RBI/2015-16/58

DBR.No.BP.BC.1/21.06.201/2015-16 July 1, 2015

On full implementation of Basel III from 31.03.2019 the following will be the capital ratios required.

The implementation schedule is as under:

1
Elements of various tiers of capital:

A. Elements of Common Equity Tier 1 Capital

Elements of Common Equity component of Tier 1 capital will comprise the following:
(i) Common shares (paid-up equity capital) issued by the bank which meet the criteria for
classification as common shares for regulatory purposes.

(ii) Stock surplus (share premium) resulting from the issue of common shares;

(iii) Statutory reserves;

(iv) Capital reserves representing surplus arising out of sale proceeds of assets;

(v) Other disclosed free reserves, if any;

(vi) 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 non-performing 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:

EPt= {NPt – 0.25*D*t}

Where;
EPt = Eligible profit up to the quarter ‘t’ of the current financial year; t varies from 1 to 4
NPt = Net profit up to the quarter ‘t’
D= average annual dividend paid during last three years

(viii) Revaluation reserves at a discount of 55%11;

B. 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.

(ii) Stock surplus (share premium) resulting from the issue of instruments included in Additional
Tier 1 capital;

(iii) Perpetual Debt Instruments eligible for inclusion in Additional Tier 1 capital, which comply
with the regulatory requirements.

(iv) Any other type of instrument generally notified by the Reserve Bank from time to time for
inclusion in Additional Tier 1 capital;
While complying with minimum Tier 1 of 7% of risk weighted assets, a bank cannot admit,
Perpetual Non-Cumulative Preference Shares (PNCPS) together with Perpetual Debt
Instruments (PDI) in Additional Tier 1 Capital, more than 1.5% of risk weighted assets.

2
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 Provisions8,
incremental provisions in respect of unhedged foreign currency exposures9, Provisions held for
Country Exposures, Investment Reserve Account, excess provisions which arise on account of
sale of NPAs and ‘countercyclical provisioning buffer10’ 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;

3
(iv) Stock surplus (share premium) resulting from the issue of instruments included in Tier 2
capital;

BFM TEST PAPER WITH ANSWER KEY

Bank XYZ has

Common shares - 600cr

Statutory reserves - 250cr

Free reserves - 200cr

General Provisions and Loss Reserves - 350cr

Debt Capital Instruments - 250cr

Perpetual Non-Cumulative Preference Shares (PNCPS) - 50cr

Perpetual Debt Instruments (PDI) - 50cr

Perpetual Cumulative Preference Shares (PCPS) - 50cr

Redeemable Non-Cumulative Preference Shares (RNCPS) - 50cr

Redeemable Cumulative Preference Shares (RCPS) - 50cr

RWA for credit risk is Rs 10000cr

RWA for operational risk is Rs. 6000 cr

RWA for market risk Rs 6000cr

Based on the above information, answer the following questions?

1. what is the amount of Tier-1 capital?

a. 1080cr

b. 1150cr

c. 1250cr

d. 1380cr

Ans - b

4
Tier-1 = Common shares + Statutory reserves + Free reserves + Perpetual Non-Cumulative Preference
Shares (PNCPS) + Perpetual Debt Instruments (PDI)

= 600+250+200+50+50= 1150cr

2. Calculate the amount of Tier-2 capital?

a. 350cr

b. 475cr

c. 550cr

d. 840cr

Ans - b

Tier2 = Provisions and Loss Reserves maximum 1.25% of Credit risk weighted assets + Debt Capital
Instruments + PCPS + RNCPS + RCPS

= (10000*1.25%) 125+200 (total debt inst 250 – PDI 50)+50+50+50

= 475cr

3. Calculate the amount of capital fund?

a. 1250cr

b. 1625cr

c. 1560cr

d. 1700cr

Ans - b

Total capital fund = Tier-1 capital + Tier-2 capital

= 1150 + 475 = 1625 cr

4. What is the capital adequacy ratio of the bank?

a. 7.39 %

b. 7.73 %

c. 8.23 %

d. 8.73 %

5
Ans - a

Capital adequacy ratio = Total Capital fund / Total RWA

= 1625 / 22000

= 7.386 %

5. What is the amount of minimum capital to support credit and operational risk as per Basel 3 without
capital conservation buffer?

a. 1240cr

b. 1440cr

c. 1640cr

d. 1840cr

Ans - b

= 16000 * 9% = 1440cr

6. What is the amount of minimum capital to support credit and operational risk as per Basel 3 with
capital conservation buffer?

a. 1240cr

b. 1440cr

c. 1640cr

d. 1840cr

Ans - d

16000 * 11.5% = 1840cr

7. What is the amount of minimum Tier 1 to support the credit and operational risk without capital
conservation buffer?

a. 1120cr

b. 1320cr

c. 1520cr

d. 1720cr

Ans - a

6
Tier 1 = 16000 * 7% = 1120 cr

8. What is the amount of minimum Tier 1 to support the credit and operational risk with capital
conservation buffer?

a. 1120cr

b. 1320cr

c. 1520cr

d. 1720cr

Ans - c

Tier 1 = 16000 * 9.5% = 1520 cr

9. What is the amount of minimum Tier 1 to support the market risk without capital conservation
buffer?

a. 420cr

b. 470cr

c. 520cr

d. 570cr

Ans - a

Tier 1 = 6000 * 7% = 420 cr

10. What is the amount of minimum Tier 1 to support the market risk with capital conservation buffer?

a. 420cr

b. 470cr

c. 520cr

d. 570cr

Ans - c

Tier 1 = 6000 * 9.5% = 520 cr

.............................................