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India¶s central bank raised interest rates for the second time in a month and ordered lenders to set
aside more cash as reserves, seeking to slow the fastest | | among Group of 20 nations.

The Reserve Bank of India boosted the three policy rates by a quarter point, it said in a statement in
Mumbai. While today¶s decision matched the median forecasts in a Bloomberg News survey, about one
third of the analysts anticipated larger moves.

India¶s one-year interest-rate swap, a gauge of rate expectations, declined the most in a year, and the
benchmark stock index climbed after Governor  |
   refrained from a more aggressive
step. Subbarao said that while inflation is worrisome, ³supportive liquidity conditions´ are needed to
help the government sell more debt.

³Monetary policy remains accommodative,´ said |

 , chief economist at Kotak Securities
Ltd. in Mumbai. ³If private consumption and investment demand rises from here it could put
manufacturing inflation under stress at a time when global commodity prices are rising.´

With today¶s increases, the reverse repurchase rate rises to 3.75 percent, the repurchase rate to 5.25
percent and the cash reserve ratio to 6 percent from 5.75 percent.

Helping Government

Policy makers may want to give the government time to complete more debt sales before pushing
rates higher, said 
     , an economist at DBS Bank Ltd. in Singapore. The
government¶s new bond sales in the year starting April 1 are 36.3 percent higher than the previous

³In terms of inflation, it may be better to hike earlier than later,´ Suryanarayanan said. ³The later they
hike, the more they will have to hike´ to restrain prices, she said.

The Sensitive Index of stocks advanced 0.9 percent to 17,549 as of 1:15 p.m. in Mumbai. One-year
interest-rate swap dropped 12.5 basis points to 4.975 percent, according to data compiled by
Bloomberg. Yields on benchmark 10-year Indian government notes fell 4 basis points to 8.04 percent,
while the rupee rose 0.4 percent to 44.54 per dollar.

Subbarao estimated India¶s $1.2 trillion economy, Asia¶s largest after Japan and China, will expand 8
percent ³with an upward bias´ in the year ending March 31, according to today¶s statement. Inflation
may slow to 5.5 percent by March from 9.9 percent last month, he said, adding that the forecast is
³contingent´ upon normal monsoon rains this year and a fall in food prices.

Capacity Constraints
³With   expected to accelerate further in the next year, capacity constraints will reemerge,´
adding to price pressures, Subbarao said. ³There is, therefore, a need to ensure that demand side
inflation does not become entrenched.´

Today¶s action comes after consumer prices paid by industrial workers in India rose 14.9 percent in
February from a year earlier. Consumer prices in China rose 2.4 percent in March, less than
economists had forecast, even amid evidence of accelerating economic growth.

India¶s inflation is in part the result of strained infrastructure. The nation produces about 10 percent
less electricity than it needs, while roads, which account for 65 percent of the nation¶s cargo, are
plagued by single lanes and irregular surfaces, boosting companies¶ costs, according to government

Capital Spending

ACC Ltd., India¶s |

 , plans to raise capacity to 30.5 million metric tons in 2010
from 26 million tons, Chairman N. S. Sekhsaria said April 8. Maruti Suzuki India Ltd., the nation¶s
  , is spending 17 billion rupees ($381 million) to increase capacity by 250,000 cars.

³It will take 12 to 15 months more before the new investment adds to productive capacity,´  |

|, chief economist at JPMorgan Chase & Co. in India, said before the RBI announcement. ³Both
food and non-food inflation could enter an extended phase where structural shortages in the economy
could keep them stick and elevated.´

Subbarao cited rising cost of oil, which India imports to meet three-quarters of its needs, as one of the
three risks that may exacerbate inflation, along with monsoon rains and ³evidence of demand side
pressures building up.´ Crude prices have surged about 82 percent in the past year.

The June-September monsoon rains are the main source of irrigation for India¶s agriculture. Food-
price inflation in the country has stayed above 15 percent since November as last year¶s rains were
the weakest since 1972.

Singh¶s Vow

Prime Minister  

| , under attack from opposition parties for failing to check rising
prices, has vowed to bring inflation under control soon. Inflation is a sensitive issue in India, where
the World Bank estimates three-fourths of the 1.2 billion people live on less than $2 a day.

The higher cash reserve ratio will be effective April 24 and drain 125 billion rupees from lenders,
Subbarao said. The interest rate decision takes immediate effect, he said.

The governor said he faces a ³dilemma´ in absorbing more cash from the economy because the
central bank has to support the government¶s borrowing program.

³While monetary policy considerations demand that surplus liquidity should be absorbed, debt
management considerations warrant supportive liquidity conditions,´ Subbarao said. ³The Reserve
Bank, therefore, has to do a fine balancing act and ensure that while absorbing excess liquidity, the
government borrowing program is not hampered.´

The central bank is next scheduled to meet on July 27 to announce its monetary policy statement.

India¶s rate increases are part of a regional battle to restrain price pressures as growth in emerging
markets outpaces that in the developed world.

Besides India, Australia and Malaysia have already raised borrowing costs, while Singapore last week
announced it will allow its currency -- the city-state¶s principal monetary tool - -to strengthen, as Asia
Pacific economies recovered from the worst recession since World War II


In the annual Credit Policy for the year 2010-11, the Reserve Bank of India (RBI) has increased
the short-term lending and borrowing rates, and the
cash reserve ratio (CRR) by 25 basis points each.

The repo and reverse repo rates have been hiked to 5.25 and
3.75 percent respectively, and will raise the cost of fund for lenders. It also hiked the CRR, the
portion of money that commercial banks deposit with the central bank, by 25 basis points. The
CRR hike draws out Rs 12,500 crores from the system.

This is the second time the RBI has raised rates in the calendar year but most banks have
refrained from raising lending or deposits rates. In January, the RBI raised the CRR by 75 basis
points and in March it raised the repo and reverse repo rates by 25 basis points each. The hike is
a part of the steady exit from the easy money policy that the RBI unveiled in the wake of the
global financial meltdown in 2008.

Borrowers can breathe easy for now as most banks have said they are unlikely to raise interest
rates in the immediate future. A quarter percent hike does not warrant an increase in the lending
or deposit rates. Also, since it is a lean season, the banks may not require deposits in a big way.

However, banks feel that short-term rates and subprime lending rates for corporates could go up.
But the prime lending rate may not be adjusted immediately. Interest rates on deposits will not
rise now since there are not many deployment avenues with banks.

Bankers feel they would not raise lending rates now because of ample liquidity in the system.
However, the interest rates would move up in the current fiscal. The credit demand peaked in
March 2010 as banks disbursed as much as Rs 1.15 lakh crores in the last fortnight of the month,
but demand for loans eased in the first fortnight of April.
The markets had already factored in the increase in the rates. As such, there was no major action
in the stock markets. Even the banking stocks were unaffected by the rate hikes. Banking stocks
edged higher following the less-than-expected hike in policy rates by the RBI.

Warning that demand side pressures have clearly emerged in the economy, the central bank has
said its medium-term objective is to contain the inflation rate at three percent and reiterated that
the policy will be tuned in a calibrated manner to support the recovery process. The RBI said it
will monitor the price situation in the economy closely and take further action as warranted. \\


c The key benchmark indices extended losses in afternoon trade as weak global stocks weighed on
investors' sentiment. The BSE 30-share Sensex was down 46.18 points or 0.28%, off close to 70
points from the day's high and up close to 15 points from the day's low. The market breadth,
indicating the overall health of the market turned negative. The breadth was strong earlier in the

Infrastructure stocks rose. Oil exploration stocks were and PSU OMCs rose as crude oil prices
declined. Index heavyweight Reliance Industries (RIL) extended Monday's losses triggered by
disappointment from Q4 March 2010 results. Banking stocks also declined.
Stocks were volatile as traders rolled over positions in the derivatives segment from the April 2010
series to the May 2010 series ahead of the expiry of the near-month April 2010 contracts on
Thursday, 29 April 2010. The market recovered from lower level after an initial slide triggered by
weak Asian stocks. The market moved into positive zone from negative zone in morning trade as
intraday recovery gathered steam. The market moved between positive and negative terrain near
the flat line in mid-morning trade. The market once again weakened in early afternoon trade. The
market extended losses in afternoon trade.
The Q4 March 2010 corporate earnings announced so far have been good. The combined net profit
of a total of 290 companies rose 28.2% to Rs 22749 crore on 43.8% rise in sales to Rs 200708 crore
in the quarter ended March 2010 over the quarter ended March 2009.
Politics is in focus as the Congress-led United Progressive Alliance government faces Opposition
sponsored cut motion in parliament today against a hike in petrol and diesel prices in the Union
Budget 2010-2011. Prime Minister Manmohan Singh on Monday said he is confident that his
government will defeat the cut-motions on the Budget proposals. BSP chief and UP Chief Minister
Mayawati today said she would back the government and not support the cut motion. BSP has 21
MPs in the Lok Sabha. If the cut motion is adopted, the government will have to step down.
European stocks were lower Tuesday, as uncertainty over the health of other indebted euro-zone
nations weighed on sentiment following Greece's debt crisis. The key benchmark indices in France,
Germany and UK fell by between 0.31% to 0.57%.
Confidence in Greek assets sank to a new low on Monday, as German Chancellor Angela Morkel kept
up the Mpressure on Greece, insisting on tougher austerity measures. Questions persist about when
and how the aid package to Greece of up to 45 billion euros ($60 billion) might be delivered.
Asian stock markets declined Tuesday after a directionless day on the Wall Street on Monday and as
commodity prices declined. The key benchmark indices in China, Hong Kong, Indonesia, South
Korea, Singapore and Taiwan fell by between 0.14% to 2.07%. But, Japan's Nikkei rose 0.42%.
South Korea's economic growth accelerated more than estimated in the three months through March
2010. Gross domestic product increased 1.8% in the first quarter from the previous three months,
when it rose 0.2%.
Trading in US index futures indicated a flat opening of US stocks on Tuesday, 27 April 2010.
Most US stocks edged lower on Monday as bank shares fell on fears that financial reform making its
way through Congress will curb profits, while Caterpillar's strong results buoyed the Dow. The Dow
Jones Industrial Average edged up 0.75 point, or 0.01%, to close at 11,205.03. The Standard &
Poor's 500 Index dropped 5.23 points, or 0.43% to 1,212.05. The Nasdaq Composite Index lost 7.20
points, or 0.28% to 2,522.95.
US Treasury Secretary Timothy Geithner said on Monday there were some signs that a sustained job
recovery was beginning, but he conceded that Americans still face difficult economic conditions.
The US Federal Reserve is likely to keep interest rates near zero and it is also likely to repeat its vow
of an extended period of very low rates at the conclusion of a two-day policy meeting on
Wednesday, 28 April 2010. The Fed has kept the Fed funds rate in a range of zero to 0.25% since
December 2008.
Back home, the Indian Meteorological department (IMD) expects normal rainfall in the June-
September monsoon season this year. Rainfall is likely to be 98% of the long-term average, the IMD
said on 23 April 2010. Good monsoon rains would help raise farm output, boost rural incomes and
lower food inflation. The south west monsoon is important for India as about 60% of the country's
farmlands are rain-fed and more than half of the workforce is employed in the agriculture sector.
The quantum of rainfall in the crucial sowing month of July and distribution of rainfall during the
monsoon season holds key.
The latest data showed the annual food and fuel inflation ticked higher, raising worries central bank
may raise interest rates before the next scheduled policy review in July 2010. The food price index
rose 17.65% in the year to 10 April 2010. The fuel price index rose 12.45% and the primary articles
index rose 14.14% in the year to 10 April 2010, the latest government data showed.
The Reserve Bank of India expects India's economy to expand 8% in the year ending March 2011
(FY 2011) with an upward bias, assuming a normal monsoon this year and sustenance of good
performance of the industrial and services sectors on the back of rising domestic and external
In its half-yearly World Economic Outlook, the International Monetary Fund (IMF) has pegged India's
GDP growth at 8.75% in calendar 2010 and 8.5% in calendar 2011. According to the IMF, domestic
demand in India will strengthen as the labour market improves, and investment is expected to be
boosted by strong corporate profitability, rising business confidence and favourable financing
Indian stocks rose for a fifth day in a row on Monday, 26 April 2010, after the Reserve Bank of India
(RBI) raised interest rates on 20 April 2010 by less than some economists had expected and forecast
inflation will slow. From a recent low of 17400.68 on 19 April 2010, the BSE Sensex jumped 345.60
points or 1.98% to 17745.28 on Monday, 26 April 2010. Optimism about the fourth quarter
corporate earnings and hopes of a normal monsoon this year aided the rally
The RBI said it will continue to monitor macroeconomic conditions, particularly the price situation
closely and take further action as warranted. A 25 basis points hike in the cash reserve ratio (CRR)
with effective from 24 April 2010 will suck out excess liquidity of Rs 12500 crore from the banking
At 13:20 IST, the BSE 30-share Sensex was down 46.18 points or 0.28% at 17,699.10. The Sensex
rose 23.97 points at the day's high of 17,769.25 in mid-morning trade. The index fell 61.27 points at
the day's low of 17,683.57 in early trade.
The S&P CNX Nifty was down 13.85 points or 0.26% at 5,308.35.
The BSE Mid-Cap index fell 0.15%. The BSE Small-Cap index rose 0.13%.
The market breadth, indicating the overall health of the market, turned negative. The breadth was
strong earlier in the day. On BSE, 1328 shares advanced as compared with 1463 that declined. A
total of 93 shares were unchanged.
From the 30 share Sensex pack, 18 stocks fell while the rest gained.
Index heavyweight Reliance Industries (RIL) fell 1.21%, extending Monday's 1.61% losses as net
profit rose a lower-than-expected 29.9% to Rs 4710 crore in Q4 March 2010 over Q4 March 2009.
The Q4 result was announced after trading hours on Friday, 23 April 2010.
Infrastructure stocks rose on government's thrust to improve the ailing infrastructure of the country.
IVRCL Infrastructure & Projects, Nagarjuna Construction Company, Hindustan Construction Company
and Larsen & Toubro rose by between 0.34% to 2.29%.
But, Jaiprakash Associates fell 2.26% on profit booking after the stock jumped 8.6% in five trading
sessions to Rs 158.95 on 26 April 2010 from a recent low of Rs 146.35 on 19 April 2010.
Oil exploration firms were mixed after crude futures fell in Asian electronic trading on Tuesday as the
market worried that weekly petroleum data would show fresh weakness in US oil demand. Cairn
India lost 0.32%. But, India's second biggest oil and gas exploration firm by revenue, Oil India, rose
0.81%. Fall in crude oil prices would result in lower realizations from crude sales for oil exploration
India's largest oil exploration firm by sales ONGC rose 2.57%, after the company said after market
hours on Monday the company added 83 million tonnes of oil and oil equivalent gas reserves in the
year ended March 2010, the highest in two decades. The stock was the top gainer from the Sensex
PSU OMCs rose as lower crude oil prices will reduce under-recoveries on domestic sale of petrol,
diesel, kerosene and LPG at controlled prices. BPCL, HPCL and Indian Oil Corporation rose by
between 0.54% to 1.11%.
Bank stocks fell on profit taking. India's second largest private sector bank by net profit HDFC Bank
fell 0.72%. The stock had risen 2.39% on Monday as net profit rose 32.61% to Rs 836.62 crore in
Q4 March 2010 over Q4 March 2009. The stock had hit all-time high of Rs 1997.85 on Monday. The
result was announced on Saturday, 24 April 2010.
India's biggest commercial bank in terms of branch network State Bank of India fell 1.43% on profit
taking after recent strong gains triggered by brokerage upgrades on the counter. A prominent
foreign brokerage has reportedly raised its rating on the stock to 'neutral' from 'sell'. Another foreign
brokerage has reportedly predicted a re-rating of the counter on the back of an expected lending
India's largest private sector bank by net profit ICICI Bank fell 1%, with the scrip falling for the
second straight day. Its ADR fell 4.48% on Monday. Net profit rose 35.2% to Rs 1005.57 crore in Q4
March 2010 over Q4 March 2009. The result was announced on Saturday, 24 April 2010.
India's largest mortgage finance firm by total income Housing Development Finance Corporation
(HDFC) rose 1.3% with the stock gaining for the second straight day. The company recently
launched a Dual Rate Product-2 (DRHL-2) in which home loan interest rates will be fixed rate at
8.25% annually up to 31 March 2011, 9% for the period between 1 April 2011 and 31 March 2012,
and the applicable floating rate for the balance term. The offer is for loan application made before 30
April 2010 and at least part-disbursement taken before 30 June 2010.
Yes Bank fell 0.14%. Net profit rose 74.8% to Rs 140 crore in Q4 March 2010 over Q4 March 2009.

c Basel

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Capital adequacy ratios ("CAR") are a measure of the amount of a bank's core capital expressed
as a percentage of its assets weighted credit exposures.

Capital adequacy ratio is defined as

where Risk can either be weighted assets () or the respective national regulator's minimum total
capital requirement. If using risk weighted assets,

• 10%.[1]

The percent threshold (10% in this case, a common requirement for regulators conforming to the
Basel Accords) is set by the national banking regulator.

Two types of capital are measured: tier one capital (À1 above), which can absorb losses without a
bank being required to cease trading, and tier two capital (À2 above), which can absorb losses in
the event of a winding-up and so provides a lesser degree of protection to depositors.

Capital adequacy ratio is the ratio which determines the capacity of the bank in terms of meeting
the time liabilities and other risks such as credit risk, operational risk, etc. In the most simple
formulation, a bank's capital is the "cushion" for potential losses, which protects the bank's
depositors or other lenders. Banking regulators in most countries define and monitor    to
protect depositors, thereby maintaining confidence in the banking system.[1]

CAR is similar to leverage; in the most basic formulation, it is comparable to the inverse of debt-
to-equity leverage formulations (although CAR uses equity over assets instead of debt-to-equity;
since assets are by definition equal to debt plus equity, a transformation is required). Unlike
traditional leverage, however, CAR recognizes that assets can have different levels of risk.

× sk we  
Since different types of assets have different risk profiles, CAR primarily adjusts for assets that
are less risky by allowing banks to "discount" lower-risk assets. The specifics of CAR
calculation vary from country to country, but general approaches tend to be similar for countries
that apply the Basel Accords. In the most basic application, government debt is allowed a 0%
"risk weighting" - that is, they are subtracted from total assets for purposes of calculating the

× sk we   example

× sk we ed asses - Fud Based : Risk weighted assets mean fund based assets such as cash,
loans, investments and other assets. Degrees of credit risk expressed as percentage weights have
been assigned by RBI to each such assets.

No-fuded (Off-Balae see Iems : The credit risk exposure attached to off-balance sheet
items has to be first calculated by multiplying the face amount of each of the off-balance sheet
items by the credit conversion factor. This will then have to be again multiplied by the relevant

Local regulations establish that cash and government bonds have a 0% risk weighting, and
residential mortgage loans have a 50% risk weighting. All other types of assets (loans to
customers) have a 100% risk weighting.

î   has assets totaling 100 units, consisting of:

yc Cash: 10 units.
yc 6overnment bonds: 15 units.
yc Mortgage loans: 20 units.
yc -ther loans: 50 units.
yc -ther assets: 5 units.

î   has deposits of 95 units, all of which are deposits. By definition, equity is equal to
assets minus debt, or 5 units.

Bank A's risk-weighted assets are calculated as follows

Cash 10 * 0% = 0

6overnment bonds 15 * 0% = 0

Mortgage loans 20 * 50% = 10

-ther loans 50 * 100% = 50

-ther assets 5 * 100% = 5

Àoal r sk

Weighted assets 65

Equity 5

CAR (Equity/RWA) 7.69%

Even though î   would appear to have a debt-to-equity ratio of 95:5, or equity-to-assets of
only 5%, its CAR is substantially higher. It is considered less risky because some of its assets are
less risky than others.

À pes of ap al

The Basel rules recognize that different types of equity are more important than others. To
recognize this, different adjustments are made:

1.c Tier I Capital: Actual contributed equity plus retained earnings.

2.c Tier II Capital: Preferred shares plus 50% of subordinated debt.

Different minimum CAR ratios are applied: minimum Tier I equity to risk-weighted assets may
be 4%, while minimum CAR including Tier II capital may be 8%.

There is usually a maximum of Tier II capital that may be "counted" towards CAR, depending
on the jurisdiction.

The ap al requ reme is a bank regulation, which sets a framework on how banks and
depository institutions must handle their capital. The categorization of assets and capital is highly
standardized so that it can be risk weighted (see Risk-weighted asset). Internationally, the Basel
Committee on Banking Supervision housed at the Bank for International Settlements influence
each country's banking capital requirements. In 1988, the Committee decided to introduce a
capital measurement system commonly referred to as the Basel Accord. This framework is now
being replaced by a new and significantly more complex capital adequacy framework commonly
known as Basel II. While Basel II significantly alters the calculation of the risk weights, it leaves
alone the calculation of the capital. The ap al ra o is the percentage of a bank's capital to its
risk-weighted assets. Weights are defined by risk-sensitivity ratios whose calculation is dictated
under the relevant Accord.
Each national regulator normally has a very slightly different way of calculating bank capital,
designed to meet the common requirements within their individual national legal framework.
Most developed countries implement Basel I and II, stipulate lending limits as a multiple of a
banks capital m mmm  
The 5 Cs of Credit - Character, Cash Flow, Collateral, Conditions and Capital, have been
replaced by one single criterion. While the international standards of bank capital were laid down
in the 1988 Basel I accord, Basel II makes significant alterations to the interpretation, if not the
calculation, of the capital requirement.
Examples of national regulators implementing Basel II include the FSA in the UK, BaFin in
6ermany, -SFI in Canada, Banca d'Italia in Italy.
Depository institutions are subject to risk-based capital guidelines issued by the Board of
6overnors of the Federal Reserve System (FRB). These guidelines are used to evaluate capital
adequacy based primarily on the perceived credit risk associated with balance sheet assets, as
well as certain off-balance sheet exposures such as unfunded loan commitments, letters of credit,
and derivatives and foreign exchange contracts. The risk-based capital guidelines are
supplemented by a leverage ratio requirement. To be adequately capitalized under federal bank
regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at least
4%, a combined Tier 1 and Tier 2 capital ratio of at least 8%, and a leverage ratio of at least 4%,
and not be subject to a directive, order, or written agreement to meet and maintain specific
capital levels. To be m   m under federal bank regulatory agency definitions, a bank
holding company must have a Tier 1 capital ratio of at least 6%, a combined Tier 1 and Tier 2
capital ratio of at least 10%, and a leverage ratio of at least 5%, and not be subject to a directive,
order, or written agreement to meet and maintain specific capital levels. These capital ratios are
reported quarterly on the Call Report or Thrift Financial Report. Although Tier 1 capital has
traditionally been emphasized, in the Late-2000s recession regulators and investors began to
focus on tangible common equity, which is different from Tier 1 capital in that it excludes
preferred equity.[1]
yc cc

×eulaor ap al

In the Basel I accord bank capital was divided into two "tiers", each with some subdivisions.

À er 1 ap al

Tier 1 capital, the more important of the two, consists largely of shareholders' equity. This is the
amount paid up to originally purchase the stock (or shares) of the Bank (not the amount those
shares are currently trading for on the stock exchange), retained profits subtracting accumulated
losses, and other qualifiable Tier 1 capital securities (see below). In simple terms, if the original
stockholders contributed $100 to buy their stock and the Bank has made $10 in retained earnings
each year since, paid out no dividends, had no other forms of capital and made no losses, after 10
years the Bank's tier one capital would be $200. Shareholders equity and retained earnings are
now commonly referred to as "Core" Tier 1 capital, whereas Tier 1 is core Tier 1 together with
other qualifying Tier 1 capital securities.
Regulators have since allowed several other instruments, other than common stock, to count in
tier one capital. These instruments are unique to each national regulator, but are always close in
nature to common stock. -ne of these instruments is referred to Tier 1 capital securities.
Apart from a few minor issues, these began to gain momentum from 1998 and usually consisted
of a perpetual security (ie no final maturity) with a fixed coupon for 10 years. After 10 years the
issue would be callable at par (ie 100% of original notional amount). If not called, the coupon
would step up usually to 100bp (1bp=0.01%) above the initial launch spread (eg if launched at
LIB-R+60, issue would step to LIB-R+160bp). As with equity, their coupons (dividends) were
not guaranteed and usually could only be paid provided the bank had sufficient distributable
reserves. If the coupon was not paid, the coupon would never be paid (ie was non-cumulative).
They were also loss absorbing to provide a further buffer for depositors. Until the credit crunch
of 2007-2009, 99% of all issues were called as they could be refinanced at cheaper levels to their
post-step coupon. However, even though many issues were trading wider than their step level
during the credit crunch most were still called much to the annoyance of the regulators. Holders
of the securities (eg pension funds, asset managers) argued that they needed these issues to be
called and coupons paid as, unlike shareholders, they do not benefit in the upside of a bank's
equity price (ie they buy the bonds at 100% and hopefully receive 100% 10years later even
though equity could have rallied by 300%). They also hold no voting rights (again, unlike
shareholders). The only benefit of holding the securities is the coupon and getting paid back your
initial outlay after 10 years. If they weren't called, or coupons paid, the holders argued that this
would therefore considerably affect the cost of issuing other Lower Tier 2 or senior issues. Due
to the fact that senior issuance vastly outweighed Tier 1 capital issuance, the banks therefore
mostly decided to call these issues at the first call/step date and continued to pay coupons, even
though it was un-economic to do so. In certain countries, eg 6ermany, the regulator took a strong
line and forbade these issues to be called. Similarly for the state-owned banks that had
restrictions imposed on them by the EU. This therefore has led to calls that such issues need to
be stronger in language in the original prospectus and that coupons can -NLY be called or
coupons paid provided there is sufficient distributable reserves. This will be part of future bank
capital requirements which are in the process of being decided as part of Basel 3.

À er 2 (supplemear  ap al

There are several classifications of tier 2 capital, which is composed of supplementary capital. In
the Basel I accord, these are categorized as undisclosed reserves, revaluation reserves, general
provisions, hybrid instruments and subordinated term debt.
Undisclosed reserves are not common, but are accepted by some regulators where a Bank has
made a profit but this has not appeared in normal retained profits or in general reserves. Most of
the regulators do not allow this type of reserve because it does not reflect a true and fair picture
of the results.

A revaluation reserve is a reserve created when a company has an asset revalued and an increase
in value is brought to account. A simple example may be where a bank owns the land and
building of its headquarters and bought them for $100 a century ago. A current revaluation is
very likely to show a large increase in value. The increase would be added to a revaluation
A general provision is created when a company is aware that a loss may have occurred but is not
sure of the exact nature of that loss. Under pre-IFRS accounting standards, general provisions
were commonly created to provide for losses that were expected in the future. As these did not
represent incurred losses, regulators tended to allow them to be counted as capital.
Subordinated debt is classed as Lower Tier 2 debt, usually has a maturity of a minimum of
10years and ranks senior to Tier 1 debt, but subordinate to senior debt. To ensure that the amount
of capital outstanding doesn't fall sharply once a Lower Tier 2 issue matures and, for example,
not be replaced, the regulator demands that the amount that is qualifiable as Tier 2 capital
amortises (ie reduces) on a straight line basis from maturity minus 5 years (eg a 1bn issue would
only count as worth 800m in capital 4years before maturity). The remainder qualifies as senior
issuance. For this reason many Lower Tier 2 instruments were issued as 10yr non-call 5 year
issues (ie final maturity after 10yrs but callable after 5yrs). If not called, issue has a large step -
similar to Tier 1 - thereby making the call more likely.

¦ ffere Iera oal Implemea os

Regulators in each country have some discretion on how they implement capital requirements in
their jurisdiction.
For example, it has been reported[2] that Australia's Commonwealth Bank is measured as having
7.6% Tier 1 capital under the rules of the Australian Prudential Regulation Authority, but this
would be measured as 10.1% if the bank was under the jurisdiction of the UK's Financial
Services Authority. This demonstrates that international differences in implementation of the rule
can vary considerably in their level of strictness.

Commo ap al ra os

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cÀ cc c c  c  c
yc À c cÀ cccÀ cc c
cÀ c cÀ cccÀ cc c  c  c

yc c c
cÀ cc c cc c   c  c
yc    c    !c" #c c
c   c    !c" #c c$c c  cc

Listed below are the capital ratios in Citigroup at the end of 2003 [1].
× c
À cc c %&'c
À c cÀ cccÀ cc &c
cc &c
   c    !c" #c (&(c
cÀ cc c  c)#c cc  &cc


   c    !c" #c *c'+%%'c
, -# cc-c  c +c
, -# c  #c)c    c -c )  #c  c +(c
.   #c  c +%c
 /c0c 1c  c c    c )-  cc +'%c
cc  c c c- 2c  +cc -c3c(c+4c (c

5 )c  /c c
6 2 c (+%c
7 c  2c  )c  c +(c
c  c c c )    c c 4c
7 c 4%c
 2c- c c  c4c '+4c

, -# c)c c 8+(8c

9 1c)c" #c    c  c c 8''c
 /cc  c c c )    c c 4c
 " #$  
×% &    #'  $

: c

Obje e
The objectives of SLR are:

1.c To restrict the expansion of bank credit.

2.c To augment the investment of the banks in 6overnment securities.
3.c To ensure solvency of banks. A reduction of SLR rates looks eminent to support the
credit growth in India.

The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it
respectively. This counter acts by decreasing or increasing the money supply in the system
respectively. Indian banks¶ holdings of government securities (6overnment securities) are now
close to the statutory minimum that banks are required to hold to comply with existing
regulation. When measured in rupees, such holdings decreased for the first time in a little less
than 40 years (since the nationalisation of banks in 1969) in 2005-06.

While the recent credit boom is a key driver of the decline in banks¶ portfolios of 6-Sec, other
factors have played an important role recently.

These include:

1.c Interest rate increases.

2.c Changes in the prudential regulation of banks¶ investments in 6-Sec.

Most 6-Sec held by banks are long-term fixed-rate bonds, which are sensitive to changes in
interest rates. Increasing interest rates have eroded banks¶ income from trading in 6-Sec.

Recently a huge demand in 6-Sec was seen by almost all the banks when RBI released around
108000 crore rupees in the financial system. This was by reducing CRR, SLR & Repo rates. This
was to increase lending by the banks to the corporates and resolve liquidity crisis. Providing
economy with the much needed fuel of liquidity to maintain the pace of growth rate. However
the exercise became futile with banks being over cautious of lending in highly shaky market
conditions. Banks invested almost 70% of this money to rather safe 6ovt securities than lending
it to corporates.

*alue ad Formula

The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the
liabilities of the bank which are payable on demand anytime, and those liabilities which are
accruing in one months time due to maturity) of a bank.
SLR Rate = Total Demand/Time Liabilities x 100%

This percentage is fixed by the Reserve Bank of India. The maximum and minimum limits for
the SLR are 40% and 25% respectively.[1] Following the amendment of the Banking regulation
Act(1949) in January 2007, the floor rate of 25% for SLR was removed. Presently, the SLR is
25% with effect from 7 November, 2009. It was raised from 24% in the RBI policy review on 27
-ctober, 2009.

¦ fferee bewee SL× & C××

SLR restricts the bank¶s leverage in pumping more money into the economy. -n the other hand,
CRR, or Cash Reserve Ratio, is the portion of deposits that the banks have to maintain with the
Central Bank.

The other difference is that to meet SLR, banks can use cash, gold or approved securities
whereas with CRR it has to be only cash. CRR is maintained in cash form with RBI, whereas
SLR is maintained in liquid form with banks themselves.

Treasury management in india«.see from