·
The Basel Committee
provided the framework for capital adequacy in 1988, which is known as the
Basel-I accord. The Basel-I accord provided global standards for minimum
capital requirements for banks.
·
The Revised Framework
consists of three-mutually reinforcing pillars, viz., minimum capital
requirements, supervisory review of capital adequacy, and market discipline.
·
The Framework offers three
distinct options for computing capital requirement for credit risk and three
other options for computing capital requirement for operational risk.
·
The options available for
computing capital for credit risk are Standardised Approach, Foundation
Internal Rating Based Approach and Advanced Internal Rating Based Approach.
·
The options available for
computing Market risk is standardized approach (based on maturity ladder and
duration baSed) and advanced approach, i.e., internal models such as VAR
·
The options available for
computing capital for operational risk are Basic Indicator Approach,
Standardised Approach and Advanced Measurement Approach.
·
The revised capital
adequacy norms shall be applicable uniformly to all Commercial Banks (except
Local Area Banks and Regional Rural Banks).
·
A Consolidated bank is
defined as a group of entities where a licensed bank is the controlling entity.
·
All commercial banks in
India shall adopt Standardised Approach (SA) for credit risk and Basic
Indicator Approach (BIA) for operational risk.
·
Banks shall continue to
apply the Standardised Duration Approach (SDA) for computing capital
requirement for market risks.
·
The term capital would
include Tier-I or core capital, Tier-II or supplemental capital, and Tier-Ill
capital
·
Core capital consists of
paid up capital, free reserves and unallocated surpluses, less specified
deductions.
·
Supplementary capital
comprises subordinated debt of more than five years' maturity, loan loss
reserves, revaluation reserves, investment fluctuation reserves, and limited
life preference shares.
·
Tier-II capital is restricted
to 100% of Tier-I capital as before and long-term subordinated debt may not
exceed 50% of Tier-I capital.
·
Tier-Ill capital will be
limited to 250% of a bank's Tier-1 capital that is required to support market
risk. This means that a minimum of about 28.5% of market risk needs to be
supported by Tier-I capital. Any capital requirement arising in respect of
credit and counter-party risk needs to be met by Tier-I and Tier-II capital.
·
Capital adequacy ratio(C) = Regulatory capital(R)/Total risk weighted
assets(T).
·
Regulatory Capital
‘R’=C*T and Total Risk weighted Assets
‘T’= R/C
·
Total Risk weighted assets
=(Risk weighted assets for credit risk) +(12.5*Capital requirement for market
risk)+(12.5*Capital requirement for operational risk)
