Capital Adequacy
With a view to adopting the Basle Committee framework on capital adequacy norms which takes into account the elements of risk in various types of assets in the balance sheet as well as off-balance sheet business and also to strengthen the capital base of banks, Reserve Bank of India decided in April 1992 to introduce a risk asset ratio system for banks (including foreign banks) in India as a capital adequacy measure.

Essentially, under the above system the balance sheet assets, non-funded items and other offbalance sheet exposures are assigned weights according to the prescribed risk weights and banks have to maintain unimpaired minimum capital funds equivalent to the prescribed ratio on the aggregate of the risk weighted assets and other exposures on an ongoing basis. The broad details of the capital adequacy framework are detailed below.

. Tier II elements should be limited to a maximum of 100% of total Tier I elements for the purpose of compliance with the norms.Norm of Capital Adequacy Minimum requirement of capital funds Banks are required to maintain a minimum CRAR of 9% on an ongoing basis.

Capital reserves representing surplus arising out of sale proceeds of assets. if any. statutory reserves. 2. Equity investments in subsidiaries. should be deducted from Tier I capital. . Paid-up capital.Tier-I Capital (Indian Banks) 1. intangible assets and losses in the current period and those brought forward from previous periods. Elements of Tier I capital a. and other disclosed free reserves. b.

DTA. should be deducted from Tier I capital. . Therefore.3. Creation of deferred tax asset (DTA) results in an increase in Tier I capital of a bank without any tangible asset being added to the banks’ balance sheet. which is an intangible asset.

Tier-I Capital (Foreign Banks) Interest free funds from H.O. Capital Reserves arising out of Sale of Assets in India. held in separate account and are not repatriable as long as the Bank functions in India Interest free funds remitted in India for . kept in separate account for meeting capital adequacy. Statutory Reserves kept in Indian Books Remittable surplus retained in Indian Books which are not repatriable so long as the Bank functions in India.

However. or a Branch Overseas will not be reckoned as Capital funds.O. any debit balance will have to be set off from the Capital. The net credit balance in Inter-Office Account with H. .Acquisition of property in India and held in a separate account.

General provisions and loss reserves. Subordinated debt. Hybrid debt capital instruments.Elements of Tier II capital Undisclosed reserves and cumulative perpetual preference shares (fully paid up) Revaluation reserves. Investment Fluctuation Reserve (IFR). .

General Provisions and Loss Reserves (GPLR). Since revaluation reserves may not give full 100% value at the time of selling of the assets. Cumulative preference shares should be fully paid up and should not contain clauses which permit redemption by shareholders.Undisclosed reserves should be accumulated out of post tax profits and not encumbered by any liability. they need to be discounted by a minimum of 55% when determining their value for inclusion in Tier-II Capital. These are available to meet .

GPLR will be admitted to Tier-II Capital upto a maximum of 1. Subordinated Debt Instruments: -Should not have initial maturity less than 5 years -If issued in last quarter of FY. should have initial maturity of 63 months -Should be fully paid up -Interest rate should not be more than 200 bp above the yield on Government Security of equal residuary maturity at the time of issue. .Unexpected losses but are not attributable to any specific/known loss which is foreseeable.25% of Risk weighted assets.

Subordinated Debt will be limited to 50% of Tier-I Capital Subordinated Debt to be included in Tier-II Capital may be subjected to the following discounts: Beyond 4 Years but not exceeding 5 years20% Beyond 3 Years but not exceeding 4 years40% Beyond 2 Years but not exceeding 3 Years60% .

GPLR+GP on SA+Investment Fluctuation Fund – Maximum to be admitted to tier II capital is 1.25% of RWA .Beyond 1 Year but not exceeding 2 years80% Maturity not exceeding 1 year – 100%. RBI permission required for issuing to NRI/FII Subordinated Debt issue should be plain vanila with no special features like options etc. Public Sector Banks are required to obtain permission of GOI before issue.

Cash margins or credit balance in CA earmarked specifically in lieu of cash margin for the credit facility extended.Banks investments in all securities should be assigned a risk weight of atleast 2. This will be in addition to the risk weight assigned towards credit risk. .Weighted aggregate of (Funded + Non Funded) Assets .5% for market risk.RISK ADJUSTED ASSETS: . be deducted (netting done) before applying weight .

g. IRDP and not appropriated to the asset be deducted from the respective Asset (Netting) before applying weight -Equity investment in subsidiaries. -Advances to the extent guaranteed by DICGC/ ECGC may be assigned risk weight of 50% to that extent. -Advances against specified securities Fixed . intangible assets which are deducted from Tier-I Capital should be assigned Zero weight.Claims received from DICGC/ECGC/Any subsidy received e.

Deposits/NSCs/KVPs/IVPs etc.Securities -Accrued interest on CRR balances & other claims with RBI . should be given zero risk weight -Loans to staff Zero risk weight Zero Risk weight under “Other Assets”: -Income Tax deducted at source -Advance Tax paid -Interest due on Govt.

Foreign Exchange & Gold open position should carry 100% risk weight.Investment in Subordinated debt instruments of other Banks or Public Financial Institutions would carry risk weight of 100%. This will again have to be multiplied by the . Other items risk weight as per BOOK Off Balance-sheet items: The credit risk exposure attached to off balance sheet items has to be first calculated by multiplying the face value of each balance sheet item by a Credit Conversion factor.

weight attributable to the counter party. -Cash margins/deposits shall be deducted before applying the credit conversion factors -All financial guarantees CF 100% -Performance guarantees CF 50% -Short Term self-liquidating trade related contingencies CF 20% -Note issuance facilities and revolving underwriting CF 50% -Certain transactions related contingent liabilities CF 50% .

.Guarantees issued by the banks against the counterguarantee of other banks CF 20% Rediscounting of documentary bills accepted by other banks CF 20% Foreign Exchange Contracts: Original maturity < 14 days CF 0% Original maturity More than 14 d to1 yr CF 2% Original maturity More than1 yr to 5 yr CF 10% More than 5 year 15% The converted values obtained shall be multiplied by the risk weight attached to the counter party.

Consider the following data of the Bank as on 31st March 2009: (Rs./Crs) Equity 240 Statutory Reserves CapitalReserves(Out of sales) Undisclosed Reserves Equity investment in subsidiaries 40 50 40 44 .

Cumulative prepetual preference shares Revaluation Reserves 90 130 General Provisions & Loss Reserves Subordinated debt:Above 5 years 5 years 4 to 5 years 3 to 4 years 2 to 3 years 1 to 2 years 80 20 30 40 20 40 30 Below 1 year 140 .

CDs 80 50 84 74 298 46 Loans and advances guaranteed by GOI Loans & advances to Central PSUs Loans & advances to State PSUs Claims to FIs 382 242 150 80 . Securities Investment in other Securities Claims on Comm Banks e.Cash on hand Balances with RBI Balances with other Banks Investment in Govt.g.

contracts: Maturity above 14 days to1 year Maturity Above 2 yr <3 years 112 100 34 32 24 .E. underlying shipment Note issuancefacility to Public sector Aggregate outstanding F.Furniture & Fixtures Buildings & Equipment Stand by LCs to PSU 130 150 84 to private Cos. Collatrised credit to Private Co.

2800 crs of Risk weighted assets. Calculate the Capital Adequacy ratio.85 .5 Risk weit 0 0 1. the Bank has Rs. Govt Securities Bal 80 50 74 weit 0% 0% 2.Apart from these. RISK WEIGHTED ASSETS (On balance sheet) Asset Cash on hand Bal with RBI Invst.

20 298 100% 382 0% 0 242 150 242 100% 150 100% Claims to FIs Furniture & Fixture Building & Equipment TOTAL 80 20% 16 130 150 1013. Other securities Claims on other banks CD etc. L & A guaranteed by GOI L & A to Central PSUs L & A to State PSUs 84 46 0.80 298 9.Bal with other Banks Inv.20 20% 16.85 130 100% 150 100% .

credit topvt.E. Coll. 34 32 24 100 100 100 100 100 100 20 50 84 112 20 17 100 100 2 10 0.Off Balance-Sheet assets: (Rs. Note issuance to F.40 236 .co.contract<1yr -<3yr Total RWA 84 112 100 Pvt./crs) Asset Bal Weit% cf% SLC PSU SLC Pvt co.64 2.

Total Risk weight assets= 1013.Rs/cr Equity Statutory Reserves Capital Reserves (Sales proceed Total 240 40 50 330 Less: Equity in subsidy Tier-I Capital 44 286 .85 cr Computation of Tier-I Capital:Amt.85+236+2800 = Rs.4049.

4 30 x .3 to 4 yr -2 to 3 yr -1 to 2 yr .Computation of Tier-II Capital: Subordinated debt: Above 5 yr .Below 1 yr Total 20 x 1 30 x 0.6 40 x 0.2 140 x 0 20 24 32 12 16 6 0 110 .8 20 x 0.5 yr .4 to 5 yr .8 40 x 0.

00 Revaluation Reserves: 130x./cr) Undisclosed Reserves 40.Subordinated Debt should be lower of 50% of tier-I Capital i. Rs.41 cr or actual i. Therefore Rs.25% of RWA i.85 = Rs.50 GPLR 50.143 cr or Rs.45 58.00 Cumulative Preference shares 90.e.50. 0.25% of 4049.e.110 cr as calculated above i.e.00 .50 x 286 =Rs.41 Subordinated debt 110. 1.80 cr.e. Rs.50.110cr General Provisions & Loss Reserves should be lower of 1.41 cr (Rs.

286 cr Therefore Capital adequacy = (286+286)/4049.e.348.Total Tier –II Capital = Rs.91 cr For computing Capital Adequacy Tier-II can not be more than Tier.13% . Rs.85 = 0.I Capital i.1413 = 14.

Tier-I Capital of Bank stands at Rs. The bank wants to find out whether it meets the capital adequacy requirement of 9% or not. the bank is contemplating on raising equity and subordinated debt in suitable proportion so that interest of present shareholders may be diluted only to limited extent. Suggest a suitable alternative to bank.49 cr resp.3250 cr. If not.ILLUSTRATION: Risk weighted assets of a bank are Rs. Revaluation reserves and General Provisions and Reserves stood at Rs. stating the regulations to be followed. . to meet the capital adequacy requirement.119 cr.74 cr and Rs.

575 cr .50-192.292.3250 crs Tier-I Capital = Rs. Existing Capital Adequacy=192.625 = Rs. 49 = 33. of 0.925 = Rs.0125x3250 or Rs.45 x74 + Min.925/3250 x100 = 5.925 = Rs.9% Total Required Capital = 9% of 3250 = Rs. 119 crs Tier-II Capital = 0.Total Risk weighted Assets = Rs.925 cr Total Capital = 119 + 73.50 cr Capital needed to be raised= 292.

e.575 cr i.Capital to be raised : Equity & Subordinated Debt Requirements: (i) Subordinated Debt can not be more than 50% of equity capital (ii) Tier II Capital can not be more than Tier I Capital If we raise whole of additional capital required by means of subordinated debt.50 cr i.119 cr. more than 50% of Tier I Capital.575=173. then Tier II Capital will be= 73.925+99.e. Let us assume that subordinated debt raised . more than Tier I Capital of Rs. Also subordinated debt will be =99.

575cr .5(119+99. therefore X = 0. therefore X+73.325cr Thus Additional capital will be raised as Subordinated Debt = Rs.27.575-72.325cr Equity(99. X crs.575-X) or X= Rs.8583cr Also the other condition that Tier II Capital can not be more than Tier-I Capital.72.325)= Rs.575 – X) crs Since subordinated debt can not be more than 50% of Total Equity.99.925 = 119+99.575-X or X= Rs.250cr TOTAL Rs.Rs.(99. Therefore Equity raised will be Rs.72.72.

Thank You .