CaplLal

CaplLal lunds
LqulLy conLrlbuLlon of owners 1he baslc approach of caplLal adequacy framework ls LhaL a bank
should have sufflclenL caplLal Lo provlde a sLable resource Lo absorb any losses arlslng from Lhe rlsks ln
lLs buslness CaplLal ls dlvlded lnLo dlfferenL Llers accordlng Lo Lhe characLerlsLlcs / quallLles of each
quallfylng lnsLrumenL lor supervlsory purposes caplLal ls spllL lnLo Lwo caLegorles 1ler l and 1ler ll
1ler l CaplLal
A Lerm used Lo refer Lo one of Lhe componenLs of regulaLory caplLal lL conslsLs malnly of share
caplLal and dlsclosed reserves (mlnus goodwlll lf any) 1ler l lLems are deemed Lo be of Lhe hlghesL
quallLy because Lhey are fully avallable Lo cover losses Pence lL ls also Lermed as core caplLal
1ler ll CaplLal
8efers Lo one of Lhe componenLs of regulaLory caplLal Also known as supplemenLary caplLal lL
conslsLs of cerLaln reserves and cerLaln Lypes of subordlnaLed debL 1ler ll lLems quallfy as regulaLory
caplLal Lo Lhe exLenL LhaL Lhey can be used Lo absorb losses arlslng from a banks acLlvlLles 1ler lls
caplLal loss absorpLlon capaclLy ls lower Lhan LhaL of 1ler l caplLal
8evaluaLlon reserves
8evaluaLlon reserves are a parL of 1lerll caplLal 1hese reserves arlse from revaluaLlon of asseLs
LhaL are undervalued on Lhe banks books Lyplcally bank premlses and markeLable securlLles 1he exLenL
Lo whlch Lhe revaluaLlon reserves can be relled upon as a cushlon for unexpecLed losses depends malnly
upon Lhe level of cerLalnLy LhaL can be placed on esLlmaLes of Lhe markeL values of Lhe relevanL asseLs
and Lhe subsequenL deLerloraLlon ln values under dlfflculL markeL condlLlons or ln a forced sale
Leverage
8aLlo of asseLs Lo caplLal
CaplLal reserves
1haL porLlon of a companys proflLs noL pald ouL as dlvldends Lo shareholders 1hey are also
known as undlsLrlbuLable reserves and are ploughed back lnLo Lhe buslness
ueferred 1ax AsseLs
unabsorbed depreclaLlon and carry forward of losses whlch can be seLoff agalnsL fuLure Laxable
lncome whlch ls consldered as Llmlng dlfferences resulL ln deferred Lax asseLs 1he deferred 1ax AsseLs
are accounLed as per Lhe AccounLlng SLandard 22
ueferred 1ax LlablllLles
ueferred Lax llablllLles have an effecL of lncreaslng fuLure years lncome Lax paymenLs whlch
lndlcaLes LhaL Lhey are accrued lncome Laxes and meeL deflnlLlon of llablllLles
SubordlnaLed debL
8efers Lo Lhe sLaLus of Lhe debL ln Lhe evenL of Lhe bankrupLcy or llquldaLlon of Lhe debLor
subordlnaLed debL only has a secondary clalm on repaymenLs afLer oLher debL has been repald
Pybrld debL caplLal lnsLrumenLs
ln Lhls caLegory fall a number of caplLal lnsLrumenLs whlch comblne cerLaln characLerlsLlcs of
equlLy and cerLaln characLerlsLlcs of debL Lach has a parLlcular feaLure whlch can be consldered Lo
affecL lLs quallLy as caplLal Where Lhese lnsLrumenLs have close slmllarlLles Lo equlLy ln parLlcular when
Lhey are able Lo supporL losses on an ongolng basls wlLhouL Lrlggerlng llquldaLlon Lhey may be lncluded
ln 1ler ll caplLal
8ASLL CommlLLee on 8anklng Supervlslon
1he 8ASLL CommlLLee ls a commlLLee of bank supervlsors conslsLlng of members from each of
Lhe C10 counLrles 1he CommlLLee ls a forum for dlscusslon on Lhe handllng of speclflc supervlsory
problems lL coordlnaLes Lhe sharlng of supervlsory responslblllLles among naLlonal auLhorlLles ln respecL
of banks forelgn esLabllshmenLs wlLh Lhe alm of ensurlng effecLlve supervlslon of banks acLlvlLles
worldwlde
8ASLL CaplLal accord
1he 8ASLL CaplLal Accord ls an AgreemenL concluded among counLry represenLaLlves ln 1988 Lo
develop sLandardlsed rlskbased caplLal requlremenLs for banks across counLrles 1he Accord was
replaced wlLh a new caplLal adequacy framework (8ASLL ll) publlshed ln !une 2004 8ASLL ll ls based on
Lhree muLually relnforclng plllars haL allow banks and supervlsors Lo evaluaLe properly Lhe varlous rlsks
LhaL banks face 1hese Lhree plllars are
Mlnlmum caplLal requlremenLs whlch seek Lo reflne Lhe presenL measuremenL framework
supervlsory revlew of an lnsLlLuLlons caplLal adequacy and lnLernal assessmenL process
markeL dlsclpllne Lhrough effecLlve dlsclosure Lo encourage safe and sound banklng pracLlces
8lsk WelghLed AsseL
1he noLlonal amounL of Lhe asseL ls mulLlplled by Lhe rlsk welghL asslgned Lo Lhe asseL Lo arrlve
aL Lhe rlsk welghLed asseL number 8lsk welghL for dlfferenL asseLs vary eg 0 on a CovernmenL uaLed
SecurlLy and 20 on a AAA raLed forelgn bank eLc
C8A8(CaplLal Lo 8lsk WelghLed AsseLs 8aLlo)
CaplLal Lo rlsk welghLed asseLs raLlo ls arrlved aL by dlvldlng Lhe caplLal of Lhe bank wlLh
aggregaLed rlsk welghLed asseLs for credlL rlsk markeL rlsk and operaLlonal rlsk 1he hlgher Lhe C8A8 of
a bank Lhe beLLer caplLallzed lL ls
CredlL 8lsk
1he rlsk LhaL a parLy Lo a conLracLual agreemenL or LransacLlon wlll be unable Lo meeL lLs
obllgaLlons or wlll defaulL on commlLmenLs CredlL rlsk can be assoclaLed wlLh almosL any flnanclal
LransacLlon 8ASLLll provldes Lwo opLlons for measuremenL of caplLal charge for credlL rlsk
1sLandardlsed approach (SA) under Lhe SA Lhe banks use a rlskwelghLlng schedule for measurlng Lhe
credlL rlsk of lLs asseLs by asslgnlng rlsk welghLs based on Lhe raLlng asslgned by Lhe exLernal credlL
raLlng agencles
2 lnLernal raLlng based approach (l88) 1he l88 approach on Lhe oLher hand allows banks Lo use Lhelr
own lnLernal raLlngs of counLerparLles and exposures whlch permlL a flner dlfferenLlaLlon of rlsk for
varlous exposures and hence dellvers caplLal requlremenLs LhaL are beLLer allgned Lo Lhe degree of rlsks
1he l88 approaches are of Lwo Lypes
a) loundaLlon l88 (ll88) 1he bank esLlmaLes Lhe robablllLy of uefaulL (u) assoclaLed wlLh each
borrower and Lhe supervlsor supplles oLher lnpuLs such as Loss Clven uefaulL (LCu) and Lxposure AL
uefaulL (LAu)
b) Advanced l88 (Al88) ln addlLlon Lo robablllLy of uefaulL (u) Lhe bank esLlmaLes oLher lnpuLs such
as LAu and LCu 1he requlremenLs for Lhls approach are more exacLlng 1he adopLlon of advanced
approaches would requlre Lhe banks Lo meeL mlnlmum requlremenLs relaLlng Lo lnLernal raLlngs aL Lhe
ouLseL and on an ongolng basls such as Lhose relaLlng Lo Lhe deslgn of Lhe raLlng sysLem operaLlons
conLrols corporaLe governance and esLlmaLlon and valldaLlon of credlL rlsk componenLs vlz u for
boLh ll88 and Al88 and LCu and LAu for Al88 1he banks should have aL Lhe mlnlmum u daLa for flve
years and LCu and LAu daLa for seven years ln lndla banks have been advlsed Lo compuLe caplLal
requlremenLs for credlL rlsk adopLlng Lhe SA
MarkeL rlsk
MarkeL rlsk ls deflned as Lhe rlsk of loss arlslng from movemenLs ln markeL prlces or raLes away
from Lhe raLes or prlces seL ouL ln a LransacLlon or agreemenL 1he caplLal charge for markeL rlsk was
lnLroduced by Lhe 8ASLL CommlLLee on 8anklng Supervlslon Lhrough Lhe MarkeL 8lsk AmendmenL of
!anuary 1996 Lo Lhe caplLal accord of 1988 (8ASLL l lramework) 1here are Lwo meLhodologles avallable
Lo esLlmaLe Lhe caplLal requlremenL Lo cover markeL rlsks
1) 1he SLandardlsed MeasuremenL MeLhod 1hls meLhod currenLly lmplemenLed by Lhe 8eserve 8ank
adopLs a 'bulldlng block' approach for lnLeresLraLe relaLed and equlLy lnsLrumenLs whlch dlfferenLlaLe
caplLal requlremenLs for 'speclflc rlsk' from Lhose of 'general markeL rlsk' 1he 'speclflc rlsk charge' ls
deslgned Lo proLecL agalnsL an adverse movemenL ln Lhe prlce of an lndlvldual securlLy due Lo facLors
relaLed Lo Lhe lndlvldual lssuer 1he 'general markeL rlsk charge' ls deslgned Lo proLecL agalnsL Lhe
lnLeresL raLe rlsk ln Lhe porLfollo
2) 1he lnLernal Models Approach (lMA) 1hls meLhod enables banks Lo use Lhelr proprleLary lnhouse
meLhod whlch musL meeL Lhe quallLaLlve and quanLlLaLlve crlLerla seL ouL by Lhe 8C8S and ls sub[ecL Lo
Lhe expllclL approval of Lhe supervlsory auLhorlLy
CperaLlonal 8lsk
1he revlsed 8ASLL ll framework offers Lhe followlng Lhree approaches for esLlmaLlng caplLal
charges for operaLlonal rlsk
1) 1he 8aslc lndlcaLor Approach (8lA) 1hls approach seLs a charge for operaLlonal rlsk as a flxed
percenLage (alpha facLor) of a slngle lndlcaLor whlch serves as a proxy for Lhe bank's rlsk exposure
2) 1he SLandardlsed Approach (SA) 1hls approach requlres LhaL Lhe lnsLlLuLlon separaLe lLs operaLlons
lnLo elghL sLandard buslness llnes and Lhe caplLal charge for each buslness llne ls calculaLed by
mulLlplylng gross lncome of LhaL buslness llne by a facLor (denoLed beLa) asslgned Lo LhaL buslness llne
3) Advanced MeasuremenL Approach (AMA) under Lhls approach Lhe regulaLory caplLal requlremenL
wlll equal Lhe rlsk measure generaLed by Lhe banks' lnLernal operaLlonal rlsk measuremenL sysLem ln
lndla Lhe banks have been advlsed Lo adopL Lhe 8lA Lo esLlmaLe Lhe caplLal charge for operaLlonal rlsk
and 13 of average gross lncome of lasL Lhree years ls Laken for calculaLlng caplLal charge for
operaLlonal rlsk
lnLernal CaplLal Adequacy AssessmenL rocess (lCAA)
ln Lerms of Lhe guldellnes on 8ASLL ll Lhe banks are requlred Lo have a boardapproved pollcy
on lnLernal caplLal adequacy assessmenL process (lCAA) Lo assess Lhe caplLal requlremenL as per lCAA
aL Lhe solo as well as consolldaLed level 1he lCAA ls requlred Lo form an lnLegral parL of Lhe
managemenL and declslonmaklng culLure of a bank lCAA documenL ls requlred Lo clearly demarcaLe
Lhe quanLlflable and quallLaLlvely assessed rlsks 1he lCAA ls also requlred Lo lnclude sLress LesLs and
scenarlo analyses Lo be conducLed perlodlcally parLlcularly ln respecL of Lhe bank's maLerlal rlsk
exposures ln order Lo evaluaLe Lhe poLenLlal vulnerablllLy of Lhe bank Lo some unllkely buL plauslble
evenLs or movemenLs ln Lhe markeL condlLlons LhaL could have an adverse lmpacL on Lhe bank's caplLal
Supervlsory 8evlew rocess (S8)
Supervlsory revlew process envlsages Lhe esLabllshmenL of sulLable rlsk managemenL sysLems ln
banks and Lhelr revlew by Lhe supervlsory auLhorlLy 1he ob[ecLlve of Lhe S8 ls Lo ensure LhaL Lhe banks
have adequaLe caplLal Lo supporL all Lhe rlsks ln Lhelr buslness as also Lo encourage Lhem Lo develop and
use beLLer rlsk managemenL Lechnlques for monlLorlng and managlng Lhelr rlsks
MarkeL ulsclpllne
MarkeL ulsclpllne seeks Lo achleve lncreased Lransparency Lhrough expanded dlsclosure
requlremenLs for banks
CredlL rlsk mlLlgaLlon
1echnlques used Lo mlLlgaLe Lhe credlL rlsks Lhrough exposure belng collaLerallsed ln whole or ln
parL wlLh cash or securlLles or guaranLeed by a Lhlrd parLy
MorLgage 8ack SecurlLy
A bondLype securlLy ln whlch Lhe collaLeral ls provlded by a pool of morLgages lncome from Lhe
underlylng morLgages ls used Lo meeL lnLeresL and prlnclpal repaymenLs
uerlvaLlve
A derlvaLlve lnsLrumenL derlves lLs value from an underlylng producL 1here are baslcally Lhree
derlvaLlves
a) lorward ConLracL A forward conLracL ls an agreemenL beLween Lwo parLles Lo buy or sell an
agreed amounL of a commodlLy or flnanclal lnsLrumenL aL an agreed prlce for dellvery on an agreed
fuLure daLe luLure ConLracL ls a sLandardlzed exchange Lradable forward conLracL execuLed aL an
exchange ln conLrasL Lo a fuLures conLracL a forward conLracL ls noL Lransferable or exchange Lradable
lLs Lerms are noL sLandardlzed and no margln ls exchanged 1he buyer of Lhe forward conLracL ls sald Lo
be long on Lhe conLracL and Lhe seller ls sald Lo be shorL on Lhe conLracL
b) CpLlons An opLlon ls a conLracL whlch granLs Lhe buyer Lhe rlghL buL noL Lhe obllgaLlon Lo buy
(call opLlon) or sell (puL opLlon) an asseL commodlLy currency or flnanclal lnsLrumenL aL an agreed raLe
(exerclse prlce) on or before an agreed daLe (explry or seLLlemenL daLe) 1he buyer pays Lhe seller an
amounL called Lhe premlum ln exchange for Lhls rlghL 1hls premlum ls Lhe prlce of Lhe opLlon
c) Swaps ls an agreemenL Lo exchange fuLure cash flow aL prespeclfled lnLervals 1yplcally one
cash flow ls based on a varlable prlce and oLher on afflxed one
uuraLlon
uuraLlon (Macaulay duraLlon) measures Lhe prlce volaLlllLy of flxed lncome securlLles lL ls ofLen
used ln Lhe comparlson of lnLeresL raLe rlsk beLween securlLles wlLh dlfferenL coupons and dlfferenL
maLurlLles lL ls deflned as Lhe welghLed average Llme Lo cash flows of a bond where Lhe welghLs are
noLhlng buL Lhe presenL value of Lhe cash flows Lhemselves lL ls expressed ln years 1he duraLlon of a
flxed lncome securlLy ls always shorLer Lhan lLs Lerm Lo maLurlLy excepL ln Lhe case of zero coupon
securlLles where Lhey are Lhe same
Modlfled uuraLlon
Modlfled uuraLlon Macaulay uuraLlon/ (1+y/m) where 'y' ls Lhe yleld () 'm' ls Lhe number of
Llmes compoundlng occurs ln a year lor example lf lnLeresL ls pald Lwlce a year m2 Modlfled uuraLlon
ls a measure of Lhe percenLage change ln prlce of a bond for a 1 change ln yleld
non erformlng AsseLs (nA)
An asseL lncludlng a leased asseL becomes non performlng when lL ceases Lo generaLe lncome
for Lhe bank
neL nA
Cross nA (8alance ln lnLeresL Suspense accounL + ulCCC/LCCC clalms recelved and held
pendlng ad[usLmenL + arL paymenL recelved and kepL ln suspense accounL + 1oLal provlslons held)
Coverage 8aLlo
LqulLy mlnus neL nA dlvlded by LoLal asseLs mlnus lnLanglble asseLs
Sllppage 8aLlo
(lresh accreLlon of nAs durlng Lhe year/1oLal sLandard asseLs aL Lhe beglnnlng of Lhe year)*100
8esLrucLurlng
A resLrucLured accounL ls one where Lhe bank granLs Lo Lhe borrower concesslons LhaL Lhe bank
would noL oLherwlse conslder 8esLrucLurlng would normally lnvolve modlflcaLlon of Lerms of Lhe
advances/securlLles whlch would generally lnclude among oLhers alLeraLlon of repaymenL perlod/
repayable amounL/ Lhe amounL of lnsLallmenLs and raLe of lnLeresL lL ls a mechanlsm Lo nurLure an
oLherwlse vlable unlL whlch has been adversely lmpacLed back Lo healLh
SubsLandard AsseLs
A subsLandard asseL would be one whlch has remalned nA for a perlod less Lhan or equal Lo
12 monLhs Such an asseL wlll have well deflned credlL weaknesses LhaL [eopardlze Lhe llquldaLlon of Lhe
debL and are characLerlsed by Lhe dlsLlncL posslblllLy LhaL Lhe banks wlll susLaln some loss lf deflclencles
are noL correcLed
uoubLful AsseL
An asseL would be classlfled as doubLful lf lL has remalned ln Lhe subsLandard caLegory for a
perlod of 12 monLhs A loan classlfled as doubLful has all Lhe weaknesses lnherenL ln asseLs LhaL were
classlfled as subsLandard wlLh Lhe added characLerlsLlc LhaL Lhe weaknesses make collecLlon or
llquldaLlon ln full on Lhe basls of currenLly known facLs condlLlons and values hlghly quesLlonable
and lmprobable
uoubLful AsseL
An asseL would be classlfled as doubLful lf lL has remalned ln Lhe subsLandard caLegory for a
perlod of 12 monLhs A loan classlfled as doubLful has all Lhe weaknesses lnherenL ln asseLs LhaL were
classlfled as subsLandard wlLh Lhe added characLerlsLlc LhaL Lhe weaknesses make collecLlon or
llquldaLlon ln full on Lhe basls of currenLly known facLs condlLlons and values hlghly quesLlonable
and lmprobable
Loss AsseL
A loss asseL ls one where loss has been ldenLlfled by Lhe bank or lnLernal or exLernal audlLors or
Lhe 88l lnspecLlon buL Lhe amounL has noL been wrlLLen off wholly ln oLher words such an asseL ls
consldered uncollecLlble and of such llLLle value LhaL lLs conLlnuance as a bankable asseL ls noL
warranLed alLhough Lhere may be some salvage or recovery value
Cff 8alance SheeL Lxposure
Cff8alance SheeL exposures refer Lo Lhe buslness acLlvlLles of a bank LhaL generally do noL
lnvolve booklng asseLs (loans) and Laklng deposlLs Cffbalance sheeL acLlvlLles normally generaLe fees
buL produce llablllLles or asseLs LhaL are deferred or conLlngenL and Lhus do noL appear on Lhe
lnsLlLuLlons balance sheeL unLll and unless Lhey become acLual asseLs or llablllLles
CurrenL Lxposure MeLhod
1he credlL equlvalenL amounL of a markeL relaLed offbalance sheeL LransacLlon ls calculaLed
uslng Lhe currenL exposure meLhod by addlng Lhe currenL credlL exposure Lo Lhe poLenLlal fuLure credlL
exposure of Lhese conLracLs CurrenL credlL exposure ls deflned as Lhe sum of Lhe poslLlve mark Lo
markeL value of a conLracL 1he CurrenL Lxposure MeLhod requlres perlodlcal calculaLlon of Lhe currenL
credlL exposure by marklng Lhe conLracLs Lo markeL Lhus capLurlng Lhe currenL credlL exposure
oLenLlal fuLure credlL exposure ls deLermlned by mulLlplylng Lhe noLlonal prlnclpal amounL of each of
Lhese conLracLs lrrespecLlve of wheLher Lhe conLracL has a zero poslLlve or negaLlve markLomarkeL
value by Lhe relevanL addon facLor prescrlbed by 88l accordlng Lo Lhe naLure and resldual maLurlLy of
Lhe lnsLrumenL


Larnlngs
1oLal lncome
Sum of lnLeresL/dlscounL earned commlsslon exchange brokerage and oLher operaLlng
lncome
1oLal operaLlng expenses
Sum of lnLeresL expended sLaff expenses and oLher overheads
CperaLlng proflL before provlslons
neL of LoLal lncome and LoLal operaLlng expenses
neL operaLlng proflL
CperaLlng proflL before provlslon mlnus provlslon for loan losses depreclaLlon ln lnvesLmenLs
wrlLe off and oLher provlslons
roflL before Lax (81)
(neL operaLlng proflL +/ reallzed galns/losses on sale of asseLs)
roflL afLer Lax (A1)
roflL before Lax provlslon for Lax
8eLalned earnlngs
roflL afLer Lax dlvldend pald/proposed
Average ?leld
(lnLeresL and dlscounL earned/average lnLeresL earnlng asseLs)*100
Average cosL
(lnLeresL expended on deposlLs and borrowlngs/Average lnLeresL bearlng llablllLles)*100
8eLurn on AsseL (8CA) AfLer 1ax
8eLurn on AsseLs (8CA) ls a proflLablllLy raLlo whlch lndlcaLes Lhe neL proflL (neL lncome)
generaLed on LoLal asseLs lL ls compuLed by dlvldlng neL lncome by average LoLal asseLs lormula (roflL
afLer Lax/Av 1oLal asseLs)*100
8eLurn on equlLy (8CL) AfLer 1ax
8eLurn on LqulLy (8CL) ls a raLlo relaLlng neL proflL (neL lncome) Lo shareholders' equlLy Pere
Lhe equlLy refers Lo share caplLal reserves and surplus of Lhe bank lormula roflL afLer Lax/(1oLal equlLy
+ 1oLal equlLy aL Lhe end of prevlous year)/2*100
AccreLlon Lo equlLy
(8eLalned earnlngs/1oLal equlLy aL Lhe end of prevlous year)*100
neL nonlnLeresL lncome
1he dlfferenLlal (surplus or deflclL) beLween nonlnLeresL lncome and nonlnLeresL expenses as a
percenLage Lo average LoLal asseLs
neL lnLeresL lncome ( nll)
1he nll ls Lhe dlfference beLween Lhe lnLeresL lncome and Lhe lnLeresL expenses
neL lnLeresL Margln
neL lnLeresL margln ls Lhe neL lnLeresL lncome dlvlded by average lnLeresL earnlng asseLs
CosL lncome raLlo (Lfflclency raLlo)
1he cosL lncome raLlo reflecLs Lhe exLenL Lo whlch nonlnLeresL expenses of a bank make a
charge on Lhe neL LoLal lncome (LoLal lncome lnLeresL expense) 1he lower Lhe raLlo Lhe more efflclenL
ls Lhe bank lormula non lnLeresL expendlLure / neL 1oLal lncome * 100


lunds and lnvesLmenL
CASA ueposlL
ueposlL ln bank ln currenL and Savlngs accounL
Plgh CosL ueposlL
ueposlLs accepLed above card raLe (for Lhe deposlLs) of Lhe bank
Llquld AsseLs
Llquld asseLs conslsLs of cash balances wlLh 88l balances ln currenL accounLs wlLh banks
money aL call and shorL noLlce lnLerbank placemenLs due wlLhln 30 days and securlLles under held for
Lradlng" and avallable for sale" caLegorles excludlng securlLles LhaL do noL have ready markeL
lundlng volaLlllLy 8aLlo
Llquld asseLs as above Lo currenL and savlngs deposlLs (Plgher Lhe raLlo Lhe beLLer)
MarkeL LlablllLy 8aLlo
lnLerbank and money markeL deposlL llablllLles Lo Average 1oLal AsseLs
ALM
AsseL LlablllLy ManagemenL (ALM) ls concerned wlLh sLraLeglc balance sheeL managemenL
lnvolvlng all markeL rlsks lL also deals wlLh llquldlLy managemenL funds managemenL Lradlng and
caplLal plannlng
ALCC
AsseLLlablllLy ManagemenL CommlLLee (ALCC) ls a sLraLeglc declslon maklng body formulaLlng
and overseelng Lhe funcLlon of asseL llablllLy managemenL (ALM) of a bank
8anklng 8ook
1he banklng book comprlses assesLs and llablllLles whlch are conLracLed baslcally on accounL of
relaLlonshlp or for sLeady lncome and sLaLuLory obllgaLlons and are generally held Llll maLurlLy
venLure CaplLal lund
A fund seL up for Lhe purpose of lnvesLlng ln sLarLup buslnesses LhaL ls percelved Lo have
excellenL growLh prospecLs buL does noL have access Lo caplLal markeLs
Peld 1lll MaLurlLy(P1M)
1he securlLles acqulred by Lhe banks wlLh Lhe lnLenLlon Lo hold Lhem up Lo maLurlLy
Peld for 1radlng(Pl1)
SecurlLles where Lhe lnLenLlon ls Lo Lrade by Laklng advanLage of shorLLerm prlce / lnLeresL raLe
movemenLs
Avallable for Sale(AlS)
1he securlLles avallable for sale are Lhose securlLles where Lhe lnLenLlon of Lhe bank ls nelLher Lo
Lrade nor Lo hold Llll maLurlLy 1hese securlLles are valued aL Lhe falr value whlch ls deLermlned by
reference Lo Lhe besL avallable source of currenL markeL quoLaLlons or oLher daLa relaLlve Lo currenL
value
?leld Lo maLurlLy (?1M) or ?leld
1he ?leld Lo maLurlLy (?1M) ls Lhe yleld promlsed Lo Lhe bondholder on Lhe assumpLlon LhaL Lhe
bond wlll be held Lo maLurlLy and coupon paymenLs wlll be relnvesLed aL Lhe ?1M lL ls a measure of Lhe
reLurn of Lhe bond
ConvexlLy
1hls represenLs Lhe raLe of change of duraLlon lL ls Lhe dlfference beLween acLual prlce of a
bond and Lhe prlce esLlmaLed by modlfled duraLlon
lorelgn Currency ConverLlble 8ond
A bond lssued ln forelgn currency abroad glvlng Lhe lnvesLor Lhe opLlon Lo converL Lhe bond lnLo
equlLy aL a flxed converslon prlce or as per a predeLermlned prlclng formula
1radlng 8ook
lnvesLmenLs ln Lradlng book are held for generaLlng proflLs on Lhe shorL Lerm dlfferences ln
prlces/ylelds Peld for Lradlng (Pl1) and Avallable for sale (AlS) caLegory consLlLuLe Lradlng book
C88
Cash reserve raLlo ls Lhe cash parked by Lhe banks ln Lhelr speclfled currenL accounL malnLalned
wlLh 88l
SL8
SLaLuLory llquldlLy raLlo ls ln Lhe form of cash (book value) gold (currenL markeL value) and
balances ln unencumbered approved securlLles
SLress LesLlng
SLress LesLlng ls used Lo evaluaLe a bank's poLenLlal vulnerablllLy Lo cerLaln unllkely buL plauslble
evenLs or movemenLs ln flnanclal varlables 1he vulnerablllLy ls usually measured wlLh reference Lo Lhe
bank's proflLablllLy and /or caplLal adequacy
Scenarlo Analysls
A meLhod ln whlch Lhe earnlngs or value lmpacL ls compuLed for dlfferenL lnLeresL raLe scenarlo
Ll8C8
London lnLer 8ank Cffered 8aLe 1he lnLeresL raLe aL whlch banks offer Lo lend funds ln Lhe
lnLerbank markeL
8asls olnL
ls one hundredLh of one percenL 1 basls polnL means 001 used for measurlng change ln
lnLeresL raLe/yleld
lraud
lrauds have been classlfled as under based malnly on Lhe provlslons of Lhe lndlan enal Code
(a) MlsapproprlaLlon and crlmlnal breach of LrusL
(b) lraudulenL encashmenL Lhrough forged lnsLrumenLs manlpulaLlon of books of accounL or Lhrough
flcLlLlous accounLs and converslon of properLy
(c) unauLhorlsed credlL faclllLles exLended for reward or for lllegal graLlflcaLlon
(d) negllgence and cash shorLages
(e) CheaLlng and forgery
(f) lrregularlLles ln forelgn exchange LransacLlons
(g) Any oLher Lype of fraud noL comlng under Lhe speclflc heads as above


AsseL SecurlLlsaLlon
SecurlLlzaLlon
A process by whlch a slngle asseL or a pool of asseLs are Lransferred from Lhe balance sheeL of
Lhe orlglnaLor (bank) Lo a bankrupLcy remoLe Sv (LrusL) ln reLurn for an lmmedlaLe cash paymenL
Speclal urpose vehlcle (Sv)
An enLlLy whlch may be a LrusL company or oLher enLlLy consLlLuLed or esLabllshed by a 'ueed'
or 'AgreemenL' for a speclflc purpose
8ankrupLcy remoLe
1he legal poslLlon wlLh reference Lo Lhe creaLlon of Lhe Sv should be such LhaL Lhe Sv and lLs
asseLs would noL be Louched ln case Lhe orlglnaLor of Lhe securlLlzaLlon goes bankrupL and lLs asseLs are
llquldaLed
CredlL enhancemenL
1hese are Lhe faclllLles offered Lo an Sv Lo cover Lhe probable losses from Lhe pool of
securlLlzed asseLs lL ls a credlL rlsk cover glven by Lhe orlglnaLor or a Lhlrd parLy and meanL for Lhe
lnvesLors ln any securlLlzaLlon process
CusLodlan
An enLlLy usually a bank LhaL acLually holds Lhe recelvables as agenL and ballee of Lhe LrusLee
llrsL loss faclllLy
llrsL level of credlL enhancemenL offered Lo an Sv as parL of Lhe process ln brlnglng Lhe
securlLles lssued by Sv Lo lnvesLmenL grade
Second loss faclllLy
CredlL enhancemenL provldlng Lhe second or subsequenL Ller of proLecLlon Lo an Sv agalnsL
poLenLlal losses
value aL 8lsk (vA8)
vA8 ls a slngle number (currency amounL) whlch esLlmaLes Lhe maxlmum expecLed loss of a
porLfollo over a glven Llme horlzon (Lhe holdlng perlod) and aL a glven confldence level va8 ls deflned as
an esLlmaLe of poLenLlal loss ln a poslLlon or asseL/llablllLy or porLfollo of asseLs/llablllLles over a glven
holdlng perlod aL a glven level of cerLalnLy 1he followlng are Lhe Lhree maln meLhodologles used Lo
calculaLe va8 arameLrlc LsLlmaLes LsLlmaLes va8 uslng parameLers such as volaLlllLy and correlaLlon
AccuraLe for LradlLlonal asseLs and llnear derlvaLlves buL less accuraLe for non llnear derlvaLlves MonLe
Carlo slmulaLlon LsLlmaLes va8 by slmulaLlng random scenarlos and revalulng poslLlons ln Lhe porLfollo
ApproprlaLe for all Lypes of lnsLrumenLs llnear and nonllnear PlsLorlcal slmulaLlon LsLlmaLes va8 by
rellvlng hlsLory Lakes acLual hlsLorlcal raLes and revalues poslLlons for each change ln Lhe markeL
Commerclal real esLaLe
commerclal real esLaLe ls deflned as fund based and nonfund based exposures secured by
morLgages on commerclal real esLaLes (offlce bulldlngs reLall space mulLlpurpose commerclal
premlses mulLlfamlly resldenLlal bulldlngs mulLlLenanLed commerclal premlses lndusLrlal or
warehouse space hoLels land acqulslLlon developmenL and consLrucLlon eLc)"