Below 100 % risk weight
100 % risk weight
More than 100 % risk weight
Deducted
250 As defined for disclosures in Table DF-3.
277Table DF-5: Credit Risk Mitigation: Disclosures for Standardised Approaches251
Qualitative Disclosures
(a) The general qualitative disclosure requirement with respect to credit risk mitigation
including:
a) Policies and processes for, and an indication of the extent to which the bank makes
use of, on- and off-balance sheet netting;
policies and processes for collateral valuation and management;
a description of the main types of collateral taken by the bank;
the main types of guarantor counterparty and their credit worthiness; and
information about (market or credit) risk concentrations within the mitigation taken
Quantitative Disclosures
(b) For each separately disclosed credit risk portfolio the total exposure (after, where
applicable, on- or off balance sheet netting) that is covered by eligible financial
collateral after the application of haircuts.
(c) For each separately disclosed portfolio the total exposure (after, where applicable,
on- or off-balance sheet netting) that is covered by guarantees/credit derivatives
(whenever specifically permitted by RBI)
Table DF-6: Securitisation Exposures: Disclosure for Standardised Approach
Qualitative Disclosures
(a) The general qualitative disclosure requirement with respect to securitisation including
a discussion of:
the bank’s objectives in relation to securitisation activity, including the extent to
which these activities transfer credit risk of the underlying securitised exposures
away from the bank to other entities.
the nature of other risks (e.g., liquidity risk) inherent in securitised assets;
the various roles played by the bank in the securitisation process (For example:
originator, investor, servicer, provider of credit enhancement, liquidity provider,
swap provider protection provider ) and an indication of the extent of the bank’s
@, #
involvement in each of them;
a description of the processes in place to monitor changes in the credit and market
risk of securitisation exposures (for example, how the behaviour of the underlying
assets impacts securitisation exposures).
a description of the bank’s policy governing the use of credit risk mitigation to
mitigate the risks retained through securitisation exposures;
A bank may have provided support to a securitisation structure in the form of an
@
interest rate swap or currency swap to mitigate the interest rate/currency risk of the
underlying assets, if permitted as per regulatory rules.
A bank may provide credit protection to a securitisation transaction through
#
guarantees, credit derivatives or any other similar product, if permitted as per
regulatory rules.
(b) Summary of the bank’s accounting policies for securitisation activities,
including:
whether the transactions are treated as sales or financings;
251 At a minimum, banks must give the disclosures in this Table in relation to credit risk mitigation that has been
recognised for the purposes of reducing capital requirements under this Framework. Where relevant, banks are
encouraged to give further information about mitigants that have not been recognised for that purpose.
278 methods and key assumptions (including inputs) applied in valuing positions
retained or purchased
changes in methods and key assumptions from the previous period and impact of
the changes;
policies for recognising liabilities on the balance sheet for arrangements that could
require the bank to provide financial support for securitised assets.
(c) In the banking book, the names of ECAIs used for securitisations and the types of
securitisation exposure for which each agency is used.
Quantitative disclosures: Banking Book
(d) The total amount of exposures securitised by the bank.
(e) For exposures securitised losses recognised by the bank during the current period
broken by the exposure type (e.g. Credit cards, housing loans, auto loans etc. detailed
by underlying security)
(f) Amount of assets intended to be securitised within a year
(g) Of (f), amount of assets originated within a year before securitisation.
(h) The total amount of exposures securitised (by exposure type) and unrecognised gain
or losses on sale by exposure type.
(i) Aggregate amount of:
on-balance sheet securitisation exposures retained or purchased broken down by
exposure type and
off-balance sheet securitisation exposures broken down by exposure type
(j) (i) Aggregate amount of securitisation exposures retained or purchased and the
associated capital charges, broken down between exposures and further broken down
into different risk weight bands for each regulatory capital approach
(ii) Exposures that have been deducted entirely from Tier 1 capital, credit enhancing
I/Os deducted from total capital, and other exposures deducted from total capital (by
exposure type).
Quantitative Disclosures: Trading book
(k) Aggregate amount of exposures securitised by the bank for which the bank has
retained some exposures and which is subject to the market risk approach, by
exposure type.
(l) Aggregate amount of:
on-balance sheet securitisation exposures retained or purchased broken down by
exposure type; and
off-balance sheet securitisation exposures broken down by exposure type.
(m) Aggregate amount of securitisation exposures retained or purchased
separately for:
securitisation exposures retained or purchased subject to Comprehensive Risk
Measure for specific risk; and
securitisation exposures subject to the securitisation framework for specific risk
broken down into different risk weight bands.
(n) Aggregate amount of:
the capital requirements for the securitisation exposures, subject to the
securitisation framework broken down into different risk weight bands.
securitisation exposures that are deducted entirely from Tier 1 capital, credit
enhancing I/Os deducted from total capital, and other exposures deducted from
total capital (by exposure type).
279Table DF-7: Market Risk in Trading Book
Qualitative disclosures
(a) The general qualitative disclosure requirement for market risk including the portfolios
covered by the standardised approach.
Quantitative disclosures
(b) The capital requirements for:
interest rate risk;
equity position risk; and
foreign exchange risk;
Table DF-8: Operational Risk
Qualitative disclosures
The general qualitative disclosure requirement for operational risk.
Table DF-9: Interest Rate Risk in the Banking Book (IRRBB)
Qualitative Disclosures
(a) The general qualitative disclosure requirement including the nature of IRRBB and key
assumptions, including assumptions regarding loan prepayments and behaviour of non-
maturity deposits, and frequency of IRRBB measurement.
Quantitative Disclosures
(b) The increase (decline) in earnings and economic value (or relevant measure used by
management) for upward and downward rate shocks according to management’s method
for measuring IRRBB, broken down by currency (where the turnover is more than 5% of the
total turnover).
Table DF-10: General Disclosure for Exposures Related to
Counterparty Credit Risk
Qualitative (a) The general qualitative disclosure requirement with respect to
Disclosures derivatives and CCR, including:
• Discussion of methodology used to assign economic capital and
credit limits for counterparty credit exposures;
• Discussion of policies for securing collateral and establishing credit
reserves;
• Discussion of policies with respect to wrong-way risk exposures;
• Discussion of the impact of the amount of collateral the bank would
have to provide given a credit rating downgrade.
Quantitative (b) Gross positive fair value of contracts, netting benefits, netted current
Disclosures credit exposure, collateral held (including type, e.g., cash,
government securities, etc.), and net derivatives credit exposure252.
Also report measures for exposure at default, or exposure amount,
252 Net credit exposure is the credit exposure on derivatives transactions after considering both the benefits from
legally enforceable netting agreements and collateral arrangements. The notional amount of credit derivative
hedges alerts market participants to an additional source of credit risk mitigation.
280under CEM. The notional value of credit derivative hedges, and the
distribution of current credit exposure by types of credit exposure253.
(c) Credit derivative transactions that create exposures to CCR
(notional value), segregated between use for the institution’s own
credit portfolio, as well as in its intermediation activities, including
the distribution of the credit derivatives products used254, broken
down further by protection bought and sold within each product
group.
3 Composition of Capital Disclosure Templates
3.1 Disclosure Template
(i) The template is designed to capture the capital positions of banks. Certain rows are in
italics. These rows will be deleted after all the ineligible capital instruments have been fully phased
out (i.e., from April 1, 2022 onwards).
(ii) The reconciliation requirement in terms of paragraph 14.13 of this Master Circular results
in the decomposition of certain regulatory adjustments. For example, the disclosure template
below includes the adjustment of ‘Goodwill net of related tax liability’. The requirements will lead
to the disclosure of both the goodwill component and the related tax liability component of this
regulatory adjustment.
(iii) Certain rows of the template are shaded as explained below:
a. each dark grey row introduces a new section detailing a certain component of
regulatory capital.
b. the light grey rows with no thick border represent the sum cells in the relevant section.
c. the light grey rows with a thick border show the main components of regulatory capital
and the capital ratios.
(iv) Also provided along with the Table, an explanation of each line of the template, with
references to the appropriate paragraphs of this Master Circular.
253 For example, interest rate contracts, FX contracts, credit derivatives, and other contracts.
254 For example, credit default swaps.
281Table DF-11: Composition of Capital
(Rs. in million)
Basel III common disclosure template
Common Equity Tier 1 capital: instruments and reserves Ref No
1 Directly issued qualifying common share capital plus related
stock surplus (share premium)
2 Retained earnings
3 Accumulated other comprehensive income (and other
reserves)
4 Directly issued capital subject to phase out from CET1 (only
applicable to non-joint stock companies255)
5 Common share capital issued by subsidiaries and held by third
parties (amount allowed in group CET1)
6 Common Equity Tier 1 capital before regulatory
adjustments
Common Equity Tier 1 capital: regulatory adjustments
7 Prudential valuation adjustments
8 Goodwill (net of related tax liability)
9 Intangibles (net of related tax liability)
10 Deferred tax assets256
11 Cash-flow hedge reserve
12 Shortfall of provisions to expected losses
13 Securitisation gain on sale
14 Gains and losses due to changes in own credit risk on fair
valued liabilities
15 Defined-benefit pension fund net assets
16 Investments in own shares (if not already netted off paid-up
capital on reported balance sheet)
17 Reciprocal cross-holdings in common equity
18 Investments in the capital of banking, financial and insurance
entities that are outside the scope of regulatory consolidation,
net of eligible short positions, where the bank does not own
more than 10% of the issued share capital (amount above 10%
threshold)
19 Significant investments in the common stock of banking,
financial and insurance entities that are outside the scope of
regulatory consolidation, net of eligible short positions (amount
above 10% threshold)257
255 Not Applicable to commercial banks in India.
256 In terms of Basel III rules text issued by the Basel Committee (December 2010), DTAs that rely on future
profitability of the bank to be realized are to be deducted. DTAs which relate to temporary differences are to be
treated under the “threshold deductions” as set out in paragraph 87.
257 Only significant investments other than in the insurance and non-financial subsidiaries should be reported here.
The insurance and non-financial subsidiaries are not consolidated for the purpose of capital adequacy. The equity
and other regulatory capital investments in insurance subsidiaries are fully deducted from consolidated regulatory
capital of the banking group. However, in terms of Basel III rules text of the Basel Committee, insurance subsidiaries
are included under significant investments and thus, deducted based on 10% threshold rule instead of full deduction.
28220 Mortgage servicing rights258(amount above 10% threshold)
21 Deferred tax assets arising from temporary differences259
(amount above 10% threshold, net of related tax liability)
22 Amount exceeding the 15% threshold
23 of which: significant investments in the common stock of
financial entities
24 of which: mortgage servicing rights
25 of which: deferred tax assets arising from temporary
differences
26 National specific regulatory adjustments260
(26a+26b+26c+26d)
26a of which: Investments in the equity capital of unconsolidated
insurance subsidiaries
26b of which: Investments in the equity capital of unconsolidated
non-financial subsidiaries261
26c of which: Shortfall in the equity capital of majority owned
financial entities which have not been consolidated with the
bank262
27 Regulatory adjustments applied to Common Equity Tier 1 due
to insufficient Additional Tier 1 and Tier 2 to cover deductions
28 Total regulatory adjustments to Common equity Tier 1
29 Common Equity Tier 1 capital (CET1)
Additional Tier 1 capital: instruments
30 Directly issued qualifying Additional Tier 1 instruments plus
related stock surplus (share premium) (31+32)
31 of which: classified as equity under applicable accounting
standards (Perpetual Non-Cumulative Preference Shares)
32 of which: classified as liabilities under applicable accounting
standards (Perpetual debt Instruments)
33 Directly issued capital instruments subject to phase out from
Additional Tier 1
34 Additional Tier 1 instruments (and CET1 instruments not
included in row 5) issued by subsidiaries and held by third
parties (amount allowed in group AT1)
35 of which: instruments issued by subsidiaries subject to phase
out
258 Not applicable in Indian context.
259 Please refer to Footnote 246 above.
260 Adjustments which are not specific to the Basel III regulatory adjustments (as prescribed by the Basel Committee)
will be reported under this row. However, regulatory adjustments which are linked to Basel III i.e., where there is a
change in the definition of the Basel III regulatory adjustments, the impact of these changes will be explained in the
Notes of this disclosure template.
261 Non-financial subsidiaries are not consolidated for the purpose of capital adequacy. The equity and other
regulatory capital investments in the non-financial subsidiaries are deducted from consolidated regulatory capital of
the group. These investments are not required to be deducted fully from capital under Basel III rules text of the Basel
Committee.
262 Please refer to paragraph 3.4.5 of this Master Circular. Please also refer to the Paragraph 34 of the Basel II
Framework issued by the Basel Committee (June 2006). Though this is not national specific adjustment, it is reported
here.
28336 Additional Tier 1 capital before regulatory adjustments
Additional Tier 1 capital: regulatory adjustments
37 Investments in own Additional Tier 1 instruments
38 Reciprocal cross-holdings in Additional Tier 1 instruments
39 Investments in the capital of banking, financial and insurance
entities that are outside the scope of regulatory consolidation,
net of eligible short positions, where the bank does not own
more than 10% of the issued common share capital of the
entity (amount above 10% threshold)
40 Significant investments in the capital of banking, financial and
insurance entities that are outside the scope of regulatory
consolidation (net of eligible short positions)263
41 National specific regulatory adjustments (41a+41b)
41a of which: Investments in the Additional Tier 1 capital of
unconsolidated insurance subsidiaries
41b of which: Shortfall in the Additional Tier 1 capital of majority
owned financial entities which have not been consolidated with
the bank
42 Regulatory adjustments applied to Additional Tier 1 due to
insufficient Tier 2 to cover deductions
43 Total regulatory adjustments to Additional Tier 1 capital
44 Additional Tier 1 capital (AT1)
45 Tier 1 capital (T1 = CET1 + AT1) (29 + 44)
Tier 2 capital: instruments and provisions
46 Directly issued qualifying Tier 2 instruments plus related stock
surplus
47 Directly issued capital instruments subject to phase out from
Tier 2
48 Tier 2 instruments (and CET1 and AT1 instruments not
included in rows 5 or 34) issued by subsidiaries and held by
third parties (amount allowed in group Tier 2)
49 of which: instruments issued by subsidiaries subject to phase
out
50 Provisions264
51 Tier 2 capital before regulatory adjustments
Tier 2 capital: regulatory adjustments
52 Investments in own Tier 2 instruments
53 Reciprocal cross-holdings in Tier 2 instruments
54 Investments in the capital of banking, financial and insurance
entities that are outside the scope of regulatory consolidation,
net of eligible short positions, where the bank does not own
more than 10% of the issued common share capital of the
entity (amount above the 10% threshold)
263 Please refer to Footnote 247 above.
264 Eligible Provisions and revaluation Reserves in terms of paragraph 4.2.5.1 of this Master Circular, both to be
reported and break-up of these two items to be furnished in Notes.
28455 Significant investments265in the capital banking, financial and
insurance entities that are outside the scope of regulatory
consolidation (net of eligible short positions)
56 National specific regulatory adjustments (56a+56b)
56a of which: Investments in the Tier 2 capital of unconsolidated
insurance subsidiaries
56b of which: Shortfall in the Tier 2 capital of majority owned
financial entities which have not been consolidated with the
bank
57 Total regulatory adjustments to Tier 2 capital
58 Tier 2 capital (T2)
59 Total capital (TC = T1 + T2) (45 + 58)
60 Total risk weighted assets (60a + 60b + 60c)
60a of which: total credit risk weighted assets
60b of which: total market risk weighted assets
60c of which: total operational risk weighted assets
Capital ratios and buffers
61 Common Equity Tier 1 (as a percentage of risk weighted
assets)
62 Tier 1 (as a percentage of risk weighted assets)
63 Total capital (as a percentage of risk weighted assets)
64 Institution specific buffer requirement (minimum CET1
requirement plus capital conservation plus countercyclical
buffer requirements plus higher of G-SIB buffer requirement
and D-SIB buffer requirement, expressed as a percentage of
risk weighted assets)
65 of which: capital conservation buffer requirement
66 of which: bank specific countercyclical buffer requirement
67 of which: higher of G-SIB and D-SIB buffer requirement
68 Common Equity Tier 1 available to meet buffers (as a
percentage of risk weighted assets)
National minima (if different from Basel III)
69 National Common Equity Tier 1 minimum ratio (if different from
Basel III minimum)
70 National Tier 1 minimum ratio (if different from Basel III
minimum)
71 National total capital minimum ratio (if different from Basel III
minimum)
Amounts below the thresholds for deduction (before risk weighting)
72 Non-significant investments in the capital of other financial
entities
73 Significant investments in the common stock of financial
entities
74 Mortgage servicing rights (net of related tax liability)
75 Deferred tax assets arising from temporary differences (net of
related tax liability)
Applicable caps on the inclusion of provisions in Tier 2
265 Please refer to Footnote 247 above.
28576 Provisions eligible for inclusion in Tier 2 in respect of
exposures subject to standardised approach (prior to
application of cap)
77 Cap on inclusion of provisions in Tier 2 under standardised
approach
78 Provisions eligible for inclusion in Tier 2 in respect of
exposures subject to internal ratings-based approach (prior to
application of cap)
79 Cap for inclusion of provisions in Tier 2 under internal ratings-
based approach
Capital instruments subject to phase-out arrangements (only applicable
between March 31, 2017 and March 31, 2022)
80 Current cap on CET1 instruments subject to phase out
arrangements
81 Amount excluded from CET1 due to cap (excess over cap after
redemptions and maturities)
82 Current cap on AT1 instruments subject to phase out
arrangements
83 Amount excluded from AT1 due to cap (excess over cap after
redemptions and maturities)
84 Current cap on T2 instruments subject to phase out
arrangements
85 Amount excluded from T2 due to cap (excess over cap after
redemptions and maturities)
Notes to the Template
Row No. of Particular (Rs. in million)
the template
10 Deferred tax assets associated with accumulated losses
Deferred tax assets (excluding those associated with
accumulated losses) net of Deferred tax liability
Total as indicated in row 10
19 If investments in insurance subsidiaries are not deducted
fully from capital and instead considered under 10%
threshold for deduction, the resultant increase in the
capital of bank
of which: Increase in Common Equity Tier 1 capital
of which: Increase in Additional Tier 1 capital
of which: Increase in Tier 2 capital
26b If investments in the equity capital of unconsolidated non-
financial subsidiaries are not deducted and hence, risk
weighted then:
(i) Increase in Common Equity Tier 1 capital
(ii) Increase in risk weighted assets
50 Eligible Provisions included in Tier 2 capital
Eligible Revaluation Reserves included in Tier 2 capital
Total of row 50
286Explanation of each row of the Common Disclosure Template
Row Explanation
No.
1 Instruments issued by the parent bank of the reporting banking group which meet
all of the CET1 entry criteria set out in paragraph 4.2.3 (read with Annex 1 / Annex
2) of the Master Circular. This should be equal to the sum of common shares (and
related surplus only) which must meet the common shares criteria. This should be
net of treasury stock and other investments in own shares to the extent that these
are already derecognised on the balance sheet under the relevant accounting
standards. Other paid-up capital elements must be excluded. All minority interest
must be excluded.
2 Retained earnings, prior to all regulatory adjustments in accordance with
paragraph 4.2.3 of the Master Circular
3 Accumulated other comprehensive income and other disclosed reserves, prior to
all regulatory adjustments.
4 Banks must report zero in this row.
5 Common share capital issued by subsidiaries and held by third parties. Only the
amount that is eligible for inclusion in group CET1 should be reported here, as
determined by the application of paragraph 4.3.4 of the Master Circular (Also see
Annex 16 of the Master Circular for illustration).
6 Sum of rows 1 to 5.
7 Valuation adjustments according to the requirements of paragraph 8.8 of the
Master Circular
8 Goodwill net of related tax liability, as set out in paragraph 4.4.1 of the Master
Circular
9 Intangibles (net of related tax liability), as set out in paragraph 4.4.1 of the Master
Circular
10 Deferred tax assets (net of related tax liability), as set out in paragraph 4.4.2 of the
Master Circular
11 The element of the cash-flow hedge reserve described in paragraph 4.4.3 of the
Master Circular
12 Shortfall of provisions to expected losses as described in paragraph 4.4.4 of the
Master Circular
13 Securitisation gain on sale as described in paragraph 4.4.5 of the Master Circular
14 Gains and losses due to changes in own credit risk on fair valued liabilities as
described in paragraph 4.4.6 of the Master Circular
15 Defined benefit pension fund net assets, the amount to be deducted, as set out in
paragraph 4.4.7 of the Master Circular
16 Investments in own shares (if not already netted off paid-in capital on reported
balance sheet), as set out in paragraph 4.4.8 of the Master Circular
17 Reciprocal cross-holdings in common equity as set out in paragraph 4.4.9.2(A) of
the Master Circular
18 Investments in the capital of banking, financial and insurance entities that are
outside the scope of regulatory consolidation where the bank does not own more
than 10% of the issued share capital (amount above 10% threshold), amount to be
287deducted from CET1 in accordance with paragraph 4.4.9.2(B) of the Master
Circular
19 Significant investments in the common stock of banking, financial and insurance
entities that are outside the scope of regulatory consolidation (amount above 10%
threshold), amount to be deducted from CET1 in accordance with paragraph
4.4.9.2(C) of the Master Circular
20 Not relevant
21 Not relevant
22 Not relevant
23 Not relevant
24 Not relevant
25 Not relevant
26 Any national specific regulatory adjustments that are required by national
authorities to be applied to CET1 in addition to the Basel III minimum set of
adjustments [i.e., in terms of December 2010 (rev June 2011) document issued by
the Basel Committee on Banking Supervision].
27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient
Additional Tier 1 to cover deductions. If the amount reported in row 43 exceeds the
amount reported in row 36 the excess is to be reported here.
28 Total regulatory adjustments to Common equity Tier 1, to be calculated as the sum
of rows 7 to 22 plus row 26 and 27.
29 Common Equity Tier 1 capital (CET1), to be calculated as row 6 minus row 28.
30 Instruments that meet all of the AT1 entry criteria set out in paragraph 4.2.4. All
instruments issued of subsidiaries of the consolidated group should be excluded
from this row.
31 The amount in row 30 classified as equity under applicable Accounting Standards.
32 The amount in row 30 classified as liabilities under applicable Accounting
Standards.
33 Directly issued capital instruments subject to phase out from Additional Tier 1 in
accordance with the requirements of paragraph 4.5 of the Master Circular
34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued
by subsidiaries and held by third parties, the amount allowed in group AT1 in
accordance with paragraph 4.3.4 of the Master Circular (please see Annex 16 for
illustration).
35 The amount reported in row 34 that relates to instruments subject to phase out
from AT1 in accordance with the requirements of paragraph 4.5 of the Master
Circular
36 The sum of rows 30, 33 and 34.
37 Investments in own Additional Tier 1 instruments, amount to be deducted from AT1
in accordance with paragraph 4.4.8 of the Master Circular
38 Reciprocal cross-holdings in Additional Tier 1 instruments, amount to be deducted
from AT1 in accordance with paragraph 4.4.9.2 (A) of the Master Circular
39 Investments in the capital of banking, financial and insurance entities that are
outside the scope of regulatory consolidation where the bank does not own more
than 10% of the issued common share capital of the entity (net of eligible short
positions), amount to be deducted from AT1 in accordance with paragraph
4.4.9.2(B) of the Master Circular
40 Significant investments in the capital of banking, financial and insurance entities
that are outside the scope of regulatory consolidation (net of eligible short
288positions), amount to be deducted from AT1 in accordance with paragraph
4.4.9.2(C) of the Master Circular
41 Any national specific regulatory adjustments that are required by national
authorities to be applied to Additional Tier 1 in addition to the Basel III minimum set
of adjustments [i.e. in terms of December 2010 (rev June 2011) document issued
by the Basel Committee on Banking Supervision.
42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to
cover deductions. If the amount reported in row 57 exceeds the amount reported
in row 51 the excess is to be reported here.
43 The sum of rows 37 to 42.
44 Additional Tier 1 capital, to be calculated as row 36 minus row 43.
45 Tier 1 capital, to be calculated as row 29 plus row 44.
46 Instruments that meet all of the Tier 2 entry criteria set out in paragraph 4.2.5 of
the Master Circular. All instruments issued of subsidiaries of the consolidated group
should be excluded from this row. Provisions and Revaluation Reserves should not
be included in Tier 2 in this row.
47 Directly issued capital instruments subject to phase out from Tier 2 in accordance
with the requirements of paragraph 4.5 of the Master Circular
48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 32)
issued by subsidiaries and held by third parties (amount allowed in group Tier 2) in
accordance with paragraph 4.3.4 of the Master Circular
49 The amount reported in row 48 that relates to instruments subject to phase out
from Tier 2 in accordance with the requirements of paragraph 4.5 of the Master
Circular
50 Provisions and Revaluation Reserves included in Tier 2 calculated in accordance
with paragraph 4.2.5 of the Master Circular
51 The sum of rows 46 to 48 and row 50.
52 Investments in own Tier 2 instruments, amount to be deducted from Tier 2 in
accordance with paragraph 4.4.8 of the Master Circular
53 Reciprocal cross-holdings in Tier 2 instruments, amount to be deducted from Tier
2 in accordance with paragraph 4.4.9.2(A) of the Master Circular
54 Investments in the capital of banking, financial and insurance entities that are
outside the scope of regulatory consolidation where the bank does not own more
than 10% of the issued common share capital of the entity (net of eligible short
positions), amount to be deducted from Tier 2 in accordance with paragraph
4.4.9.2(B) of the Master Circular
55 Significant investments in the capital of banking, financial and insurance entities
that are outside the scope of regulatory consolidation (net of eligible short
positions), amount to be deducted from Tier 2 in accordance with paragraph
4.4.9.2(C) of the Master Circular
56 Any national specific regulatory adjustments that are required by national
authorities to be applied to Tier 2 in addition to the Basel III minimum set of
adjustments [i.e. in terms of December 2010 (rev June 2011) document issued by
the Basel Committee on Banking Supervision].
57 The sum of rows 52 to 56.
58 Tier 2 capital, to be calculated as row 51 minus row 57.
59 Total capital, to be calculated as row 45 plus row 58.
60 Total risk weighted assets of the reporting group. Details to be furnished under
rows 60a, 60b and 60c.
28961 Common Equity Tier 1ratio (as a percentage of risk weighted assets), to be
calculated as row 29 divided by row 60 (expressed as a percentage).
62 Tier 1 ratio (as a percentage of risk weighted assets), to be calculated as row 45
divided by row 60 (expressed as a percentage).
63 Total capital ratio (as a percentage of risk weighted assets), to be calculated as
row 59 divided by row 60 (expressed as a percentage).
64 Institution specific buffer requirement (minimum CET1 requirement plus capital
conservation buffer plus countercyclical buffer requirements plus higher of G-SIB
buffer requirement and D-SIB buffer requirement, expressed as a percentage of
risk weighted assets). To be calculated as 5.5% plus 2.5% capital conservation
buffer plus the bank specific countercyclical buffer requirement whenever activated
plus the higher of bank D-SIB requirement (where applicable) and the bank G-SIB
requirement (where applicable) as set out in Global systemically important banks:
assessment methodology and the additional loss absorbency requirement: Rules
text (November 2011) issued by the Basel Committee. This row will show the CET1
ratio below which the bank will become subject to constraints on distributions.
65 The amount in row 64 (expressed as a percentage of risk weighed assets) that
relates to the capital conservation buffer), i.e., banks will report 2.5% here.
66 The amount in row 64 (expressed as a percentage of risk weighed assets) that
relates to the bank specific countercyclical buffer requirement.
67 The amount in row 64 (expressed as a percentage of risk weighed assets) that
relates to the higher of the bank’s D-SIB requirement and G-SIB requirement.
68 Common Equity Tier 1 (as a percentage of risk-weighted assets) available to meet
the buffers after meeting the bank’s minimum capital requirements. To be
calculated as the CET1 ratio of the bank, less any common equity (as a percentage
of risk-weighted assets) used to meet the bank’s minimum CET1, minimum Tier 1
and minimum Total capital requirements.
69 National Common Equity Tier 1 minimum ratio (if different from Basel III minimum).
5.5% should be reported.
70 National Tier 1 minimum ratio (if different from Basel III minimum). 7% should be
reported.
71 National total capital minimum ratio (if different from Basel III minimum). 9% should
be reported.
72 Non-significant investments in the capital of other financial entities, the total amount
of such holdings that are not reported in row 18, row 39 and row 54.
73 Significant investments in the common stock of financial entities, the total amount
of such holdings that are not reported in row 19
74 Mortgage servicing rights, the total amount of such holdings that are not reported
in row 19 and row 23. - Not Applicable in India.
75 Deferred tax assets arising from temporary differences, the total amount of such
holdings that are not reported in row 21 and row 25.
76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to
standardised approach calculated in accordance paragraph 4.2.5 of the Master
Circular, prior to the application of the cap.
77 Cap on inclusion of provisions in Tier 2 under standardised approach calculated in
accordance paragraph 4.2.5 of the Master Circular.
78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal
ratings-based approach calculated in accordance paragraph 4.2.5 of the Master
Circular.
79 Cap for inclusion of provisions in Tier 2 under internal ratings-based approach
calculated in accordance paragraph 4.2.5 of the Master Circular
29080 Current cap on CET1 instruments subject to phase out arrangements see
paragraph 4.5 of the Master Circular
81 Amount excluded from CET1 due to cap (excess over cap after redemptions and
maturities), see paragraph 4.5 of the Master Circular
82 Current cap on AT1 instruments subject to phase out arrangements see paragraph
4.5 of the Master Circular
83 Amount excluded from AT1 due to cap (excess over cap after redemptions and
maturities) see paragraph 4.5 of the Master Circular
84 Current cap on T2 instruments subject to phase out arrangements see paragraph
4.5 of the Master Circular
85 Amount excluded from T2 due to cap (excess over cap after redemptions and
maturities) see paragraph 4.5 of the Master Circular
3.2 Three Step Approach to Reconciliation Requirements
Step 1
Under Step 1, banks are required to take their balance sheet in their financial statements
(numbers reported the middle column below) and report the numbers when the regulatory scope
of consolidation is applied (numbers reported in the right hand column below). If there are rows
in the regulatory consolidation balance sheet that are not present in the published financial
statements, banks are required to give a value of zero in the middle column and furnish the
corresponding amount in the column meant for regulatory scope of consolidation. Banks may
however, indicate what the exact treatment is for such amount in the balance sheet.
Table DF-12: Composition of Capital- Reconciliation Requirements
(Rs. in million)
Balance sheet as Balance sheet
in financial under
statements regulatory
scope of
consolidation
As on As on
reporting date reporting date
A Capital & Liabilities
i Paid-up Capital
Reserves & Surplus
Minority Interest
Total Capital
ii Deposits
of which: Deposits from banks
of which: Customer deposits
of which: Other deposits (pl. specify)
iii Borrowings
of which: From RBI
of which: From banks
of which: From other institutions &
agencies
291of which: Others (pl. specify)
of which: Capital instruments
iv Other liabilities & provisions
Total
B Assets
i Cash and balances with Reserve Bank of
India
Balance with banks and money at call and
short notice
ii Investments:
of which: Government securities
of which: Other approved securities
of which: Shares
of which: Debentures & Bonds
of which: Subsidiaries / Joint Ventures /
Associates
of which: Others (Commercial Papers,
Mutual Funds etc.)
iii Loans and advances
of which: Loans and advances to banks
of which: Loans and advances to
customers
iv Fixed assets
v Other assets
of which: Goodwill and intangible assets
of which: Deferred tax assets
vi Goodwill on consolidation
vii Debit balance in Profit & Loss account
Total Assets
Step 2
Under Step 2 banks are required to expand the regulatory-scope balance sheet (revealed in Step
1) to identify all the elements that are used in the definition of capital disclosure template set out
in Table DF-11. Set out below are some examples of elements that may need to be expanded for
a particular banking group. The more complex the balance sheet of the bank, the more items
would need to be disclosed. Each element must be given a reference number/letter that can be
used in Step 3.
(Rs. in million)
Balance sheet as Balance sheet
in financial under
statements regulatory
scope of
consolidation
As on reporting As on
date reporting date
292A Capital & Liabilities
i Paid-up Capital
of which: Amount eligible for CET1 e
of which: Amount eligible for AT1 f
Reserves & Surplus
Minority Interest
Total Capital
ii Deposits
of which: Deposits from banks
of which: Customer deposits
of which: Other deposits (pl. specify)
iii Borrowings
of which: From RBI
of which: From banks
of which: From other institutions & agencies
of which: Others (pl. specify)
of which: Capital instruments
iv Other liabilities & provisions
of which: DTLs related to goodwill c
of which: DTLs related to intangible assets d
Total
B Assets
i Cash and balances with Reserve Bank of
India
Balance with banks and money at call and
short notice
ii Investments
of which: Government securities
of which: Other approved securities
of which: Shares
of which: Debentures & Bonds
of which: Subsidiaries / Joint Ventures /
Associates
of which: Others (Commercial Papers,
Mutual Funds etc.)
iii Loans and advances
of which: Loans and advances to banks
of which: Loans and advances to
customers
iv Fixed assets
v Other assets
of which: Goodwill and intangible assets
Out of which:
Goodwill a
Other intangibles (excluding MSRs) b
Deferred tax assets
vi Goodwill on consolidation
vii Debit balance in Profit & Loss account
Total Assets
293Step 3: Under Step 3 banks are required to complete a column added to the Table DF-11
disclosure template to show the source of every input.
(iii) For example, the definition of capital disclosure template includes the line “goodwill net of
related deferred tax liability”. Next to the disclosure of this item in the disclosure template under
Table DF-11, the bank would be required to put ‘a – c’ to show that row 8 of the template has
been calculated as the difference between component ‘a’ of the balance sheet under the
regulatory scope of consolidation, illustrated in step 2, and component ‘c’.
Extract of Basel III common disclosure template (with added column) – Table DF-11 *
Common Equity Tier 1 capital: instruments and reserves
Component of Source based on
regulatory reference numbers/letters
capital reported of the balance sheet under
by bank the regulatory scope of
consolidation from step 2
1 Directly issued qualifying common e
share (and equivalent for non-joint stock
companies) capital plus related stock
surplus
2 Retained earnings
3 Accumulated other comprehensive
income (and other reserves)
4 Directly issued capital subject to phase
out from CET1 (only applicable to non-
joint stock companies)
5 Common share capital issued by
subsidiaries and held by third parties
(amount allowed in group CET1)
6 Common Equity Tier 1 capital before
regulatory adjustments
7 Prudential valuation adjustments
8 Goodwill (net of related tax liability) a-c
*This table is not a separate disclosure requirement. Rather, this extract indicates how step 3
would be reflected in Table DF-11.
3.3 Main Features Template
(i) Template which banks must use to ensure that the key features of regulatory capital
instruments are disclosed is set out below. Banks will be required to complete all of the shaded
cells for each outstanding regulatory capital instrument (banks should insert “NA” if the question
is not applicable).
294Table DF-13: Main Features of Regulatory Capital Instruments
Disclosure template for main features of regulatory capital instruments
1 Issuer
2 Unique identifier (e.g., CUSIP, ISIN or Bloomberg identifier for private
placement)
3 Governing law(s) of the instrument
Regulatory treatment
4 Transitional Basel III rules
5 Post-transitional Basel III rules
6 Eligible at solo/group/ group & solo
7 Instrument type
8 Amount recognised in regulatory capital (Rs. in million, as of most
recent reporting date)
9 Par value of instrument
10 Accounting classification
11 Original date of issuance
12 Perpetual or dated
13 Original maturity date
14 Issuer call subject to prior supervisory approval
15 Optional call date, contingent call dates and redemption amount
16 Subsequent call dates, if applicable
Coupons / dividends
17 Fixed or floating dividend/coupon
18 Coupon rate and any related index
19 Existence of a dividend stopper
20 Fully discretionary, partially discretionary or mandatory
21 Existence of step up or other incentive to redeem
22 Noncumulative or cumulative
23 Convertible or non-convertible
24 If convertible, conversion trigger(s)
25 If convertible, fully or partially
26 If convertible, conversion rate
27 If convertible, mandatory or optional conversion
28 If convertible, specify instrument type convertible into
29 If convertible, specify issuer of instrument it converts into
30 Write-down feature
31 If write-down, write-down trigger(s)
32 If write-down, full or partial
33 If write-down, permanent or temporary
34 If temporary write-down, description of write-up mechanism
35 Position in subordination hierarchy in liquidation (specify instrument
type immediately senior to instrument)
36 Non-compliant transitioned features
37 If yes, specify non-compliant features
(ii) Using the reference numbers in the left column of the table above, the following table
provides a more detailed explanation of what banks would be required to report in each of the
295grey cells, including, where relevant, the list of options contained in the spread sheet’s drop down
menu.
Further explanation of items in main features disclosure template
Identifies issuer legal entity.
1
Free text
Unique identifier (e.g., CUSIP, ISIN or Bloomberg identifier for private placement)
2
Free text
Specifies the governing law(s) of the instrument
3
Free text
Specifies transitional Basel III regulatory capital treatment.
4
Select from menu: [Common Equity Tier 1] [Additional Tier 1] [Tier 2]
Specifies regulatory capital treatment under Basel III rules not taking into account
5 transitional treatment.
Select from menu: [Common Equity Tier 1] [Additional Tier 1] [Tier 2] [Ineligible]
Specifies the level(s) within the group at which the instrument is included in capital.
6
Select from menu: [Solo] [Group] [Solo and Group]
Specifies instrument type, varying by jurisdiction. Helps provide more granular
understanding of features, particularly during transition.
Select from menu: [Common Shares] [Perpetual Non-cumulative Preference Shares]
7 [Perpetual Debt Instruments] [Upper Tier 2 Capital Instruments] [Perpetual
Cumulative Preference Shares] [ Redeemable Non-cumulative Preference Shares]
[Redeemable Cumulative Preference Shares] [Tier 2 Debt Instruments] [Others-
specify]
Specifies amount recognised in regulatory capital.
8
Free text
Par value of instrument
9
Free text
Specifies accounting classification. Helps to assess loss absorbency.
10 Select from menu:
[Shareholders’ equity] [Liability] [Non-controlling interest in consolidated subsidiary]
Specifies date of issuance.
11
Free text
Specifies whether dated or perpetual.
12
Select from menu: [Perpetual] [Dated]
For dated instrument, specifies original maturity date (day, month and year). For
13 perpetual instrument put “no maturity”.
Free text
Specifies whether there is an issuer call option. Helps to assess permanence.
14
Select from menu: [Yes] [No]
For instrument with issuer call option, specifies first date of call if the instrument has
a call option on a specific date (day, month and year) and, in addition, specifies if the
15 instrument has a tax and/or regulatory event call. Also specifies the redemption price.
Helps to assess permanence.
Free text
Specifies the existence and frequency of subsequent call dates, if applicable. Helps
16 to assess permanence.
Free text
296Specifies whether the coupon/dividend is fixed over the life of the instrument, floating
over the life of the instrument, currently fixed but will move to a floating rate in the
17
future, currently floating but will move to a fixed rate in the future.
Select from menu: [Fixed], [Floating] [Fixed to floating], [Floating to fixed]
Specifies the coupon rate of the instrument and any related index that the
18 coupon/dividend rate references.
Free text
Specifies whether the non-payment of a coupon or dividend on the instrument
prohibits the payment of dividends on common shares (i.e. whether there is a dividend
19
stopper).
Select from menu: [Yes], [No]
Specifies whether the issuer has full discretion, partial discretion or no discretion over
whether a coupon/dividend is paid. If the bank has full discretion to cancel
coupon/dividend payments under all circumstances it must select “fully discretionary”
(including when there is a dividend stopper that does not have the effect of preventing
20 the bank from cancelling payments on the instrument). If there are conditions that
must be met before payment can be cancelled (e.g. capital below a certain threshold),
the bank must select “partially discretionary”. If the bank is unable to cancel the
payment outside of insolvency the bank must select “mandatory”.
Select from menu: [Fully discretionary] [Partially discretionary] [Mandatory]
Specifies whether there is a step-up or other incentive to redeem.
21
Select from menu: [Yes] [No]
Specifies whether dividends / coupons are cumulative or noncumulative.
22
Select from menu: [Noncumulative] [Cumulative]
Specifies whether instrument is convertible or not. Helps to assess loss absorbency.
23
Select from menu: [Convertible] [Nonconvertible]
Specifies the conditions under which the instrument will convert, including point of
non-viability. Where one or more authorities have the ability to trigger conversion, the
authorities should be listed. For each of the authorities it should be stated whether it
24 is the terms of the contract of the instrument that provide the legal basis for the
authority to trigger conversion (a contractual approach) or whether the legal basis is
provided by statutory means (a statutory approach).
Free text
Specifies whether the instrument will always convert fully, may convert fully or
25 partially, or will always convert partially
Select from menu: [Always Fully] [Fully or Partially] [Always partially]
Specifies rate of conversion into the more loss absorbent instrument. Helps to assess
26 the degree of loss absorbency.
Free text
For convertible instruments, specifies whether conversion is mandatory or optional.
27 Helps to assess loss absorbency.
Select from menu: [Mandatory] [Optional] [NA]
For convertible instruments, specifies instrument type convertible into. Helps to
28 assess loss absorbency.
Select from menu: [Common Equity Tier 1] [Additional Tier 1] [Tier 2] [Other]
If convertible, specify issuer of instrument into which it converts.
29
Free text
Specifies whether there is a write down feature. Helps to assess loss absorbency.
30
Select from menu: [Yes] [No]
Specifies the trigger at which write-down occurs, including point of non-viability.
31
Where one or more authorities have the ability to trigger write-down, the authorities
297should be listed. For each of the authorities it should be stated whether it is the terms
of the contract of the instrument that provide the legal basis for the authority to trigger
write-down (a contractual approach) or whether the legal basis is provided by statutory
means (a statutory approach).
Free text
Specifies whether the instrument will always be written down fully, may be written
down partially, or will always be written down partially. Helps assess the level of loss
32
absorbency at write-down.
Select from menu: [Always Fully] [Fully or Partially] [Always partially]
For write down instrument, specifies whether write down is permanent or temporary.
33 Helps to assess loss absorbency.
Select from menu: [Permanent] [Temporary] [NA]
For instrument that has a temporary write-down, description of write-up mechanism.
34
Free text
Specifies instrument to which it is most immediately subordinate. Helps to assess loss
absorbency on gone-concern basis. Where applicable, banks should specify the
35 column numbers of the instruments in the completed main features template to which
the instrument is most immediately subordinate.
Free text
Specifies whether there are non-compliant features.
36
Select from menu: [Yes] [No]
If there are non-compliant features, banks to specify which ones. Helps to assess
37 instrument loss absorbency.
Free text
3.5 Full Terms and Conditions of Regulatory Capital Instruments
Under this template, banks are required to disclose the full terms and conditions of all instruments
included in the regulatory capital.
Table DF-14: Full Terms and Conditions of Regulatory Capital Instruments
Instruments Full Terms and Conditions
3.6 Disclosure Requirements for Remuneration
Please refer to the Guidelines on Compensation of Whole Time Directors/ Chief Executive
Officers/ Material Risk Takers and Control Function staff issued vide circular
DOR.Appt.BC.No.23/29.67.001/2019-20 dated November 4, 2019, as amended from time to time,
addressed to all private sector and foreign banks operating in India. Private sector and foreign
banks operating in India are required to make disclosure on remuneration on an annual basis at
the minimum, in their Annual Financial Statements in the following template:
298Table DF-15: Disclosure Requirements for Remuneration
Remuneration
Qualitative (a) Information relating to the bodies that oversee remuneration.
disclosures Disclosure should include:
• Name, composition and mandate of the main body overseeing
remuneration.
• External consultants whose advice has been sought, the body by
which they were commissioned, and in what areas of the
remuneration process.
• A description of the scope of the bank’s remuneration policy (eg.
by regions, business lines), including the extent to which it is
applicable to foreign subsidiaries and branches.
• A description of the type of employees covered and number of such
employees.
(b) Information relating to the design and structure of remuneration
processes. Disclosure should include:
• An overview of the key features and objectives of remuneration
policy.
• Whether the remuneration committee reviewed the firm’s
remuneration policy during the past year, and if so, an overview of
any changes that were made.
• A discussion of how the bank ensures that risk and compliance
employees are remunerated independently of the businesses they
oversee.
(c) Description of the ways in which current and future risks are taken
into account in the remuneration processes. Disclosure should
include:
• An overview of the key risks that the bank takes into account when
implementing remuneration measures.
• An overview of the nature and type of key measures used to take
account of these risks, including risk difficult to measure (values
need not be disclosed).
• A discussion of the ways in which these measures affect
remuneration.
• A discussion of how the nature and type of these measures have
changed over the past year and reasons for the changes, as well as
the impact of changes on remuneration.
(d) Description of the ways in which the bank seeks to link performance
during a performance measurement period with levels of
remuneration.
Disclosure should include:
• An overview of main performance metrics for bank, top level
business lines and individuals.
• A discussion of how amounts of individual remuneration are linked
to the bank-wide and individual performance.
• A discussion of the measures the bank will in general implement to
adjust remuneration in the event that performance metrics are weak.
This should include the bank’s criteria for determining ‘weak’
performance metrics.
299(e) Description of the ways in which the bank seeks to adjust
remuneration to take account of the longer term performance.
Disclosure should include:
• A discussion of the bank’s policy on deferral and vesting of variable
remuneration and, if the fraction of variable remuneration that is
deferred differs across employees or groups of employees, a
description of the factors that determine the fraction and their relative
importance.
• A discussion of the bank’s policy and criteria for adjusting deferred
remuneration before vesting and (if permitted by national law) after.
(f) Description of the different forms of variable remuneration that the
bank utilizes and the rationale for using these different forms.
Disclosure should include:
• An overview of the forms of variable remuneration offered.
• A discussion of the use of different forms of variable remuneration
and, if the mix of different forms of variable remuneration differs
across employees or group of employees, a description of the factors
that determine the mix and their relative importance.
Quantitative (g) * Number of meetings held by the main body overseeing
disclosures remuneration during the financial year and remuneration paid
(The to its member.
quantitative (h) * Number of employees having received a variable remuneration
disclosures award during the financial year.
should only * Number and total amount of sign-on awards made during the
cover Whole financial year.
Time
* Number and total amount of guaranteed bonuses awarded
Directors /
during the financial year.
Chief
* Details of severance pay, in addition to accrued benefits, if any.
Executive
(i) * Total amount of outstanding deferred remuneration, split into
Officer / Other
cash, shares and share-linked instruments and other forms.
Risk Takers)
* Total amount of deferred remuneration paid out in the financial
year.
(j) * Breakdown of amount of remuneration awards for the financial
year to show
• fixed and variable,
• deferred and non-deferred
• different forms used
(k) * Total amount of outstanding deferred remuneration and retained
remuneration exposed to ex post explicit and / or implicit
adjustments.
* Total amount of reductions during the financial year due to ex-
post explicit adjustments.
* Total amount of reductions during the financial year due to ex-
post implicit adjustments.
300Table DF-16: Equities – Disclosure for Banking Book Positions
Qualitative Disclosures
1 The general qualitative disclosure requirement (Para 2.1 of this Annex) with respect
to equity risk, including:
differentiation between holdings on which capital gains are expected and
those taken under other objectives including for relationship and strategic
reasons; and
discussion of important policies covering the valuation and accounting of
equity holdings in the banking book. This includes the accounting techniques
and valuation methodologies used, including key assumptions and practices
affecting valuation as well as significant changes in these practices.
Quantitative Disclosures
1 Value disclosed in the balance sheet of investments, as well as the fair value of
those investments; for quoted securities, a comparison to publicly quoted share
values where the share price is materially different from fair value.
2 The types and nature of investments, including the amount that can be classified
as:
Publicly traded; and
Privately held.
3 The cumulative realised gains (losses) arising from sales and liquidations in the
reporting period.
4 Total unrealised gains (losses)266
5 Total latent revaluation gains (losses)267
6 Any amounts of the above included in Tier 1 and/or Tier 2 capital.
7 Capital requirements broken down by appropriate equity groupings, consistent with
the bank’s methodology, as well as the aggregate amounts and the type of equity
investments subject to any supervisory transition or grandfathering provisions
regarding regulatory capital requirements.
4. Leverage Ratio Disclosures
(i) The scope of consolidation of the Basel III leverage ratio as set out in paragraph 16.2.3
may be different from the scope of consolidation of the published financial statements.
Also, there may be differences between the measurement criteria of assets on the
accounting balance sheet in the published financial statements relative to measurement
criteria of the leverage ratio (e.g., due to differences of eligible hedges, netting or the
recognition of credit risk mitigation). Further, in order to adequately capture embedded
leverage, the framework incorporates both on- and off-balance sheet exposures.
266 Unrealised gains (losses) recognised in the balance sheet but not through the profit and loss account.
267 Unrealised gains (losses) not recognised either in the balance sheet or through the profit and loss account.
301(ii) The templates set out below are designed to be flexible enough to be used under any
accounting standard, and are consistent yet proportionate, varying with the complexity of
the balance sheet of the reporting bank268.
4.1 Summary comparison table
4.1.1 Applying values at the end of period (e.g., quarter-end), banks must report a reconciliation
of their balance sheet assets from their published financial statements with the leverage ratio
exposure measure as shown in Table DF-17 below. Specifically:
line 1 should show the bank’s total consolidated assets as per published financial
statements;
line 2 should show adjustments related to investments in banking, financial, insurance or
commercial entities that are consolidated for accounting purposes, but outside the scope
of regulatory consolidation as set out in paragraphs 16.2.4 and 16.4.2.2;
line 3 should show adjustments related to any fiduciary assets recognised on the balance
sheet pursuant to the bank’s operative accounting framework but excluded from the
leverage ratio exposure measure, as described in footnote 147 of the Master Circular;
lines 4 and 5 should show adjustments related to derivative financial instruments and
securities financing transactions (i.e., repos and other similar secured lending),
respectively;
line 6 should show the credit equivalent amount of OBS items, as determined under
paragraph 16.4.5.2;
line 7 should show any other adjustments; and
line 8 should show the leverage ratio exposure, which should be the sum of the previous
items. This should also be consistent with line 22 of Table DF-18 below.
Table DF 17- Summary comparison of
accounting assets vs. leverage ratio exposure measure
Item (Rs. in Million)
1 Total consolidated assets as per published financial statements
2 Adjustment for investments in banking, financial, insurance or
commercial entities that are consolidated for accounting purposes
but outside the scope of regulatory consolidation
3 Adjustment for fiduciary assets recognised on the balance sheet
pursuant to the operative accounting framework but excluded from
the leverage ratio exposure measure
4 Adjustments for derivative financial instruments
5 Adjustment for securities financing transactions (i.e., repos and
similar secured lending)
268 Specifically, a common template is set out. However, with respect to reconciliation, banks are to qualitatively
reconcile any material difference between total balance sheet assets in their reported financial statements and on-
balance sheet exposures as prescribed in the leverage ratio.
3026 Adjustment for off-balance sheet items (i.e., conversion to credit
equivalent amounts of off- balance sheet exposures)
7 Other adjustments
8 Leverage ratio exposure
4.2 Common disclosure template and explanatory table, reconciliation and other
requirements
4.2.1 Banks must report, in accordance with Table DF-18 below, and applying values at the end
of period (e.g., quarter-end), a breakdown of the following exposures under the leverage ratio
framework: (i) on-balance sheet exposures; (ii) derivative exposures; (iii) SFT exposures; and (iv)
OBS items. Banks must also report their Tier 1 capital, total exposures and the leverage ratio.
4.2.2 The Basel III leverage ratio for the quarter, expressed as a percentage and calculated
according to paragraph 16.2, is to be reported in line 22.
4.2.3 Reconciliation with public financial statements: banks are required to disclose and detail
the source of material differences between their total balance sheet assets (net of on-balance
sheet derivative and SFT assets) as reported in their financial statements and their on-balance
sheet exposures in line 1 of the common disclosure template.
4.2.4 Material periodic changes in the leverage ratio: banks are required to explain the key
drivers of material changes in their Basel III leverage ratio observed from the end of the previous
reporting period to the end of the current reporting period (whether these changes stem from
changes in the numerator and/or from changes in the denominator).
Table DF-18: Leverage ratio common disclosure template
Item Leverage ratio
framework
(Rs. in million)
On-balance sheet exposures
1 On-balance sheet items (excluding derivatives and SFTs, but
including collateral)
2 (Asset amounts deducted in determining Basel III Tier 1 capital)
3 Total on-balance sheet exposures (excluding derivatives and
SFTs) (sum of lines 1 and 2)
Derivative exposures
4 Replacement cost associated with all derivatives transactions
(i.e., net of eligible cash variation margin)
5 Add-on amounts for PFE associated with all derivatives
transactions
6 Gross-up for derivatives collateral provided where deducted
from the balance sheet assets pursuant to the operative
accounting framework
7 (Deductions of receivables assets for cash variation margin
provided in derivatives transactions)
8 (Exempted CCP leg of client-cleared trade exposures)
3039 Adjusted effective notional amount of written credit derivatives
10 (Adjusted effective notional offsets and add-on deductions for
written credit derivatives)
11 Total derivative exposures (sum of lines 4 to 10)
Securities financing transaction exposures
12 Gross SFT assets (with no recognition of netting), after adjusting
for sale accounting transactions
13 (Netted amounts of cash payables and cash receivables of gross
SFT assets)
14 CCR exposure for SFT assets
15 Agent transaction exposures
16 Total securities financing transaction exposures (sum of
lines 12 to 15)
Other off-balance sheet exposures
17 Off-balance sheet exposure at gross notional amount
18 (Adjustments for conversion to credit equivalent amounts)
19 Off-balance sheet items (sum of lines 17 and 18)
Capital and total exposures
20 Tier 1 capital
21 Total exposures (sum of lines 3, 11, 16 and 19)
Leverage ratio
22 Basel III leverage ratio
4.2.5 The following table sets out explanations for each row of the disclosure template
referencing the relevant paragraphs of the Basel III leverage ratio framework detailed in this
document.
Explanation of each row of the common disclosure template
Row Explanation
number
1 On-balance sheet assets according to paragraph 16.4.2.1.
2 Deductions from Basel III Tier 1 capital determined by paragraphs 16.2.4 and
16.4.2.2 and excluded from the leverage ratio exposure measure, reported as
negative amounts.
3 Sum of lines 1 and 2.
4 Replacement cost (RC) associated with all derivatives transactions (including
exposures resulting from transactions described in paragraph 16.4.3.11), net of
cash variation margin received and with, where applicable, bilateral netting
according to paragraphs 16.4.3.2-16.4.3.4 and 16.4.3.9.
5 Add-on amount for all derivative exposures according to paragraphs 16.4.3.2-
16.4.3.4
6 Grossed-up amount for collateral provided according to paragraph 16.4.3.7
7 Deductions of receivables assets from cash variation margin provided in
derivatives transactions according to paragraph 16.4.3.9, reported as negative
amounts.
8 Exempted trade exposures associated with the CCP leg of derivatives
transactions resulting from client-cleared transactions according to paragraph
16.4.3.10, reported as negative amounts.
3049 Adjusted effective notional amount (i.e., the effective notional amount reduced by
any negative change in fair value) for written credit derivatives according to
paragraph 16.4.3.13.
10 Adjusted effective notional offsets of written credit derivatives according to
paragraph 16.4.3.13 and deducted add-on amounts relating to written credit
derivatives according to paragraph 16.4.3.14, reported as negative amounts.
11 Sum of lines 4–10.
12 Gross SFT assets with no recognition of any netting other than novation with
QCCPs as set out in footnote 139, removing certain securities received as
determined by paragraph 16.4.4.2 (A) and adjusting for any sales accounting
transactions as determined by paragraph 16.4.4.3.
13 Cash payables and cash receivables of gross SFT assets netted according to
paragraph 16.4.4.2 (A), reported as negative amounts.
14 Measure of counterparty credit risk for SFTs as determined by paragraph 16.4.4.2
(B).
15 Agent transaction exposure amount determined according to paragraphs
16.4.4.4-16.4.4.6
16 Sum of lines 12–15.
17 Total off-balance sheet exposure amounts on a gross notional basis, before any
adjustment for credit conversion factors according to paragraph 16.4.5.2.
18 Reduction in gross amount of off-balance sheet exposures due to the application
of credit conversion factors in paragraph 16.4.5.2.
19 Sum of lines 17 and 18.
20 Tier 1 capital as determined by paragraph 16.3.
21 Sum of lines 3, 11, 16 and 19.
22 Basel III leverage ratio according to paragraph 4.2.2 of Annex 17.
4.2.6 To ensure that the summary comparison table, common disclosure template and
explanatory table remain comparable across jurisdictions, there should be no adjustments made
by banks to disclose their leverage ratio. Banks are not permitted to add, delete or change the
definitions of any rows from the summary comparison table and common disclosure template
implemented in their jurisdiction. This will prevent a divergence of tables and templates that could
undermine the objectives of consistency and comparability.
305Annex 18
Requirements for Recognition of Net Replacement Cost
in Close-out Netting Sets
A. For repo-style transactions
The effects of bilateral netting agreements covering repo-style transactions will be recognised on
a counterparty-by-counterparty basis if the agreements are legally enforceable in each relevant
jurisdiction upon the occurrence of an event of default and regardless of whether the counterparty
is insolvent or bankrupt. In addition, netting agreements must:
a) provide the non-defaulting party the right to terminate and close-out in a timely manner
all transactions under the agreement upon an event of default, including in the event
of insolvency or bankruptcy of the counterparty;
b) provide for the netting of gains and losses on transactions (including the value of any
collateral) terminated and closed out under it so that a single net amount is owed by
one party to the other;
c) allow for the prompt liquidation or setoff of collateral upon the event of default; and
d) be, together with the rights arising from the provisions required in (a) to (c) above,
legally enforceable in each relevant jurisdiction upon the occurrence of an event of
default and regardless of the counterparty's insolvency or bankruptcy.
e) Netting across positions in the banking and trading book will only be recognised when
the netted transactions fulfil the following conditions:
(i) All transactions are marked to market daily269; and
(ii) The collateral instruments used in the transactions are recognised as eligible
financial collateral in the banking book.
B. For Derivatives transactions
(a) Banks may net transactions subject to novation under which any obligation between a
bank and its counterparty to deliver a given currency on a given value date is automatically
amalgamated with all other obligations for the same currency and value date, legally substituting
one single amount for the previous gross obligations.
(b) Banks may also net transactions subject to any legally valid form of bilateral netting not
covered in (a), including other forms of novation.
269 The holding period for the haircuts will depend as in other repo-style transactions on the frequency of margining.
306(c) In both cases (a) and (b), a bank will need to satisfy that it has:
(i) A netting contract or agreement270 with the counterparty which creates a single legal
obligation, covering all included transactions, such that the bank would have either a
claim to receive or obligation to pay only the net sum of the positive and negative
mark-to-market values of included individual transactions in the event a counterparty
fails to perform due to any of the following: default, bankruptcy, liquidation or similar
circumstances;
(ii) Written and reasoned legal opinions that, in the event of a legal challenge, the relevant
courts and administrative authorities would find the bank's exposure to be such a net
amount under:
The law of the jurisdiction in which the counterparty is chartered and, if the
foreign branch of a counterparty is involved, then also under the law of the
jurisdiction in which the branch is located;
The law that governs the individual transactions; and
The law that governs any contract or agreement necessary to effect the netting.
(iii) Procedures in place to ensure that the legal characteristics of netting arrangements
are kept under review in the light of possible changes in relevant law.
(d) Contracts containing walkaway clauses will not be eligible for netting for the purpose of
calculating capital requirements under these guidelines. A walkaway clause is a provision which
permits a non-defaulting counterparty to make only limited payments or no payment at all, to the
estate of a defaulter, even if the defaulter is a net creditor.
270 It is clarified that the membership agreement together with relevant netting provisions contained in QCCP’s bye
laws, rules and regulations are a type of netting agreement.
307Annex 19
(cf para 3.4.7)
Guidelines on General permission for infusion of capital in overseas banking centres271
and retention/ repatriation/ transfer of profits in these centres by banks incorporated in
India
Banks which meet the regulatory capital requirements (including capital buffers272) may, with the
approval of their boards:
a) infuse capital in their overseas branches and banking subsidiaries; and
b) retain profits in, and transfer or repatriate profits from these overseas centres.
2. Banks shall, while considering such proposals, analyse all relevant aspects including inter alia
the business plans, home and host country regulatory requirements and performance parameters
of their overseas centres. Banks shall also ensure compliance with all applicable home and host
country laws and regulations.
3. Banks which do not meet the minimum regulatory capital requirements as laid down in para 1
above, shall be required to seek prior approval of RBI.
Reporting
4. Banks shall report all such instances of infusion of capital and/ or retention273/transfer/
repatriation of profits in overseas branches and banking subsidiaries within 30 days of such
action, to the Chief General Manager-in-Charge, Department of Regulation, Central Office,
Mumbai with a copy to Chief General Manager-in-Charge, Department of Supervision, Central
Office, Mumbai.
Applicability
5. The guidelines in this Annex are not applicable to foreign banks, Small Finance Banks,
Payments Banks and Regional Rural Banks.
271 Overseas banking centres, in the context of this Annex, include Branches, Banking Subsidiaries, Joint Ventures
and Associates. Banks shall continue to take the applicable RBI approvals necessary for opening and for change in
the nature of these centres.
272 Capital Conservation Buffer (CCB), including Domestic – Systemically Important Bank (D-SIB) capital requirements
where applicable, and Counter-Cyclical Capital Buffer as may be mandated.
273 In case of retention of profits in overseas branch/ subsidiary, the reporting shall be done within 30 days of the
finalisation of the annual financial statements of the overseas branch/ subsidiary.
308Annex 20
(refer para 4.4.2(iii))
Calculation of 15% of common equity limit on items subject to limited recognition (i.e.,
DTAs associated with timing differences and significant investments in common shares
of unconsolidated financial entities)
1. Banks must follow the 15% limit on significant investments in the common shares of
unconsolidated financial institutions (banks, insurance and other financial entities) and deferred
tax assets arising from timing differences (collectively referred to as specified items) as stipulated
in paragraph 3 of this circular.
2. The recognition of these specified items will be limited to 15% of Common Equity Tier 1 (CET1)
capital, after the application of all deductions. To determine the maximum amount of the specified
items that can be recognised*, banks should multiply the amount of CET1** (after all deductions,
including after the deduction of the specified items in full i.e., specified items should be fully
deducted from CET1 along with other deductions first for arriving at CET1**) by 17.65%. This
number i.e., 17.65% is derived from the proportion of 15% to 85% (15%/85% = 17.65%).
3. As an example, take a bank with Rs.85 of common equity (calculated net of all deductions,
including after the deduction of the specified items in full).
4. The maximum amount of specified items that can be recognised by this bank in its calculation
of CET1 capital is Rs.85 x 17.65% = Rs.15. Any excess above Rs.15 must be deducted from
CET1. If the bank has specified items (excluding amounts deducted after applying the individual
10% limits) that in aggregate sum up to the 15% limit, CET1 after inclusion of the specified items,
will amount to Rs.85 + Rs.15 = Rs.100. The percentage of specified items to total CET1 would
equal 15%.
* The actual amount that will be recognised may be lower than this maximum, either because the sum of the three
specified items are below the 15% limit set out in this annex, or due to the application of the 10% limit applied to each
item.
** At this point, this is a "hypothetical" amount of CET1 in that it is used only for the purposes of determining the
deduction of the specified items.
309Annex 21
(refer para 5.9.3)
Illustrations of revised instructions on Regulatory Retail
Scenario 1 : As on October 12, 2020, a bank has an exposure of ₹ 4 crore to borrower A which
qualifies for classification as ‘regulatory retail’ in terms of Paragraph 5.9 of the Master Circular.
Accordingly, it attracts 75% risk weight.
If the bank takes an additional exposure to borrower A upto ₹ 7.5 crore and which continues to
satisfy all other eligibility criteria of para 5.9 of the above-mentioned circular, the entire revised
exposure shall qualify for classification as ‘regulatory retail’ and attract 75% risk weight.
Scenario 2 : As on October 12, 2020, a bank has an exposure of ₹ 6 crore to borrower B. After
October 12, 2020, if the bank takes an additional exposure to borrower B, upto ₹ 7.5 crore and
which otherwise satisfies all other eligibility criteria of para 5.9 of the above-mentioned circular,
the entire revised exposure shall qualify for classification as ‘regulatory retail’ and attract 75% risk
weight. However, if no additional exposure is taken after October 12, 2020, then the existing
exposure shall continue to attract risk weight as applicable earlier. The illustrations are tabulated
below.
Borrower A B
Scenarios 1 2 3 4
A Existing Exposure (in ₹ crore) 4.0 4.0 6.0 6.0
as on October 12, 2020
B Existing risk weight 75% 75% 100% 100%
C Additional exposure taken on 0 1.5 0 1.5
or after October 12, 2020 (in
₹ crore)
D Total exposure on or after 4.0 5.5 6 7.5
October 12, 2020 (in ₹ crore)
E Applicable risk weight on D 75% 75% 100% 75%
310Annex 22
Format- Reporting of Capital Issuances
Issuer
Issue Size
Instrument
Deemed Date of Allotment
Coupon
Tenor
Credit Rating
Put Option
Call Option
Redemption/ Maturity
Whether Private Placement or otherwise
Banks may also email a soft copy of such details in excel format to cgmicdor@rbi.org.in
2. The reporting shall be duly certified by the compliance officer of the bank.
3. The compliance of the capital issuances with the Basel III Capital regulations will continue to
be examined by our Department of Supervision, in course of the supervisory evaluation.
311Annex 23
(refer para 5.15.3.4)
Clarifications regarding Bilateral Netting under Current Exposure Method
Banks’ Query Our Response
1. W hile the definition of ‘Netting Set’
provided in para 5.15.3.2 requires
Netting Set to be formed basis legally
enforceable bilateral netting
arrangement, The Bilateral Netting of
Qualified Financial Contracts Act,
2020 stipulates that bilateral netting
act applies to a Qualified Financial
Contract entered into on a bilateral
To avail the benefit of bilateral netting for
basis between qualified financial
computation of regulatory capital requirement for
market participants, either under a
derivative transactions, the bank shall have an
netting agreement or otherwise.
effective bilateral netting contract or agreement
Clarification required on the following with each counterparty, as specified in Annex 18
(Part B).
a) Whether the Bank can legally
enforce bilateral netting
arrangements without executing
separate mutual bilateral agreements
with each counterparty?
b) If response for part “a” is “Yes”
then, do the Banks still need to satisfy
the terms & conditions as articulated
in Annexure 18 – Part B of Basel III
capital regulations?
2. Pa ragraph 5.15.3.4(vi) provides the (a) Bilateral Netting as per para 5.15.3.4(vi), shall
formula for computation of credit be applicable for all over-the-counter (OTC)
exposure for ‘bilaterally netted derivative exposures to a counterparty, arising
forward transactions’. Please clarify from the netting set covered by a qualifying
bilateral netting agreement, subject to meeting
a) whether the term ‘bilaterally netted
the criterion prescribed for effective bilateral
forward transactions’ means ‘all
netting contracts as specified in Annex 18 (Part
bilaterally netted contracts maturing
B).
on a future date’; and
(b) For such exposures as at (a) above, as
b) whether A formula be applied
Net
specified in para 5.15.3.4 (vi) , Replacement Cost
considering all types of deals in the
will be Net Replacement Cost and Potential
netting set or only those where the
Future Exposure will be A . A is calculated
notional principal amount is Net Net
using gross add-on (A ) and NGR. Gross add-
equivalent to cash flows. Gross
on (A ), in turn, is calculated as sum of
Gross
312Banks’ Query Our Response
individual add-on amounts (add-on factor
multiplied by notional principal amount).
(c) However, while calculating add-on amounts in
case of forward foreign exchange contracts or
other similar contracts where notional principal
amount is equivalent to cash flows, the notional
principal amount can be taken as the net receipts
falling due on each value date in each currency.
3. Th e definition of cross-product The term ‘product categories’ in the definition of
netting, as per paragraph 5.15.3.2, cross-product netting refers to (a) OTC derivative
provides that “Cross-Product Netting transactions and (b) repo / reverse repo.
refers to the inclusion of transactions
Cross-Product Netting is not permitted for capital
of different product categories within
adequacy as well as leverage ratio measure.
the same netting set”. Also, footnote
120 provides that cross-product Thus, all eligible OTC derivative transactions with
netting is not permitted in determining a counterparty will form part of one netting set and
the leverage ratio exposure measure. all eligible OTC repo / reverse repo transactions
with that counterparty will form part of a separate
In this regard, please clarify
netting set.
a) meaning of product categories in
definition of cross-product netting
b) whether cross-product netting is
allowed for capital adequacy
framework.
4. Th e definition of ‘Outstanding EAD’, The total capital charge for counterparty credit
as per paragraph 5.15.3.2, provides risk in OTC derivatives is sum of capital charge to
that “Outstanding EAD for a given cover the default risk and capital charge for credit
OTC derivative counterparty is valuation adjustment (CVA) risk. CVA risk is credit
defined as the greater of zero and the migration risk of the counterparty reflected in
difference between the sum of EADs mark-to-market losses on the expected
across all netting sets with the counterparty risk.
counterparty and the credit valuation The ‘capital charge for default risk’ will be
adjustment (CVA) for that calculated using Current Exposure Method
counterparty which has already been (CEM) as explained in paragraph 5.15.3.4. Under
recognised by the bank as an CEM, the exposure amount for default risk is the
incurred write-down (i.e., a CVA credit equivalent amount of a market related off-
loss)”. balance sheet transaction calculated as the sum
of current credit exposure and potential future
In this regard, please clarify whether
credit exposure of OTC derivative contracts. The
“CVA loss” mentioned above refers to
credit equivalent amount will be adjusted for
“Incurred CVA loss” as per paragraph
legally valid eligible financial collaterals and the
provisions held by the bank for CVA losses. The
313Banks’ Query Our Response
8.8.1.2 or “CVA Capital charge as per CVA loss will be calculated as per instructions
paragraph 5.15.3.5. contained in paragraph 8.8.1.2.
In addition to the default risk capital requirement
for counterparty credit risk as discussed above,
banks are also required to compute an additional
capital charge to cover the risk of mark-to-market
losses on the expected counterparty risk (such
losses being known as credit value adjustments,
CVA) to OTC derivatives. The CVA capital charge
will be calculated as per instructions given in para
5.15.3.5.
In the definition of ‘Outstanding EAD’, the
reference has been made to ‘CVA loss’ which
should be calculated as per paragraph 8.8.1.2.
5. W ith the revised guidelines, trades The risk-weight corresponding to the worst
across maturities within a netting set applicable long-term rating of the counterparty
will be netted. In this connection, should be applied.
please clarify whether the Long-term,
or Short-term ratings shall be
considered for claims on corporates.
6. Pa ragraph 7.3.9 provides that The collateral can be netted against both
collateral can be used to net off replacement cost and PFE for capital adequacy
exposure (RC as well as PFE) under purposes.
capital adequacy framework.
While computing for leverage ratio exposure
However, for leverage ratio,
measure, as provided in paragraph 16.4.3.5 to
paragraph 16.4.3.9 provides Cash
16.4.3.9, collateral cannot be netted against
variation margin cannot be used to
derivative exposure (RC and PFE). However,
reduce the PFE amount. Please
cash variation margin can be used to reduce
clarify whether collateral (cash
replacement cost portion of the leverage ratio
variation margin) can be used for PFE
exposure measure, but not the PFE subject to
as well.
conditions provided in paragraph 16.4.3.8 and
16.4.3.9.
7. W hether the amendments to a) The exposure computation under the Large
Prudential guidelines for Bilateral Exposure Framework shall be as per this Master
Netting shall be applicable for Circular.
exposure computation under Large
b) A reference is made to Guidance Note on
Exposure Framework and Financial
Accounting for Derivative Contracts (Revised
Disclosures.
2021) issued by the Institute of Chartered
Accountants of India (ICAI). The Guidance Note
314Banks’ Query Our Response
(Para 64) mandates that all amounts presented in
the financial statements should be gross
amounts.
8. a) The counterparty exposure for a) Banks may refer to paragraph 8.8.1.2, read
incurred CVA is calculated using the with paragraph 5.15.3 of this Master Circular in
CEM method. However, given the the matter.
CEM method has undergone an
b) Reference is invited to clarification no. 5 above.
amendment pursuant to the netting
Under the same principle, it is clarified that credit
guidelines, clarity is required that the
spread pertaining to long-term issuer rating shall
exposure used for calculating
be used.
Incurred CVA Loss should also be
considered on net basis wherever
applicable (in case of enforceable
netting agreement).
b) Also, given that there will be many
trades with different start date and
maturity date within the same netting
set, clarity is required on the credit
spread to be used for calculation of
incurred CVA losses.
9. As per Paragraph 5.9.8 ‘Provisioning The provisioning requirement for standard assets
requirements for derivative shall be applicable on the credit exposures arising
exposures’ of Master Circular on from derivative contracts. For this purpose, credit
‘Prudential norms on Income exposure of derivative contracts shall be
Recognition, Asset Classification and computed as per this Master Circular.
Provisioning pertaining to Advances’ Accordingly, standard asset provisions on
dated April 1, 2022, derivative derivative exposures may be computed based on
transactions shall attract provisioning net replacement cost instead of current marked to
requirement as applicable to the loan market value of the contract (i.e., replacement
assets in the 'standard' category. cost), subject to compliance with the conditions
The treatment applicable after prescribed for “effective bilateral netting
implementation of bilateral netting contracts” in this Master Circular.
framework may be clarified.
10. Ne tting guidelines do not indicate The Current Exposure Method, as provided in this
about any amendment of para 2.1.3.2 Master Circular, shall be applicable for
on Measurement of Credit Exposure measurement of credit exposure of derivatives
of Derivative Products to the Master products for the purpose of para 2.1.3.2 of Master
Circular – Exposure Norms dated Circular – Exposure Norms dated July 1, 2015, as
July 1, 2015. amended from time to time.
315Annex 24
(Refer para 5.2.4)
Illustrative Examples - Risk Weights (RW) applicable on credit facilities guaranteed under
specific existing schemes
(Guarantee coverage, first loss percentage and payout cap ratio may be factored in as given
below and as amended from time to time in the respective schemes)
Scheme name Guarantee Cover Risk Weight
1. Credit Guarantee The first loss of 10% of the amount in First loss of 10% amount in
Fund Scheme for default to be borne by Factors. The default – Full capital
Factoring (CGFSF) remaining 90% (i.e. second loss) of the deduction
amount in default will be borne by 60% amount in default
NCGTC and Factors in the ratio of 2:1 borne by NCGTC- 0% RW.
respectively Balance 30% amount in
default
Counterparty/Regulatory
Retail Portfolio (RRP) RW
as applicable.
Note: The maximum capital
charge shall be capped at a
notional level arrived by
treating the entire exposure
as unguaranteed.
2. Credit Guarantee 75% of the amount in default. Entire amount in default -
Fund Scheme for 100% of the guaranteed claims shall Counterparty/ Regulatory
Skill Development be paid by the Trust after all avenues Retail Portfolio (RRP) RW
(CGFSD) for recovery have been exhausted and as applicable.
there is no scope for recovering the
default amount.
3. Credit Guarantee Micro Loans First loss of 3% amount in
Fund for Micro Units The first loss to the extent of 3% of default – Full capital
(CGFMU) amount in default. deduction
Out of the balance, guarantee will be to 72.75% of the amount in
a maximum extent of 75% of the default - 0% RW, subject to
amount in default in the crystallized maximum of
portfolio SLA
({15%∗CP}−C)∗[ ]
CP
316Where-
o CP = Crystallized Portfolio
(sanctioned amount)
o C = Claims received in
previous years, if any, in the
crystallized portfolio
o SLA = Sanctioned limit of
each account in the
crystallized portfolio
o 15 per cent represents the
payout cap
Balance amount in default -
Counterparty/ RRP RW as
applicable.
Note: The maximum capital
charge shall be capped at a
notional level arrived by
treating the entire exposure
as unguaranteed.
4.CGTMSE Upto ₹5 lakh Guaranteed amount in
guarantee coverage 85% of the amount in default subject to default – 0% RW*
for Micro-Enterprises a maximum of ₹4.25 lakh Balance amount in default -
Above ₹5 lakh & upto ₹50 lakh Counterparty/ RRP RW as
75% of the amount in default subject to applicable.
a maximum of ₹37.50 lakh
Above ₹50 lakh & upto ₹200 lakh
75% of the amount in default subject to
a maximum of ₹150 lakh
*In terms of the payout cap stipulations of CGTMSE, claims of the member lending institutions
will be settled to the extent of 2 times of the fee including recovery remitted during the previous
financial year. However, since the balance claims will be settled in subsequent year/s as the
position is remedied, the entire extent of guaranteed portion may be assigned zero percent risk
weight.
317Annex 25
GLOSSARY
Asset An asset is anything of value that is owned by a person or business
Balance Sheet A balance sheet is a financial statement of the assets and liabilities of a
trading concern, recorded at a particular point in time.
Basel Committee The Basel Committee is a committee of bank supervisors consisting of
on Banking members from each of the G10 countries. The Committee is a forum for
Supervision discussion on the handling of specific supervisory problems. It coordinates
the sharing of supervisory responsibilities among national authorities in
respect of banks' foreign establishments with the aim of ensuring effective
supervision of banks' activities worldwide. Update with latest
Basic Indicator An operational risk measurement technique permitted under Basel II. The
Approach approach sets a charge for operational risk as a fixed percentage ("alpha
factor") of a single indicator. The indicator serves as a proxy for the bank's
risk exposure.
Basis Risk The risk that the interest rate of different assets, liabilities and off-balance
sheet items may change in different magnitude is termed as basis risk.
Capital Capital refers to the funds (e.g., money, loans, equity, etc.) which are
available to carry on a business, make an investment, and generate future
revenue. Capital also refers to physical assets which can be used to generate
future returns.
Capital adequacy A measure of the adequacy of an entity's capital resources in relation to its
current liabilities and also in relation to the risks associated with its assets.
An appropriate level of capital adequacy ensures that the entity has sufficient
capital to support its activities and that its net worth is sufficient to absorb
adverse changes in the value of its assets without becoming insolvent. For
example, under BIS (Bank for International Settlements) rules, banks are
required to maintain a certain level of capital against their risk-adjusted
assets.
Capital reserves That portion of a company's profits not paid out as dividends to shareholders.
They are also known as undistributable reserves.
Convertible Bond A bond giving the investor the option to convert the bond into equity at a fixed
conversion price or as per a pre-determined pricing formula.
Credit risk Risk that a party to a contractual agreement or transaction will be unable to
meet their obligations or will default on commitments. Credit risk can be
associated with almost any transaction or instrument such as swaps, repos,
CDs, foreign exchange transactions, etc.
Specific types of credit risk include sovereign risk, country risk, legal or force
majeure risk, marginal risk and settlement risk.
Debentures Bonds issued by a company bearing a fixed rate of interest usually payable
half yearly on specific dates and principal amount repayable on a particular
date on redemption of the debentures.
Deferred Tax Unabsorbed depreciation and carry forward of losses which can be set-off
Assets against future taxable income which is considered as timing differences
result in deferred tax assets. The deferred Tax Assets are accounted as per
the Accounting Standard 22.
Deferred Tax Assets have an effect of decreasing future income tax
payments, which indicates that they are prepaid income taxes and meet
definition of assets. Whereas deferred tax liabilities have an effect of
increasing future year's income tax payments, which indicates that they are
accrued income taxes and meet definition of liabilities
Delta (Δ) The delta of an option / a portfolio of options is the rate of change in the value
of the option / portfolio with respect to change in the price of the asset(s)
underlying the option(s).
318Derivative A derivative instrument derives much of its value from an underlying product.
Examples of derivatives include futures, options, forwards and swaps. For
example, a forward contract can be derived from the spot currency market
and the spot markets for borrowing and lending. In the past, derivative
instruments tended to be restricted only to those products which could be
derived from spot markets. However, today the term seems to be used for
any product that can be derived from any other.
Duration Duration (Macaulay duration) measures the price volatility of fixed income
securities. It is often used in the comparison of the interest rate risk between
securities with different coupons and different maturities. It is the weighted
average of the present value of all the cash flows associated with a fixed
income security. It is expressed in years. The duration of a fixed income
security is always shorter than its term to maturity, except in the case of zero
coupon securities where they are the same.
Foreign An institution established or incorporated outside India which proposes to
Institutional make investment in India insecurities; provided that a domestic asset
Investor management company or domestic portfolio manager who manages funds
raised or collected or brought from outside India for investment in India on
behalf of a sub-account, shall be deemed to be a Foreign Institutional
Investor.
Forward Contract A forward contract is an agreement between two parties to buy or sell an
agreed amount of a commodity or financial instrument at an agreed price, for
delivery on an agreed future date. In contrast to a futures contract, a forward
contract is not transferable or exchange tradable, its terms are not
standardized and no margin is exchanged. The buyer of the forward contract
is said to be long the contract and the seller is said to be short the contract.
Gamma(Г) The gamma of an option / portfolio of options is the rate of change of the
option’s / portfolio’s delta with respect to the change in the price of the
asset(s) underlying the option (s).
General Such reserves, if they are not attributable to the actual diminution in value or
provisions & loss identifiable potential loss in any specific asset and are available to meet
reserves unexpected losses, can be included in Tier II capital.
General market Risk that relates to overall market conditions while specific risk is risk that
risk relates to the issuer of a particular security
Hedging Taking action to eliminate or reduce exposure to risk
Horizontal A disallowance of offsets to required capital used the BIS Method for
Disallowance assessing market risk for regulatory capital. In order to calculate the capital
required for interest rate risk of a trading portfolio, the BIS Method allows
offsets of long and short positions. Yet interest rate risk of instruments at
different horizontal points of the yield curve are not perfectly correlated.
Hence, the BIS Method requires that a portion of these offsets be disallowed.
Interest rate risk Risk that the financial value of assets or liabilities (or inflows/outflows) will be
altered because of fluctuations in interest rates. For example, the risk that
future investment may have to be made at lower rates and future borrowings
at higher rates.
Long Position A long position refers to a position where gains arise from a rise in the value
of the underlying.
Market risk Risk of loss arising from movements in market prices or rates away from the
rates or prices set out in a transaction or agreement.
Modified Duration The modified duration or volatility of an interest bearing security is its
Macaulay duration divided by one plus security’s yield to maturity (YTM) per
period. It represents the percentage change in a securities' price for a 100
basis points change in yield. It is generally accurate for only small changes
in the yield.
319where: MD = Modified duration
P = Gross price (i.e. clean price plus accrued interest).
dP = Corresponding small change in price.
dY = Small change in yield compounded with the frequency of the coupon
payment.
Mortgage-backed As defined in the Master Direction DOR.STR.REC.53/21.04.177/2021-22
security dated September 24, 2021 – Reserve Bank of India (Securitisation of
Standard Assets) Directions, 2021.
Mutual Fund Mutual Fund is a mechanism for pooling the resources by issuing units to the
investors and investing funds in securities in accordance with objectives as
disclosed in offer document. A fund established in the form of a trust to raise
monies through the sale of units to the public or a section of the public under
one or more schemes for investing in securities, including money market
instruments.
Net Interest Net interest margin is the net interest income divided by average interest
Margin earning assets
Net NPA Net NPA = Gross NPA – (Balance in Interest Suspense account +
DICGC/ECGC claims received and held pending adjustment + Part payment
received and kept in suspense account + Total provisions held)‘
Nostro accounts Foreign currency settlement accounts that a bank maintains with its overseas
correspondent banks. These accounts are assets of the domestic bank.
Off-Balance Sheet Off-Balance Sheet exposures refer to the business activities of a bank that
exposures generally do not involve booking assets (loans) and taking deposits. Off-
balance sheet activities normally generate fees, but produce liabilities or
assets that are deferred or contingent and thus, do not appear on the
institution's balance sheet until or unless they become actual assets or
liabilities.
Open position It is the net difference between the amounts payable and amounts receivable
in a particular instrument or commodity. It results from the existence of a net
long or net short position in the particular instrument or commodity.
Option An option is a contract which grants the buyer the right, but not the obligation,
to buy (call option) or sell (put option) an asset, commodity, currency or
financial instrument at an agreed rate (exercise price) on or before an agreed
date (expiry or settlement date). The buyer pays the seller an amount called
the premium in exchange for this right. This premium is the price of the
option.
Rho(ρ) Rho of an option / a portfolio of options is the rate of change in the value of
an option / portfolio with respect to change in the level of interest rates.
Risk The possibility of an outcome not occurring as expected. It can be measured
and is not the same as uncertainty, which is not measurable. In financial
terms, risk refers to the possibility of financial loss. It can be classified as
credit risk, market risk and operational risk.
Risk Asset Ratio A bank's risk asset ratio is the ratio of a bank's risk assets to its capital funds.
Risk assets include assets other than highly rated government and
government agency obligations and cash, for example, corporate bonds and
loans. The capital funds include capital and undistributed reserves. The lower
the risk asset ratio the better the bank's 'capital cushion'
Risk Weights Basel II sets out a risk-weighting schedule for measuring the credit risk of
obligors. The risk weights are linked to ratings given to sovereigns, financial
institutions and corporations by external credit rating agencies.
320Securitisation As defined in the Master Direction DOR.STR.REC.53/21.04.177/2021-22
dated September 24, 2021 – Reserve Bank of India (Securitisation of
Standard Assets) Directions, 2021.
Short position A short position refers to a position where gains arise from a decline in the
value of the underlying. It also refers to the sale of a security in which the
seller does not have a long position.
Specific risk Within the framework of the BIS proposals on market risk, specific risk refers
to the risk associated with a specific security, issuer or company, as opposed
to the risk associated with a market or market sector (general risk).
Subordinated Refers to the status of the debt. In the event of the bankruptcy or liquidation
debt of the debtor, subordinated debt only has a secondary claim on repayments,
after other debt has been repaid.
Theta(θ) The theta of an option / a portfolio of options is the rate of change in the value
of the option / portfolio with respect to passage of time, with all else remaining
the same. It is also called the “time decay” of the option.
Underwrite Generally, to underwrite means to assume a risk for a fee. Its two most
common contexts are: a) Securities: a dealer or investment bank agrees to
purchase a new issue of securities from the issuer and distribute these
securities to investors. The underwriter may be one person or part of an
underwriting syndicate. Thus the issuer faces no risk of being left with unsold
securities.
b) Insurance: a person or company agrees to provide financial compensation
against the risk of fire, theft, death, disability, etc., for a fee called a premium.
Value at risk It is a method for calculating and controlling exposure to market risk. VAR is
(VAR) a single number (currency amount) which estimates the maximum expected
loss of a portfolio over a given time horizon (the holding period) and at a given
confidence level.
Vega (ν) The Vega of an option / a portfolio of options is the rate of change in the value
of the option / portfolio with respect to volatility of the asset(s) underlying the
options
Venture capital A fund with the purpose of investing in start-up businesses that is perceived
Fund to have excellent growth prospects but does not have access to capital
markets
Vertical In the BIS Method for determining regulatory capital necessary to cushion
Disallowance market risk, a reversal of the offsets of a general risk charge of a long position
by a short position in two or more securities in the same time band in the
yield curve where the securities have differing credit risks
321Annex 26
(Cf. Para 2 of the covering circular)
List of Circulars Consolidated in the Master Circular
Sl. Circular No. Subject Updated Para No.
No of the Master
Circular
1 DBOD.No.BP.BC.16 Master Circular -
/21.06.001/2012-13 dated July 2, Prudential Guidelines on
2012 Capital Adequacy and
Market Discipline- New
Capital Adequacy
Framework (NCAF)
2 DBOD.No.BC.72/29.67.001 Guidelines on Table DF-15 on
/2011-12 dated January 13, 2012 Compensation of Whole Disclosure
Time Directors / Requirements for
Chief Executive Officers / Remuneration of
Risk takers and Control Annex 17
function Staff, etc.
3 DBOD.No.BP.BC.98 Guidelines on Scope of
/21.06.201/2011-12 dated May 2, Implementation of Basel Application
2012 III Capital Regulations in (paragraph 3) is
India replaced by sub-
paragraph 3.1 of
Section B of Annex
1;
• Definition of
Capital (paragraph
4) is replaced by
Annex 1 (excluding
sub-paragraph 3.1
of Section B) ;
• Risk Coverage :
Capital Charge for
Credit Risk
(paragraph 5),
External Credit
Assessments
(paragraph 6),
Credit Risk
Mitigation
(paragraph 7) and
Capital Charge for
Market Risk
(paragraph 8) will be
modified as
indicated in Annex
2;
• Supervisory
Review and
322Evaluation Process
under Pillar 2
(paragraphs 12 &
13) is modified as
indicated in Annex
3.
4 DBOD.No.BP.BC.28 Prudential Guidelines on Para 4.2.3.2.B.(iv)
/21.06.001/2012-13 dated July 9, Capital Adequacy
2012 Treatment of Head Office
Debit Balance - Foreign
Banks
5 DBOD.No.BP.BC.41 Prudential Guidelines on Para 6.1.2
/21.06.009/2012-13 dated Capital Adequacy and Para 7.3.5.(vi) (b)
September 13, 2012 Market Discipline - New Para 7.3.5.(vii) (d)
Capital Adequacy and (e)
Framework (NCAF) Tables 5:Part B, 10,
Eligible Credit Rating 11
Agencies - SME Rating
Agency of India Ltd.
(SMERA)
6 DBOD.No.BP.BC.54 Prudential Guidelines on Para 6.1.2
/21.06.007/2012-13 dated Capital Adequacy and Para 7.3.5.(vi) (b)
November 5, 2012 Market Discipline - New Para 7.3.5.(vii) (d)
Capital Adequacy and (e)
Framework (NCAF) - Tables 5:Part B, 10,
Change of Name of Fitch 11
Ratings to India Ratings
and Research Private
Limited (India Ratings)
7 DBOD.BP.BC.No.72 Retail Issue of Footnote under para
/21.01.002/2012-13 dated January Subordinated Debt for 1.17 of Annex 5
1, 2013 Raising Tier II Capital
8 DBOD.No.BP.BC.88 Guidelines on Paragraphs 3.4.2,
/21.06.201/2012-13 dated March Implementation of Basel 4.4.6.(i), 4.4.9.2
28, 2013 III Capital Regulations in .B.(iv),
India - Clarifications 4.4.9.2.C.(iii), 4.5,
7.5.6, 8.4.4,
Table 3, Table 14 -
Part B, Annex 15
and 25
9 DBOD.No.BP.BC.89.21.04.009 New Capital Adequacy Paragraph
/2012-13 dated April 2, 2013 Framework - Non-market 5.15.2.(vii)
related Off Balance Sheet
Items - Bank Guarantees
10 DBOD.No.BP.BC.98 Guidelines on Part – C : Market
/21.06.201/2012-13 dated May 28, Composition of Capital Discipline (Pillar 3)
2013 Disclosure Requirements and Annex 17
11 DBOD.BP.BC.No.103 Risk Weights on deposits Para 6.8.2
/21.06.001/2012-13 dated June 20, placed with
2013 NABARD/SIDBI/NHB in
lieu of shortfall in
323achievement of priority
sector lending
targets/sub-targets
12 DBOD.BP.BC.No.104 Housing Sector: New sub- Para 5.10.1 and
/08.12.015/2012-13 dated June 21, sector CRE (Residential Table 7
2013 Housing) within CRE and
Rationalisation of
provisioning, risk-weight
and LTV ratios
13 DBOD.No.BP.BC.28 Capital Requirements for Paras 5.15.3 and
/21.06.201/2013-14 dated July 2, Banks’ Exposures to 5.15.4
2013 Central Counterparties
14 DBOD.BP.BC.No.59 Change of name of SME Tables 5-Part B, 10
/21.06.007/2013-14 dated October Rating Agency of India and 11
17, 2013 Limited to SMERA Paras 6.1.2
Ratings Limited (SMERA)
15 DBOD.BP.BC.No.75 Guidelines on Stress Para 12.10
/21.04.103/2013-14 dated Testing
December 2, 2013
16 DBOD.No.BP.BC.81 Basel III Capital Footnote to para
/21.06.201/2013-14 dated Regulations – Capital 5.15.3.6
December 31, 2013 Requirements for Credit
Valuation Adjustment Risk
on OTC Derivatives and
for Banks’ Exposures to
Central Counterparties
17 DBOD.No.BP.BC.96 Guidelines on Para 4.4.11
/21.06.102/2013-14 dated February Management of Intra-
11, 2014 Group Transactions and
Exposures
18 DBOD.No.BP.BC.102 Implementation of Basel Annex 1 para 6
/21.06.201/2013-14 dated March III Capital Regulations in Annex 2 para 4
27, 2014 India – Capital Planning Annex 3 para 1.6
and 1.8
Annex 4 para 1.6
and 1.8
Annex 5 para 1.6
Annex 6 para 1.6
Annex 15
19 DBOD Mailbox Clarification dated Master Circular – Basel III Para 7.5.11 inserted
October 18, 2013 Capital Regulations –
Applicable Risk Weights
for ECGC Guaranteed
Exposures
20 DBOD.No.BP.BC.38 Implementation of Basel Paras 4.2.2 and
/21.06.201/2014-15 dated III Capital Regulations in 4.2.4.1.B
September 1, 2014 India – Amendments Paras 1.3, 1.6 and
1.20 of Annex 3
Paras 1.3, 1.6,
1.8(e), 1.22 of
Annex 4
324Paras 1.3, 1.12(ii),
1.17 and 1.18 of
Annex 5
Paras 1.3 and 1.16
of Annex 6
Annex 15
Table DF-11 under
Annex 17
21 DBR.No.BP.BC.58 Implementation of Basel Part E fully replaced
/21.06.201/2014-15 dated January III Capital Regulations in Para 4, Table DF-
8, 2015 India – Revised 17, Table DF-18
Framework for Leverage and Table 21 of
Ratio Annex 17
22 DBR.No.BP.BC.71 Guidelines for Para 17
/21.06.201/2014-15 dated February implementation of
5, 2015 Countercyclical Capital
Buffer (CCCB)
23 DBR.No.BP.BC.80 Prudential Guidelines on Figure 1 under para
/21.06.201/2014-15 dated March Capital Adequacy and 4.4.9.2 revised
31, 2015 Liquidity Standards - Paras 4.4.1 (ii),
Amendments 4.4.2, 4.4.11, 4.4,
4.5, 5.2.6, 5.9,
5.13.6, 5.15.3.8. (ii)
(c), 5.15.3.9, 5.15.4,
7.4, 7.5.6, 8.6.4,
8.7, 9.3, 15.2.1,
Paras 8 and 11.4
(iv) of Annex 7
Tables DF-3, DF-15
and DF-16 of Annex
17
24 DBR.BP.BC.No.43 Risk Weights for Claims Para 5.3
/21.06.001/2015-16 dated October on Foreign Central Banks
8, 2015
25 DBR.BP.BC.No.44 Individual Housing Loans: Para 5.10
/08.12.015/2015-16 dated October Rationalisation of Risk-
8, 2015 Weights and LTV Ratios
26 DBR.No.BP.BC.57 Non-Operative Financial Para 3.4.6
/21.06.201/2015-16 dated Holding Company
November 19, 2015 (NOFHC) - Application of
Capital Adequacy Norms
27 DBR.No.BP.BC.71 Master Circular - Basel III Para 1.8(e) of
/21.06.201/2015-16 dated January Capital Regulations - Annex 4
14, 2016 Clarification
28 DBR.No.BP.BC.83 Master Circular – Basel III Para 4.2.3.1,
/21.06.201/2015-16 March 1, 2016 Capital Regulations – 4.2.3.2, 4.4.2
Revision Annex 20
29 DBR.BP.BC.No.105 Reporting Requirements Para 1.17 of Annex
/21.06.001/2015-16 dated June 23, under Basel III Capital 3
2016 Regulations – Review Para 1.18 of Annex
4
325Para 1.14 of Annex
5
Para 1.13 of Annex
6
Annex 22
30 DBR.No.BP.BC.6 Review of Prudential Para 5.8
/21.06.001/2016-17 dated August Norms - Risk Weights for
25, 2016 Exposures to Corporates,
AFCs and NBFC-IFCs
31 DBR.BP.BC.No.8 Guidelines on Enhancing Para 5.13.10
/21.01.003/2016-17 dated August Credit Supply for Large
25, 2016 Borrowers through Market
Mechanism
32 DBR.BP.BC.No.20 Risk Weights for Para 5.8
/21.06.001/2016-17 dated October exposures to HFCs
20, 2016
33 DBR.BP.BC.No.28 Issue of Rupee Para 1.16 of Annex
/21.06.001/2016-17 dated Denominated Bonds 4
November 3, 2016 Overseas Para 1.11A of
Annex 5
34 DBR.No.BP.5609 Risk Weights for Para 5.2.3
/21.06.001/2016-17 dated Advances Guaranteed by
November 17, 2016 Various Schemes
35 DBR.BP.BC.No.50 Basel III Capital Para 1.8(e) of
/21.06.201/2016-17 dated February Regulations - Additional Annex 4
2, 2017 Tier 1 Capital
36 DBOD Mail Box Clarification dated Elements of Common Para 4.2.3.1.A (x)
April 25, 2017 Equity Tier 1 Capital
37 DBR.BP.BC.No.72 Individual Housing Loans: Para 5.10
/08.12.015/2016-17 dated June 7, Rationalisation of Risk-
2017 Weights and Loan to
Value (LTV) Ratios
38 DBR.No.BP.BC.74 Eligible Credit Rating Para 6.1.2
/21.06.009/2016-17 dated June 13, Agencies – INFOMERICS Table 10 under para
2017 Valuation and Rating Pvt 6.4.1
Ltd. (INFOMERICS) Table 11 under para
6.5.4
39 DBOD Mail Box Clarifications dated Review of Prudential Para 5.8
July 24, 2017, October 4, 2017 and Norms – Risk Weights for
December 29, 2017 Exposures to Corporates,
AFCs and NBFC-IFCs
40 DBR.BP.BC.No.12 Guidelines on Loan Para 5.15.2 (iv)
/21.04.048/2018-19 dated System for Delivery of
December 5, 2018 Bank Credit
41 DBR.BP.BC.No.20 Basel III Capital Para 4.2.2 (vi)
/21.06.201/2018-19 dated January Regulations- Review of
10, 2019; transitional arrangements
DOR.BP.BC.No.45
/21.06.201/2019-20 dated March
27, 2020;
DOR.BP.BC.No.15
326/21.06.201/2020-21 dated
September 29, 2020; and
DOR.CAP.BC.No.34
/21.06.201/2020-21 dated February
5, 2021
42 DBR.BP.BC.No.25 Risk Weights for Para 5.8
/21.06.001/2018-19 dated February Exposures to NBFCs Para 5.13.5
22, 2019
43 DBR.BP.BC.No.49 Basel III Capital Para 16.2.2
/21.06.201/2018-19 dated June 28, Regulations-
2019 Implementation of
Leverage Ratio
44 DOR.No.BP.BC.43 Large Exposures Para 5.6.2
/21.01.003/2019-20 dated March Framework
23, 2020
45 DoR.BP.BC.No.76 Assignment of Risk Para 5.2.3
/21.06.201/2019-20 dated June 21, Weights on Credit
2020 Facilities (Guaranteed
Emergency Credit Line)
under the Emergency
Credit Line Guarantee
Scheme
46 DOR.No.BP.BC.5 Treatment of debt mutual Para 8.3.4
/21.04.201/2020-21 dated August funds/ETFs Para 8.4.1
6, 2020
47 DOR.No.BP.BC.23 Regulatory Retail Portfolio Para 5.9.3
/21.06.201/2020-21 dated October – Revised Limit for Risk Annex 21
12, 2020 Weight
48 DOR.No.BP.BC.24 Individual Housing Loans Para 5.10
/08.12.015/2020-21 dated October – Rationalisation of Risk
16, 2020 Weights
49 DOR.No.CRE.BC.33/ Eligible Credit Rating Para 6.1.2
21.06.007/2020-21 dated January Agencies – CRISIL
27, 2021 Ratings Limited
50 DOR.CAP.51 Bilateral Netting of Paras 5.15.3.1,
/21.06.201/2020-21 dated March Qualified Financial 5.15.3.2, 5.15.3.4,
30, 2021 Contracts- Amendments 5.15.3.5, 7.3.8,
to Prudential Guidelines 7.3.9, 16.4.3.2,
16.4.3.3, 16.4.3.4,
16.4.3.8, 16.4.3.9,
16.4.3.14,
16.4.4.2(B)
Annex 7
Annex 17: Table
DF-10
Annex 18
51 DOR.CRE.REC.47 Large Exposures Para 7.3.5 (x)
/21.01.003/2021-22 dated Framework – Credit Risk
September 9, 2021 Mitigation (CRM) for
offsetting – non-centrally
cleared derivative
327transactions of foreign
bank branches in India
with their Head Office
52 DOR.CAP.REC.No.56 Basel III Capital Para 1.16 of Annex
/21.06.201/2021-22 dated October Regulations - Perpetual 4
4, 2021 Debt Instruments (PDI) in Annex 4A
Additional Tier 1 Capital –
Eligible Limit for
Instruments Denominated
in Foreign
Currency/Rupee
Denominated Bonds
Overseas
53 DOR.CAP.REC.No.72 General permission for Para 3.4.7
/21.06.201/2021-22 dated infusion of capital in Annex 19
December 8, 2021 overseas branches and
subsidiaries and retention/
repatriation/ transfer of
profits in these centres by
banks incorporated in
India
54 DOR.CRE.REC.13 Individual Housing Loans Para 5.10.1
/08.12.015/2022-23 dated April 8, – Rationalisation of Risk
2022 Weights
55 DOR.MRG.REC.64 Bilateral Netting of Paras 5.15.3.2,
/00-00-005/2022-23 dated August Qualified Financial 5.15.3.4(iii), 8.6.3.1
11, 2022 Contracts - Amendments Para 7.1 of Annex 7
to Prudential Guidelines
56 DOR.STR.REC.67 Review of Prudential Para 5.2
/21.06.201/2022-23 dated Norms – Risk Weights for Annex 24
September 07, 2022 Exposures guaranteed by
Credit Guarantee
Schemes (CGS)
57 DOR.STR.REC.71 Review of Prudential Para 6.8.1(i)
/21.06.201/2022-23 October 10, Norms – Risk Weights for
2022 Exposures to Corporates
and NBFCs
58 DOR.STR.REC.94 Basel III Capital Para 6.1.2
/21.06.008/2022-23 dated January Regulations - Eligible
09, 2023 Credit Rating Agencies
59 DOR.STR.REC.57/21.06.001/2023- Regulatory measures Para 5.8.1 Note (iv),
24 dated November 16, 2023 towards consumer credit Para 5.13.3
and bank credit to NBFCs
60 DOR.MRG.REC.80/00-00- Capital Adequacy 4.2.3.1(A),
003/2022-23 dated February 28, Guidelines – Review of 4.2.3.2(A),
2024 Trading Book 4.2.5.1(A)(i)(b),
4.4.9.2, 4.4.12,
Table 3,
7.3.8.1(A)(iv), 8.2.1,
8.2.4, 8.3.2, 8.3.4,
Table 14, 8.4.1,
3288.4.3, Table 17 Part
A, 8.8.1(i),
8.8.1.2(iii), 9.3.2,
16.4.1(i), Annex 3
Para 1.8, Annex 4
Para 1.8, Annex 7
Para 3, Annex 8
Part B.
329