|
Risk Mitigation
Credit Risk can be mitigated by accepting Collaterals, 3rd party guarantees, Diversification of Advances and Credit Derivatives.
Interest rate Risk can be reduced by Derivatives of Interest Rate Swaps.
Forex Risk can be reduced by entering into Forward Contracts and Futures etc.
Calculation of CRAR (Capital to Risk Weighted Asset Ratio)
Basel – I requires measurement of Capital Adequacy in respect of Credit risks and Market Risks only as per the following method:
Capital funds(Tier I & Tier II)/(Credit Risk Weighted Assets + Market RWAs + Operational RWAs) X 100
Minimum requirement of CRAR is as under:
As per BASEL-II recommendations 8%
As per RBI guidelines 9%
Tier –I Capital
Tier –I Capital includes:
• Paid up capital, Statutory reserves, Other disclosed free reserves, Capital Reserve representing surplus out of sale proceeds of assets.
• Investment fluctuation reserve without ceiling.
• Innovative perpetual Debt instruments (Max. 15% of Tier I capital)
• Perpetual non-cumulative Preference shares
Less Intangible assets & Losses.
• Sum total of Innovative Perpetual Instruments and Preference shares as stated above should not exceed 40% of Tier I capital. Rest amount will be treated as Tier II capital.
Tier –II Capital
It includes:
• Redeemable Cumulative Preference shares, Redeemable non-cumulative Preference shares & Perpetual cumulative Preference shares,
• Revaluation reserves at a discount of 55%,
• General Provisions & Loss reserves up to 1.25 % of RWAs
• Hybrid debts (say bonds) & Subordinate debts (Long term Unsecured loans) limited to 50% of Tier –I Capital.
Tier – III Capital
Banks may at the discretion of the National Authority, employ 3rd tier of Capital consisting of short term subordinate debts for the sole purpose of meeting a proportion of capital requirements for market risks. Tier III capital will be limited to 250% of bank’s Tier –I Capital (Minimum of 28.5%) that is required to support market risks.
Tier – II capital should not be more than 50% of Total Capital.
Three Pillars of BASEL-II
Pillar –I Minimum Capital Requirement
Pillar – II Supervisory Review Process
Pillar –III Market Discipline
Pillar - I – Minimum Capital Requirement
CRAR will be calculated by adopting same method as discussed above under Basel – I with the only difference that Denominator will be arrived at by adding 3 types of risks i.e. Credit Risks, Market Risks and Operational Risks.
Pillar – II – Supervisory Review Process (SRP)
SRP has two issues:
1. To ensure that bank is having adequate capital.
2. To encourage banks to use better techniques to mitigate risks.
SRP concentrates on 3 main areas:
• Risks not fully captured under Pillar -1 i.e. Interest Rate Risks, Credit concentration Risks, Liquidity Risk, Settlement Risks, Reputational Risks and Strategic Risks.
• Risks not at all taken care of in Pillar -1.
• External Factors.
Pillar – III – Market Discipline
Market discipline is complete disclosure and transparency in the balance sheet and all the financial statements of the bank. The disclosure is required in respect of the following:
• Capital structure.
• Components of Tier –I and Tier –II Capital
• Bank’s approach to assess capital adequacy
• Assessment of Credit Risks, Market Risk and Operational Risk.
• Credit Aspects like Asset Classification, Net NPA ratios, Movement of NPAs and Provisioning.
Frequency of Disclosure
• Banks with Capital funds of Rs. 100 crore or more will make interim Disclosures on Quantitative aspects on standalone basis on their respective websites.
• Larger banks with Capital Funds of Rs. 500 crore or more will disclose Tier-I capital, Total Capital, CAR on Quarterly basis on website.
……………………………………………………………………………………………………………………………………………
|
