ComponentsofCapital

Capitalfunds :Thec apitalfu ndsw ouldi

ncludet hec omponentsT ierI c apitala ndT

ierI I capital.

Elements ofTier ICapital :Thee lementso fT

ierI c apitalin cludes:

(i) Paid-up capital (ordinary shares),

statutory reserves, and other disclosed fre

reserves,ifany;

(i)PerpetualNon-cumulative

PreferenceShares(PNCPS)eligiblefor inclusion

asTier I capital-subjecttolaws inforce from

time totime;

(i)InnovativePerpetualDebtInstruments(IPDI)e

ligiblefor inclusionasTier Icapital; and

(iv)Capitalreserves representing surplus

arising outofsale proceds ofasets.

Elements ofTier ICapital:The elements ofTier

Icapitalinclude

Undisclosedreserves,revaluation
reserves,generalprovisionsandlosreserves,hyb
rid

capitalinstruments,subordinateddebtandinvest
mentreserve acount.

(a) UndisclosedReserves

 Theyc an bei ncluded in capital,i ft heyr

epresenta cumulationso fp ost-taxp rofitsa nd

are not encumbered by any known liability

and should not be routinely used for

absorbing sor ses.

normallo operatin
g lo

(b) RevaluationReserves

Itwouldbe prudentto
considerrevaluationreserves

atadiscountof55per cent while
determiningtheir value for inclusioninTier

Icapital.

(c) GeneralProvisions andLo sReserves

Generalprovisions/losreserves wilbe
admiteduptoamaximum of1.25percentof

totalriskweightedasets, whicheveri sl
ower,is t aken

Exces provisions whicharise onsale ofNPAs

wouldbe eligible Tier Icapitalsubjectto the

overalceiling of1.25% oftotalRiskWeightedA

sets.

e)Subordinated Debt
 Banks canraise,withthe ap rovaloftheir

Boards,rupe-subordinateddebtasTier I

capital.

Deductions from Tier ICapital :Thef olowingd

eductionss hould bem adef rom TierI

capital:

(a) Intangibleasetsandlosesinthecurent

periodandthosebrought forwardfrom previous

periods shouldbe deductedfrom Tier Icapital;

(b) Creationofdeferedtaxaset(DTA)resultsinanin
creaseinTier Icapitalofabank

 withouta ny tangible asetb eing ad ed to the

banks’b alance shet.T herefore,D TA,

 whichi sa ni ntangiblea set,s houldb ed

eductedf rom TierI c apital.

Deductions from Tier

IandTier ICapital

a.Equity/non-

equityinvestments

insubsidiaries

 Thei nvestmentso fa b anki nt hee quitya sw

ela sn on-equityc apitalin strumentsi sued

 by a subsidiary, which are reckoned towards

its regulatory capitala s per norms

prescribedby the respective

regulator,shouldbe

deductedat50percenteach,from Tier IandTier

Icapitalofthe parentbank,while asesing the

capitaladequacyofthe bank

on'solo'basis,underthe BaselIFramework.

LimitforTier Ielements

 TierI Ie lementss houldb el imitedt oa m

aximum of1 0 p erc ento ft otalT ierI e
lements

forthe purpose ofcompliance

withthe norms. Note:Tier

Icapitalcannotbe more

thanTier Icapital.

Elementoftier-IIcapital;

• Short term subordinated debt

• Shortterm bondwithanoriginalmaturity
of2Yeara.

Note:

 Tier-IIc apitalis l imitedt o2 50% ofT

ier-I
 28.5% ofmarketrisk neds to be sup orted by
Tier-I

Minimum requirementofCapitalFunds
Banks are required to maintaina minimum

CRARof9 percentonanongoing basis.

CommoncapitalRatio:

 Tier-Ic apital-6 %

 Tier-IC apital-3 %

CapitalAdequa
yc Ratio:

CapitalAdequacyRatio=(Tie
r Icapital+(Tie
r Icapital)/RWA

RWA=Capital(TierI+I)x CAR

Capitaladequacy ratio(C)=Regulatory

capital(R)/Totalriskweightedasets(T).

Regulatory

Capital‘R’=C*TandTotalRiskweightedAsets

‘T’=R/C

 Total Risk weighted asets =(Risk weighted

asets for credit risk) +(12.5*Capital

requirementfor marketrisk)

+(12.5*Capitalrequirementfor

operationalrisk)

NetInterestIncome=InterestIncome -

InterestExpenses.

NetInterestMargin(NIM)=NetInterestInco

me/AveragetotalAsets. Economic Equity

Ratio =Shareholders funds /Totalasets.

Profit=InterestIncome - Interestexpense -

provisionfor loanlos +non-interest revenue

– noninterestexpense – taxes.

PROVISION REQUIREMENT:

Los Aset :10 %

DoubtfulAset(Unsecured Portion) :10 %

DoubtfulAset(Secured –up to 1 Year):25%

DoubtfulAset(Secured –up

to 3 Year) :40%

DoubtfulAset(Secured–

more than3year):10 %

Substandard(Secured) :15

Substandard(Unsecured) :25%

InfrastructureLoan :20%
 For
StandardAsets:
DirectadvancetoAg :0.25%
ri& SME
CommercialRealEst :1%
ate
HousingLoanwithTe :2%
aserRates
Restructured : 2.75%
Advances
 Alo thera dvances :0 .40%

ProvisioningCover = Provision
ageRatio Amount/ Gros NPA

RiskAdjustedReturnonCapital(RAROC):

RAROC= ExpectedReturn/ Economic Capital.

RAROC= Expected Return/ Value atRisk

(Revenue – Expenses – Expected Los +

Income From Capital)/ Capital.
RAROC=
Capital

Revenue–Expenses
ROA =
  Asets

Revenue–Expenses
ROE =
  Equity

Revenue–Expenses
ROC =
  Capital

Modifiedduration=McCauley's
duration/(1+yield)

% change inprice = -modified duration×

yieldchange