Basel II- RBI Guidelines

Usha Janakiraman
NIBM Pune

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Scope of application

All commercial banks ( except LAB and RRBs)
Both at solo ( global position ) and at consolidated level

Consolidated bank is defined as a group of entities where a
licensed bank is the controlling entity

Consolidated bank includes all group entities under its control
except entities engaged in:

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Insurance business
Business not pertaining to financial services

Consolidated bank to maintain minimum capital adequacy ratio
as applicable to solo bank on ongoing basis

Capital Funds

Minimum 9% CAR to be maintained on an ongoing basis
Role of Pillar 2 to be critical:


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RBI to take into account internal capital adequacy assessments
of individual banks to ensure adequacy of capital
commensurate with risk profile
Banks to effectively manage “ other risks” – interest rate risk in
banking book, liquidity risk, concentration risk and residual risk
Higher than minimum capital ratio for individual banks can be
prescribed by RBI if warranted by individual risk profiles and
risk management
Banks expected to operate at a level above the minimum
requirement

minimum capital shall be subjected to a prudential floor Adequacy & need for capital floors to be reviewed periodically Prudential Floor Specified percent of minimum capital as Minimum capital as per per Basel I ( credit & market) Basel II as below March 2008/09 100% 4 March 2009/10 90% March 2010/11 80% .Capital Funds   On implementation of Basel II.

banks below this must attain this by March 2010 Capital Funds= Tier I + Tier II CAR= Capital Funds/ Credit Risk RWA+ Market Risk RWA+Op Risk RWA .Capital Funds    5 Banks encouraged to maintain Tier 1 CAR of at least 6% both at solo and consolidated level.

Capital Charge for Credit Risk-Standardised Approach  All commercial banks in India to adopt Standardised Approach (SA) for credit risk  Under SA. rating assigned by eligible external credit rating agencies will largely support the measure of credit risk Exposures to be risk weighted net of specific provisions Exposures not explicitly addressed to retain current treatment   6 .

Standardised Approach-RBI Guidelines Domestic OffSovereigns Foreign Balance Sovereigns Sheet PSEs Other Assets Specified Higher Risk Categories MDBs. BIS & IMF SA Banks NPAs Commercial Real Estate PDs Residential Corporates Property Regulatory Retail 7 .

CGTSI: 0% RW Claims on ECGC: 20% RW Above risk weights apply only for standard performing loans.Standardised Approach-RBI Guidelines.Domestic Sovereigns      Claims on central government( FB & NFB): 0% RW Central government guaranteed claims: 0% RW Investment in state government securities: 0% RW State government guaranteed claims: 20% RW Others: – – Claims on RBI. DICGC. otherwise risk weights as applicable to NPAs will apply 8 .

Standardised Approach-RBI Guidelines.Foreign Sovereigns A BB B BB to < B B Unrated Aaa To Aa A Ba a Ba to <B B Unrated 0 20 50 100 100 S&P/Fitch AAA To AA Moody’s Risk weights as per rating assigned to the sovereigns/sov ereign claims Risk by rating Weight agencies (%) 9 Claims in domestic currency of foreign sovereign met out of resources in the same currency raised in the jurisdiction Of that sovereign will attract RW of 0% 150 .

Standardised Approach-RBI: Public sector entities   10 Domestic PSEs: Risk weighted in the same manner as corporates Foreign PSEs: Risk weighted as per rating assigned by international rating agencies: S&P/FITCH AAA to AA A BBB <BB Unra ted Moody’s Aaa to Aa A Baa to Ba <Ba Unra ted 50 100 150 100 Risk Weight 20 (%) .

Standardised Approach-RBI Claims on BIS . IMF & eligible MDBs   11 Similar to claims on scheduled banks Uniform risk weight of 20% .

Standardised Approach-RBI: Claims on Banks: Banks incorporated in India & foreign bank branches in India  Excludes investment in equity shares and other instruments eligible for capital status – –  Claims on scheduled banks complying with minimum CAR & RRBs-20% RW Claims on non-scheduled banks complying with minimum CAR-100% RW Claims on banks not complying with minimum CAR : ( includes equity & other instruments eligible for capital status ) CAR (%) Scheduled Banks RW Non-scheduled banks RW 50% 100% 150% 625% 150% 250% 350% 625% As on date of last full audit* 12 6 to < 9 3 to < 6 0 to < 3 negative * Fresh subsequent capital raised can be reckoned .

if host supervisor requires a more conservative treatment for such claims in the books of foreign branches of Indian banks. .Standardised Approach-RBI: Claims on Banks: Foreign banks As per the ratings assigned by international rating agencies 13 S&P/FITC H AAA to AA A BBB BB to B <B Unrated Moody’s Aaa to Aa A Baa Ba to B <B Unrated Risk Weight (%) 20 50 50 100 150 50 Claims on a bank in “domestic” foreign currency met out of resources in the same currency raised in that jurisdiction will be risk weighted at 20% provided the bank meets the prescribed minimum CAR of that country. that should prevail.

Standardised Approach-RBI: Claims on Primary Dealers: Shall be risk weighted in a manner similar to corporates 14 .

Standardised Approach-RBI: Claims on Corporates: Corporates: Shall include all exposures (FB & NFB) other than those qualifying for inclusion under sovereign. regulatory retail. residential mortgage. bank. non-performing assets & specified category all of which are separately addressed 15 .

30%. 50%. 150%.100%.Standardised Approach-RBI: Claims on Corporates: To be risk weighted as per the rating agencies registered with SEBI and chosen by RBI  Risk weights for long term & short term claims on corporates specified under the guidelines: 20%. Unrated claims upto threshold level: 100% 16 .

10 crore will have a RW of 150% Threshold ( Rs. 50/Rs. 50 crore will have a RW of 150% From April 1. 2009: all fresh sanctions/renewals of unrated corporates > Rs.Standardised Approach-RBI: Claims on Corporates: UNRATED CLAIMS No claim on unrated corporate to given a risk weight preferential to that assigned to the sovereign of incorporation RBI may increase the standard risk weights for unrated where warranted by overall default experience Under Pillar 2. 2008-09: all fresh sanctions/renewals of unrated corporates >Rs. RBI would consider whether unrated corporate claims of individual banks warrant a standard RW higher than 100% Thresholds* for 150% RW for unrated exposures to corporates:  – – For F. 10 crore) with reference to aggregate exposure on a single counterparty for bank as a whole 17 .Y.

Standardised Approach-RBI: Claims
on Corporates: UNRATED CLAIMS
Unrated standard restructured loans to corporates to
be assigned a higher RW of 125% until satisfactory
performance under the revised payment schedule for
one year from the due date of payment of first interest
/principal under the revised schedule.

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Standardised Approach-RBI Guidelines:
RATED CORPORATES

Domestic credit rating agencies identified by RBI:

Credit Analysis and Research Limited (CARE)

CRISIL Limited
FITCH India
ICRA Limited


International credit rating agencies identified by RBI:


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FITCH
Moodys
Standard & Poor’s

Standardised Approach-RBI Guidelines: Scope of External Ratings

Banks to choose the rating agencies

Banks to use chosen credit rating agencies’ ratings consistently
for each type of claim-for risk weighting & risk management
purposes
No cherry picking assessments of different rating agenciespicking the most favourable rating
Banks to disclose the names of rating agencies proposed to be
used for risk weighting assets by type of claim


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seek approval of Board/Top Management for any subsequent changes If bank has exposure to a person and the exposure or the person does not have a rating assigned by the agency chosen by the bank. treat the exposure or the person as “unrated” for risk weighting purposes Unless exposures are rated by only one of the nominated credit rating agencies. and geographical regions Formalise /document the above and obtain Board /Top Management approval for application of external rating agencies to each of the bank’s external-rating based portfolios Use the ratings of the nominated rating agencies within each of the external rating-based portfolios consistently. do not use one agency’s rating for one corporate bond and another agency for another exposure to the same customer .bank to take into account whether the nominated rating agency can provide reasonable coverage on banks exposures within portfolios in terms of types of counterparties.Standardised Approach-RBI Guidelines: Scope of External Ratings  How to avoid inconsistency and cherry picking?      21 Nominate one or more rating agencies whose ratings will be used by the bank for deriving risk weights for exposures in each of the external ratingsbased portfolios.

to be included in the rating agency’s transaction matrix. confirmed from the monthly bulletin of the rating agency Rating agency to have reviewed the rating at least once in the last 15 months The credit assessment to be publicly available.Standardised Approach-RBI Guidelines: Scope of External Ratings  Other issues:       22 A rating for one entity within a group cannot be used to risk weight other entities in the group To be eligible. Assets with contractual maturity of less than or equal to one year.short term ratings accorded by rating agencies relevant. Cash credits-to be reckoned as long-term exposures and long term ratings accorded by rating agencies relevant . rating has to be in force.

all unrated claims (ST & LT) •shall receive 150% RW ( unless recognised CRM are available) .Standardised Approach-RBI Guidelines: External Ratings LONG TERM RATINGS: ( MAPPED BY RBI TO THE RISK WEIGHTS UNDER THE STANDARDISED APPROACH) Long –term Ratings 23 AAA SA Risk Weights 20% AA 30% A 50% BBB 100% BB & Below 150% Unrated 100%* •If issuer has an external long term/short term rating warranting a RW of 150%.

ST rating cannot be generalised for other ST exposures  Cannot be applied to unrated long-term claim in any case Can be used for short-term claims against banks and corporates Points to be noted:     24 Unrated ST claim on borrower to attract RW at least one level higher then rated ST claim on same borrower Unrated claims. if the borrower/issuer has a ST exposure with an external ST rating warranting a RW of 150%.Standardised Approach-RBI Guidelines: External Ratings SHORT TERM RATINGS  Issue-specific . ST or LT on a borrower shall receive 150% RW . unless recognised CRM techniques are available . can be used only for the rated facility.

Standardised Approach-RBI Guidelines: External Ratings SHORT TERM RATINGS: ( MAPPED BY RBI TO THE RISK WEIGHTS UNDER THE STANDARDISED APPROACH) Short–term Ratings SA Risk Weights PR1+. A4& A5 CARE. &D.P1.P1+.F1+. P3.F1.B.A1+ 20% 30% 50% 100% 150% PR1. P2. FITCH & ICRA 25 RW mapping of both LT & ST of these rating agencies to be reviewed annually by RBI .F2. CRISIL.A2 PR3. F3. C.P4& P5.A1 PR2. A3 PR4&PR5.

Standardised Approach-RBI Guidelines: External Ratings Exposures/Borrowers with multiple rating assessments    26 If one rating available: use the rating to determine the RW If two different ratings available: apply higher RW If three or more ratings available: apply the second lowest RW .

Standardised Approach-RBI Guidelines: External Ratings Applicability of issue specific rating to issuer/other claims or issues  Specific issue rating ( mapping into a lower RW) can apply to the bank’s unrated claim : Unrated claim ranks paripassu or senior  Maturity of unrated claim is not later than the maturity of above ( not applicable to rated short term issues)   27 Issuer/Issue Rating maps to a risk weight =/> unrated claims. then the unrated claim will also have the same risk weight unless it is senior to rated claim .

Standardised Approach-RBI Guidelines: External Ratings Use of unsolicited ratings  What is a solicited rating?    28 Issuer has requested rating agency for the rating and has accepted the rating assigned Banks to use only solicited ratings from chosen agencies Unsolicited ratings not to be considered for RW calculation under SA .

10 crore) with reference to aggregate exposure on a single counterparty for bank as a whole . 2008-09: all fresh sanctions/renewals of unrated corporates >Rs.Standardised Approach-RBI: Claims on Corporates: Non-resident corporates Non-resident corporates: Risk weighted as per the ratings assigned by international rating agencies approved by RBI:  S&P/FITCH AAA to AA A BBB <BB Unrated* Moody’s Aaa to Aa A Baa to Ba <Ba Unrated Risk Weight (%) 20 50 100 150 100* *Unrated exposures could carry higher risk weight of 150%. Thresholds* for 150% RW for unrated exposures to corporates: – For F. 2009: all fresh sanctions/renewals of unrated corporates > Rs. 50/Rs. 50 crore will have a RW of 150% – From April 1. 10 crore will have a RW of 150% 29 Threshold ( Rs.Y.

Standardised Approach-RBI: Regulatory Retail Portfolios To qualify as retail claims for regulatory capital purposes. exposures (FB & NFB) to meet all four criteria: Orientation criteria Product criterion Granularity criterion Low value of individual exposures 30 .

private limited companies. 50 crore:    31 Existing entities: average of the last 3 years New entities: Projected turnover Entities yet to complete three years: Both Actual & Projected . public limited companies. HUF. – partnership. etc.) Small business is one where the total average annual turnover is < Rs. trust. cooperative societies.Standardised Approach-RBI: Regulatory Retail Portfolios Orientation criteria Exposure is to an individual person or persons or to small business – Person as above would mean any legal person (individual. firm.

student loans) Small business facilities & commitments .Standardised Approach-RBI: Regulatory Retail Portfolios Product criteria Exposure takes the form of : – – – – – 32 Revolving credits Lines of credits Overdrafts Term Loans ( installment loans.

banks can use group exposure concept NPAs under retail loans to be excluded from the overall RR portfolio when assessing granularity criterion  – 33 .2% of the overall regulatory retail portfolio Aggregate exposure: Gross Amount ( excluding CRM)  One counterpart: one or several entities which can be considered as a single beneficiary.Standardised Approach-RBI: Regulatory Retail Portfolios Granularity criteria Exposure is sufficiently diversified : – Aggregate exposure to one counterpart not to exceed 0.

5 crore – – 34 Exposure means sanctioned limit or actual outstanding. including OffBalance Sheet exposures For Term Loans.exposure shall mean actual outstanding . for all FB & NFB. whichever is higher .Standardised Approach-RBI: Regulatory Retail Portfolios Individual exposure criteria Maximum aggregated exposure to one counterpart not to exceed Rs.

Standardised Approach-RBI: Regulatory Retail Portfolios RBI to play a crucial role under Pillar 2 in respect of risks in the RR portfolio of individual banks If warranted. may mandate a RW higher than 75% for individual banks 35 .

20 lakh -50% – Amount of loan Rs. whichever is higher. . or rented Shall be Risk Weighted as below: Amount of loan upto Rs.Standardised Approach-RBI: Claims secured by residential property Loans to individuals for acquiring residential property fully secured by mortgages on residential property that is/will be occupied by borrower. 20 lakh & > -75% Subject to: –    All 36 Loan to Value ratio is not more than 75% Board approved valuation policy LTV: Total o/s in account: (Principal + Accrued interest+ other charges )/ Realisable value of property mortgaged other claims secured by residential property would attract : RW applicable to counterparty or to the purpose for which bank has extended finance.

development and construction. industrial or warehouse space. multi-purpose commercial premises.Standardised Approach-RBI: Claims secured by commercial real estate Exposures ( FB & NFB) secured by mortgages on commercial real estate: office buildings. multi-family residential buildings. retail space.Also includes exposures to entities for setting up SEZs or for acquiring units in SEZs which includes real estate Such exposures to attract RW of 150% 37 . etc. multi-tenanted commercial premises. hotels. land acquisition.

net of specific provisions & partial writeoffs:    – 38 – 150% RW: Specific Provisions <20% of outstanding amount of NPA 100%* RW: Specific Provisions are at least 20% of outstanding amount of NPA 50% RW : Specific Provisions are at least 50% of outstanding amount of NPA Specific Provisions: All funded exposures of a single counterparty w/o netting off eligible collateral to be reckoned in the denominator For computing secured portion of NPA. eligible collateral will be the same as reckoned for CRM .Standardised Approach-RBI: Non-Performing Assets NPA ( other than a qualifying RM addressed separately) will carry RW as below: – Unsecured Portion.

 RW 100% may apply .Standardised Approach-RBI: Non-Performing Assets Additionally. well documented  Claims secured by residential property: – 39 RW 100% net of specific provisions  If specific provisions are >/= 20% but <50% of outstanding. when provisions reach 15% of outstanding amount if NPA is secured fully by the following collateral ( not eligible CRM) either alone or with other eligible collateral: – Land & Building ( valuation not more than 3 years old) – Plant & Machinery ( value not higher then depreciated value reflected in the audited balance sheet of the borrower. RW: 50% . RW net of specific provisions : 75%  If specific provisions >/=50%. not more than eighteen months) – Clear title available.

Standardised Approach-RBI: Specified categories High risk exposures: Consumer credit-personal loans & credit card receivables : – – RW of 125% More . if warranted by external rating of the counterparty Systemically Important NBFCs-ND: a non-deposit taking NBFC with an asset size of Rs. if warranted by external rating of the counterparty  Loans upto Rs. 1 lakh against gold & silver ornaments: concessional RW of 50% Capital market exposures & claims on non-deposit taking systemically important NBFCs: – – 40 RW of 125% More . 100 crore or more as per the latest audited balance sheet .

Debt capital instruments (eligible Tier II ) of other banks/FIs to attract RW as per ratings assigned to the instruments or RW warranted by external rating of counterparty ( or lack of it) or as determined in para 5.6. whichever is >.Standardised Approach-RBI: Specified categories High risk exposures: Contd… Investments in paid-up equity of non-financial entities not consolidated for capital purposes to attract 125% RW Investment up to 30% in paid up equity of financial entities not consolidated for capital purposes: RW: 125% or RW warranted by external rating) or as determined in Para 5.6 whichever is > Investment in paid up equity of financial entities specifically exempt from capital market exposure: RW 100% Investment in IPDI (eligibel Tier 1). 41 .

Standardised Approach-RBI: Other Assets Loans & Advances to banks own staff fully covered by superannuation benefits/ mortgage of flat/house: RW 20% Other loans & advances to bank staff: eligible for inclusion under RR : RW 75% All other assets: RW 100% 42 .

Standardised Approach-RBI: Off-balance sheet items RW Off –Balance Sheet Credit Exposure: RW amount of market related + RW amount of nonmarket related Off-balance sheet items Risk Weighted amount of credit exposure of off-balance sheet item is calculated as below: Total – Calculate Credit Equivalent Amount: (CEA)  – If Notional amount * specified CCF OR by applying the Current Exposure Method Multiply CEA by RW applicable to counterparty/purpose of finance/type of asset. 43 . whichever is higher item is secured by eligible collateral or guarantee. credit risk mitigation can be applied.

Irrevocable commitments to provide off-balance sheet facilities should be assigned the lower of the two applicable CCFs 44 .Standardised Approach-RBI: Off-balance sheet items : Non-market related Broadly categorised into direct credit substitutes . Multiply contracted amount by relevant CCF If item is an undrawn or partially drawn facility. trade & performance related contingent items & other commitments. Drawn portion would be on-balance sheet credit exposure Irrevocable commitments: original maturity would be from the commencement of commitment until the time the associated facility expires. amount of undrawn commitment to be included in the above category is: maximum unused portion of commitment that could be drawn during the remaining period to maturity.

Standardised Approach-RBI: Off-balance sheet items : Non-market related CCFs range from 0 to 100% CCF: 100% in respect of the following instruments: – Direct credit substitutes: risk of loss depends on creditworthiness of counterparty or the party against whom a potential claim is acquired e. financial guarantees. including repo style transactions ( repurchase/reverse repurchase and securities lending/borrowing transactions) – Commitments with certain drawdown – Unconditional take-out finance in the books of taking-over institution 45 . liquidity facilities for securitisation transactions & acceptances-CCF 100% – Sale & repurchase agreement and asset sales with recourse where credit risk remains with the bank : risk weighted according to tyoe of asset and not the type of counterparty – Forward asset purchases. forward deposits. credit enhancements.g. partly paid shares 7 securities: represent commitments with certain drawdown: risk weighted according to type of asset & not type of counterparty-CCF 100% – Lending of banks’ securities/posting of securities as collateral by banks.

indemnities and standby L/Cs related to particular transaction – Note issuance facilities and revolving underwriting facilities – Other commitemnts ( e.Standardised Approach-RBI: Off-balance sheet items : Non-market related CCFs range from 0 to 100% CCF: 50 % in respect of the following instruments: – Transaction-related contingent items: performance bonds.g. formal standby facilities and credit lines ) with original maturity of over one year. – Conditional take-out finance in the books of taking-over institution 46 . warranties. bid bonds.

g.Standardised Approach-RBI: Off-balance sheet items : Non-market related CCFs range from 0 to 100% CCF: 20 % in respect of the following instruments: – Trade letters of credit arising from movement of goods for both issuing bank and confirming banks-short term and self liquidating: e. formal standby facilities and credit lines ) with an original maturity of upto one year 47 .g. documentary credits collaterised by underlying shipment – Other commitments (e.

Formal standby facilities and credit lines) which are unconditionally cancellable at any time by banks:   48 without prior notice or Effectively provide for automatic cancellation due to deterioration in credit worthiness of borrower .Standardised Approach-RBI: Off-balance sheet items : Non-market related CCFs range from 0 to 100% CCF: 0 % in respect of the following instruments: – Other commitments ( eg.

cross currency swaps. Factors responsible: maturity of contract. basis swaps. currency futures & options – Any other market related contracts allowed by RBI giving rise to credit risk Bank to include all market-related transactions held in banking and trading book which give rise to off-balance sheet credit risk Credit risk in such items is the cost of replacing the cash flow specified by the contract in the event of default of the counterparty. FRAs.Standardised Approach-RBI: Offbalance sheet items : Market related of market related off-balance sheet items: – Interest rate contracts-single currency interest rate swaps. forward forex contracts. interest rate futures – Foreign exchange contracts. volatility of rates underlying the type of instrument etc. Examples 49 .

Standardised Approach-RBI: Offbalance sheet items : Market related Exemptions from capital requirements: – Forex ( except gold) contracts having an original maturity of </= 14 days – Instruments traded on futures and options exchanges subject to daily mark-to-market and margin payments Credit Equivalent Amount (CEA) : To be determined by Current Exposure Method 50 .

5% .0% >1 year </= 5 years 0.25% 1.Standardised Approach-RBI: Offbalance sheet items : Market related Current Exposure Method  Current Credit Exposure (CCE) + Potential Future Credit Exposure (PFCE) – – 51 CCE: Sum of positive mark-to-market value of these contracts PFCE: Notional Principal amount of each of these contracts ( whether +ve.5% 7. -ve or 0 M-T-M)* Add-on Factor prescribed: Residual Maturity Add-on Factor: interest rate contract Add-on Factor: Gold & Exchange rate contract </= 1 year 0.5% 5.0% > 5 years 1.

Standardised Approach-RBI: Credit Risk Mitigation 52  Wider range of credit risk mitigants recognised  Applicable to banking book exposures and also for calculation of the counterparty risk charges for OTC and repo-style transactions in the trading book. .

.Standardised Approach-RBI: Credit Risk Mitigation Some general principles for use of CRM    Effects of CRM will not be double counted.      53 Policies & procedures for collateral valuation & management Description of main types of collateral taken by the bank Main types of guarantor counterparty and their credit worthiness Information about concentrations within the mitigation taken Minimum standards for legal documentation to be met. Principal only ratings not allowed within CRM . Disclosure requirements to be observed.

 Bank has a specific lien on the collateral  Requirements of legal certainty are met  54 .Standardised Approach-RBI: Credit Risk Mitigation What is a collateralised transaction? Bank has a credit exposure that is hedged by collateral posted by the counterparty ( to whom bank has a credit exposure-on or off-balance sheet) or a third person on his behalf.

Standardised Approach-RBI: Credit Risk Mitigation Framework Simple Approach: risk weight of the collateral substituted for the risk weight of the counterparty for the collateralised portion-similar to 1988 Accord  Comprehensive Approach: allows fuller offset of collateral against exposures  55 .

Standardised Approach-RBI: Credit Risk Mitigation Some minimum conditions       56 Only eligible financial collateral Allowed only on account-by-account basis . even within regulatory retail portfolio Credit quality of counterparty and value of collateral not to have a material positive correlation Clear and robust procedures for timely liquidation of collateral If held by custodian. bank to ensure segregation of assets Capital requirement to be applied to bank on either side of the collateralised transaction .

in the jurisdiction of bank’s operation) Mutual Fund investments regulated by securities regulator (price for the units is publicly quoted daily i.e.Standardised Approach-RBI: Credit Risk Mitigation Eligible financial collateral          57 Cash.e. where issued by a bank ( subject to certain conditions)-next slide Listed equities-including convertible bonds ( listed on a recognised stock exchange ans included in the BSE-SENSEX & BSE 200 of BSE..99 purity. certificate of deposits or instruments issued by lending bank on deposit with the bank Gold: (Bullion & jewellery): value of collateralised jewellery to be arrived at after notionally converting to 99. and the mutual fund is limited to investing in the eligible instruments. Central & State Government Securities KVP & NSC: no lock-in-period and can be encashed within the holding period Life Insurance Policy with a declared surrender value Debt securities rated ( subject to certain conditions) -next slide Debt securities not rated..i. investments listed in eligible financial . where the daily NAV is available in public domain. S& P CNX NIFTY and Junior NIFTY of NSE and tha main index of any other recognised stock exchange.

and the bank holding the securities as collateral has no information to suggest that the issue justifies a rating below BBB(-) or PR3/P3/F3/A3 and. and all rated issues of the same seniority by the issuing bank that are rated at least BBB(-) or PR3/P3/F3/A3 by a chosenCredit Rating Agency. and listed on a recognised exchange.Standardised Approach-RBI: Credit Risk Mitigation Eligible financial collateral  Debt securities rated by a chosen credit rating agency and sufficiently liquid attracting 100% or lesser risk weight: – –  Debt securities not rated by a chosen Credit Rating Agency and sufficiently liquid where these are: – 58 at least BBB (-) or at least PR3/P3/F3/A3 for short-term debt instruments issued by a bank. there is sufficient confidence about the market liquidity of the security . and classified as senior debt.

Hfx)]} where: E*= the exposure value after risk mitigation E = current value of the exposure He= haircut appropriate to the exposure C= the current value of the collateral received Hc= haircut appropriate to the collateral Hfx= haircut appropriate for currency mismatch between the collateral and exposure The exposure amount after risk mitigation will be multiplied by the risk weight of the counterparty to obtain the risk-weighted asset amount for the collateralised transaction. [E x (1 + He) .Hc .Standardised Approach-RBI Credit Risk Mitigation Comprehensive approach    Application of haircuts to exposure and collateral: haircut for exposure will be a premium and for the collateral will be a discount Additional downward adjustment for the collateral if exposure and collateral held in different currencies Calculation of capital for a collateralised transaction: E* = max {0.C x (1 . 59 .

Standardised Approach-RBI: Credit Risk Mitigation Comprehensive approach: Haircuts Standard Supervisory Haircuts: Parameters set out in the Accord  Own-estimate Hair cuts: Bank’s own internal estimates of market price volatility Banks in India to use only the former for both exposure and collateral  60 .

Standardised Approach-RBI: Credit Risk Mitigation Comprehensive approach: Standard Supervisory Haircuts: Assumptions: – Daily mark-to-market – Daily re-margining – 10 business day holding period ( time normally required for realising the collateral value) Unrated bank exposures or bank lends non-eligible instruments.i. eg.e 25% 61 . haircut on exposure to be same as for equity traded on recognised SE not part of main index.NI grade corp sec.

t rating of the counterparty Exposure/Eligible unrated securities issued by Central or State Governments: same as AAA debt Sovereign to include RBI. SV of LIP.r.Standardised Approach-RBI: Credit Risk Mitigation  Comprehensive approach: Standard Supervisory Haircuts:  Prescribed haircuts would apply to security w. DICGC.r. KVP. CGTSI Haircut will be determined by:         62 Maturity of exposure External rating assigned to exposure Counterparty category NSC.t rating of the issuer and to exposure w. Banks own deposits as collateral: 0 haircut HC for currency risk: 8% ( daily m-t-m & 10 –business day holding period) .

haircut on basket: where ai= weight of the asset ( measured by units of currency) & hi= haircut applicable to that asset 63 .Standardised Approach-RBI: Credit Risk Mitigation  Comprehensive approach: Standard Supervisory Haircuts: contd…  If collateral is a basket of assets.

of business days between remargining for capital market transactions or revaluation for secured transactions TM= minimum holding period for the type of transaction ( adjusting for differences in holding period and revaluation frequency) 64 . haircut to be scaled up or down depending on:  Type of transaction Frequency of remargining or revaluation  Formula:  – – – – H=haircut H10=10 business day standard supervisory haircut for instrument NR= actual no.Standardised Approach-RBI: Credit Risk Mitigation: Haircuts contd… 10-business day haircuts to be the basis .

loans & advances would be “exposure” and deposits would be “ collateral”. . haircuts will be 0 except for currency mismatch. where :   Netting arrangements are legally enforceable: specific lien. Other conditions apply.Standardised Approach-RBI: Credit Risk Mitigation: contd… On-balance sheet netting  Confined to loans/advances and deposits. proof of documentation Capital requirements can be calculated on basis of net credit exposures subject to:     65 Well-founded legal basis for netting/offsetting regardless of bankruptcy/insolvency of counterparty Able to determine at any time loans/advances & deposits with the same counterparty subject to netting Relevant exposures monitored and controlled on net basis Same formula as earlier.

MDBs. uncovered portion: risk weight of underlying counterparty:  66 Entities with lower risk weight than counterparty Sovereigns. protected portion of the counterparty exposure : RW of guarantor. sovereign entities( BIS. Includes guarantee of parent. subsidiary & affiliate companies having a lower risk weight Guarantor rating should be an entity rating: factoring all liabilities & commitments of the entity  Exposures covered by state government guarantees to attract a risk weight of 20% If credit protection is denominated in a different currency. ECGC & CGTSI). explicit. banks & PDs with lower risk weight Other entities rated AA (-) or better. irrevocable & unconditional can be treated as credit protection Whose guarantees are recognised?      Substitution approach-same as 1988 Accord. European central banks. amount of exposure deemed to be protected to be reduced by application of a haircut Hfx: 8% .Standardised Approach-RBI: Credit Risk Mitigation: contd… Guarantees   Direct. IMF.

margin payments. etc. If guarantee covers principal only.Standardised Approach-RBI: Credit Risk Mitigation: contd… Guarantees: Operational requirements        67 Must represent a direct claim on protection provider Explicitly referenced to specific exposures or pool of exposures: extent of cover clearly defined Irrevocable: no clause for unilateral cancellation of cover of for increase in effective cost of cover on deterioration of credit quality of guaranteed exposure Unconditional: no clause that could prevent the guarantor form obligation to pay in a timely manner in the event of counterparty's default When exposure is classified as non-performing: guarantee shall cease to be a credit risk mitigant Explicitly documented Guarantee to cover all types of payments governing the transaction: notional amount. interests and uncovered payments to be treated as unsecured amount .

i. when mismatch exists?  If there is a maturity mismatch & CRM has an original maturity <1 year. maturity of collateral for exposures with original maturities of <1 year to be matched to be recognised  Collateral with maturity mismatches will not be recognised if collateral has a RM </= 3 months  Other cases of maturity mismatches. including grace period  Collateral maturity: shortest possible taking into account embedded options which may reduce its term  Maturity relevant is residual maturity When is CRM not recognised. CRM not recognised. partial recognition given to CRM .Standardised Approach-RBI: Credit Risk Mitigation: contd… Collaterals: Maturity Mismatch    68 When residual maturity (RM) of collateral < RM of underlying exposure Conservative definition of maturity of both exposure & collateral:  Exposure maturity: longest possible remaining time before obligation is scheduled to be fulfilled.e.

Standardised Approach-RBI: Credit Risk Mitigation: contd… Collaterals: Maturity Mismatch Adjustment to be applied for maturity mismatch with recognised CRM ( collateral . on-balance sheet netting & guarantees): 69 .

subdivision into separate protection required.Standardised Approach-RBI: Credit Risk Mitigation: contd… Collaterals: Treatment of pools of CRM: Multiple collaterals covering a single exposure    70 Subdivide the exposure into portions covered by each CRM RW assets of each portion to be calculated separately If credit protection of a single provider has different maturities. .