CAPITAL FUNDS

Usha Janakiraman

Capital Adequacy • Minimum Capital Requirement (9% of RWA) • CAR= Capital Funds/RWA • Capital Funds– Capital for regulatory/supervisory purposes – Tier approach .

cumulative preference shares • 50% of the capital as Core: Deduct goodwill and investments in subsidiaries • Tier III. ( not permissible in India) .Capital Funds.Short-term subordinated debt for the sole purpose of meeting a proportion of the capital requirement for market risks. Disclosed Reserves. Innovative capital instruments.Supplementary Capital: General Provisions/Loan Loss Reserves.The Tier Approach of Basel Accord • Tier I. Hybrid Capital Instruments and Subordinated Debts. Revaluation Reserves.Core Capital: Equity. perpetual non-cumulative preference shares • Tier II.

and other disclosed free reserves. .Elements of Tier I capital • Paid-up capital ( ordinary shares). eligible for inclusion as Tier I capital • Perpetual non-cumulative Preference Shares eligible for inclusion in Tier I capital-subject to laws in force from time to time • Capital reserves representing surplus arising out of sale proceeds of assets. if any. • Innovative Perpetual Debt Instruments( IPDI). statutory reserves.

unsecured and free of restrictive clauses • amount raised as IPDI shall not attract CRR/SLR requirements • not to exceed 15% of Tier I capital as on March 31 of the previous financial year • can be issued in Indian rupees or foreign currency-not more than 49% of eligible amount in foreign currency • maturity period-perpetual • rate of interest-either fixed or floating.market determined • no put option. after 10 years. in conjunction with call .Innovative Perpetual Debt Instruments-Features • fully paid-up. call option permissible subject to: • instrument to have run for at least 10 years • prior approval of RBI • step-up option once .

bank may pay interest subject to prior approval of RBI • Interest shall not be cumulative • No progressive discount for capital adequacy purposes since these are perpetual .Innovative Perpetual Debt Instruments-Features • IPDI shall be subject to a lock-in clause wherein bank shall not be liable to pay interest if: • bank’s CAR <9% • impact of such payment results in bank’s CAR falling below 9% • If bank incurs a loss or impact of payment shall result in a net loss.

25% of RWA) • Investment Reserve Account( overall ceiling of 1.at a discount of 55% • General provisions and loss reserves ( overall ceiling of 1.limited to 50% of Tier I capital • Revaluation Reserves.25% of RWA) .subject to laws in place from time to time • Debt capital instruments eligible for inclusion as Upper Tier II capital • Subordinated debt.25% of RWA). to represent accumulations of posttax profits and not represent any known liability • Hybrid debt capital instruments: • Redeemable cumulative preference shares eligible for inclusion in Tier II capital.Elements of Tier II capital • Undisclosed Reserves-characteristics similar to disclosed reserves. General provions for standard assets and provisions for country risk ( overall ceiling of 1.

Debt instruments qualifying for inclusion as Upper Tier II capital • Can be issued in Indian rupees or foreign currency. Call option provided: • instrument has run for atleast 10 years • prior approval of RBI • step-up option of 100bps after completion of 10 years in conjunction with call option possible only once . shall be subject to progressive discount as they approach maturity in the last five years of their tenor • Rate of interest. unsecured and free of any restrictive clauses • Amount to be decided by Board of Directors. instruments in foreign currency not to exceed 25% of Tier I capital of previous year • Fully paid up. market determined • No put option.either fixed or floating. along with other components of Tier II not to exceed 100% of Tier I • Minimum maturity -15 years.

Debt instruments qualifying for inclusion as Upper Tier II capital • shall be subject to a lock-in clause wherein bank shall not be liable to pay interest and principal even at maturity if: • bank’s CAR <9% • impact of such payment results in bank’s CAR falling below 9% • If bank incurs a loss or impact of payment shall result in a net loss. bank may pay interest subject to prior approval of RBI • Interest due and remaining unpaid can be paid in later years subject to compliance with above regulatory requirement • Seniority of claim: – superior to investors of instruments eligible for inclusion in Tier I capital – subordinate to claims of other creditors • redemption with prior RBI approval .but CRAR remains above the regulatory norm.

As they approach maturity.Features • Typical Tier II bonds that banks have been issuing in India.Subordinated Debt. and are not be redeemable at the initiative of the holder or without the prior consent of the Reserve Bank of India. unsecured. for inclusion in the Tier II capital. free of restrictive clauses. • They are fully paid-up. • Minimum maturity of 5 years . • Shall attract CRR/SLR requirements • Instruments with an initial maturity of less than 5 years or with a remaining maturity of one year should not be included as part of Tier II capital . subordinated to the claim of other creditors. they are subjected to progressive discount. Amount shall be decided by Board of Directors.

Elements of Tier II capital Subordinated debt Subject to discount at rates shown below: Remaining maturity < 1 year Rate of Discount 100% >/= 1 year but <2 years 80% >/= 2 years but < 3 years 60% >/= 3 years but < 4 years 40% 4 years & more but < 5 years 20% .

Deductions from capital funds • Securitisation: – First loss credit enhancement provided by the originator to be reduced from capital funds-50% from Tier I and 50% from Tier II. Cap: amount of capital that bank would require to hold for full value of assets had it not been securitised – second loss credit enhancement to be reduced to full extent.securities of SPVs devolved and held by the bank in excess of 10% of original amount of issue to be deducted 50% from Tier I and 50% from Tier II – underwriting by bank as third party-securities devolved and held which are below investment grade to be deducted 50% from Tier I & 50% from Tier II .50% from Tier I and 50% from Tier II – credit enhancement provided by bank as third party-first loss credit enhancement reduced to full extent as earlier – underwriting by originator.

shall not exceed 100% of Tier I capital . in excess of these limits can be included in Tier II • Upper Tier II capital instruments along with other Tier II components shall not exceed 100% of Tier I capital • Subordinated debt instruments limited to 50% of Tier I capital and along with other components of Tier II capital.LIMITS • Tier II not to exceed Tier I • IPDI ( Innovative Perpetual Debt Instruments) not to exceed 15% of Tier I capital as on March 31 of the previous financial year.