|
RBI guidelines on CCF (Credit Conversion Factor)
Direct Credit Substitutes CCF
General Guarantees (including Standby LCs), Acceptances - 100%
Transaction related contingent items (Performance bonds, Bid bonds, - 50%
Warranties, Indemnities, Standby LC relating to particular transaction
Short Term LC (Documentary) for Issuing bank as well as confirming bank - 20%
Capital Charge on Un-availed limit
Capital Charge on Undrawn limits is calculated as under:
• 20% on Undrawn CC limit
• 20% on Undrawn TL limit (which is to be drawn in a year)
• 50% on Undrawn TL limit (which is to be drawn beyond a year)
Example
In the case of a cash credit facility for Rs.100 lakh (which is not unconditionally cancelable) where the
availed portion is Rs. 60 lakh, the un-availed portion of Rs.40 lakh will attract a Credit Conversion Factor (CCF) of 20% (since the cash credit facility is subject to review / renewal normally once a year). The credit equivalent amount of Rs.8 lakh (20% of Rs.40 lakh) will be assigned the appropriate risk weight as applicable to the counterparty / rating to arrive at the risk weighted asset for the unavailed portion. The availed portion (Rs.60 lakh) will attract a risk weight as applicable to the counterparty / rating.
In compliance of the new guidelines banks have advised all the branches for:
i) Insertion of Limit Cancellation Clause in loan documents
ii) Levying of Commitment Charges
Time frame for application of different approaches
Application to RBI by Approval by RBI by
IRB approach for Credit Risk 01.04.2012 31.3.2014
AMA approach for Operational Risk 01.04.2012 31.3.2014
Internal Model approach for
Market Risk 01.04.2010 31.3.2011
BASEL -III Basel III covers Liquidity Risk in addition to Basel II.
It is planned to implement BASEL-III w.e.f. 1.1.2013. The propose reforms are as under:
Capital Common Equity Tier –I Total Capital
Minimum 4.5% 6% 8%
+ Conservative Buffer 2.5% 2.5% 2.5%
Transition Arrangement
As on 1.1.2013, the banks will meet new minimum requirement in relation to Risk Weighted Assets as under:
3.5% of Common Equity + 4.5% of Tier –I Capital = .8% of Total Capital /Risk Weighted Assets.
VaR (Value at Risk)
Value at Risk is how much can we expect to lose? What is potential loss?
We can lose maximum up to VaR (value at Risk) over a given time at a given confidence level.
Calculation of VaR
Market Factor Sensitivity X Daily Volatility X Probability at given confidence level
Suppose impact of 1% change of interest rate (Price) = 6000/-
Daily Volatility = 3% : Confidence level is 99%
Probability of occurrence at 99% confidence level is 2.326
Defeasance period = 1 day
VaR = 6000x3x2.326 = 41874/-
Duration and Modified Duration
Duration is the time that Bondholder must wait for a number of years (duration) to receive Present Value of Cash Inflows i.e. PV of Cash Inflows equals Actual Cash Inflows.
Formula of calculating Duration (Macaulay’s Duration)
Σ ( PV*T) / ΣPV
For example:
5 years bond of Rs. 100 @ 6% gives Duration of 3.7 years. It means Total Cash flow of Rs. 130/- would be equivalent to receiving Rs. 130/- at the end of 3.7 years.
Modified Duration = Duration / 1 + Yield
…………………………………………………………………………………………………………………………………………… |
