Master Circular on ‘Prudential Norms on Capital Adequacy’Purpose
The Reserve Bank of India decided in April 1992 to introduce a risk asset ratio systemfor banks (including foreign banks) in India as a capital adequacy measure in line withthe Capital Adequacy Norms prescribed by Basel Committee. This circular prescribesthe risk weights for the balance sheet assets, non-funded items and other off-balancesheet exposures and the minimum capital funds to be maintained as ratio to theaggregate of the risk weighted assets and other exposures, as also, capital requirementsin the trading book, on an ongoing basis.
This master circular consolidates and updates the instructions on the above subjectcontained in the circulars listed in Annex 13.
To all the commercial banks, excluding Regional Rural Banks
This master circular covers instructions regarding the components of capital and capitalcharge required to be provided for by the banks for credit and market risks. It deals withproviding explicit capital charge for credit and market risk and addresses the issuesinvolved in computing capital charges for interest rate related instruments in the tradingbook, 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 these guidelines includes securities included under the Held for Trading category,securities included under the Available For Sale category, open gold position limits, openforeign exchange position limits, trading positions in derivatives, and derivatives enteredinto for hedging trading book exposures.
The basic approach of capital adequacy framework is that a bank should have sufficientcapital to provide a stable resource to absorb any losses arising from the risks in itsbusiness. Capital is divided into tiers according to the characteristics/qualities of eachqualifying instrument. For supervisory purposes capital is split into two categories: Tier I