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1 ž ú ¹ { Ä ÿˆå RESERVE BANK OF INDIA RBI/ /70 DBOD.No.BP.BC.2 / / July 1, 2013 All Scheduled Commercial Banks (Excluding Local Area Banks and Regional Rural Banks) Madam / Sir, Master Circular Basel III Capital Regulations Please refer to the Master Circular No.DBOD.BP.BC.16/ / dated July 2, 2012, consolidating therein the prudential guidelines issued to banks till that date on Capital Adequacy and Market Discipline - New Capital Adequacy Framework (NCAF). 2. As you are aware, Basel III Capital Regulations is being implemented in India with effect from April 1, 2013 in a phased manner. Accordingly, instructions contained in the aforesaid Master Circular have been suitably updated / amended by incorporating relevant guidelines, issued up to June 30, 2013 and is being issued as Master Circular on Basel III Capital Regulations. 3. The Basel II guidelines as contained in the Master Circular DBOD.No.BP.BC.9/ / dated July 1, 2013 on Prudential Guidelines on Capital Adequacy and Market Discipline- New Capital Adequacy Framework (NCAF) may, however, be referred to during the Basel III transition period for regulatory adjustments / deductions up to March 31, Yours faithfully, (Chandan Sinha) Principal Chief General Manager Encl.: As above Department of Banking Operations and Development, Central Office, 12th Floor, Central Office Building, SBS Marg, Mumbai-1,, 12,,,, Tel No: /Fax No: ID: cgmicdbodco@rbi.org.in

2 - 2 - TABLE OF CONTENTS Part A : Minimum Capital Requirement (Pillar 1) 1 Introduction 2 Approach to Implementation and Effective Date 3 Scope of Application of Capital Adequacy Framework 4 Composition of Regulatory Capital 4.1 General 4.2 Elements and Criteria of Regulatory Capital 4.3 Recognition of Minority Interests 4.4 Regulatory Adjustments / Deductions 4.5 Transitional Arrangements 5 Capital Charge for Credit Risk 5.1 General 5.2 Claims on Domestic Sovereigns 5.3 Claims on Foreign Sovereigns 5.4 Claims on Public Sector Entities 5.5 Claims on MDBs, BIS and IMF 5.6 Claims on Banks 5.7 Claims on Primary Dealers 5.8 Claims on Corporates, AFCs & NBFC-IFCs 5.9 Claims included in the Regulatory Retail Portfolios 5.10 Claims secured by Residential Property 5.11 Claims Classified as Commercial Real Estate 5.12 Non-Performing Assets 5.13 Specified Categories 5.14 Other Assets 5.15 Off-Balance Sheet Items General Non-Market-related Off-balance Sheet items Treatment of Total Counterparty Credit Risk Failed Transactions 5.16 Securitisation Exposures General Treatment of Securitisation Exposures Implicit Support Application of External Ratings Risk-weighted Securitisation Exposures Off-balance Sheet Securitisation Exposures Recognition of Credit Risk Mitigants Liquidity Facilities Re-Securitisation Exposures/Synthetic Securitisation/ Securitisation with Revolving Structures (with or without early amortization features) 5.17 Capital Adequacy Requirements for Credit Default Swaps (CDS) Position in Banking Book Recognition of External/Third Party CDS Hedges Internal Hedges 6 External Credit Assessments

3 Eligible Credit Rating Agencies 6.2 Scope of Application of External Ratings 6.3 Mapping Process 6.4 Long Term Ratings 6.5 Short Term Ratings 6.6 Use of Unsolicited Ratings 6.7 Use of Multiple Rating Assessments 6.8 Applicability of Issue rating to Issuer/other claims 7 Credit Risk Mitigation 7.1 General Principles 7.2 Legal certainty 7.3 Credit Risk Mitigation techniques Collateralised Transactions Overall framework and minimum conditions The Comprehensive Approach Eligible Financial Collateral Calculation of Capital Requirement Haircuts Capital Adequacy Framework for Repo-/Reverse Repo-style Transactions. 7.4 Credit Risk Mitigation techniques On balance Sheet netting 7.5 Credit Risk Mitigation techniques Guarantees Operational requirements for Guarantees Additional operational requirements for Guarantees Range of Eligible Guarantors (counter-guarantors) Risk Weights Proportional Cover Currency Mismatches Sovereign Guarantees and Counter-guarantees 7.6 Maturity Mismatch 7.7 Treatment of pools of CRM Techniques 8 Capital Charge for Market Risk 8.1 Introduction 8.2 Scope and Coverage of Capital Charge for Market Risks 8.3 Measurement of Capital Charge for Interest Rate Risk 8.4 Measurement of Capital Charge for Equity Risk 8.5 Measurement of Capital Charge for Foreign Exchange Risk 8.6 Measurement of Capital Charge for CDS in Trading Book General Market Risk Specific Risk for Exposure to Reference Entity Capital Charge for Counterparty Credit Risk Treatment of Exposures below Materiality Thresholds of CDS 8.7 Aggregation of the Capital Charge for Market Risk 8.8 Treatment of illiquid positions 9 Capital charge for Operational Risk 9.1 Definition of Operational Risk 9.2 The Measurement Methodologies 9.3 The Basic Indicator Approach Part B : Supervisory Review and Evaluation Process (Pillar 2) 10 Introduction to Supervisory Review and Evaluation Process (SREP)

4 Need for improved risk management 12 Guidelines for SREP of the RBI and the ICAAP of the Bank 12.1 The Background 12.2 Conduct of the SREP by the RBI 12.3 The Structural Aspects of the ICAAP 12.4 Review of ICAAP Outcomes 12.5 ICAAP to be an integral part of the Mgmt. & Decision making Culture 12.6 The Principle of Proportionality 12.7 Regular independent review and validation 12.8 ICAAP to be a Forward looking Process 12.9 ICAAP to be a Risk-based Process ICAAP to include Stress Tests and Scenario Analysis Use of Capital Models for ICAAP 13 Select Operational Aspects of ICAAP Part C : Market Discipline (Pillar 3) 14 Market Discipline 14.1 General 14.2 Achieving Appropriate Disclosure 14.3 Interaction with Accounting Disclosure 14.4 Validation 14.5 Materiality 14.6 Proprietary and Confidential Information 14.7 General Disclosure Principle 14.8 Implementation Date 14.9 Scope and Frequency of Disclosures Regulatory Disclosure Section Pillar 3 Under Basel III Framework The Post March 31, 2017 Disclosure Templates Template During Transition Period Reconciliation Requirements Disclosure Templates Table DF-1 Table DF-2 Table DF-3 Table DF-4 Table DF-5 Table DF-6 Table DF-7 Table DF-8 Table DF-9 Table DF-10 Table DF-11 Table DF-12 Table DF-13 Table DF-14 Scope of Application and Capital Adequacy Capital Adequacy Credit Risk: General Disclosures for All Banks Credit Risk: Disclosures for Portfolios subject to the Standardised Approach Credit Risk Mitigation: Disclosures for Standardised Approach Securitisation: Disclosure for Standardised Approach Market Risk in Trading Book Operational Risk Interest Rate Risk in the Banking Book (IRRBB) General Disclosure for Exposures Related to Counterparty Credit Risk Composition of Capital Composition of Capital- Reconciliation Requirements Main Features of Regulatory Capital Instruments Full Terms and Conditions of Regulatory Capital

5 - 5 - Instruments Table DF-15 Disclosure Requirements for Remuneration Part D : Capital Conservation Buffer 15 Capital Conservation Buffer 15.1 Objective 15.2 The Framework Part E : Leverage Ratio 16 Leverage Ratio 16.1 Rationale and Objective 16.2 Definition and Calculation of Leverage Ratio 16.3 Transitional Arrangements Annex Criteria for classification as common shares (paid-up equity capital) for Annex 1 regulatory purposes Indian Banks Annex 2 Criteria for classification as common equity for regulatory purposes Foreign Banks Annex 3 Criteria for inclusion of perpetual non-cumulative preference shares (PNCPS) in Additional Tier 1 capital Annex 4 Criteria for inclusion of Perpetual Debt Instruments (PDI) in Additional Tier 1 capital Annex 5 Criteria for inclusion of debt capital instruments as Tier 2 capital Criteria for inclusion of perpetual cumulative preference shares Annex 6 (PCPS)/ redeemable non-cumulative preference shares (RNCPS) / redeemable cumulative preference shares (RCPS) as part of Tier 2 capital Annex 7 Prudential guidelines on Credit Default Swaps (CDS) Annex 8 Illustrations on Credit Risk Mitigation Annex 9 Measurement of capita charge for Market Risks in respect of Interest Rate Derivatives. Annex 10 An Illustrative Approach for Measurement of Interest Rate Risk in the Banking Book (IRRBB) under Pillar 2 Annex 11 Investments in the capital of banking, financial and insurance entities which are outside the scope of regulatory consolidation Annex 12 Illustration of transitional arrangements - capital instruments which no longer qualify as non-common equity Tier 1 capital or Tier 2 capital Annex 13 Calculation of CVA risk capital charge Calculation of admissible excess Additional Tier 1 (AT1) and Tier 2 Annex 14 capital for the purpose of reporting and disclosing minimum total capital ratios Annex 15 An Illustrative outline of the ICAAP Annex 16 Minimum requirements to ensure loss absorbency of Additional Tier 1 instruments at pre-specified trigger and of all non-equity regulatory capital instruments at the point of non-viability Annex 17 Calculation of minority interest - illustrative example Annex 18 Pillar 3 disclosure requirements Annex 19 Transitional arrangements for non-equity regulatory capital instruments Annex 20 Glossary Annex 21 List of circulars consolidated

6 - 6 - Master Circular on Basel III Capital Regulations 1. Introduction Part A: Guidelines on Minimum Capital Requirement 1.1 Basel III reforms are the response of Basel Committee on Banking Supervision (BCBS) to improve the banking sector s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spill over from the financial sector to the real economy. During Pittsburgh summit in September 2009, the G20 leaders committed to strengthen the regulatory system for banks and other financial firms and also act together to raise capital standards, to implement strong international compensation standards aimed at ending practices that lead to excessive risk-taking, to improve the overthe-counter derivatives market and to create more powerful tools to hold large global firms to account for the risks they take. For all these reforms, the leaders set for themselves strict and precise timetables. Consequently, the Basel Committee on Banking Supervision (BCBS) released comprehensive reform package entitled Basel III: A global regulatory framework for more resilient banks and banking systems (known as Basel III capital regulations) in December Basel III reforms strengthen the bank-level i.e. micro prudential regulation, with the intention to raise the resilience of individual banking institutions in periods of stress. Besides, the reforms have a macro prudential focus also, addressing system wide risks, which can build up across the banking sector, as well as the procyclical amplification of these risks over time. These new global regulatory and supervisory standards mainly seek to raise the quality and level of capital to ensure banks are better able to absorb losses on both a going concern and a gone concern basis, increase the risk coverage of the capital framework, introduce leverage ratio to serve as a backstop to the risk-based capital measure, raise the standards for the supervisory review process (Pillar 2) and public disclosures (Pillar 3) etc. The macro prudential aspects of Basel III are largely enshrined in the capital buffers. Both the buffers i.e. the capital conservation buffer and the countercyclical buffer are intended to protect the banking sector from periods of excess credit growth. 1.3 Reserve Bank issued Guidelines based on the Basel III reforms on capital regulation on May 2, 2012, to the extent applicable to banks operating in India. The Basel III capital regulation has been implemented from April 1, 2013 in India in phases and it will be fully implemented as on March 31, Further, on a review, the parallel run and prudential floor for implementation of Basel II vis-à-vis Basel I have been discontinued 1. 1 Please refer to the circular DBOD.BP.BC.No.95/ / dated May 27, 2013 on Prudential Guidelines on Capital Adequacy and Market Discipline New Capital Adequacy Framework (NCAF) - Parallel Run and Prudential Floor.

7 Approach to Implementation and Effective Date 2.1 The Basel III capital regulations continue to be based on three-mutually reinforcing Pillars, viz. minimum capital requirements, supervisory review of capital adequacy, and market discipline of the Basel II capital adequacy framework 2. Under Pillar 1, the Basel III framework will continue to offer the three distinct options for computing capital requirement for credit risk and three other options for computing capital requirement for operational risk, albeit with certain modifications / enhancements. These options for credit and operational risks are based on increasing risk sensitivity and allow banks to select an approach that is most appropriate to the stage of development of bank's operations. The options available for computing capital for credit risk are Standardised Approach, Foundation Internal Rating Based Approach and Advanced Internal Rating Based Approach. The options available for computing capital for operational risk are Basic Indicator Approach (BIA), The Standardised Approach (TSA) and Advanced Measurement Approach (AMA). 2.2 Keeping in view the Reserve Bank s goal to have consistency and harmony with international standards, it was decided in 2007 that all commercial banks in India (excluding Local Area Banks and Regional Rural Banks) should adopt Standardised Approach for credit risk, Basic Indicator Approach for operational risk by March 2009 and banks should continue to apply the Standardised Duration Approach (SDA) for computing capital requirement for market risks. 2.3 Having regard to the necessary upgradation of risk management framework as also capital efficiency likely to accrue to the banks by adoption of the advanced approaches, the following time schedule was laid down for implementation of the advanced approaches for the regulatory capital measurement in July 2009: S. No. Approach a. Internal Models Approach (IMA) for Market Risk b. The Standardised Approach (TSA) for Operational Risk c. Advanced Measurement Approach (AMA) for Operational Risk d. Internal Ratings-Based (IRB) Approaches for Credit Risk (Foundation- as well as Advanced IRB) The earliest date of making application by banks to the RBI Likely date of approval by the RBI April 1, 2010 March 31, 2011 April 1, 2010 September 30, 2010 April 1, 2012 March 31, 2014 April 1, 2012 March 31, For reference, please refer to the Master Circular on Prudential Guidelines on Capital Adequacy and Market Discipline - New Capital Adequacy Framework (NCAF) issued vide circular DBOD.No.BP.BC.9/ / dated July 1, 2013.

8 Accordingly, banks were advised to undertake an internal assessment of their preparedness for migration to advanced approaches and take a decision with the approval of their Boards, whether they would like to migrate to any of the advanced approaches. Based on bank's internal assessment and its preparation, a bank may choose a suitable date to apply for implementation of advanced approach. Besides, banks, at their discretion, would have the option of adopting the advanced approaches for one or more of the risk categories, as per their preparedness, while continuing with the simpler approaches for other risk categories, and it would not be necessary to adopt the advanced approaches for all the risk categories simultaneously. However, banks should invariably obtain prior approval of the RBI for adopting any of the advanced approaches. 2.5 Effective Date: The Basel III capital regulations are being implemented in India with effect from April 1, Banks have to comply with the regulatory limits and minima as prescribed under Basel III capital regulations, on an ongoing basis. To ensure smooth transition to Basel III, appropriate transitional arrangements have been provided for meeting the minimum Basel III capital ratios, full regulatory adjustments to the components of capital etc. Consequently, Basel III capital regulations would be fully implemented as on March 31, In view of the gradual phase-in of regulatory adjustments to the Common Equity component of Tier 1 capital under Basel III, certain specific prescriptions of Basel II capital adequacy framework (e.g. rules relating to deductions from regulatory capital, risk weighting of investments in other financial entities etc.) will also continue to apply till March 31, 2017 on the remainder of regulatory adjustments not treated in terms of Basel III rules (refer to paragraph 4.5.2). 3. Scope of Application of Capital Adequacy Framework 3.1 A bank shall comply with the capital adequacy ratio requirements at two levels: (a) the consolidated ( Group ) level 3 capital adequacy ratio requirements, which measure the capital adequacy of a bank based on its capital strength and risk profile after consolidating the assets and liabilities of its subsidiaries / joint ventures / associates etc. except those engaged in insurance and any non-financial activities; and (b) the standalone ( Solo ) level capital adequacy ratio requirements, which measure the capital adequacy of a bank based on its standalone capital strength and risk profile. Accordingly, overseas operations of a bank through its branches will be covered in both the above scenarios. 3.2 For the purpose of these guidelines, the subsidiary is an enterprise that is controlled by another enterprise (known as the parent). Banks will follow the definition of control as given in the applicable accounting standards. 3 In terms of guidelines on preparation of consolidated prudential reports issued vide circular DBOD. No.BP.BC.72/ / dated February 25, 2003; a consolidated bank may exclude group companies which are engaged in insurance business and businesses not pertaining to financial services. A consolidated bank should maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) as applicable to a bank on an ongoing basis.

9 Capital Adequacy at Group / Consolidated Level All banking and other financial subsidiaries except subsidiaries engaged in insurance and any non-financial activities (both regulated and unregulated) should be fully consolidated for the purpose of capital adequacy. This would ensure assessment of capital adequacy at the group level, taking into account the risk profile of assets and liabilities of the consolidated subsidiaries The insurance and non-financial subsidiaries / joint ventures / associates etc. of a bank should not be consolidated for the purpose of capital adequacy. The equity and other regulatory capital investments in the insurance and non-financial subsidiaries will be deducted from consolidated regulatory capital of the group. Equity and other regulatory capital investments in the unconsolidated insurance and non-financial entities of banks (which also include joint ventures / associates of the parent bank) will be treated in terms of paragraphs and respectively All regulatory adjustments indicated in paragraph 4.4 are required to be made to the consolidated Common Equity Tier 1 capital of the banking group as indicated therein Minority interest (i.e. non-controlling interest) and other capital issued out of consolidated subsidiaries as per paragraph that is held by third parties will be recognized in the consolidated regulatory capital of the group subject to certain conditions as stipulated in paragraph Banks should ensure that majority owned financial entities that are not consolidated for capital purposes and for which the investment in equity and other instruments eligible for regulatory capital status is deducted, meet their respective regulatory capital requirements. In case of any shortfall in the regulatory capital requirements in the unconsolidated entity, the shortfall shall be fully deducted from the Common Equity Tier 1 capital. 3.4 Capital Adequacy at Solo Level While assessing the capital adequacy of a bank at solo level, all regulatory adjustments indicated in paragraph 4.4 are required to be made. In addition, investments in the capital instruments of the subsidiaries, which are consolidated in the consolidated financial statements of the group, will also have to be deducted from the corresponding capital instruments issued by the bank In case of any shortfall in the regulatory capital requirements in the unconsolidated entity (e.g. insurance subsidiary), the shortfall shall be fully deducted from the Common Equity Tier 1 capital. 4. Composition of Regulatory Capital 4.1 General Banks are required to maintain a minimum Pillar 1 Capital to Risk-weighted Assets Ratio (CRAR) of 9% on an on-going basis (other than capital conservation buffer and countercyclical capital buffer etc.). The Reserve Bank will take into account the relevant risk factors and the internal capital adequacy assessments of each bank to ensure that the

10 capital held by a bank is commensurate with the bank s overall risk profile. This would include, among others, the effectiveness of the bank s risk management systems in identifying, assessing / measuring, monitoring and managing various risks including interest rate risk in the banking book, liquidity risk, concentration risk and residual risk. Accordingly, the Reserve Bank will consider prescribing a higher level of minimum capital ratio for each bank under the Pillar 2 framework on the basis of their respective risk profiles and their risk management systems. Further, in terms of the Pillar 2 requirements, banks are expected to operate at a level well above the minimum requirement. A bank should compute Basel III capital ratios in the following manner: Common Equity Tier 1 capital ratio Tier 1 capital ratio = Common Equity Tier 1 Capital. Credit Risk RWA* + Market Risk RWA + Operational Risk RWA = Eligible Tier 1 Capital 4. Credit Risk RWA* + Market Risk RWA + Operational Risk RWA Total (CRAR # ) Capital = Eligible Total Capital 5. Credit Risk RWA + Market Risk RWA + Operational Risk RWA * RWA = Risk weighted Assets; # Capital to Risk Weighted Asset Ratio 4.2 Elements of Regulatory Capital and the Criteria for their Inclusion in the Definition of Regulatory Capital Components of Capital Total regulatory capital will consist of the sum of the following categories: (i) Tier 1 Capital (going-concern capital 6 ) (a) Common Equity Tier 1 (b) Additional Tier 1 (ii) Tier 2 Capital (gone-concern capital) Limits and Minima (i) As a matter of prudence, it has been decided that scheduled commercial banks (excluding LABs and RRBs) operating in India shall maintain a minimum total capital (MTC) of 9% of total risk weighted assets (RWAs) i.e. capital to risk weighted assets (CRAR). This will be further divided into different components as described under paragraphs 4.2.2(ii) to 4 Tier 1 capital in terms of paragraph 4.2.2(vii) 5 Total Capital in terms of paragraph 4.2.2(vii) 6 From regulatory capital perspective, going-concern capital is the capital which can absorb losses without triggering bankruptcy of the bank. Gone-concern capital is the capital which will absorb losses only in a situation of liquidation of the bank.

11 (viii). (ii) Common Equity Tier 1 (CET1) capital must be at least 5.5% of risk-weighted assets (RWAs) i.e. for credit risk + market risk + operational risk on an ongoing basis. (iii) Tier 1 capital must be at least 7% of RWAs on an ongoing basis. Thus, within the minimum Tier 1 capital, Additional Tier 1 capital can be admitted maximum at 1.5% of RWAs. (iv) Total Capital (Tier 1 Capital plus Tier 2 Capital) must be at least 9% of RWAs on an ongoing basis. Thus, within the minimum CRAR of 9%, Tier 2 capital can be admitted maximum up to 2%. (v) If a bank has complied with the minimum Common Equity Tier 1 and Tier 1 capital ratios, then the excess Additional Tier 1 capital can be admitted for compliance with the minimum CRAR of 9% of RWAs. (vi) In addition to the minimum Common Equity Tier 1 capital of 5.5% of RWAs, banks are also required to maintain a capital conservation buffer (CCB) of 2.5% of RWAs in the form of Common Equity Tier 1 capital. Details of operational aspects of CCB have been furnished in paragraph 15. Thus, with full implementation of capital ratios 7 and CCB the capital requirements are summarised as follows: Regulatory Capital As % to RWAs (i) Minimum Common Equity Tier 1 Ratio 5.5 (ii) Capital Conservation Buffer (comprised of Common Equity) 2.5 (iii) Minimum Common Equity Tier 1 Ratio plus Capital 8.0 Conservation Buffer [(i)+(ii)] (iv) Additional Tier 1 Capital 1.5 (v) Minimum Tier 1 Capital Ratio [(i) +(iv)] 7.0 (vi) Tier 2 Capital 2.0 (vii) Minimum Total Capital Ratio (MTC) [(v)+(vi)] 9.0 (viii) Minimum Total Capital Ratio plus Capital Conservation Buffer [(vii)+(ii)] 11.5 (vii) For the purpose of reporting Tier 1 capital and CRAR, any excess Additional Tier 1 (AT1) capital and Tier 2 (T2) capital will be recognised in the same proportion as that applicable towards minimum capital requirements. This would mean that to admit any excess AT1 and T2 capital, the bank should have excess CET1 over and above 8% 8 (5.5%+2.5%). An illustration has been given in Part A of Annex 14. (viii) It would follow from paragraph 4.2.2(vii) that in cases where the a bank does not have minimum Common Equity Tier 1 + capital conservation buffer of 2.5% of RWAs as required but, has excess Additional Tier 1 and / or Tier 2 capital, no such excess capital can be reckoned towards computation and reporting of Tier 1 capital and Total Capital. 7 For smooth migration to these capital ratios, transitional arrangements have been provided as detailed in paragraph During the transition period, the excess will be determined with reference to the applicable minimum Common Equity Tier 1 capital and applicable capital conservation buffer and the proportion with reference to the available Common Equity. For instance, as on March 31, 2015, the excess Additional Tier 1 and Tier 2 will be determined with reference to total Common Equity 6.125% (5.5%+0.625%) and the proportion with reference to 5.5% Common Equity Tier 1 capital.

12 (ix) For the purpose of all prudential exposure limits linked to capital funds, the capital funds 9 will exclude the applicable capital conservation buffer and countercyclical capital buffer as and when activated, but include Additional Tier 1 capital and Tier 2 capital which are supported by proportionate amount of Common Equity Tier 1 capital as indicated in paragraph 4.2.2(vii). Accordingly, capital funds will be defined as [(Common Equity Tier 1 capital) + (Additional Tier 1 capital and Tier 2 capital eligible for computing and reporting CRAR of the bank)]. It may be noted that the term Common Equity Tier 1 capital does not include capital conservation buffer and countercyclical capital buffer Common Equity Tier 1 Capital Common Equity Indian Banks A. Elements of Common Equity Tier 1 Capital Elements of Common Equity component of Tier 1 capital will comprise the following: (i) (ii) (iii) (iv) (v) (vi) Common shares (paid-up equity capital) issued by the bank which meet the criteria for classification as common shares for regulatory purposes as given in Annex 1; Stock surplus (share premium) resulting from the issue of common shares; Statutory reserves; Capital reserves representing surplus arising out of sale proceeds of assets; Other disclosed free reserves, if any; Balance in Profit & Loss Account at the end of the previous financial year; (vii) Banks may reckon the profits in current financial year for CRAR calculation on a quarterly basis provided the incremental provisions made for nonperforming assets at the end of any of the four quarters of the previous financial year have not deviated more than 25% from the average of the four quarters. The amount which can be reckoned would be arrived at by using the following formula: EP t = {NP t 0.25*D*t} Where; EP t = Eligible profit up to the quarter t of the current financial year; t varies from 1 to 4 NP t = Net profit up to the quarter t D= average annual dividend paid during last three years 9 The definition of capital funds as indicated in para 4.2.2(ix) will be reviewed by RBI as and when any changes in the Large Exposure regime is considered by the Basel Committee.

13 (viii) (ix) While calculating capital adequacy at the consolidated level, common shares issued by consolidated subsidiaries of the bank and held by third parties (i.e. minority interest) which meet the criteria for inclusion in Common Equity Tier 1 capital (refer to paragraph 4.3.2); and Less: Regulatory adjustments / deductions applied in the calculation of Common Equity Tier 1 capital [i.e. to be deducted from the sum of items (i) to (viii)]. B. Criteria for Classification as Common Shares for Regulatory Purposes Common Equity is recognised as the highest quality component of capital and is the primary form of funding which ensures that a bank remains solvent. Therefore, under Basel III, common shares to be included in Common Equity Tier 1 capital must meet the criteria as furnished in Annex Common Equity Tier 1 Capital Foreign Banks Branches A. Elements of Common Equity Tier 1 Capital Elements of Common Equity Tier 1 capital will remain the same and consist of the following: (i) (ii) (iii) (iv) (v) (vi) Interest-free funds from Head Office kept in a separate account in Indian books specifically for the purpose of meeting the capital adequacy norms; Statutory reserves kept in Indian books; Remittable surplus retained in Indian books which is not repatriable so long as the bank functions in India; Interest-free funds remitted from abroad for the purpose of acquisition of property and held in a separate account in Indian books provided they are non-repatriable and have the ability to absorb losses regardless of their source; Capital reserve representing surplus arising out of sale of assets in India held in a separate account and which is not eligible for repatriation so long as the bank functions in India; and Less: Regulatory adjustments / deductions applied in the calculation of Common Equity Tier 1 capital [i.e. to be deducted from the sum of items (i) to (v)]. B. Criteria for Classification as Common Equity for Regulatory Purposes The instruments to be included in Common Equity Tier 1 capital must meet the criteria furnished in Annex 2. Notes: (i) Foreign banks are required to furnish to Reserve Bank, an undertaking to the effect that the bank will not remit abroad the 'capital reserve' and remittable surplus retained in India as long as they function in India to be eligible for including this item under Common Equity Tier 1 capital.

14 (ii) (iii) These funds may be retained in a separate account titled as 'Amount Retained in India for Meeting Capital to Risk-weighted Asset Ratio (CRAR) Requirements' under 'Capital Funds'. An auditor's certificate to the effect that these funds represent surplus remittable to Head Office once tax assessments are completed or tax appeals are decided and do not include funds in the nature of provisions towards tax or for any other contingency may also be furnished to Reserve Bank. (iv) The net credit balance, if any, in the inter-office account with Head Office / overseas branches will not be reckoned as capital funds. However, the debit balance in the Head Office account will have to be set-off against capital subject to the following provisions 10 : (a) If net overseas placements with Head Office / other overseas branches / other group entities (Placement minus borrowings, excluding Head Office borrowings for Tier I and II capital purposes) exceed 10% of the bank's minimum CRAR requirement, the amount in excess of this limit would be deducted from Tier I capital. (b) For the purpose of the above prudential cap, the net overseas placement would be the higher of the overseas placements as on date and the average daily outstanding over year to date. (c) The overall cap on such placements / investments will continue to be guided by the present regulatory and statutory restrictions i.e. net open position limit and the gap limits approved by the Reserve Bank of India, and Section 25 of the Banking Regulation Act, All such transactions should also be in conformity with other FEMA guidelines Additional Tier 1 Capital Additional Tier 1 Capital Indian Banks A. Elements of Additional Tier 1 Capital Additional Tier 1 capital will consist of the sum of the following elements: (i) Perpetual Non-Cumulative Preference Shares (PNCPS), which comply with the regulatory requirements as specified in Annex 3; (ii) Stock surplus (share premium) resulting from the issue of instruments included in Additional Tier 1 capital; (iii) Debt capital instruments eligible for inclusion in Additional Tier 1 capital, which comply with the regulatory requirements as specified in Annex 4; (iv) Any other type of instrument generally notified by the Reserve Bank from time to time for inclusion in Additional Tier 1 capital; 10 Please refer to the circular DBOD.No.BP.BC.28/ / dated July 9, 2012 on Treatment of Head Office Debit Balance - Foreign Banks.

15 (v) While calculating capital adequacy at the consolidated level, Additional Tier 1 instruments issued by consolidated subsidiaries of the bank and held by third parties which meet the criteria for inclusion in Additional Tier 1 capital (refer to paragraph 4.3.3); and (vi) Less: Regulatory adjustments / deductions applied in the calculation of Additional Tier 1 capital [i.e. to be deducted from the sum of items (i) to (v)]. B. Criteria for Classification as Additional Tier 1 Capital for Regulatory Purposes (i) Under Basel III, the criteria for instruments to be included in Additional Tier 1 capital have been modified to improve their loss absorbency as indicated in Annex 3, 4 and 16. Criteria for inclusion of Perpetual Non-Cumulative Preference Shares (PNCPS) in Additional Tier 1 Capital are furnished in Annex 3. Criteria for inclusion of Perpetual Debt Instruments (PDI) in Additional Tier 1 Capital are furnished in Annex 4. Annex 16 contains criteria for loss absorption through conversion / write-down / write-off of Additional Tier 1 instruments on breach of the pre-specified trigger and of all non-common equity regulatory capital instruments at the point of non-viability. (ii) Banks should not issue Additional Tier 1 capital instruments to the retail investors Elements and Criteria for Additional Tier 1 Capital Foreign Banks Branches Various elements and their criteria for inclusion in the Additional Tier 1 capital are as follows: (i) (ii) (iii) Head Office borrowings in foreign currency by foreign banks operating in India for inclusion in Additional Tier 1 capital which comply with the regulatory requirements as specified in Annex 4 and Annex 16; Any other item specifically allowed by the Reserve Bank from time to time for inclusion in Additional Tier 1 capital; and Less: Regulatory adjustments / deductions applied in the calculation of Additional Tier 1 capital [i.e. to be deducted from the sum of items (i) to (ii)] Elements of Tier 2 Capital Under Basel III, there will be a single set of criteria governing all Tier 2 debt capital instruments Tier 2 Capital - Indian Banks A. Elements of Tier 2 Capital (i) General Provisions and Loss Reserves a. Provisions or loan-loss reserves held against future, presently unidentified losses, which are freely available to meet losses which subsequently materialize, will qualify for inclusion within Tier 2 capital. Accordingly, General Provisions on Standard Assets, Floating

16 Provisions 11, Provisions held for Country Exposures, Investment Reserve Account, excess provisions which arise on account of sale of NPAs and countercyclical provisioning buffer 12 will qualify for inclusion in Tier 2 capital. However, these items together will be admitted as Tier 2 capital up to a maximum of 1.25% of the total credit risk-weighted assets under the standardized approach. Under Internal Ratings Based (IRB) approach, where the total expected loss amount is less than total eligible provisions, banks may recognise the difference as Tier 2 capital up to a maximum of 0.6% of credit-risk weighted assets calculated under the IRB approach. b. Provisions ascribed to identified deterioration of particular assets or loan liabilities, whether individual or grouped should be excluded. Accordingly, for instance, specific provisions on NPAs, both at individual account or at portfolio level, provisions in lieu of diminution in the fair value of assets in the case of restructured advances, provisions against depreciation in the value of investments will be excluded. (ii) Debt Capital Instruments issued by the banks; (iii) Preference Share Capital Instruments [Perpetual Cumulative Preference Shares (PCPS) / Redeemable Non-Cumulative Preference Shares (RNCPS) / Redeemable Cumulative Preference Shares (RCPS)] issued by the banks; (iv) Stock surplus (share premium) resulting from the issue of instruments included in Tier 2 capital; (v) While calculating capital adequacy at the consolidated level, Tier 2 capital instruments issued by consolidated subsidiaries of the bank and held by third parties which meet the criteria for inclusion in Tier 2 capital (refer to paragraph 4.3.4); (vi) Revaluation reserves at a discount of 55% 13 ; (vii) Any other type of instrument generally notified by the Reserve Bank from time to time for inclusion in Tier 2 capital; and (viii) Less: Regulatory adjustments / deductions applied in the calculation of Tier 2 capital [i.e. to be deducted from the sum of items (i) to (vii)]. 11 Banks will continue to have the option to net off such provisions from Gross NPAs to arrive at Net NPA or reckoning it as part of their Tier 2 capital as per circular DBOD.NO.BP.BC 33/ / dated August 27, Please refer to circular DBOD.No.BP.BC.87/ / dated April 21, 2011 on provisioning coverage ratio (PCR) for advances. 13 These reserves often serve as a cushion against unexpected losses, but they are less permanent in nature and cannot be considered as Core Capital. Revaluation reserves arise from revaluation of assets that are undervalued on the bank s books, typically bank premises. The extent to which the revaluation reserves can be relied upon as a cushion for unexpected losses depends mainly upon the level of certainty that can be placed on estimates of the market values of the relevant assets, the subsequent deterioration in values under difficult market conditions or in a forced sale, potential for actual liquidation at those values, tax consequences of revaluation, etc. Therefore, it would be prudent to consider revaluation reserves at a discount of 55% while determining their value for inclusion in Tier 2 capital. Such reserves will have to be reflected on the face of the Balance Sheet as revaluation reserves.

17 B. Criteria for Classification as Tier 2 Capital for Regulatory Purposes Under Basel III, the criteria for instruments 14 to be included in Tier 2 capital have been modified to improve their loss absorbency as indicated in Annex 5, 6 and 16. Criteria for inclusion of Debt Capital Instruments as Tier 2 capital are furnished in Annex 5. Criteria for inclusion of Perpetual Cumulative Preference Shares (PCPS) / Redeemable Non- Cumulative Preference Shares (RNCPS) / Redeemable Cumulative Preference Shares (RCPS) as part of Tier 2 capital are furnished in Annex 6. Annex 16 contains criteria for loss absorption through conversion / write-off of all non-common equity regulatory capital instruments at the point of non-viability Tier 2 Capital Foreign Banks Branches A. Elements of Tier 2 Capital Elements of Tier 2 capital in case of foreign banks branches will be as under: (i) General Provisions and Loss Reserves (as detailed in paragraph A.(i) above); (ii) Head Office (HO) borrowings in foreign currency received as part of Tier 2 debt capital; (iii) Revaluation reserves at a discount of 55%; and (iv) Less: Regulatory adjustments / deductions applied in the calculation of Tier 2 capital [i.e. to be deducted from the sum of items (i) and (iii)]. B. Criteria for Classification as Tier 2 Capital for Regulatory Purposes Criteria for inclusion of Head Office (HO) borrowings in foreign currency received as part of Tier 2 debt Capital for foreign banks are furnished in Annex 5 and Annex Recognition of Minority Interest (i.e. Non-Controlling Interest) and Other Capital Issued out of Consolidated Subsidiaries That is Held by Third Parties Under Basel III, the minority interest is recognised only in cases where there is considerable explicit or implicit assurance that the minority interest which is supporting the risks of the subsidiary would be available to absorb the losses at the consolidated level. Accordingly, the portion of minority interest which supports risks in a subsidiary that is a bank will be included in group s Common Equity Tier 1. Consequently, minority interest in the subsidiaries which are not banks will not be included in the regulatory capital of the group. In other words, the proportion of surplus capital which is attributable to the minority shareholders would be excluded from the group s Common Equity Tier 1 capital. Further, as opposed to Basel II, a need was felt to extend the minority interest treatment to other 14 Please also refer circular DBOD.BP.BC.No.75/ / dated January 20, 2011 on Regulatory Capital Instruments Step up Option doing away with step up option. Banks may also refer to the BCBS Press Release dated September 12, 2010 indicating announcements made by the Group of Governors and Heads of Supervision on higher global minimum capital standards.

18 components of regulatory capital also (i.e. Additional Tier 1 capital and Tier 2 capital). Therefore, under Basel III, the minority interest in relation to other components of regulatory capital will also be recognised Treatment of Minority Interest Corresponding to Common Shares Issued by Consolidated Subsidiaries Minority interest arising from the issue of common shares by a fully consolidated subsidiary of the bank may receive recognition in Common Equity Tier 1 capital only if: (a) the instrument giving rise to the minority interest would, if issued by the bank, meet all of the criteria for classification as common shares for regulatory capital purposes as stipulated in Annex 1; and (b) the subsidiary that issued the instrument is itself a bank 15. The amount of minority interest meeting the criteria above that will be recognised in consolidated Common Equity Tier 1 capital will be calculated as follows: (i) Total minority interest meeting the two criteria above minus the amount of the surplus Common Equity Tier 1 capital of the subsidiary attributable to the minority shareholders. (ii) Surplus Common Equity Tier 1 capital of the subsidiary is calculated as the Common Equity Tier 1 of the subsidiary minus the lower of: (a) the minimum Common Equity Tier 1 capital requirement of the subsidiary plus the capital conservation buffer (i.e. 8.0% of risk weighted assets) and (b) the portion of the consolidated minimum Common Equity Tier 1 capital requirement plus the capital conservation buffer (i.e. 8.0% of consolidated risk weighted assets) that relates to the subsidiary 16. (iii) The amount of the surplus Common Equity Tier 1 capital that is attributable to the minority shareholders is calculated by multiplying the surplus Common Equity Tier 1 by the percentage of Common Equity Tier 1 that is held by minority shareholders Treatment of Minority Interest Corresponding to Tier 1 Qualifying Capital Issued by Consolidated Subsidiaries Tier 1 capital instruments issued by a fully consolidated subsidiary of the bank to third party investors (including amounts under paragraph 4.3.2) may receive recognition in Tier 1 capital only if the instruments would, if issued by the bank, meet all of the criteria for classification as Tier 1 capital. The amount of this capital that will be recognised in Tier 1 capital will be calculated as follows: (i) Total Tier 1 capital of the subsidiary issued to third parties minus the amount of the surplus Tier 1 capital of the subsidiary attributable to the third party investors. (ii) Surplus Tier 1 capital of the subsidiary is calculated as the Tier 1 capital of the subsidiary minus the lower of: (a) the minimum Tier 1 capital requirement of the subsidiary plus the capital conservation buffer (i.e. 9.5% of risk weighted assets) and (b) the portion of the consolidated minimum Tier 1 capital requirement plus the capital conservation buffer (i.e. 9.5% of consolidated risk weighted assets) that relates to the subsidiary. 15 For the purposes of this paragraph, All India Financial Institutions, Non-banking Financial Companies regulated by RBI and Primary Dealers will be considered to be a bank. 16 The ratios used as the basis for computing the surplus (8.0%, 9.5% and 11.5%) in paragraphs 4.3.2, and respectively will not be phased-in.

19 (iii) The amount of the surplus Tier 1 capital that is attributable to the third party investors is calculated by multiplying the surplus Tier 1 capital by the percentage of Tier 1 capital that is held by third party investors. The amount of this Tier 1 capital that will be recognised in Additional Tier 1 capital will exclude amounts recognised in Common Equity Tier 1 capital under paragraph Treatment of Minority Interest Corresponding to Tier 1 Capital and Tier 2 Capital Qualifying Capital Issued by Consolidated Subsidiaries Total capital instruments (i.e. Tier 1 and Tier 2 capital instruments) issued by a fully consolidated subsidiary of the bank to third party investors (including amounts under paragraphs and 4.3.3) may receive recognition in Total Capital only if the instruments would, if issued by the bank, meet all of the criteria for classification as Tier 1 or Tier 2 capital. The amount of this capital that will be recognised in consolidated Total Capital will be calculated as follows: (i) Total capital instruments of the subsidiary issued to third parties minus the amount of the surplus Total Capital of the subsidiary attributable to the third party investors. (ii) Surplus Total Capital of the subsidiary is calculated as the Total Capital of the subsidiary minus the lower of: (a) the minimum Total Capital requirement of the subsidiary plus the capital conservation buffer (i.e. 11.5% of risk weighted assets) and (b) the portion of the consolidated minimum Total Capital requirement plus the capital conservation buffer (i.e. 11.5% of consolidated risk weighted assets) that relates to the subsidiary. (iii) The amount of the surplus Total Capital that is attributable to the third party investors is calculated by multiplying the surplus Total Capital by the percentage of Total Capital that is held by third party investors. The amount of this Total Capital that will be recognised in Tier 2 capital will exclude amounts recognised in Common Equity Tier 1 capital under paragraph and amounts recognised in Additional Tier 1 under paragraph An illustration of calculation of minority interest and other capital issued out of consolidated subsidiaries that is held by third parties is furnished in Annex Regulatory Adjustments / Deductions The following paragraphs deal with the regulatory adjustments / deductions which will be applied to regulatory capital both at solo and consolidated level Goodwill and all Other Intangible Assets (i) Goodwill and all other intangible assets should be deducted from Common Equity Tier 1 capital including any goodwill included in the valuation of significant investments in the capital of banking, financial and insurance entities which are outside the scope of regulatory consolidation. In terms of AS 23 Accounting for investments in associates, goodwill/capital reserve arising on the acquisition of an associate by an investor should be included in the carrying amount of investment in the associate but should be disclosed separately. Therefore, if the acquisition of equity interest in any associate involves payment which can be attributable to

20 goodwill, this should be deducted from the Common Equity Tier 1 of the bank. (ii) The full amount of the intangible assets is to be deducted net of any associated deferred tax liabilities which would be extinguished if the intangible assets become impaired or derecognized under the relevant accounting standards. For this purpose, the definition of intangible assets would be in accordance with the Indian accounting standards. Operating losses in the current period and those brought forward from previous periods should also be deducted from Common Equity Tier 1 capital. (iii) Application of these rules at consolidated level would mean deduction of any goodwill and other intangible assets from the consolidated Common Equity which is attributed to the Balance Sheets of subsidiaries, in addition to deduction of goodwill and other intangible assets which pertain to the solo bank Deferred Tax Assets (DTAs) (i) The DTAs computed as under should be deducted from Common Equity Tier 1 capital: (a) DTA associated with accumulated losses; and (b) The DTA (excluding DTA associated with accumulated losses), net of DTL. Where the DTL is in excess of the DTA (excluding DTA associated with accumulated losses), the excess shall neither be adjusted against item (a) nor added to Common Equity Tier 1 capital. (ii) Application of these rules at consolidated level would mean deduction of DTAs from the consolidated Common Equity which is attributed to the subsidiaries, in addition to deduction of DTAs which pertain to the solo bank Cash Flow Hedge Reserve (i) The amount of the cash flow hedge reserve which relates to the hedging of items that are not fair valued on the balance sheet (including projected cash flows) should be derecognised in the calculation of Common Equity Tier 1. This means that positive amounts should be deducted and negative amounts should be added back. This treatment specifically identifies the element of the cash flow hedge reserve that is to be derecognised for prudential purposes. It removes the element that gives rise to artificial volatility in Common Equity, as in this case the reserve only reflects one half of the picture (the fair value of the derivative, but not the changes in fair value of the hedged future cash flow). (ii) Application of these rules at consolidated level would mean derecognition of cash flow hedge reserve from the consolidated Common Equity which is attributed to the subsidiaries, in addition to derecognition of cash flow hedge reserve pertaining to the solo bank Shortfall of the Stock of Provisions to Expected Losses The deduction from capital in respect of a shortfall of the stock of provisions to expected losses under the Internal Ratings Based (IRB) approach should be made in