Capital Adequacy Compliance

Transcription

1 Capital Adequacy Compliance

2 Objectives of Capital Adequacy Requirement Fundamental objective for holding adequate capital by banks Strengthen the soundness of banks Stability of the banking system Provide a stable resource to absorb losses Loss absorption capacity based on the business risk

3 Capital Fund Division of capital fund Characteristics of instruments Quality of instruments Supervisory requirements

4 Elements of Tier I Capital Paid-up capital (ordinary shares) Statutory reserves Other disclosed free reserves Perpetual non-cumulative preference shares (PNCPS) eligible for inclusion as Tier I capital Subject to laws in force from time to time Innovative perpetual debt instruments (IPDI) eligible for inclusion as Tier I capital Capital reserves representing surplus arising out of sale proceeds of assets

5 Elements of Tier II Capital Undisclosed reserves Revaluation reserves General provisions Loss reserves Hybrid capital instruments Subordinated debt Investment reserve account

6 Undisclosed Reserves Represent accumulations of post-tax profits Not encumbered by any known liability Not routinely used for absorbing normal loss Not routinely used for absorbing operating losses

7 Revaluation Reserve Revaluation reserves at a discount of 55 per cent for Tier II capital. Disclosed in the balance sheet as revaluation reserves.

8 General Provisions and Loss Reserves Identifiable potential loss in any specific asset. Available to meet unexpected losses. Sufficient provisions have been made to meet all known losses and foreseeable potential losses before considering general provisions and loss reserves to be part of Tier II capital. General provisions and loss reserves considered up to a maximum of 1.25 percent of total risk weighted assets.

9 Floating Reserves General in nature Not made against any identified assets Excess provisions which arise on sale of non performing assets eligible for Tier II capital Applicable ceiling 1.25% of total risk weighted assets

10 Hybrid Debt Capital Instruments Instruments that have close similarities to equity instruments Instruments that support losses on an ongoing basis without triggering liquidation Debt capital instruments eligible for inclusion as upper Tier II capital Perpetual Cumulative Preference Shares (PCPS) Redeemable Non Cumulative Preference Shares (RNCPS) Redeemable Cumulative Preference Shares (RCPS)

11 Subordinated Debt Approval of the Board Rupee-subordinated debt as Tier II capital Maturity period initially less than 5 years Subject to progressive discount Maturity of the Instrument Rate of discount Less then one year 100% 1 year > 2 years 80% 2 years > 3 years 60% 3 years > 4 years 40% 4 years > 5 years 20%

12 Subordinated Debt Fully paid up instruments Unsecured instruments Subordinated to the claims of other creditors Free of restrictive clauses Not redeemable at the initiative of the holder Not redeemed without the consent of Reserve Bank of India

13 Investment Reserve Account Provisions created on account of depreciation in Available for Sale Held for Trading Excess profits recognized in the income statement Equivalent amount net of taxes and net of transfer to statutory reserves appropriated to an investment reserve account Revenue and other reserves disclosed in the balance sheet Investment reserve account (Tier II capital within the overall ceiling of 1.25 per cent of total risk weighted assets)

14 Capital Funds of Foreign Banks Tier I capital Interest-free funds from Head Office kept in a separate account in Indian books specifically for the purpose of meeting the capital adequacy norms Innovative instruments eligible for inclusion as Tier I capital Statutory reserves kept in Indian books Remittable surplus retained in Indian books which is not repatriable so long as the bank functions in India

15 Capital Funds of Foreign Banks Tier II capital Elements of Tier II capital as applicable to Indian banks. Head Office (HO) borrowings raised in foreign currency (for inclusion in Upper Tier II Capital).

16 Foreign Bank Capital Requirements Foreign banks are required to furnish to Reserve Bank undertaking to the effect that the banks will not remit abroad the remittable surplus retained in India and included in Tier I capital as long as the banks function in India. Retained in a separate account In India for meeting capital to risk-weighted asset ratio (CRAR) requirements under capital funds.

17 Foreign Bank Capital Requirements Auditor's certificate to the effect that these funds represent surplus payable to Head office once tax assessments are completed or tax appeals are decided Do not include funds in the nature of provisions towards tax or for any other contingency

18 Foreign Bank Capital Requirements Foreign banks operating in India are permitted to hedge their entire Tier I capital held by them in Indian books subject to: Forward contract should be for a tenor of one year or more and may be rolled over on maturity Rebooking of cancelled hedge will require prior approval of Reserve Bank Capital funds should be available in India to meet local regulatory CRAR requirements Foreign currency funds accruing out of hedging should not be parked in nostro accounts but should remain swapped with banks in India at all times

19 Foreign Bank Capital Requirements Capital reserve representing surplus arising out of sale of assets in India held in a separate account is not eligible for repatriation so long as the bank functions in India Interest-free funds remitted from abroad for the purpose of acquisition of property should be held in a separate account in Indian books Net credit balance in the inter-office account with head office / overseas branches will not be considered as capital funds. Debit balance in head office account will have to be setoff against the capital

20 Deductions for Tier I and Tier II Capital Equity and non equity investments in subsidiaries Investments of a bank in the equity as well as non-equity capital instruments issued by a subsidiary, which are considered towards its regulatory capital as per norms prescribed by the respective regulator, deducted at 50 per cent each, from Tier I and Tier II capital of the parent bank, while assessing the capital adequacy of the bank under the Basel I framework

21 Credit Enhancement Relating to Securitization of Standard Assets Treatment of First Loss Facility First loss credit enhancement provided by the originator reduced from capital funds and the deduction capped at the amount of capital that the bank would have been required to hold for the full value of the assets, had they not been securitised. Deduction for this purpose would be made at 50% from Tier I and 50% from Tier II capital

22 Credit Enhancement Relating to Securitization of Standard Assets Treatment of Second Loss Facility Second loss credit enhancement provided by the originator would be reduced from capital funds to the full extent. Deduction would be made at 50% from Tier I and 50% from Tier II capital Treatment of credit enhancements provided by third party If the bank is acting as a third party service provider, the first loss credit enhancement provided by it is reduced from capital to the full extent

23 Credit Enhancement Relating to Securitization of Standard Assets Underwriting by an originator Securities issued by the Special Purpose Vehicles (SPVs) and held by the bank in excess of 10 per cent of the original amount of issue, including secondary market purchases, deducted at 50% from Tier I capital and 50% from Tier II capital Underwriting by third party service providers If the bank has underwritten securities issued by SPVs which are below investment grade, then deducted from capital at 50% from Tier I and 50% from Tier II capital

24 Limits for Tier II Capital Tier II capital components limited to a maximum of 100 per cent of total Tier I capital components for the purpose of compliance with the norms

25 Illustrative Application of Tier I Capital Tier I capital Paid up capital Statutory reserves Disclosed free reserves Capital reserves representing surplus from sale proceeds of assets Minus equity investment in subsidiaries Minus intangible assets Minus losses incurred by the bank

26 Illustrative Application of Tier II Capital Un-disclosed reserves and cumulative perpetual preference shares Revaluation reserves (at a discount of 55 percent while determining their value for inclusion in Tier II capital) General provisions and loss reserves up to a maximum of 1.25% of weighted risk assets Investment fluctuation reserve not subject to 1.25% restriction Hybrid debt capital instruments (bonds) Subordinated debt (long term unsecured loans)

27 Illustrative Application of Risk Weighted Assets Degrees of credit risk expressed as percentage weights Assigned by Reserve Bank of India for each asset Fund based assets Cash Loans Investments Other assets

28 Application of Risk Weighted Assets Non-funded (off-balance sheet) Items Credit risk exposure of off-balance sheet items Computed by multiplying the face value amount of each of the off-balance sheet items by the credit conversion factor Resulting amount has to be again multiplied by the relevant weights assigned for each off-balance sheet item

29 Reporting Requirements Disclose in balance sheet the quantum of Tier I capital fund Tier II capital fund Annual return indicating capital funds Conversion of off-balance sheet items Non-funded exposures Computation of risk weighted assets Computation of capital to risk assets ratio

30 Capital Adequacy Ratio Capital Adequacy Ratio / (CAR) / (CRAR) Ratio of capital fund to risk weighted assets expressed in percentage terms Minimum Requirements of Capital Fund in India Existing banks: 9 % New private sector banks: 10 % Banks undertaking insurance business: 10 % Local area banks: 15 % Tier I capital at no point of time be less than 50 % of the total capital. Tier II capital cannot be more than 50 % of the total capital