CARE s rating approach for BASEL III instruments

CARE s rating approach for BASEL III instruments

Regulatory Minimum Capital Adequacy Ratio Regulatory Capital (As % of RWA) Basel II April 1 2013 2014 2015 2016 2017 2018 2019 (i) Minimum Common Equity Tier I Ratio 3.6 4.5 5 5.5 5.5 5.5 5.5 5.5 (ii) Capital Conservation Buffer (CCB) NA - - - 0.625 1.25 1.875 2.5 (iii) Minimum Common Equity Tier I Ratio + CCB (i) + (ii) 3.6 4.5 5 5.5 6.125 6.75 7.375 8.0 (iv) Additional Tier I Capital (IPDI+PNCPS) 2.4 1.5 1.5 1.5 1.5 1.5 1.5 1.5 (v) Minimum Tier I Capital (i) + (iv) 6 6 6.5 7.0 7.0 7.0 7.0 7.0 (vi) Tier II Capital 3 3 2.5 2.0 2.0 2.0 2.0 2.0 (vii) Minimum Total Capital [MTC] (v) + (vi) 9 9.0 9.0 9.0 9.0 9.0 9.0 9.0 (viii) MTC + CCB (ii) + (vii) 9 9 9 9 9.625 10.25 10.875 11.5

Key Comparison - Tier II Bonds under Basel II and Under Clause Lower Tier II Bonds Tier II Bonds Lock-in Clause on payment of coupon/principal in going concern scenario No Lock-in Clause applicable No Lock-in Clause applicable Loss Absorption Features Not applicable Such instruments can be written off or converted into common equity upon declaration of point of non viability (PONV) by RBI. Call / Put / Coupon Option No step-up option No step-up option No Put Option No Put Option Call option subject to conditions only after the instrument has run for at least 5 years and with approval of RBI Call option subject to conditions only after the instrument has run for at least 5 years and with approval of RBI.

Criteria to determine Point of Non Viability (PONV) As per the RBI guidelines a Non-Viable Bank is: 1. A bank which, owing to its financial and other difficulties, may no longer remain a going concern on its own in the opinion of the Reserve Bank unless appropriate measures are taken to revive its operations and thus, enable it to continue as a going concern. 2. The difficulties faced by a bank should be such that these are likely to result in financial losses and raising the Common Equity Tier 1 capital of the bank should be considered as the most appropriate way to prevent the bank from turning non-viable. Such measures would include write-off / conversion of non-equity regulatory capital into common shares in combination with or without other measures as considered appropriate by the Reserve Bank

CARE s Rating Approach for Tier II Bonds under The parameters considered to assess whether a bank will reach the PONV are similar to the parameters considered to assess rating of Tier II instruments even under Basel II Therefore the rating of Tier II instruments under Basel III will be similar to the rating of Lower Tier II instruments under Basel II

Key Differences between Tier I instruments under Basel II and Under Clause Innovative Instruments (IPDI) Instruments (PDI) Impact on Credit Risk Lock-in Clause on payment of coupon Non-payment of coupon if CAR is below 9% or goes below 9% on payment of coupon Prior RBI approval if coupon results in net loss or increases net loss provided CAR > 9% If a bank does not have positive earnings and has a Common Equity Tier 1 ratio less than 8%, the bank will not be able make coupon payment on Perpetual bond., the trigger is based on overall CAR and under, the trigger is based on Common equity

Key Differences between Tier I instruments under Basel II and Under Clause Innovative Instruments (IPDI) Instruments (PDI) Impact on Credit Risk Loss absorption features No such clause Can be permanently written-off or converted into common equity in case of two events: For instruments issued prior to ch, 2019 - Breach of CE Tier I capital ratio of 5.5% till ch, 2019 and 6.125% post, 2019 in a going concern scenario The credit loss is higher under as compared to Basel II as breach of capital based trigger under in a going concern scenario resulting in conversion or write-off.

Key Differences between Tier I instruments under Basel II and Under Clause Innovative Instruments (IPDI) Instruments (PDI) Impact on Credit Risk Loss absorption features No such clause Instruments issued on or after ch, 2019 - Breach of CE Tier I capital ratio of 6.125% in a going concern scenario The credit loss is higher under as compared to Basel II as breach of capital based trigger under in a going concern scenario resulting in conversion or write-off. Upon declaration of non viability by RBI on reaching the trigger of PONV

Key Differences between Tier I instruments under Basel II and Under Clause Innovative Instruments (IPDI) Instruments (PDI) Impact on Credit Risk Coupon Discretion No such clause The bank must have full discretion at all times to cancel distributions /payments. The interest shall not be cumulative. Makes the credit quality of the Perpetual bonds under framework weaker in relation to the Perpetual bonds under the Basel II framework

Key Differences between Tier I instruments under Basel II and Under Clause Innovative Instruments (IPDI) Instruments (PDI) Impact on Credit Risk Coupon payment Payment of coupon with the prior approval of RBI allowed even when the impact of such payment may result in net loss or increase the net loss, provided the CRAR remains above the regulatory norm If the payment of coupons is likely to result in losses in the current year, their declaration should be precluded to that extent. Coupons should not be paid out of retained earnings / reserves Makes the credit quality of the Perpetual bonds under framework weaker in relation to the Perpetual bonds under the Basel II framework

Rating Approach for Tier I instruments under IPDI under Basel II was rated 0 1 notch lower than Lower Tier II bonds depending upon the rating of the bank (Ratings of some of the AAA rated banks were not notched down) Tier I instruments under have higher loss absorption characteristics as compared to IPDI under Basel II thereby increasing the riskiness of these instruments Tier I instruments under may be rated more notches down as compared to Tier I instruments under Basel II based upon the credit profile of the bank