ž¸¸£·¸ú¡¸ ¹£{¸¨¸Ä ¤¸ÿˆÅ ____________RESERVE BANK OF INDIA________________ www.rbi.org.in RBI/2013-14/70 DBOD.No.BP.BC.2 /21.06.201/2013-14

July 1, 2013

All Scheduled Commercial Banks (Excluding Local Area Banks and Regional Rural Banks)

Madam / Sir, Master Circular – Basel III Capital Regulations Please refer to the Master Circular No.DBOD.BP.BC.16/21.06.001/2012-13 dated July 2, 2012, consolidating therein the prudential guidelines issued to banks till that date on Capital Adequacy and Market Discipline - New Capital Adequacy Framework (NCAF). 2. As you are aware, Basel III Capital Regulations is being implemented in India with

effect from April 1, 2013 in a phased manner. Accordingly, instructions contained in the aforesaid Master Circular have been suitably updated / amended by incorporating relevant guidelines, issued up to June 30, 2013 and is being issued as Master Circular on ‘Basel III Capital Regulations’. 3. The Basel II guidelines as contained in the Master Circular

DBOD.No.BP.BC.9/21.06.001/2013-14 dated July 1, 2013 on ‘Prudential Guidelines on Capital Adequacy and Market Discipline- New Capital Adequacy Framework (NCAF)’ may, however, be referred to during the Basel III transition period for regulatory adjustments / deductions up to March 31, 2017.

Yours faithfully,

(Chandan Sinha) Principal Chief General Manager Encl.: As above

Department of Banking Operations and Development, Central Office, 12th Floor, Central Office Building, SBS Marg, Mumbai-1
, , 12 , , , , – 400 001

Tel No: 022-2266 1602 /Fax No: 022-2270 5691 Email ID: cgmicdbodco@rbi.org.in

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TABLE OF CONTENTS Part – A : Minimum Capital Requirement (Pillar 1) 1 2 3 4 Introduction Approach to Implementation and Effective Date Scope of Application of Capital Adequacy Framework Composition of Regulatory Capital 4.1 General 4.2 Elements and Criteria of Regulatory Capital 4.3 Recognition of Minority Interests 4.4 Regulatory Adjustments / Deductions 4.5 Transitional Arrangements Capital Charge for Credit Risk 5.1 General 5.2 Claims on Domestic Sovereigns 5.3 Claims on Foreign Sovereigns 5.4 Claims on Public Sector Entities 5.5 Claims on MDBs, BIS and IMF 5.6 Claims on Banks 5.7 Claims on Primary Dealers 5.8 Claims on Corporates, AFCs & NBFC-IFCs 5.9 Claims included in the Regulatory Retail Portfolios 5.10 Claims secured by Residential Property 5.11 Claims Classified as Commercial Real Estate 5.12 Non-Performing Assets 5.13 Specified Categories 5.14 Other Assets 5.15 Off-Balance Sheet Items 5.15.1 General 5.15.2 Non-Market-related Off-balance Sheet items 5.15.3 Treatment of Total Counterparty Credit Risk 5.15.4 Failed Transactions 5.16 Securitisation Exposures 5.16.1 General 5.16.2 Treatment of Securitisation Exposures 5.16.3 Implicit Support 5.16.4 Application of External Ratings 5.16.5 Risk-weighted Securitisation Exposures 5.16.6 Off-balance Sheet Securitisation Exposures 5.16.7 Recognition of Credit Risk Mitigants 5.16.8 Liquidity Facilities Re-Securitisation Exposures/Synthetic Securitisation/ 5.16.9 Securitisation with Revolving Structures (with or without early amortization features) 5.17 Capital Adequacy Requirements for Credit Default Swaps (CDS) Position in Banking Book 5.17.1 Recognition of External/Third Party CDS Hedges 5.17.2 Internal Hedges External Credit Assessments

5

6

-3-

7

8

9

10

6.1 Eligible Credit Rating Agencies 6.2 Scope of Application of External Ratings 6.3 Mapping Process 6.4 Long Term Ratings 6.5 Short Term Ratings 6.6 Use of Unsolicited Ratings 6.7 Use of Multiple Rating Assessments 6.8 Applicability of Issue rating to Issuer/other claims Credit Risk Mitigation 7.1 General Principles 7.2 Legal certainty 7.3 Credit Risk Mitigation techniques – Collateralised Transactions 7.3.2 Overall framework and minimum conditions 7.3.4 The Comprehensive Approach 7.3.5 Eligible Financial Collateral 7.3.6 Calculation of Capital Requirement 7.3.7 Haircuts Capital Adequacy Framework for Repo-/Reverse Repo-style 7.3.8 Transactions. 7.4 Credit Risk Mitigation techniques – On–balance Sheet netting 7.5 Credit Risk Mitigation techniques – Guarantees 7.5.4 Operational requirements for Guarantees 7.5.5 Additional operational requirements for Guarantees 7.5.6 Range of Eligible Guarantors (counter-guarantors) 7.5.7 Risk Weights 7.5.8 Proportional Cover 7.5.9 Currency Mismatches 7.5.10 Sovereign Guarantees and Counter-guarantees 7.6 Maturity Mismatch 7.7 Treatment of pools of CRM Techniques Capital Charge for Market Risk 8.1 Introduction 8.2 Scope and Coverage of Capital Charge for Market Risks 8.3 Measurement of Capital Charge for Interest Rate Risk 8.4 Measurement of Capital Charge for Equity Risk 8.5 Measurement of Capital Charge for Foreign Exchange Risk 8.6 Measurement of Capital Charge for CDS in Trading Book 8.6.1 General Market Risk 8.6.2 Specific Risk for Exposure to Reference Entity 8.6.3 Capital Charge for Counterparty Credit Risk 8.6.4 Treatment of Exposures below Materiality Thresholds of CDS 8.7 Aggregation of the Capital Charge for Market Risk 8.8 Treatment of illiquid positions Capital charge for Operational Risk 9.1 Definition of Operational Risk 9.2 The Measurement Methodologies 9.3 The Basic Indicator Approach Part – B : Supervisory Review and Evaluation Process (Pillar 2) Introduction to Supervisory Review and Evaluation Process (SREP)

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11 12

13 14

Need for improved risk management Guidelines for SREP of the RBI and the ICAAP of the Bank 12.1 The Background 12.2 Conduct of the SREP by the RBI 12.3 The Structural Aspects of the ICAAP 12.4 Review of ICAAP Outcomes ICAAP to be an integral part of the Mgmt. & Decision making 12.5 Culture 12.6 The Principle of Proportionality 12.7 Regular independent review and validation 12.8 ICAAP to be a Forward looking Process 12.9 ICAAP to be a Risk-based Process 12.10 ICAAP to include Stress Tests and Scenario Analysis 12.11 Use of Capital Models for ICAAP Select Operational Aspects of ICAAP Part – C : Market Discipline (Pillar 3) Market Discipline 14.1 General 14.2 Achieving Appropriate Disclosure 14.3 Interaction with Accounting Disclosure 14.4 Validation 14.5 Materiality 14.6 Proprietary and Confidential Information 14.7 General Disclosure Principle 14.8 Implementation Date 14.9 Scope and Frequency of Disclosures 14.10 Regulatory Disclosure Section 14.11 Pillar 3 Under Basel III Framework 14.12 The Post March 31, 2017 Disclosure Templates 14.13 Template During Transition Period 14.14 Reconciliation Requirements 14.15 Disclosure Templates Table DF-1 Scope of Application and Capital Adequacy Table DF-2 Capital Adequacy Table DF-3 Credit Risk: General Disclosures for All Banks Credit Risk: Disclosures for Portfolios subject to the Table DF-4 Standardised Approach Credit Risk Mitigation: Disclosures for Standardised Table DF-5 Approach Table DF-6 Securitisation: Disclosure for Standardised Approach Table DF-7 Market Risk in Trading Book Table DF-8 Operational Risk Table DF-9 Interest Rate Risk in the Banking Book (IRRBB) General Disclosure for Exposures Related to Table DF-10 Counterparty Credit Risk Table DF-11 Composition of Capital Table DF-12 Composition of Capital- Reconciliation Requirements Table DF-13 Main Features of Regulatory Capital Instruments Table DF-14 Full Terms and Conditions of Regulatory Capital

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15

16

Instruments Table DF-15 Disclosure Requirements for Remuneration Part – D : Capital Conservation Buffer Capital Conservation Buffer 15.1 Objective 15.2 The Framework Part – E : Leverage Ratio Leverage Ratio 16.1 Rationale and Objective 16.2 Definition and Calculation of Leverage Ratio 16.3 Transitional Arrangements Annex Criteria for classification as common shares (paid-up equity capital) for regulatory purposes – Indian Banks Criteria for classification as common equity for regulatory purposes – Foreign Banks Criteria for inclusion of perpetual non-cumulative preference shares (PNCPS) in Additional Tier 1 capital Criteria for inclusion of Perpetual Debt Instruments (PDI) in Additional Tier 1 capital Criteria for inclusion of debt capital instruments as Tier 2 capital Criteria for inclusion of perpetual cumulative preference shares (PCPS)/ redeemable non-cumulative preference shares (RNCPS) / redeemable cumulative preference shares (RCPS) as part of Tier 2 capital Prudential guidelines on Credit Default Swaps (CDS) Illustrations on Credit Risk Mitigation Measurement of capita charge for Market Risks in respect of Interest Rate Derivatives. An Illustrative Approach for Measurement of Interest Rate Risk in the Banking Book (IRRBB) under Pillar 2 Investments in the capital of banking, financial and insurance entities which are outside the scope of regulatory consolidation Illustration of transitional arrangements - capital instruments which no longer qualify as non-common equity Tier 1 capital or Tier 2 capital Calculation of CVA risk capital charge Calculation of admissible excess Additional Tier 1 (AT1) and Tier 2 capital for the purpose of reporting and disclosing minimum total capital ratios An Illustrative outline of the ICAAP Minimum requirements to ensure loss absorbency of Additional Tier 1 instruments at pre-specified trigger and of all non-equity regulatory capital instruments at the point of non-viability Calculation of minority interest - illustrative example Pillar 3 disclosure requirements Transitional arrangements for non-equity regulatory capital instruments Glossary List of circulars consolidated

Annex 1 Annex 2 Annex 3 Annex 4 Annex 5 Annex 6 Annex 7 Annex 8 Annex 9 Annex 10 Annex 11 Annex 12 Annex 13 Annex 14 Annex 15 Annex 16

Annex 17 Annex 18 Annex 19 Annex 20 Annex 21

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Master Circular on Basel III Capital Regulations

Part A: Guidelines on Minimum Capital Requirement 1. Introduction

1.1 Basel III reforms are the response of Basel Committee on Banking Supervision (BCBS) to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spill over from the financial sector to the real economy. During Pittsburgh summit in September 2009, the G20 leaders committed to strengthen the regulatory system for banks and other financial firms and also act together to raise capital standards, to implement strong international compensation standards aimed at ending practices that lead to excessive risk-taking, to improve the overthe-counter derivatives market and to create more powerful tools to hold large global firms to account for the risks they take. For all these reforms, the leaders set for themselves strict and precise timetables. Consequently, the Basel Committee on Banking Supervision (BCBS) released comprehensive reform package entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” (known as Basel III capital regulations) in December 2010. 1.2 Basel III reforms strengthen the bank-level i.e. micro prudential regulation, with the intention to raise the resilience of individual banking institutions in periods of stress. Besides, the reforms have a macro prudential focus also, addressing system wide risks, which can build up across the banking sector, as well as the procyclical amplification of these risks over time. These new global regulatory and supervisory standards mainly seek to raise the quality and level of capital to ensure banks are better able to absorb losses on both a going concern and a gone concern basis, increase the risk coverage of the capital framework, introduce leverage ratio to serve as a backstop to the risk-based capital measure, raise the standards for the supervisory review process (Pillar 2) and public disclosures (Pillar 3) etc. The macro prudential aspects of Basel III are largely enshrined in the capital buffers. Both the buffers i.e. the capital conservation buffer and the countercyclical buffer are intended to protect the banking sector from periods of excess credit growth. 1.3 Reserve Bank issued Guidelines based on the Basel III reforms on capital regulation on May 2, 2012, to the extent applicable to banks operating in India. The Basel III capital regulation has been implemented from April 1, 2013 in India in phases and it will be fully implemented as on March 31, 2018. 1.4 Further, on a review, the parallel run and prudential floor for implementation of Basel II vis-à-vis Basel I have been discontinued1.

1

Please refer to the circular DBOD.BP.BC.No.95/21.06.001/2012-13 dated May 27, 2013 on Prudential Guidelines on Capital Adequacy and Market Discipline New Capital Adequacy Framework (NCAF) - Parallel Run and Prudential Floor.

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2. Approach to Implementation and Effective Date 2.1 The Basel III capital regulations continue to be based on three-mutually reinforcing Pillars, viz. minimum capital requirements, supervisory review of capital adequacy, and market discipline of the Basel II capital adequacy framework 2. Under Pillar 1, the Basel III framework will continue to offer the three distinct options for computing capital requirement for credit risk and three other options for computing capital requirement for operational risk, albeit with certain modifications / enhancements. These options for credit and operational risks are based on increasing risk sensitivity and allow banks to select an approach that is most appropriate to the stage of development of bank's operations. 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 capital for operational risk are Basic Indicator Approach (BIA), The Standardised Approach (TSA) and Advanced Measurement Approach (AMA). 2.2 Keeping in view the Reserve Bank’s goal to have consistency and harmony with international standards, it was decided in 2007 that all commercial banks in India (excluding Local Area Banks and Regional Rural Banks) should adopt Standardised Approach for credit risk, Basic Indicator Approach for operational risk by March 2009 and banks should continue to apply the Standardised Duration Approach (SDA) for computing capital requirement for market risks. 2.3 Having regard to the necessary upgradation of risk management framework as also capital efficiency likely to accrue to the banks by adoption of the advanced approaches, the following time schedule was laid down for implementation of the advanced approaches for the regulatory capital measurement in July 2009: The earliest date of making Likely date of application by approval by the RBI banks to the RBI April 1, 2010 April 1, 2010 April 1, 2012 March 31, 2011 September 30, 2010 March 31, 2014

S. No. a. b. c.

Approach Internal Models Approach (IMA) for Market Risk The Standardised Approach (TSA) for Operational Risk Advanced Measurement Approach (AMA) for Operational Risk Internal Ratings-Based (IRB) Approaches for Credit Risk (Foundation- as well as Advanced IRB)

d.

April 1, 2012

March 31, 2014

2

For reference, please refer to the Master Circular on Prudential Guidelines on Capital Adequacy and Market Discipline - New Capital Adequacy Framework (NCAF) issued vide circular DBOD.No.BP.BC.9/21.06.001/2013-14 dated July 1, 2013.

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2.4 Accordingly, banks were advised to undertake an internal assessment of their preparedness for migration to advanced approaches and take a decision with the approval of their Boards, whether they would like to migrate to any of the advanced approaches. Based on bank's internal assessment and its preparation, a bank may choose a suitable date to apply for implementation of advanced approach. Besides, banks, at their discretion, would have the option of adopting the advanced approaches for one or more of the risk categories, as per their preparedness, while continuing with the simpler approaches for other risk categories, and it would not be necessary to adopt the advanced approaches for all the risk categories simultaneously. However, banks should invariably obtain prior approval of the RBI for adopting any of the advanced approaches. 2.5 Effective Date: The Basel III capital regulations are being implemented in India with effect from April 1, 2013. Banks have to comply with the regulatory limits and minima as prescribed under Basel III capital regulations, on an ongoing basis. To ensure smooth transition to Basel III, appropriate transitional arrangements have been provided for meeting the minimum Basel III capital ratios, full regulatory adjustments to the components of capital etc. Consequently, Basel III capital regulations would be fully implemented as on March 31, 2018. In view of the gradual phase-in of regulatory adjustments to the Common Equity component of Tier 1 capital under Basel III, certain specific prescriptions of Basel II capital adequacy framework (e.g. rules relating to deductions from regulatory capital, risk weighting of investments in other financial entities etc.) will also continue to apply till March 31, 2017 on the remainder of regulatory adjustments not treated in terms of Basel III rules (refer to paragraph 4.5.2). 3. 3.1 Scope of Application of Capital Adequacy Framework A bank shall comply with the capital adequacy ratio requirements at two levels: (a) the consolidated (“Group”) level3 capital adequacy ratio requirements, which measure the capital adequacy of a bank based on its capital strength and risk profile after consolidating the assets and liabilities of its subsidiaries / joint ventures / associates etc. except those engaged in insurance and any non-financial activities; and (b) the standalone (“Solo”) level capital adequacy ratio requirements, which measure the capital adequacy of a bank based on its standalone capital strength and risk profile. Accordingly, overseas operations of a bank through its branches will be covered in both the above scenarios. 3.2 For the purpose of these guidelines, the subsidiary is an enterprise that is controlled by another enterprise (known as the parent). Banks will follow the definition of ‘control’ as given in the applicable accounting standards.

3

In terms of guidelines on preparation of consolidated prudential reports issued vide circular DBOD. No.BP.BC.72/21.04.018/ 2001-02 dated February 25, 2003; a consolidated bank may exclude group companies which are engaged in insurance business and businesses not pertaining to financial services. A consolidated bank should maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) as applicable to a bank on an ongoing basis.

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3.3

Capital Adequacy at Group / Consolidated Level

3.3.1 All banking and other financial subsidiaries except subsidiaries engaged in insurance and any non-financial activities (both regulated and unregulated) should be fully consolidated for the purpose of capital adequacy. This would ensure assessment of capital adequacy at the group level, taking into account the risk profile of assets and liabilities of the consolidated subsidiaries. 3.3.2 The insurance and non-financial subsidiaries / joint ventures / associates etc. of a bank should not be consolidated for the purpose of capital adequacy. The equity and other regulatory capital investments in the insurance and non-financial subsidiaries will be deducted from consolidated regulatory capital of the group. Equity and other regulatory capital investments in the unconsolidated insurance and non-financial entities of banks (which also include joint ventures / associates of the parent bank) will be treated in terms of paragraphs 4.4.9 and 5.13.6 respectively. 3.3.3 All regulatory adjustments indicated in paragraph 4.4 are required to be made to the consolidated Common Equity Tier 1 capital of the banking group as indicated therein. 3.3.4 Minority interest (i.e. non-controlling interest) and other capital issued out of consolidated subsidiaries as per paragraph 3.3.1 that is held by third parties will be recognized in the consolidated regulatory capital of the group subject to certain conditions as stipulated in paragraph 4.3. 3.3.5 Banks should ensure that majority owned financial entities that are not consolidated for capital purposes and for which the investment in equity and other instruments eligible for regulatory capital status is deducted, meet their respective regulatory capital requirements. In case of any shortfall in the regulatory capital requirements in the unconsolidated entity, the shortfall shall be fully deducted from the Common Equity Tier 1 capital. 3.4 Capital Adequacy at Solo Level

3.4.1 While assessing the capital adequacy of a bank at solo level, all regulatory adjustments indicated in paragraph 4.4 are required to be made. In addition, investments in the capital instruments of the subsidiaries, which are consolidated in the consolidated financial statements of the group, will also have to be deducted from the corresponding capital instruments issued by the bank. 3.4.2 In case of any shortfall in the regulatory capital requirements in the unconsolidated entity (e.g. insurance subsidiary), the shortfall shall be fully deducted from the Common Equity Tier 1 capital. 4. Composition of Regulatory Capital 4.1 General

Banks are required to maintain a minimum Pillar 1 Capital to Risk-weighted Assets Ratio (CRAR) of 9% on an on-going basis (other than capital conservation buffer and countercyclical capital buffer etc.). The Reserve Bank will take into account the relevant risk factors and the internal capital adequacy assessments of each bank to ensure that the

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capital held by a bank is commensurate with the bank’s overall risk profile. This would include, among others, the effectiveness of the bank’s risk management systems in identifying, assessing / measuring, monitoring and managing various risks including interest rate risk in the banking book, liquidity risk, concentration risk and residual risk. Accordingly, the Reserve Bank will consider prescribing a higher level of minimum capital ratio for each bank under the Pillar 2 framework on the basis of their respective risk profiles and their risk management systems. Further, in terms of the Pillar 2 requirements, banks are expected to operate at a level well above the minimum requirement. A bank should compute Basel III capital ratios in the following manner:

Common Equity Tier 1 capital ratio Tier ratio 1 capital

=

Common Equity Tier 1 Capital Credit Risk RWA* + Market Risk RWA + Operational Risk RWA

.

=

Eligible Tier 1 Capital4

.

Credit Risk RWA* + Market Risk RWA + Operational Risk RWA = Eligible Total Capital5 .

Total Capital (CRAR#)

Credit Risk RWA + Market Risk RWA + Operational Risk RWA

* RWA = Risk weighted Assets; # Capital to Risk Weighted Asset Ratio

4.2

Elements of Regulatory Capital and the Criteria for their Inclusion in the Definition of Regulatory Capital Components of Capital Total regulatory capital will consist of the sum of the following categories: (i) Tier 1 Capital (going-concern capital6) (a) Common Equity Tier 1 (b) Additional Tier 1 (ii) Tier 2 Capital (gone-concern capital)

4.2.1

4.2.2

Limits and Minima

(i) As a matter of prudence, it has been decided that scheduled commercial banks (excluding LABs and RRBs) operating in India shall maintain a minimum total capital (MTC) of 9% of total risk weighted assets (RWAs) i.e. capital to risk weighted assets (CRAR). This will be further divided into different components as described under paragraphs 4.2.2(ii) to

4 5

Tier 1 capital in terms of paragraph 4.2.2(vii) Total Capital in terms of paragraph 4.2.2(vii) 6 From regulatory capital perspective, going-concern capital is the capital which can absorb losses without triggering bankruptcy of the bank. Gone-concern capital is the capital which will absorb losses only in a situation of liquidation of the bank.

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4.2.2(viii). (ii) Common Equity Tier 1 (CET1) capital must be at least 5.5% of risk-weighted assets (RWAs) i.e. for credit risk + market risk + operational risk on an ongoing basis. (iii) Tier 1 capital must be at least 7% of RWAs on an ongoing basis. Thus, within the minimum Tier 1 capital, Additional Tier 1 capital can be admitted maximum at 1.5% of RWAs. (iv) Total Capital (Tier 1 Capital plus Tier 2 Capital) must be at least 9% of RWAs on an ongoing basis. Thus, within the minimum CRAR of 9%, Tier 2 capital can be admitted maximum up to 2%. (v) If a bank has complied with the minimum Common Equity Tier 1 and Tier 1 capital ratios, then the excess Additional Tier 1 capital can be admitted for compliance with the minimum CRAR of 9% of RWAs. (vi) In addition to the minimum Common Equity Tier 1 capital of 5.5% of RWAs, banks are also required to maintain a capital conservation buffer (CCB) of 2.5% of RWAs in the form of Common Equity Tier 1 capital. Details of operational aspects of CCB have been furnished in paragraph 15. Thus, with full implementation of capital ratios7 and CCB the capital requirements are summarised as follows:

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii)

Regulatory Capital Minimum Common Equity Tier 1 Ratio Capital Conservation Buffer (comprised of Common Equity) Minimum Common Equity Tier 1 Ratio plus Capital Conservation Buffer [(i)+(ii)] Additional Tier 1 Capital Minimum Tier 1 Capital Ratio [(i) +(iv)] Tier 2 Capital Minimum Total Capital Ratio (MTC) [(v)+(vi)] Minimum Total Capital Ratio plus Capital Conservation Buffer [(vii)+(ii)]

As % to RWAs 5.5 2.5 8.0 1.5 7.0 2.0 9.0 11.5

(vii) For the purpose of reporting Tier 1 capital and CRAR, any excess Additional Tier 1 (AT1) capital and Tier 2 (T2) capital will be recognised in the same proportion as that applicable towards minimum capital requirements. This would mean that to admit any excess AT1 and T2 capital, the bank should have excess CET1 over and above 8%8 (5.5%+2.5%). An illustration has been given in Part A of Annex 14. (viii) It would follow from paragraph 4.2.2(vii) that in cases where the a bank does not have minimum Common Equity Tier 1 + capital conservation buffer of 2.5% of RWAs as required but, has excess Additional Tier 1 and / or Tier 2 capital, no such excess capital can be reckoned towards computation and reporting of Tier 1 capital and Total Capital.
7

For smooth migration to these capital ratios, transitional arrangements have been provided as detailed in paragraph 4.5. 8 During the transition period, the excess will be determined with reference to the applicable minimum Common Equity Tier 1 capital and applicable capital conservation buffer and the proportion with reference to the available Common Equity. For instance, as on March 31, 2015, the excess Additional Tier 1 and Tier 2 will be determined with reference to total Common Equity 6.125% (5.5%+0.625%) and the proportion with reference to 5.5% Common Equity Tier 1 capital.

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(ix) For the purpose of all prudential exposure limits linked to capital funds, the ‘capital 9 funds’ will exclude the applicable capital conservation buffer and countercyclical capital buffer as and when activated, but include Additional Tier 1 capital and Tier 2 capital which are supported by proportionate amount of Common Equity Tier 1 capital as indicated in paragraph 4.2.2(vii). Accordingly, capital funds will be defined as [(Common Equity Tier 1 capital) + (Additional Tier 1 capital and Tier 2 capital eligible for computing and reporting CRAR of the bank)]. It may be noted that the term ‘Common Equity Tier 1 capital’ does not include capital conservation buffer and countercyclical capital buffer. 4.2.3 Common Equity Tier 1 Capital

4.2.3.1 Common Equity – Indian Banks 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 as given in Annex 1; Stock surplus (share premium) resulting from the issue of common shares; Statutory reserves; Capital reserves representing surplus arising out of sale proceeds of assets; Other disclosed free reserves, if any; Balance in Profit & Loss Account at the end of the previous financial year;

(ii) (iii) (iv) (v) (vi)

(vii) Banks may reckon the profits in current financial year for CRAR calculation on a quarterly basis provided the incremental provisions made for nonperforming 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

9

The definition of capital funds as indicated in para 4.2.2(ix) will be reviewed by RBI as and when any changes in the Large Exposure regime is considered by the Basel Committee.

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(viii)

While calculating capital adequacy at the consolidated level, common shares issued by consolidated subsidiaries of the bank and held by third parties (i.e. minority interest) which meet the criteria for inclusion in Common Equity Tier 1 capital (refer to paragraph 4.3.2); and Less: Regulatory adjustments / deductions applied in the calculation of Common Equity Tier 1 capital [i.e. to be deducted from the sum of items (i) to (viii)].

(ix)

B.

Criteria for Classification as Common Shares for Regulatory Purposes

Common Equity is recognised as the highest quality component of capital and is the primary form of funding which ensures that a bank remains solvent. Therefore, under Basel III, common shares to be included in Common Equity Tier 1 capital must meet the criteria as furnished in Annex 1. 4.2.3.2 Common Equity Tier 1 Capital – Foreign Banks’ Branches A. Elements of Common Equity Tier 1 Capital

Elements of Common Equity Tier 1 capital will remain the same and consist of the following: (i) Interest-free funds from Head Office kept in a separate account in Indian books specifically for the purpose of meeting the capital adequacy norms; Statutory reserves kept in Indian books; Remittable surplus retained in Indian books which is not repatriable so long as the bank functions in India; Interest-free funds remitted from abroad for the purpose of acquisition of property and held in a separate account in Indian books provided they are non-repatriable and have the ability to absorb losses regardless of their source; Capital reserve representing surplus arising out of sale of assets in India held in a separate account and which is not eligible for repatriation so long as the bank functions in India; and Less: Regulatory adjustments / deductions applied in the calculation of Common Equity Tier 1 capital [i.e. to be deducted from the sum of items (i) to (v)].

(ii) (iii)

(iv)

(v)

(vi)

B.

Criteria for Classification as Common Equity for Regulatory Purposes

The instruments to be included in Common Equity Tier 1 capital must meet the criteria furnished in Annex 2. Notes: (i) Foreign banks are required to furnish to Reserve Bank, an undertaking to the effect that the bank will not remit abroad the 'capital reserve' and ‘remittable surplus retained in India’ as long as they function in India to be eligible for including this item under Common Equity Tier 1 capital.

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(ii)

These funds may be retained in a separate account titled as 'Amount Retained in India for Meeting Capital to Risk-weighted Asset Ratio (CRAR) Requirements' under 'Capital Funds'. An auditor's certificate to the effect that these funds represent surplus remittable to Head Office once tax assessments are completed or tax appeals are decided and do not include funds in the nature of provisions towards tax or for any other contingency may also be furnished to Reserve Bank. The net credit balance, if any, in the inter-office account with Head Office / overseas branches will not be reckoned as capital funds. However, the debit balance in the Head Office account will have to be set-off against capital subject to the following provisions10: (a) If net overseas placements with Head Office / other overseas branches / other group entities (Placement minus borrowings, excluding Head Office borrowings for Tier I and II capital purposes) exceed 10% of the bank's minimum CRAR requirement, the amount in excess of this limit would be deducted from Tier I capital. (b) For the purpose of the above prudential cap, the net overseas placement would be the higher of the overseas placements as on date and the average daily outstanding over year to date. (c) The overall cap on such placements / investments will continue to be guided by the present regulatory and statutory restrictions i.e. net open position limit and the gap limits approved by the Reserve Bank of India, and Section 25 of the Banking Regulation Act, 1949. All such transactions should also be in conformity with other FEMA guidelines.

(iii)

(iv)

4.2.4

Additional Tier 1 Capital

4.2.4.1 Additional Tier 1 Capital – Indian Banks A. 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 as specified in Annex 3; (ii) Stock surplus (share premium) resulting from the issue of instruments included in Additional Tier 1 capital; (iii) Debt capital instruments eligible for inclusion in Additional Tier 1 capital, which comply with the regulatory requirements as specified in Annex 4; (iv) Any other type of instrument generally notified by the Reserve Bank from time to time for inclusion in Additional Tier 1 capital;

10

Please refer to the circular DBOD.No.BP.BC.28/21.06.001/2012-13 dated July 9, 2012 on ‘Treatment of Head Office Debit Balance - Foreign Banks’.

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(v) While calculating capital adequacy at the consolidated level, Additional Tier 1 instruments issued by consolidated subsidiaries of the bank and held by third parties which meet the criteria for inclusion in Additional Tier 1 capital (refer to paragraph 4.3.3); and (vi) Less: Regulatory adjustments / deductions applied in the calculation of Additional Tier 1 capital [i.e. to be deducted from the sum of items (i) to (v)]. B. Criteria for Classification as Additional Tier 1 Capital for Regulatory Purposes

(i) Under Basel III, the criteria for instruments to be included in Additional Tier 1 capital have been modified to improve their loss absorbency as indicated in Annex 3, 4 and 16. Criteria for inclusion of Perpetual Non-Cumulative Preference Shares (PNCPS) in Additional Tier 1 Capital are furnished in Annex 3. Criteria for inclusion of Perpetual Debt Instruments (PDI) in Additional Tier 1 Capital are furnished in Annex 4. Annex 16 contains criteria for loss absorption through conversion / write-down / write-off of Additional Tier 1 instruments on breach of the pre-specified trigger and of all non-common equity regulatory capital instruments at the point of non-viability. (ii) Banks should not issue Additional Tier 1 capital instruments to the retail investors. 4.2.4.2 Elements and Criteria for Additional Tier 1 Capital – Foreign Banks’ Branches Various elements and their criteria for inclusion in the Additional Tier 1 capital are as follows: (i) Head Office borrowings in foreign currency by foreign banks operating in India for inclusion in Additional Tier 1 capital which comply with the regulatory requirements as specified in Annex 4 and Annex 16; Any other item specifically allowed by the Reserve Bank from time to time for inclusion in Additional Tier 1 capital; and Less: Regulatory adjustments / deductions applied in the calculation of Additional Tier 1 capital [i.e. to be deducted from the sum of items (i) to (ii)].

(ii)

(iii)

4.2.5

Elements of Tier 2 Capital

Under Basel III, there will be a single set of criteria governing all Tier 2 debt capital instruments. 4.2.5.1 Tier 2 Capital - Indian Banks A. (i) Elements of Tier 2 Capital 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

- 16 -

Provisions11, Provisions held for Country Exposures, Investment Reserve Account, excess provisions which arise on account of sale of NPAs and ‘countercyclical provisioning buffer12’ 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; (iv) Stock surplus (share premium) resulting from the issue of instruments included in Tier 2 capital; (v) While calculating capital adequacy at the consolidated level, Tier 2 capital instruments issued by consolidated subsidiaries of the bank and held by third parties which meet the criteria for inclusion in Tier 2 capital (refer to paragraph 4.3.4); (vi) Revaluation reserves at a discount of 55%13;

(vii) Any other type of instrument generally notified by the Reserve Bank from time to time for inclusion in Tier 2 capital; and (viii) Less: Regulatory adjustments / deductions applied in the calculation of Tier 2 capital [i.e. to be deducted from the sum of items (i) to (vii)].

11

Banks will continue to have the option to net off such provisions from Gross NPAs to arrive at Net NPA or reckoning it as part of their Tier 2 capital as per circular DBOD.NO.BP.BC 33/21.04.048/200910 dated August 27, 2009. 12 Please refer to circular DBOD.No.BP.BC.87/21.04.048/2010-11 dated April 21, 2011 on provisioning coverage ratio (PCR) for advances.
13

These reserves often serve as a cushion against unexpected losses, but they are less permanent in nature and cannot be considered as ‘Core Capital’. Revaluation reserves arise from revaluation of assets that are undervalued on the bank’s books, typically bank premises. The extent to which the revaluation reserves can be relied upon as a cushion for unexpected losses depends mainly upon the level of certainty that can be placed on estimates of the market values of the relevant assets, the subsequent deterioration in values under difficult market conditions or in a forced sale, potential for actual liquidation at those values, tax consequences of revaluation, etc. Therefore, it would be prudent to consider revaluation reserves at a discount of 55% while determining their value for inclusion in Tier 2 capital. Such reserves will have to be reflected on the face of the Balance Sheet as revaluation reserves.

- 17 -

B.

Criteria for Classification as Tier 2 Capital for Regulatory Purposes

Under Basel III, the criteria for instruments14 to be included in Tier 2 capital have been modified to improve their loss absorbency as indicated in Annex 5, 6 and 16. Criteria for inclusion of Debt Capital Instruments as Tier 2 capital are furnished in Annex 5. Criteria for inclusion of Perpetual Cumulative Preference Shares (PCPS) / Redeemable NonCumulative Preference Shares (RNCPS) / Redeemable Cumulative Preference Shares (RCPS) as part of Tier 2 capital are furnished in Annex 6. Annex 16 contains criteria for loss absorption through conversion / write-off of all non-common equity regulatory capital instruments at the point of non-viability. 4.2.5.2 Tier 2 Capital – Foreign Banks’ Branches A. Elements of Tier 2 Capital

Elements of Tier 2 capital in case of foreign banks’ branches will be as under:

(i) General Provisions and Loss Reserves (as detailed in paragraph 4.2.5.1.A.(i) above); (ii) Head Office (HO) borrowings in foreign currency received as part of Tier 2 debt capital; (iii) Revaluation reserves at a discount of 55%; and (iv) Less: Regulatory adjustments / deductions applied in the calculation of Tier 2 capital
[i.e. to be deducted from the sum of items (i) and (iii)]. B. Criteria for Classification as Tier 2 Capital for Regulatory Purposes

Criteria for inclusion of Head Office (HO) borrowings in foreign currency received as part of Tier 2 debt Capital for foreign banks are furnished in Annex 5 and Annex 16. 4.3 Recognition of Minority Interest (i.e. Non-Controlling Interest) and Other Capital Issued out of Consolidated Subsidiaries That is Held by Third Parties

4.3.1 Under Basel III, the minority interest is recognised only in cases where there is considerable explicit or implicit assurance that the minority interest which is supporting the risks of the subsidiary would be available to absorb the losses at the consolidated level. Accordingly, the portion of minority interest which supports risks in a subsidiary that is a bank will be included in group’s Common Equity Tier 1. Consequently, minority interest in the subsidiaries which are not banks will not be included in the regulatory capital of the group. In other words, the proportion of surplus capital which is attributable to the minority shareholders would be excluded from the group’s Common Equity Tier 1 capital. Further, as opposed to Basel II, a need was felt to extend the minority interest treatment to other

14

Please also refer circular DBOD.BP.BC.No.75/21.06.001/2010‐11 dated January 20, 2011 on ‘Regulatory Capital Instruments – Step up Option’ doing away with step up option. Banks may also refer to the BCBS Press Release dated September 12, 2010 indicating announcements made by the Group of Governors and Heads of Supervision on higher global minimum capital standards.

- 18 -

components of regulatory capital also (i.e. Additional Tier 1 capital and Tier 2 capital). Therefore, under Basel III, the minority interest in relation to other components of regulatory capital will also be recognised. 4.3.2 Treatment of Minority Interest Corresponding to Common Shares Issued by Consolidated Subsidiaries

Minority interest arising from the issue of common shares by a fully consolidated subsidiary of the bank may receive recognition in Common Equity Tier 1 capital only if: (a) the instrument giving rise to the minority interest would, if issued by the bank, meet all of the criteria for classification as common shares for regulatory capital purposes as stipulated in Annex 1; and (b) the subsidiary that issued the instrument is itself a bank15. The amount of minority interest meeting the criteria above that will be recognised in consolidated Common Equity Tier 1 capital will be calculated as follows:

(i) Total minority interest meeting the two criteria above minus the amount of the surplus
Common Equity Tier 1 capital of the subsidiary attributable to the minority shareholders.

(ii) Surplus Common Equity Tier 1 capital of the subsidiary is calculated as the Common
Equity Tier 1 of the subsidiary minus the lower of: (a) the minimum Common Equity Tier 1 capital requirement of the subsidiary plus the capital conservation buffer (i.e. 8.0% of risk weighted assets) and (b) the portion of the consolidated minimum Common Equity Tier 1 capital requirement plus the capital conservation buffer (i.e. 8.0% of consolidated risk weighted assets) that relates to the subsidiary16.

(iii) The amount of the surplus Common Equity Tier 1 capital that is attributable to the minority shareholders is calculated by multiplying the surplus Common Equity Tier 1 by the percentage of Common Equity Tier 1 that is held by minority shareholders. 4.3.3 Treatment of Minority Interest Corresponding to Tier 1 Qualifying Capital Issued by Consolidated Subsidiaries

Tier 1 capital instruments issued by a fully consolidated subsidiary of the bank to third party investors (including amounts under paragraph 4.3.2) may receive recognition in Tier 1 capital only if the instruments would, if issued by the bank, meet all of the criteria for classification as Tier 1 capital. The amount of this capital that will be recognised in Tier 1 capital will be calculated as follows:

(i) Total Tier 1 capital of the subsidiary issued to third parties minus the amount of the surplus Tier 1 capital of the subsidiary attributable to the third party investors.

(ii) Surplus Tier 1 capital of the subsidiary is calculated as the Tier 1 capital of the subsidiary minus the lower of: (a) the minimum Tier 1 capital requirement of the subsidiary plus the capital conservation buffer (i.e. 9.5% of risk weighted assets) and (b) the portion of the consolidated minimum Tier 1 capital requirement plus the capital conservation buffer (i.e. 9.5% of consolidated risk weighted assets) that relates to the subsidiary.
15

For the purposes of this paragraph, All India Financial Institutions, Non-banking Financial Companies regulated by RBI and Primary Dealers will be considered to be a bank. 16 The ratios used as the basis for computing the surplus (8.0%, 9.5% and 11.5%) in paragraphs 4.3.2, 4.3.3 and 4.3.4 respectively will not be phased-in.

- 19 -

(iii) The amount of the surplus Tier 1 capital that is attributable to the third party investors is calculated by multiplying the surplus Tier 1 capital by the percentage of Tier 1 capital that is held by third party investors. The amount of this Tier 1 capital that will be recognised in Additional Tier 1 capital will exclude amounts recognised in Common Equity Tier 1 capital under paragraph 4.3.2. 4.3.4 Treatment of Minority Interest Corresponding to Tier 1 Capital and Tier 2 Capital Qualifying Capital Issued by Consolidated Subsidiaries

Total capital instruments (i.e. Tier 1 and Tier 2 capital instruments) issued by a fully consolidated subsidiary of the bank to third party investors (including amounts under paragraphs 4.3.2 and 4.3.3) may receive recognition in Total Capital only if the instruments would, if issued by the bank, meet all of the criteria for classification as Tier 1 or Tier 2 capital. The amount of this capital that will be recognised in consolidated Total Capital will be calculated as follows:

(i) Total capital instruments of the subsidiary issued to third parties minus the amount of the surplus Total Capital of the subsidiary attributable to the third party investors.

(ii) Surplus Total Capital of the subsidiary is calculated as the Total Capital of the subsidiary minus the lower of: (a) the minimum Total Capital requirement of the subsidiary plus the capital conservation buffer (i.e. 11.5% of risk weighted assets) and (b) the portion of the consolidated minimum Total Capital requirement plus the capital conservation buffer (i.e. 11.5% of consolidated risk weighted assets) that relates to the subsidiary.

(iii) The amount of the surplus Total Capital that is attributable to the third party investors is calculated by multiplying the surplus Total Capital by the percentage of Total Capital that is held by third party investors. The amount of this Total Capital that will be recognised in Tier 2 capital will exclude amounts recognised in Common Equity Tier 1 capital under paragraph 4.3.2 and amounts recognised in Additional Tier 1 under paragraph 4.3.3. 4.3.5 An illustration of calculation of minority interest and other capital issued out of consolidated subsidiaries that is held by third parties is furnished in Annex 17. 4.4

Regulatory Adjustments / Deductions

The following paragraphs deal with the regulatory adjustments / deductions which will be applied to regulatory capital both at solo and consolidated level. 4.4.1 Goodwill and all Other Intangible Assets (i) Goodwill and all other intangible assets should be deducted from Common Equity Tier 1 capital including any goodwill included in the valuation of significant investments in the capital of banking, financial and insurance entities which are outside the scope of regulatory consolidation. In terms of AS 23 – Accounting for investments in associates, goodwill/capital reserve arising on the acquisition of an associate by an investor should be included in the carrying amount of investment in the associate but should be disclosed separately. Therefore, if the acquisition of equity interest in any associate involves payment which can be attributable to

- 20 -

goodwill, this should be deducted from the Common Equity Tier 1 of the bank. (ii) The full amount of the intangible assets is to be deducted net of any associated deferred tax liabilities which would be extinguished if the intangible assets become impaired or derecognized under the relevant accounting standards. For this purpose, the definition of intangible assets would be in accordance with the Indian accounting standards. Operating losses in the current period and those brought forward from previous periods should also be deducted from Common Equity Tier 1 capital. (iii) Application of these rules at consolidated level would mean deduction of any goodwill and other intangible assets from the consolidated Common Equity which is attributed to the Balance Sheets of subsidiaries, in addition to deduction of goodwill and other intangible assets which pertain to the solo bank. 4.4.2 Deferred Tax Assets (DTAs)

(i) The DTAs computed as under should be deducted from Common Equity Tier 1 capital: (a) DTA associated with accumulated losses; and (b) The DTA (excluding DTA associated with accumulated losses), net of DTL. Where the DTL is in excess of the DTA (excluding DTA associated with accumulated losses), the excess shall neither be adjusted against item (a) nor added to Common Equity Tier 1 capital. (ii) Application of these rules at consolidated level would mean deduction of DTAs from the consolidated Common Equity which is attributed to the subsidiaries, in addition to deduction of DTAs which pertain to the solo bank. 4.4.3 Cash Flow Hedge Reserve (i) The amount of the cash flow hedge reserve which relates to the hedging of items that are not fair valued on the balance sheet (including projected cash flows) should be derecognised in the calculation of Common Equity Tier 1. This means that positive amounts should be deducted and negative amounts should be added back. This treatment specifically identifies the element of the cash flow hedge reserve that is to be derecognised for prudential purposes. It removes the element that gives rise to artificial volatility in Common Equity, as in this case the reserve only reflects one half of the picture (the fair value of the derivative, but not the changes in fair value of the hedged future cash flow). (ii) Application of these rules at consolidated level would mean derecognition of cash flow hedge reserve from the consolidated Common Equity which is attributed to the subsidiaries, in addition to derecognition of cash flow hedge reserve pertaining to the solo bank. 4.4.4 Shortfall of the Stock of Provisions to Expected Losses The deduction from capital in respect of a shortfall of the stock of provisions to expected losses under the Internal Ratings Based (IRB) approach should be made in

- 21 -

the calculation of Common Equity Tier 1. The full amount is to be deducted and should not be reduced by any tax effects that could be expected to occur if provisions were to rise to the level of expected losses. 4.4.5 Gain-on-Sale Related to Securitisation Transactions (i) As per Basel III rule text, banks are required to derecognise in the calculation of Common Equity Tier 1 capital, any increase in equity capital resulting from a securitisation transaction, such as that associated with expected future margin income (FMI) resulting in a gain-on-sale. However, as per existing guidelines on securitization of standard assets issued by RBI, banks are not permitted to recognise the gain-on-sale in the P&L account including cash profits. Therefore, there is no need for any deduction on account of gain-on-sale on securitization. Banks are allowed to amortise the profit including cash profit over the period of the securities issued by the SPV. However, if a bank is following an accounting practice which in substance results in recognition of realized or unrealized gains at the inception of the securitization transactions, the treatment stipulated as per Basel III rule text as indicated in the beginning of the paragraph would be applicable. (ii) Application of these rules at consolidated level would mean deduction of gainon-sale from the consolidated Common Equity which is recognized by the subsidiaries in their P&L and / or equity, in addition to deduction of any gain-on-sale recognised by the bank at the solo level. 4.4.6 Cumulative Gains and Losses due to Changes in Own Credit Risk on Fair Valued Financial Liabilities (i) Banks are required to derecognise in the calculation of Common Equity Tier 1 capital, all unrealised gains and losses which have resulted from changes in the fair value of liabilities that are due to changes in the bank’s own credit risk. In addition, with regard to derivative liabilities, derecognise all accounting valuation adjustments arising from the bank's own credit risk. The offsetting between valuation adjustments arising from the bank's own credit risk and those arising from its counterparties' credit risk is not allowed. If a bank values its derivatives and securities financing transactions (SFTs) liabilities taking into account its own creditworthiness in the form of debit valuation adjustments (DVAs), then the bank is required to deduct all DVAs from its Common Equity Tier 1 capital, irrespective of whether the DVAs arises due to changes in its own credit risk or other market factors. Thus, such deduction also includes the deduction of initial DVA at inception of a new trade. In other words, though a bank will have to recognize a loss reflecting the credit risk of the counterparty (i.e. credit valuation adjustments-CVA), the bank will not be allowed to recognize the corresponding gain due to its own credit risk. (ii) Application of these rules at consolidated level would mean derecognition of unrealised gains and losses which have resulted from changes in the fair value of liabilities that are due to changes in the subsidiaries’ credit risk, in the calculation of consolidated Common Equity Tier 1 capital, in addition to derecognition of any such unrealised gains and losses attributed to the bank at the solo level.

- 22 -

4.4.7

Defined Benefit Pension Fund17 Assets and Liabilities

(i) Defined benefit pension fund liabilities, as included on the balance sheet, must be fully recognised in the calculation of Common Equity Tier 1 capital (i.e. Common Equity Tier 1 capital cannot be increased through derecognising these liabilities). For each defined benefit pension fund that is an asset on the balance sheet, the asset should be deducted in the calculation of Common Equity Tier 1 net of any associated deferred tax liability which would be extinguished if the asset should become impaired or derecognised under the relevant accounting standards. (ii) Application of these rules at consolidated level would mean deduction of defined benefit pension fund assets and recognition of defined benefit pension fund liabilities pertaining to subsidiaries in the consolidated Common Equity Tier 1, in addition to those pertaining to the solo bank. (iii) In terms of circular DBOD.No.BP.BC.80/21.04.018/2010-11dated February 9, 2011, a special dispensation of amortizing the expenditure arising out of second pension option and enhancement of gratuity over a period of 5 years was permitted to public sector banks as also select private sector banks who were parties to 9 bipartite settlement with Indian Banks Association (IBA). Further, in terms of this circular, the unamortised expenditure is not required to be reduced from Tier 1 capital. It is not possible to retain this dispensation under Basel III, as all pension fund liabilities are required to be recognized in the balance sheet under Basel III. Accordingly, from April 1, 2013, banks should deduct the entire amount of unamortized expenditure from common equity Tier 1 capital for the purpose of capital adequacy ratios. 4.4.8 Investments in Own Shares (Treasury Stock) (i) Investment in a bank’s own shares is tantamount to repayment of capital and therefore, it is necessary to knock-off such investment from the bank’s capital with a view to improving the bank’s quality of capital. This deduction would remove the double counting of equity capital which arises from direct holdings, indirect holdings via index funds and potential future holdings as a result of contractual obligations to purchase own shares. (ii) Banks should not repay their equity capital without specific approval of Reserve Bank of India. Repayment of equity capital can take place by way of share buy-back, investments in own shares (treasury stock) or payment of dividends out of reserves, none of which are permissible. However, banks may end up having indirect investments in their own stock if they invest in / take exposure to mutual funds or index funds / securities which have long position in bank’s share. In such cases, banks should look through holdings of index securities to deduct exposures to own shares from their Common Equity Tier 1 capital. Following the same approach outlined above, banks must deduct investments in their own Additional Tier 1 capital in the calculation of their Additional Tier 1 capital and investments in their own Tier 2 th 17

It includes other defined employees’ funds also.

- 23 -

capital in the calculation of their Tier 2 capital. In this regard, the following rules may be observed: (a) If the amount of investments made by the mutual funds / index funds / venture capital funds / private equity funds / investment companies in the capital instruments of the investing bank is known; the indirect investment would be equal to bank’s investments in such entities multiplied by the percent of investments of these entities in the investing bank’s respective capital instruments. (b) If the amount of investments made by the mutual funds / index funds / venture capital funds / private equity funds / investment companies in the capital instruments of the investing bank is not known but, as per the investment policies / mandate of these entities such investments are permissible; the indirect investment would be equal to bank’s investments in these entities multiplied by 10%18 of investments of such entities in the investing bank’s capital instruments. Banks must note that this method does not follow corresponding deduction approach i.e. all deductions will be made from the Common Equity Tier 1 capital even though, the investments of such entities are in the Additional Tier 1 / Tier 2 capital of the investing banks. (iii) Application of these rules at consolidated level would mean deduction of subsidiaries’ investments in their own shares (direct or indirect) in addition to bank’s direct or indirect investments in its own shares while computing consolidated Common Equity Tier 1. 4.4.9 Investments in the Capital of Banking, Financial and Insurance Entities19

4.4.9.1 Limits on a Bank’s Investments in the Capital of Banking, Financial and Insurance Entities (i) A bank’s investment in the capital instruments issued by banking, financial and insurance entities is subject to the following limits: (a) A bank’s investments in the capital instruments issued by banking, financial and insurance entities should not exceed 10% of its capital funds, but after all deductions mentioned in paragraph 4 (upto paragraph 4.4.8). (b) Banks should not acquire any fresh stake in a bank's equity shares, if by such acquisition, the investing bank's holding exceeds 5% of the investee bank's equity capital.

18

In terms of Securities and Exchange Board of India (Mutual Funds) Regulations 1996, no mutual fund under all its schemes should own more than ten per cent of any company's paid up capital carrying voting rights. 19 These rules will be applicable to a bank’s equity investments in other banks and financial entities, even if such investments are exempted from ‘capital market exposure’ limit.

- 24 -

(c) Under the provisions of Section 19(2) of the Banking Regulation Act, 1949, a banking company cannot hold shares in any company whether as pledge or mortgagee or absolute owner of an amount exceeding 30% of the paid-up share capital of that company or 30% of its own paid-up share capital and reserves, whichever is less. (d) Equity investment by a bank in a subsidiary company, financial services company, financial institution, stock and other exchanges should not exceed 10% of the bank's paid-up share capital and reserves. (e) Equity investment by a bank in companies engaged in non-financial services activities would be subject to a limit of 10% of the investee company’s paid up share capital or 10% of the bank’s paid up share capital and reserves, whichever is less. (f) Equity investments in any non-financial services company held by (a) a bank; (b) entities which are bank’s subsidiaries, associates or joint ventures or entities directly or indirectly controlled by the bank; and (c) mutual funds managed by AMCs controlled by the bank should in the aggregate not exceed 20% of the investee company’s paid up share capital. (g) A bank’s equity investments in subsidiaries and other entities that are engaged in financial services activities together with equity investments in entities engaged in non-financial services activities should not exceed 20% of the bank’s paid-up share capital and reserves. The cap of 20% would not apply for investments classified under ‘Held for Trading’ category and which are not held beyond 90 days. (ii) An indicative list of institutions which may be deemed to be financial institutions other than banks and insurance companies for capital adequacy purposes is as under: Asset Management Companies of Mutual Funds / Venture Capital Funds / Private Equity Funds etc; Non-Banking Finance Companies; Housing Finance Companies; Primary Dealers; Merchant Banking Companies; and Entities engaged in activities which are ancillary to the business of banking under the B.R. Act, 1949. (iii) Investments made by a banking subsidiary/ associate in the equity or nonequity regulatory capital instruments issued by its parent bank should be deducted from such subsidiary's regulatory capital following corresponding deduction approach, in its capital adequacy assessment on a solo basis. The regulatory treatment of investment by the non-banking financial subsidiaries / associates in the parent bank's regulatory capital would, however, be governed by the applicable regulatory capital norms of the respective regulators of such subsidiaries / associates.

- 25 -

4.4.9.2 Treatment of a Bank’s Investments in the Capital Instruments Issued by Banking, Financial and Insurance Entities within Limits The investment of banks in the regulatory capital instruments of other financial entities contributes to the inter-connectedness amongst the financial institutions. In addition, these investments also amount to double counting of capital in the financial system. Therefore, these investments have been subjected to stringent treatment in terms of deduction from respective tiers of regulatory capital. A schematic representation of treatment of banks’ investments in capital instruments of financial entities is shown in Figure 1 below. Accordingly, all investments20 in the capital instruments issued by banking, financial and insurance entities within the limits mentioned in paragraph 4.4.9.1 will be subject to the following rules: Figure 1: Investments in the Capital Instruments of Banking, Financial and Insurance Entities that are outside the scope of regulatory consolidation (i.e. excluding insurance and non-financial subsidiaries) In the entities where the bank does not own more than 10% of the common share capital of individual entity Aggregate of investments in capital instruments of all such entities and compare with 10% of bank’s own Common Equity In the entities where the bank owns more than 10% of the common share capital of individual entity EQUITY Compare aggregated equity investments with 10% of bank’s Common Equity NON-COMMON EQUITY All such investment will be deducted following corresponding deduction approach

Investments less than 10% will be risk weighted according to banking book and trading book rules (A)

Investments more than 10% will be deducted following corresponding deduction approach

Investments less than 10% will be risk weighted at 250%

More than 10% will be deducted from Common Equity

Reciprocal Cross- Holdings in the Capital of Banking, Financial and Insurance Entities

Reciprocal cross holdings of capital might result in artificially inflating the capital position of banks. Such holdings of capital will be fully deducted. Banks must apply a “corresponding deduction approach” to such investments in the capital of other banks, other financial institutions and insurance entities. This means the deduction should be applied to the same component of capital (Common Equity, Additional Tier 1 and Tier 2 capital) for which the capital would qualify if it was issued by the bank itself. For this purpose, a holding will be

20

For this purpose, investments held in AFS / HFT category may be reckoned at their market values, whereas, those held in HTM category may be reckoned at values appearing in the Balance sheet of the Bank.

- 26 -

treated as reciprocal cross holding if the investee entity has also invested in the any class of bank’s capital instruments which need not necessarily be the same as the bank’s holdings.

(B)

Investments in the Capital of Banking, Financial and Insurance Entities which are outside the Scope of Regulatory Consolidation and where the Bank does not Own more than 10% of the Issued Common Share Capital of the Entity (i) The regulatory adjustment described in this section applies to investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation and where the bank does not own more than 10% of the issued common share capital of the entity. In addition: (a) Investments include direct, indirect21 and synthetic holdings of capital instruments. For example, banks should look through holdings of index securities to determine their underlying holdings of capital. (b) Holdings in both the banking book and trading book are to be included. Capital includes common stock (paid-up equity capital) and all other types of cash and synthetic capital instruments (e.g. subordinated debt). (c) Underwriting positions held for five working days or less can be excluded. Underwriting positions held for longer than five working days must be included. (d) If the capital instrument of the entity in which the bank has invested does not meet the criteria for Common Equity Tier 1, Additional Tier 1, or Tier 2 capital of the bank, the capital is to be considered common shares for the purposes of this regulatory adjustment22. (e) With the prior approval of RBI a bank can temporarily exclude certain investments where these have been made in the context of resolving or providing financial assistance to reorganise a distressed institution. (ii) If the total of all holdings listed in paragraph (i) above, in aggregate exceed 10% of the bank’s Common Equity (after applying all other regulatory adjustments in full listed prior to this one), then the amount above 10% is required to be deducted, applying a corresponding deduction approach. This means the deduction should be applied to the same component of capital for which the capital would qualify if it was issued by the bank itself. Accordingly, the amount to be deducted from common equity should be calculated as the total of all holdings which in aggregate exceed 10% of the bank’s common equity (as per above) multiplied by the common equity holdings as a percentage of the total capital holdings. This would result in a Common Equity deduction which corresponds to the proportion of total capital holdings held in Common Equity. Similarly, the amount to be deducted from Additional Tier 1 capital should be calculated as the total of all holdings which in aggregate exceed 10% of the bank’s Common Equity (as per above) multiplied by the Additional Tier 1 capital

21

Indirect holdings are exposures or part of exposures that, if a direct holding loses its value, will result in a loss to the bank substantially equivalent to the loss in the value of direct holding. 22 If the investment is issued out of a regulated financial entity and not included in regulatory capital in the relevant sector of the financial entity, it is not required to be deducted.

- 27 -

holdings as a percentage of the total capital holdings. The amount to be deducted from Tier 2 capital should be calculated as the total of all holdings which in aggregate exceed 10% of the bank’s Common Equity (as per above) multiplied by the Tier 2 capital holdings as a percentage of the total capital holdings. (Please refer to illustration given in Annex 11). (iii) If, under the corresponding deduction approach, a bank is required to make a deduction from a particular tier of capital and it does not have enough of that tier of capital to satisfy that deduction, the shortfall will be deducted from the next higher tier of capital (e.g. if a bank does not have enough Additional Tier 1 capital to satisfy the deduction, the shortfall will be deducted from Common Equity Tier 1 capital). (iv) Investments below the threshold of 10% of bank’s Common Equity, which are not deducted, will be risk weighted. Thus, instruments in the trading book will be treated as per the market risk rules and instruments in the banking book should be treated as per the standardised approach or internal ratings-based approach (as applicable). For the application of risk weighting the amount of the holdings which are required to be risk weighted would be allocated on a pro rata basis between the Banking and Trading Book. However, in certain cases, such investments in both scheduled and non-scheduled commercial banks will be fully deducted from Common Equity Tier 1 capital of investing bank as indicated in paragraphs 5.6, 8.3.5 and 8.4.4. (v) For the purpose of risk weighting of investments in as indicated in para (iv) above, investments in securities having comparatively higher risk weights will be considered for risk weighting to the extent required to be risk weighted, both in banking and trading books. In other words, investments with comparatively poor ratings (i.e. higher risk weights) should be considered for the purpose of application of risk weighting first and the residual investments should be considered for deduction. (C) Significant Investments in the Capital of Banking, Financial and Insurance Entities which are outside the Scope of Regulatory Consolidation23 (i) The regulatory adjustment described in this section applies to investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation where the bank owns more than 10% of the issued common share capital of the issuing entity or where the entity is an affiliate 24 of the bank. In addition:

23

Investments in entities that are outside of the scope of regulatory consolidation refers to investments in entities that have not been consolidated at all or have not been consolidated in such a way as to result in their assets being included in the calculation of consolidated risk-weighted assets of the group. 24 An affiliate of a bank is defined as a company that controls, or is controlled by, or is under common control with, the bank. Control of a company is defined as (1) ownership, control, or holding with power to vote 20% or more of a class of voting securities of the company; or (2) consolidation of the company for financial reporting purposes.

- 28 -

Investments include direct, indirect25 and synthetic holdings of capital instruments. For example, banks should look through holdings of index securities to determine their underlying holdings of capital. Holdings in both the banking book and trading book are to be included. Capital includes common stock and all other types of cash and synthetic capital instruments (e.g. subordinated debt). Underwriting positions held for five working days or less can be excluded. Underwriting positions held for longer than five working days must be included. If the capital instrument of the entity in which the bank has invested does not meet the criteria for Common Equity Tier 1, Additional Tier 1, or Tier 2 capital of the bank, the capital is to be considered common shares for the purposes of this regulatory adjustment26. With the prior approval of RBI a bank can temporarily exclude certain investments where these have been made in the context of resolving or providing financial assistance to reorganise a distressed institution. (ii) Investments other than Common Shares All investments included in para (i) above which are not common shares must be fully deducted following a corresponding deduction approach. This means the deduction should be applied to the same tier of capital for which the capital would qualify if it was issued by the bank itself. If the bank is required to make a deduction from a particular tier of capital and it does not have enough of that tier of capital to satisfy that deduction, the shortfall will be deducted from the next higher tier of capital (e.g. if a bank does not have enough Additional Tier 1 capital to satisfy the deduction, the shortfall will be deducted from Common Equity Tier 1 capital). (iii) Investments which are Common Shares All investments included in para (i) above which are common shares and which exceed 10% of the bank’s Common Equity (after the application of all regulatory adjustments) will be deducted while calculating Common Equity Tier 1 capital. The amount that is not deducted (upto 10% if bank’s common equity invested in the equity capital of such entities) in the calculation of Common Equity Tier 1 will be risk weighted at 250% (refer to illustration in Annex 11). However, in certain cases, such investments in both scheduled and non-scheduled commercial banks will be fully deducted from Common Equity Tier 1 capital of investing bank as indicated in paragraphs 5.6, 8.3.5 and 8.4.4. 4.4.9.3 With regard to computation of indirect holdings through mutual funds or index funds, of capital of banking, financial and insurance entities which are outside the scope of regulatory consolidation as mentioned in paragraphs 4.4.9.2(B) and 4.4.9.2(C) above, the

25

Indirect holdings are exposures or part of exposures that, if a direct holding loses its value, will result in a loss to the bank substantially equivalent to the loss in the value of direct holding.
26

If the investment is issued out of a regulated financial entity and not included in regulatory capital in the relevant sector of the financial entity, it is not required to be deducted.

- 29 -

following rules may be observed: (i) If the amount of investments made by the mutual funds / index funds / venture capital funds / private equity funds / investment companies in the capital instruments of the financial entities is known; the indirect investment of the bank in such entities would be equal to bank’s investments in these entities multiplied by the percent of investments of such entities in the financial entities’ capital instruments. (ii) If the amount of investments made by the mutual funds / index funds / venture capital funds / private equity funds / investment companies in the capital instruments of the investing bank is not known but, as per the investment policies / mandate of these entities such investments are permissible; the indirect investment would be equal to bank’s investments in these entities multiplied by maximum permissible limit which these entities are authorized to invest in the financial entities’ capital instruments. (iii) If neither the amount of investments made by the mutual funds / index funds / venture capital funds / private equity funds in the capital instruments of financial entities nor the maximum amount which these entities can invest in financial entities are known but, as per the investment policies / mandate of these entities such investments are permissible; the entire investment of the bank in these entities would be treated as indirect investment in financial entities. Banks must note that this method does not follow corresponding deduction approach i.e. all deductions will be made from the Common Equity Tier 1 capital even though, the investments of such entities are in the Additional Tier 1 / Tier 2 capital of the investing banks.

4.4.9.4 Application of these rules at consolidated level would mean: (i) Identifying the relevant entities below and above threshold of 10% of common share capital of investee entities, based on aggregate investments of the consolidated group (parent plus consolidated subsidiaries) in common share capital of individual investee entities. (ii) Applying the rules as stipulated in paragraphs 4.4.9.2(A), 4.4.9.2(B) and 4.4.9.2(C) and segregating investments into those which will be deducted from the consolidated capital and those which will be risk weighted. For this purpose, investments of the entire consolidated entity in capital instruments of investee entities will be aggregated into different classes of instruments. the consolidated Common Equity of the group will be taken into account.

4.4.9.5 It has come to our notice that certain investors such as Employee Pension Funds have subscribed to regulatory capital issues of commercial banks concerned. These funds enjoy the counter guarantee by the bank concerned in respect of returns. When returns of the investors of the capital issues are counter guaranteed by the bank, such investments will not be considered as regulatory capital for the purpose of capital adequacy.

4.5

Transitional Arrangements

- 30 -

4.5.1 In order to ensure smooth migration to Basel III without aggravating any near term stress, appropriate transitional arrangements have been made. The transitional arrangements for capital ratios begin as on April 1, 2013. However, the phasing out of nonBasel III compliant regulatory capital instruments begins as on January 1, 201327. Capital ratios and deductions from Common Equity will be fully phased-in and implemented as on March 31, 2018. The phase-in arrangements for banks operating in India are indicated in the following Table: Table 1: Transitional Arrangements-Scheduled Commercial Banks (excluding LABs and RRBs)
Minimum capital ratios Minimum Common Equity Tier 1 (CET1) Capital conservation buffer (CCB) Minimum CET1+ CCB Minimum Tier 1 capital Minimum Total Capital* Minimum Total Capital +CCB April 1, 2013 4.5 4.5 6 9 9 March 31, 2014 5 5 6.5 9 9 March 31, 2015 5.5 0.625 6.125 7 9 9.625 March 31, 2016 5.5 1.25 6.75 7 9 10.25 March 31, 2017 5.5 1.875 7.375 7 9 10.875 (% of RWAs) March 31, 2018 5.5 2.5 8 7 9 11.5

Phase-in of all 20 40 60 80 100 100 deductions from CET1 (in %) # * The difference between the minimum total capital requirement of 9% and the Tier 1 requirement can be met with Tier 2 and higher forms of capital; # The same transition approach will apply to deductions from Additional Tier 1 and Tier 2 capital.

4.5.2 The regulatory adjustments (i.e. deductions and prudential filters) would be fully deducted from Common Equity Tier 1 only by March 31, 2017. During this transition period, the remainder not deducted from Common Equity Tier 1 / Additional Tier 1 / Tier 2 capital will continue to be subject to treatments given under Basel II capital adequacy framework28. To illustrate: if a deduction amount is taken off CET1 under the Basel III rules, the treatment for it in 2013 is as follows: 20% of that amount is taken off CET1 and 80% of it is taken off the tier where this deduction used to apply under existing treatment (e.g. in case of DTAs, irrespective of their origin, they are currently deducted from Tier 1 capital. Under new rules, 20% of the eligible deduction will be made to CET1 and 80% will be made to balance Tier 1 capital in the year 2013). if the item to be deducted under new rules based on Basel III, is risk weighted under existing framework, the treatment for it in 2013 is as follows: 20% of the amount is taken off CET1, and 80% is subject to the risk weight that applies under existing framework.

27

Please refer to paragraph 3 of the DBOD.No.BP.BC.88/21.06.201/2012-13 dated March 28, 2013 on ‘Guidelines on Implementation of Basel III Capital Regulations in India - Clarifications’ 28 Master Circular on Prudential Guidelines on Capital Adequacy and Market Discipline - New Capital Adequacy Framework (NCAF) issued vide circular DBOD.No.BP.BC.9/21.06.001/2013-14 dated July 1, 2013.

- 31 -

4.5.3 The treatment of capital issued out of subsidiaries and held by third parties (e.g. minority interest) will also be phased in. Where such capital is eligible for inclusion in one of the three components of capital according to paragraphs 4.3.2, 4.3.3 and 4.3.4, it can be included from April 1, 2013. Where such capital is not eligible for inclusion in one of the three components of capital but is included under the existing guidelines, 20% of this amount should be excluded from the relevant component of capital on April 1, 2013, 40% on March 31, 2014, 60% on March 31, 2015, 80% on March 31, 2016 and reach 100% on March 31, 2017. 4.5.4 Capital instruments which no longer qualify as non-common equity Tier 1 capital or Tier 2 capital (e.g. IPDI and Tier 2 debt instruments with step-ups) will be phased out beginning January 1, 2013. Fixing the base at the nominal amount of such instruments outstanding on January 1, 2013, their recognition will be capped at 90% from January 1, 2013, with the cap reducing by 10 percentage points in each subsequent year29. This cap will be applied to Additional Tier 1 and Tier 2 capital instruments separately and refers to the total amount of instruments outstanding which no longer meet the relevant entry criteria. To the extent an instrument is redeemed, or its recognition in capital is amortised, after January 1, 2013, the nominal amount serving as the base is not reduced. In addition, instruments, specifically those with an incentive to be redeemed will be treated as follows: 4.5.4.1 If the non-common equity regulatory capital instrument has been issued prior to September 12, 2010, then the treatment indicated in paragraphs from 4.5.4.1(A) to 4.5.4.1(D) will apply: (A) If the instrument does not have a call and a step-up and other incentive to redeem (i) if it meets all the other criteria, including the non-viability criteria, then such instrument will continue to be fully recognised from January 1, 2013; (ii) if the instrument does not meet the other criteria, including the non-viability criteria, then it will be phased out from January 1, 2013.

29

The base should only include instruments that will be grandfathered. If an instrument is derecognized on January 1, 2013, it does not count towards the base fixed on January 1, 2013. Also, the base for the transitional arrangements should reflect the outstanding amount which is eligible to be included in the relevant tier of capital under the existing framework applied as on December 31, 2012. Further, for Tier 2 instruments which have begun to amortise before January 1, 2013, the base for grandfathering should take into account the amortised amount, and not the full nominal amount. Thus, individual instruments will continue to be amortised at a rate of 20% per year while the aggregate cap will be reduced at a rate of 10% per year. To calculate the base in cases of instruments denominated in foreign currency, which no longer qualify for inclusion in the relevant tier of capital (but will be grandfathered) should be included using their value in the reporting currency of the bank as on January 1, 2013. The base will therefore be fixed in the reporting currency of the bank throughout the transitional period. During the transitional period instruments denominated in a foreign currency should be valued as they are reported on the balance sheet of the bank at the relevant reporting date (adjusting for any amortisation in the case of Tier 2 instruments) and, along with all other instruments which no longer meet the criteria for inclusion in the relevant tier of capital, will be subject to the cap.

- 32 -

(B) If the instrument has a call and a step-up and the effective maturity date was prior to September 12, 2010 and the call option was not exercised - (i) if the instrument meets the all other criteria, including the non-viability criteria, then such instrument will continue to be fully recognised from January 1, 2013; (ii) if the instrument does not meet the other criteria, including the non-viability criteria, then it will be phased out from January 1, 2013. (C) If the instrument has a call and a step-up and the effective maturity date is between September 12, 2010 and December 31, 2012 and the call option is not exercised – (i) if the instrument meets the all other criteria, including the non-viability criteria, then such instrument will continue to be fully recognised from January 1, 2013; (ii) if the instrument does not meet the other criteria, including the non-viability criteria, then it will be fully derecognised from January 1, 2013. However, if such instrument meets all other criteria except the non-viability criteria then it will be phased out from January 1, 2013. (D) If the instrument has a call and a step-up and the effective maturity date is after January 1, 2013 - (i) the instrument will be phased out from January 1, 2013 till the call option is exercised; (ii) if the call option is not exercised and it meets the all other criteria, including the non-viability criteria, then the instrument will be phased out from January 1, 2013 till the call date and fully recognised after the call date. However, if it does not meet all the criteria including the non-viability criteria, then the instrument will be phased out from January 1, 2013 till the call date and fully derecognised after the call date. 4.5.4.2 If the non-common equity regulatory capital instrument has been issued between September 12, 2010 and December 31, 201230, then the treatment indicated in paragraphs from 4.5.4.2(A) to 4.5.4.2(C) will apply: (A) If such instrument meets all the criteria including non-viability criteria, then it will continue to be fully recognised from January 1, 2013. (B) If such instrument does not meet all the criteria including non-viability criteria, then it will be fully derecognised from January 1, 2013. (C) If such instrument meets all the criteria except the non-viability criteria, then it will be phased out from January 1, 2013. 4.5.4.3 Non-common equity regulatory capital instrument issued on or after January 1, 2013 must comply with all the eligibility criteria including the non-viability criteria in order to be an eligible regulatory capital instrument (Additional Tier 1 or Tier 2 capital). Otherwise, such instrument will be fully derecognised as eligible capital instrument. 4.5.4.4 A schematic representation of above mentioned phase-out arrangements has been shown in the Annex 19. 4.5.5 Capital instruments which do not meet the criteria for inclusion in Common Equity Tier 1 will be excluded from Common Equity Tier 1 as on April 1, 2013. However, instruments meeting the following two conditions will be phased out over the same horizon
30

Please refer circular DBOD.BP.BC.No.75/21.06.001/2010‐11 dated January 20, 2011 on ‘Regulatory Capital Instruments – Step up Option’. Banks may also refer to the BCBS Press Release dated September 12, 2010 indicating announcements made by the Group of Governors and Heads of Supervision on higher global minimum capital standards

- 33 -

described in paragraph 4.5.4 above: (i) they are treated as equity under the prevailing accounting standards; and (ii) they receive unlimited recognition as part of Tier 1 capital under current laws / regulations. 4.5.6 An illustration of transitional arrangements - Capital instruments which no longer qualify as non-common equity Tier 1 capital or Tier 2 capital is furnished in the Annex 12.

5. 5.1

Capital Charge for Credit Risk General

Under the Standardised Approach, the rating assigned by the eligible external credit rating agencies will largely support the measure of credit risk. The Reserve Bank has identified the external credit rating agencies that meet the eligibility criteria specified under the revised Framework. Banks may rely upon the ratings assigned by the external credit rating agencies chosen by the Reserve Bank for assigning risk weights for capital adequacy purposes as per the mapping furnished in these guidelines. 5.2 Claims on Domestic Sovereigns

5.2.1 Both fund based and non-fund based claims on the central government will attract a zero risk weight. Central Government guaranteed claims will attract a zero risk weight. 5.2.2 The Direct loan / credit / overdraft exposure, if any, of banks to the State Governments and the investment in State Government securities will attract zero risk weight. State Government guaranteed claims will attract 20 per cent risk weight. 5.2.3 The risk weight applicable to claims on central government exposures will also apply to the claims on the Reserve Bank of India, DICGC, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH)31. The claims on ECGC will attract a risk weight of 20 per cent. 5.2.4 The above risk weights for both direct claims and guarantee claims will be applicable as long as they are classified as ‘standard’ / performing assets. Where these sovereign exposures are classified as non-performing, they would attract risk weights as applicable to NPAs, which are detailed in paragraph 5.12. 5.2.5 The amount outstanding in the account styled as ‘Amount receivable from Government of India under Agricultural Debt Waiver Scheme, 2008’ shall be treated as a claim on the Government of India and would attract zero risk weight for the purpose of capital adequacy norms. However, the amount outstanding in the accounts covered by the Debt Relief Scheme shall be treated as a claim on the borrower and risk weighted as per the extant norms.

31

Please refer to the circular DBOD.No.BP.BC-90/21.04.048/2012-13 dated April 16, 2013 on Advances Guaranteed by ‘Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) Risk Weights and Provisioning’.

- 34 -

5.3

Claims on Foreign Sovereigns

5.3.1 Claims on foreign sovereigns will attract risk weights as per the rating assigned 32 to those sovereigns / sovereign claims by international rating agencies as follows:

Table 2: Claims on Foreign Sovereigns – Risk Weights S&P*/ Fitch ratings Moody’s ratings Risk weight (%) AAA to AA Aaa to Aa 0 A A 20 BBB Baa 50 BB to B Ba to B 100 Below B Below B 150 Unrated Unrated 100

* Standard & Poor’s
5.3.2 Claims denominated in domestic currency of the foreign sovereign met out of the resources in the same currency raised in the jurisdiction33 of that sovereign will, however, attract a risk weight of zero percent. 5.3.3 However, in case a Host Supervisor requires a more conservative treatment to such claims in the books of the foreign branches of the Indian banks, they should adopt the requirements prescribed by the Host Country supervisors for computing capital adequacy. 5.4 Claims on Public Sector Entities (PSEs)

5.4.1 Claims on domestic public sector entities will be risk weighted in a manner similar to claims on Corporates. 5.4.2 Claims on foreign PSEs will be risk weighted as per the rating assigned by the international rating agencies as under: Table 3: Claims on Foreign PSEs – Risk Weights S&P/ Fitch ratings Moody’s ratings RW (%) 5.5 Claims on MDBs, BIS and IMF AAA to AA Aaa to Aa 20 BBB to BB Baa to Ba 100 Below BB Below Ba 150 Unrated Unrated 100

A A 50

Claims on the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and the following eligible Multilateral Development Banks (MDBs) evaluated by the BCBS will be treated similar to claims on scheduled banks meeting the minimum capital

32

For example: The risk weight assigned to an investment in US Treasury Bills by SBI branch in Paris, irrespective of the currency of funding, will be determined by the rating assigned to the Treasury Bills, as indicated in Table 2. 33 For example: The risk weight assigned to an investment in US Treasury Bills by SBI branch in New York will attract a zero per cent risk weight, irrespective of the rating of the claim, if the investment is funded from out of the USD denominated resources of SBI, New York. In case the SBI, New York, did not have any USD denominated resources, the risk weight will be determined by the rating assigned to the Treasury Bills, as indicated in Table 2 above.

- 35 -

adequacy requirements and assigned a uniform twenty per cent risk weight: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) World Bank Group: IBRD and IFC, Asian Development Bank, African Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank, European Investment Bank, European Investment Fund, Nordic Investment Bank, Caribbean Development Bank, Islamic Development Bank and Council of Europe Development Bank.

Similarly, claims on the International Finance Facility for Immunization (IFFIm) will also attract a twenty per cent risk weight. 5.6 Claims on Banks (Exposure to capital instruments)

5.6.1 In case of a banks’ investment in capital instruments of other banks, the following such investments would not be deducted, but would attract appropriate risk weights (refer to the paragraph 4.4.9 above: (i) Investments in capital instruments of banks where the investing bank holds not more than 10% of the issued common shares of the investee banks, subject to the following conditions: Aggregate of these investments, together with investments in the capital instruments in insurance and other financial entities, do not exceed 10% of Common Equity of the investing bank; and The equity investment in the investee entities is outside the scope of regulatory consolidation. (ii) Equity investments in other banks where the investing bank holds more than 10% of the issued common shares of the investee banks, subject to the following conditions: Aggregate of these investments, together with such investments in insurance and other financial entities, do not exceed 10% of Common Equity of the investing bank. The equity investment in the investee entities is outside the scope of regulatory consolidation. Accordingly, the claims on banks incorporated in India and the branches of foreign banks in India, other than those deducted in terms of paragraph 4.4.9 above, will be risk weighted as under:

- 36 -

Table 4: Claims on Banks34 Incorporated in India and Foreign Bank Branches in India Risk Weights (%) All Scheduled Banks All Non-Scheduled Banks (Commercial, Regional Rural (Commercial, Regional Rural Banks, Local Area Banks and CoBanks, Local Area Banks and CoOperative Banks) Operative Banks ) Investments Investments All Investments Investments All referred to referred to other referred to referred to Other in in claims in in Claim paragraph paragraph paragraph paragraph s 5.6.1 (i) 5.6.1 (ii) 5.6.1 (i) 5.6.1 (ii)

Level of Common Equity Tier 1 capital (CET1) including applicable capital conservation buffer (CCB) (%) of the investee bank (where applicable) 1 2 Applicable Minimum 125 % or the CET1 + Applicable risk weight CCB and above as per the rating of the instrument or counterparty , whichever is higher Applicable Minimum 150 CET1 + CCB = 75% and 1 year and ≤ 5 4 Ii AAA to AA years A1 > 5 years 8 A to BBB ≤ 1 year 2 A2, A3 and Iii > 1 year and ≤ years 6 unrated bank securities as specified in paragraph 7.3.5 (vii) of the > 5 years 12 circular Highest haircut applicable to any of the above securities, Iv Units of Mutual Funds in which the eligible mutual fund {cf. paragraph 7.3.5 (viii)} can invest 0 Cash in the same currency 15 Gold Securitisation Exposures64 E ≤ 1 year 2

64

Including those backed by securities issued by foreign sovereigns and foreign corporates.

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Ii

AAA to AA

Iii

A to BBB and unrated bank securities as specified in paragraph 7.3.5 (vii) of the circular

> 1 year and ≤ 5 years > 5 years ≤ 1 year > 1 year and ≤ years > 5 years

8 16 4 12 24

Table 15: Standard Supervisory Haircut for Exposures and Collaterals which are obligations of foreign central sovereigns / foreign corporates Issue rating for debt securities as assigned by international rating agencies AAA to AA / A1 A to BBB / A2 / A3 and Unrated Bank Securities Residual Maturity < = 1 year > 1 year and < or = 5 years > 5 years < = 1 year > 1 year and < or = 5 years > 5 years Sovereigns (%) 0.5 2 4 1 3 6 Other Issues (%) 1 4 8 2 6 12

(vii)

For transactions in which banks’ exposures are unrated or bank lends non-eligible instruments (i.e. non-investment grade corporate securities), the haircut to be applied on a exposure should be 25 per cent. (Since, at present, the repos are allowed only in the case of Government securities, banks are not likely to have any exposure which will attract the provisions of this clause. However, this would be relevant, if in future, repos/security lending transactions are permitted in the case of unrated corporate securities). Where the collateral is a basket of assets, the haircut on the basket will be,

(viii)

H i aiHi

where ai is the weight of the asset (as measured by the amount/value of the asset in units of currency) in the basket and Hi, the haircut applicable to that asset. (ix) Adjustment for different holding periods: For some transactions, depending on the nature and frequency of the revaluation and remargining provisions, different holding periods (other than 10 business-days ) are appropriate. The framework for collateral haircuts distinguishes between repostyle transactions (i.e. repo/reverse repos and securities lending/borrowing), “other capital-market-driven transactions” (i.e. OTC derivatives transactions and margin lending) and secured lending. In capital-market-driven transactions and repo-style transactions, the documentation contains remargining clauses; in secured lending transactions, it generally does not. In view of different holding periods, in the case of these transactions, the minimum holding period shall be taken as indicated below:

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Transaction type Repo-style transaction Other capital market transactions Secured lending

Minimum holding Period five business days ten business days twenty business days

Condition daily remargining daily remargining daily revaluation

The haircut for the transactions with other than 10 business-days minimum holding period, as indicated above, will have to be adjusted by scaling up/down the haircut for 10 business–days indicated in the Table 14, as per the formula given in paragraph 7.3.7 (xi) below. (x) Adjustment for non-daily mark-to-market or remargining: In case a transaction has margining frequency different from daily margining assumed, the applicable haircut for the transaction will also need to be adjusted by using the formula given in paragraph 7.3.7 (xi) below. (xi) Formula for adjustment for different holding periods and / or non-daily mark-to-market or remargining: Adjustment for the variation in holding period and margining / mark-to-market, as indicated in paragraph (ix) and (x) above will be done as per the following formula:

H

H 10

NR (TM 1) 10

where: H = haircut H10 = 10-business-day standard supervisory haircut for instrument NR = actual number of business days between remargining for capital market transactions or revaluation for secured transactions. TM = minimum holding period for the type of transaction 7.3.8 Capital Adequacy Framework for Repo-/Reverse Repo-style transactions.

The repo-style transactions also attract capital charge for Counterparty credit risk (CCR), in addition to the credit risk and market risk. The CCR is defined as the risk of default by the counterparty in a repo-style transaction, resulting in non-delivery of the security lent/pledged/sold or non-repayment of the cash. A. Treatment in the books of the borrower of funds: (i) Where a bank has borrowed funds by selling / lending or posting, as collateral, of securities, the ‘Exposure’ will be an off-balance sheet exposure equal to the 'market value' of the securities sold/lent as scaled up after applying appropriate haircut. For the purpose, the haircut as per Table 14 would be used as the basis which should be applied by using the formula in paragraph 7.3.7 (xi), to reflect minimum (prescribed) holding period of five business-days for repo-style transactions and the variations, if any, in the frequency of re-margining, from the daily margining assumed for the standard

- 78 -

supervisory haircut. The 'off-balance sheet exposure' will be converted into 'on-balance sheet' equivalent by applying a credit conversion factor of 100 per cent, as per item 5 in Table 8 (paragraph 5.15). (ii) The amount of money received will be treated as collateral for the securities lent/sold/pledged. Since the collateral is cash, the haircut for it would be zero. The credit equivalent amount arrived at (i) above, net of amount of cash collateral, will attract a risk weight as applicable to the counterparty. As the securities will come back to the books of the borrowing bank after the repo period, it will continue to maintain the capital for the credit risk in the securities in the cases where the securities involved in repo are held under HTM category, and capital for market risk in cases where the securities are held under AFS/HFT categories. The capital charge for credit risk / specific risk would be determined according to the credit rating of the issuer of the security. In the case of Government securities, the capital charge for credit / specific risk will be 'zero'.

(iii)

(iv)

B. Treatment in the books of the lender of funds: (i) The amount lent will be treated as on-balance sheet/funded exposure on the counter party, collateralised by the securities accepted under the repo. The exposure, being cash, will receive a zero haircut. The collateral will be adjusted downwards/marked down as per applicable haircut. The amount of exposure reduced by the adjusted amount of collateral, will receive a risk weight as applicable to the counterparty, as it is an on- balance sheet exposure. The lending bank will not maintain any capital charge for the security received by it as collateral during the repo period, since such collateral does not enter its balance sheet but is only held as a bailee.

(ii) (iii)

(iv)

(v)

7.4 Credit Risk Mitigation Techniques – On-Balance Sheet Netting On-balance sheet netting is confined to loans/advances and deposits, where banks have legally enforceable netting arrangements, involving specific lien with proof of documentation. They may calculate capital requirements on the basis of net credit exposures subject to the following conditions: Where a bank, (a) has a well-founded legal basis for concluding that the netting or offsetting agreement is enforceable in each relevant jurisdiction regardless of whether the counterparty is insolvent or bankrupt;

- 79 -

(b) is able at any time to determine the loans/advances and deposits with the same counterparty that are subject to the netting agreement; and (c) monitors and controls the relevant exposures on a net basis, it may use the net exposure of loans/advances and deposits as the basis for its capital adequacy calculation in accordance with the formula in paragraph 7.3.6. Loans/advances are treated as exposure and deposits as collateral. The haircuts will be zero except when a currency mismatch exists. All the requirements contained in paragraph 7.3.6 and 7.6 will also apply. 7.5 Credit Risk Mitigation Techniques - Guarantees 7.5.1 Where guarantees are direct, explicit, irrevocable and unconditional banks may take account of such credit protection in calculating capital requirements. 7.5.2 A range of guarantors are recognised. As under the 1988 Accord, a substitution approach will be applied. Thus only guarantees issued by entities with a lower risk weight than the counterparty will lead to reduced capital charges since the protected portion of the counterparty exposure is assigned the risk weight of the guarantor, whereas the uncovered portion retains the risk weight of the underlying counterparty. 7.5.3 Detailed operational requirements for guarantees eligible for being treated as a CRM are as under: 7.5.4 (i) Operational requirements for guarantees

A guarantee (counter-guarantee) must represent a direct claim on the protection provider and must be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible. The guarantee must be irrevocable; there must be no clause in the contract that would allow the protection provider unilaterally to cancel the cover or that would increase the effective cost of cover as a result of deteriorating credit quality in the guaranteed exposure. The guarantee must also be unconditional; there should be no clause in the guarantee outside the direct control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the payment(s) due. All exposures will be risk weighted after taking into account risk mitigation available in the form of guarantees. When a guaranteed exposure is classified as non-performing, the guarantee will cease to be a credit risk mitigant and no adjustment would be permissible on account of credit risk mitigation in the form of guarantees. The entire outstanding, net of specific provision and net of realisable value of eligible collaterals / credit risk mitigants, will attract the appropriate risk weight. Additional operational requirements for guarantees

(ii)

7.5.5

In addition to the legal certainty requirements in paragraph 7.2 above, in order for a guarantee to be recognised, the following conditions must be satisfied:

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(i)

On the qualifying default/non-payment of the counterparty, the bank is able in a timely manner to pursue the guarantor for any monies outstanding under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guarantor may assume the future payment obligations of the counterparty covered by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal actions in order to pursue the counterparty for payment. The guarantee is an explicitly documented obligation assumed by the guarantor. Except as noted in the following sentence, the guarantee covers all types of payments the underlying obligor is expected to make under the documentation governing the transaction, for example notional amount, margin payments etc. Where a guarantee covers payment of principal only, interests and other uncovered payments should be treated as an unsecured amount in accordance with paragraph Range of Eligible Guarantors (Counter-Guarantors)

(ii) (iii)

7.5.6

Credit protection given by the following entities will be recognised: (i) Sovereigns, sovereign entities (including BIS, IMF, European Central Bank and European Community as well as those MDBs referred to in paragraph 5.5, ECGC and CGTSI, CRGFTLIH), banks and primary dealers with a lower risk weight than the counterparty; Other entities that are externally rated except when credit protection is provided to a securitisation exposure. This would include credit protection provided by parent, subsidiary and affiliate companies when they have a lower risk weight than the obligor. When credit protection is provided to a securitisation exposure, other entities that currently are externally rated BBB- or better and that were externally rated A- or better at the time the credit protection was provided. This would include credit protection provided by parent, subsidiary and affiliate companies when they have a lower risk weight than the obligor.

(ii)

(iii)

7.5.7

Risk Weights

The protected portion is assigned the risk weight of the protection provider. Exposures covered by State Government guarantees will attract a risk weight of 20 per cent. The uncovered portion of the exposure is assigned the risk weight of the underlying counterparty. 7.5.8 Proportional Cover

Where the amount guaranteed, or against which credit protection is held, is less than the amount of the exposure, and the secured and unsecured portions are of equal seniority, i.e. the bank and the guarantor share losses on a pro-rata basis capital relief will be afforded on a proportional basis: i.e. the protected portion of the exposure will receive the treatment applicable to eligible guarantees, with the remainder treated as unsecured.

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7.5.9 Currency Mismatches Where the credit protection is denominated in a currency different from that in which the exposure is denominated – i.e. there is a currency mismatch – the amount of the exposure deemed to be protected will be reduced by the application of a haircut HFX, i.e., GA where: = G x (1- HFX) nominal amount of the credit protection haircut appropriate for currency mismatch between the credit protection and underlying obligation.

G = HFX =

Banks using the supervisory haircuts will apply a haircut of eight per cent for currency mismatch. 7.5.10 Sovereign Guarantees and Counter-Guarantees A claim may be covered by a guarantee that is indirectly counter-guaranteed by a sovereign. Such a claim may be treated as covered by a sovereign guarantee provided that: (i) the sovereign counter-guarantee covers all credit risk elements of the claim; both the original guarantee and the counter-guarantee meet all operational requirements for guarantees, except that the counterguarantee need not be direct and explicit to the original claim; and the cover should be robust and no historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct sovereign guarantee.

(ii)

(iii)

7.6 Maturity Mismatch 7.6.1 For the purposes of calculating risk-weighted assets, a maturity mismatch occurs when the residual maturity of collateral is less than that of the underlying exposure. Where there is a maturity mismatch and the CRM has an original maturity of less than one year, the CRM is not recognised for capital purposes. In other cases where there is a maturity mismatch, partial recognition is given to the CRM for regulatory capital purposes as detailed below in paragraphs 7.6.2 to 7.6.4. In case of loans collateralised by the bank’s own deposits, even if the tenor of such deposits is less than three months or deposits have maturity mismatch vis-à-vis the tenor of the loan, the provisions of paragraph 7.6.1 regarding derecognition of collateral would not be attracted provided an explicit consent of the depositor has been obtained from the depositor (i.e. borrower) for adjusting the maturity proceeds of such deposits against the outstanding loan or for renewal of such deposits till the full repayment of the underlying loan.
1.1.1.

7.6.2 Definition of Maturity The maturity of the underlying exposure and the maturity of the collateral should both be defined conservatively. The effective maturity of the underlying should be gauged as the

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longest possible remaining time before the counterparty is scheduled to fulfil its obligation, taking into account any applicable grace period. For the collateral, embedded options which may reduce the term of the collateral should be taken into account so that the shortest possible effective maturity is used. The maturity relevant here is the residual maturity. 7.6.3 Risk Weights for Maturity Mismatches As outlined in paragraph 7.6.1, collateral with maturity mismatches are only recognised when their original maturities are greater than or equal to one year. As a result, the maturity of collateral for exposures with original maturities of less than one year must be matched to be recognised. In all cases, collateral with maturity mismatches will no longer be recognised when they have a residual maturity of three months or less. 7.6.4 When there is a maturity mismatch with recognised credit risk mitigants (collateral, on-balance sheet netting and guarantees) the following adjustment will be applied: Pa = P x ( t- 0.25 ) ÷ ( T- 0.25) where: Pa P = value of the credit protection adjusted for maturity mismatch = credit protection (e.g. collateral amount, guarantee amount) adjusted for any haircuts = min (T, residual maturity of the credit protection arrangement) expressed in years min (5, residual maturity of the exposure) expressed in years

t

T 7.7

=

Treatment of pools of CRM Techniques

In the case where a bank has multiple CRM techniques covering a single exposure (e.g. a bank has both collateral and guarantee partially covering an exposure), the bank will be required to subdivide the exposure into portions covered by each type of CRM technique (e.g. portion covered by collateral, portion covered by guarantee) and the risk-weighted assets of each portion must be calculated separately. When credit protection provided by a single protection provider has differing maturities, they must be subdivided into separate protection as well. 8. 8.1 Capital Charge for Market Risk Introduction

Market risk is defined as the risk of losses in on-balance sheet and off-balance sheet positions arising from movements in market prices. The market risk positions subject to capital charge requirement are: (i) The risks pertaining to interest rate related instruments and equities in the trading book; and Foreign exchange risk (including open position in precious metals) throughout the bank (both banking and trading books).

(ii)

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8.2

Scope and Coverage of Capital Charge for Market Risks

8.2.1 These guidelines seek to address the issues involved in computing capital charges for interest rate related instruments in the trading book, equities in the trading book and foreign exchange risk (including gold and other precious metals) in both trading and banking books. Trading book for the purpose of capital adequacy will include: (i) (ii) (iii) (iv) (v) (vi) Securities included under the Held for Trading category Securities included under the Available for Sale category Open gold position limits Open foreign exchange position limits Trading positions in derivatives, and Derivatives entered into for hedging trading book exposures.

8.2.2 Banks are required to manage the market risks in their books on an ongoing basis and ensure that the capital requirements for market risks are being maintained on a continuous basis, i.e. at the close of each business day. Banks are also required to maintain strict risk management systems to monitor and control intra-day exposures to market risks. 8.2.3 Capital for market risk would not be relevant for securities, which have already matured and remain unpaid. These securities will attract capital only for credit risk. On completion of 90 days delinquency, these will be treated on par with NPAs for deciding the appropriate risk weights for credit risk. 8.3 Measurement of Capital Charge for Interest Rate Risk

8.3.1 This section describes the framework for measuring the risk of holding or taking positions in debt securities and other interest rate related instruments in the trading book. 8.3.2 The capital charge for interest rate related instruments would apply to current market value of these items in bank's trading book. Since banks are required to maintain capital for market risks on an ongoing basis, they are required to mark to market their trading positions on a daily basis. The current market value will be determined as per extant RBI guidelines on valuation of investments. 8.3.3 The minimum capital requirement is expressed in terms of two separately calculated charges, (i) "specific risk" charge for each security, which is designed to protect against an adverse movement in the price of an individual security owing to factors related to the individual issuer, both for short (short position is not allowed in India except in derivatives and Central Government Securities) and long positions, and (ii) "general market risk" charge towards interest rate risk in the portfolio, where long and short positions (which is not allowed in India except in derivatives and Central Government Securities) in different securities or instruments can be offset.

8.3.4 For the debt securities held under AFS category, in view of the possible longer holding period and attendant higher specific risk, the banks shall hold total capital charge for market risk equal to greater of (a) or (b) below:

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(a) Specific risk capital charge, computed notionally for the AFS securities treating them as held under HFT category (as computed according to Table 16: Part A / C / E(i) / F / G / H, as applicable) plus the General Market Risk Capital Charge. (b) Alternative total capital charge for the AFS category computed notionally treating them as held in the banking book (as computed in accordance with Table 16: Part B / D / E(ii) / F / G / I, as applicable) A. Specific Risk

8.3.5 The capital charge for specific risk is designed to protect against an adverse movement in the price of an individual security owing to factors related to the individual issuer. The specific risk charges for various kinds of exposures would be applied as detailed below: Sr. No. a. Nature of debt securities / issuer Central, State and Foreign Central Governments’ Bonds: (i) Held in HFT category (ii) Held in AFS category Banks’ Bonds: (i) Held in HFT category (ii) Held in AFS category Corporate Bonds (other than Bank Bonds): (i) Held in HFT category (ii) Held in AFS category Securitiesd Debt Instruments Held in HFT and AFS categories Re-securitiesd Debt Instruments Held in HFT and AFS categories Non-common Equity Capital Instruments issued by Financial Entities other than Banks (i) Held in HFT category (ii) Held in AFS category Equity Investments in Banks Held in HFT and AFS Categories Equity Investments in Financial Entities (other than Banks) Held in HFT and AFS Categories Equity Investments in Non-financial (commercial) Entities Table to be followed Table 16 – Part A Table 16 – Part B Table 16 – Part C Table 16 – Part D Table 16 – Part E(i) Table 16 – Part E(ii) Table 16 – Part F Table 16 – Part G Table 16 – Part H Table 16 – Part I Table 19 – Part A Table 19 – Part B Table 19 – Part C

b.

c.

d. e. f.

g. h.

i.

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Table 16 – Part A: Specific Risk Capital Charge for Sovereign securities issued by Indian and foreign sovereigns – Held by banks under the HFT Category

Sr. No. A. 1. 2.

Nature of Investment

Residual Maturity

Specific risk capital (as % of exposure)

3.

4.

5.

B. 1. 2.

3. 4. 5.

Indian Central Government and State Governments Investment in Central and State All Government Securities Investments in other approved All securities guaranteed by Central Government 6 months or less Investments in other approved More than 6 months and up securities guaranteed by State to and including 24 months Government More than 24 months Investment in other securities where payment of interest and All repayment of principal are guaranteed by Central Government 6 months or less Investments in other securities where payment of interest and More than 6 months and up repayment of principal are to and including 24 months guaranteed by State Government. More than 24 months Foreign Central Governments AAA to AA All 6 months or less More than 6 months and up A to BBB to and including 24 months More than 24 months BB to B All Below B All Unrated All

0.00 0.00

0.28 1.13 1.80 0.00

0.28 1.13 1.80 0.00 0.28 1.13 1.80 9.00 13.50 13.50

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Table 16 – Part B: Alternative Total Capital Charge for securities issued by Indian and foreign sovereigns - Held by banks under the AFS Category

Sr. No.

Nature of Investment

Residual Maturity State

Specific risk capital (as % of exposure)

A. Indian Central Government and State Governments 1. Investment in Central Government Securities and All All All All 0.00 0.00 1.80 0.00

2. Investments in other approved securities guaranteed by Central Government 3. Investments in other approved securities guaranteed by State Government 4. Investment in other securities where payment of interest and repayment of principal are guaranteed by Central Government 5. Investments in other securities where payment of interest and repayment of principal are guaranteed by State Government. B. Foreign Central Governments 1. 2. 3. 4. 5. AAA to AA A BBB BB to B Below B Unrated

All

1.80

All All All All All All

0.00 1.80 4.50 9.00 13.50 9.00

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Table 16 - Part C: Specific risk capital charge for bonds issued by banks – Held by banks under the HFT category Specific risk capital charge (%) All Scheduled Banks All Non-Scheduled (Commercial, Regional Banks (Commercial, Rural Banks, Local Area Regional Rural Banks, Banks and Co-Operative Local Area Banks and Banks) Co-Operative Banks ) Investment All other Investment All other s in capital claims s in capital Claims instrument instrument s (other s (other than than equity#) equity#) referred to referred to in para in para 5.6.1(i) 5.6.1(i) 3 4 5 6 1.75 0.28 1.75 1.75

Residual maturity

Level of Common Equity Tier 1 capital (CET1) including applicable capital conservation buffer (CCB) (%) of the investee bank (where applicable) 1 Applicable Minimum CET1 + Applicable CCB and above 2 ≤6 months

> 6 months and 7.06 1.13 7.06 7.06 ≤ 24 months >24 months 11.25 1.8 11.25 11.25 All Applicable Minimum Maturities CET1 + CCB = 75% 13.5 4.5 22.5 13.5 and 8.0% 0% For example, a bank with a Common Equity Tier 1 capital ratio in the range of 6.125% to 6.75% is required to conserve 80% of its earnings in the subsequent financial year (i.e. payout no more than 20% in terms of dividends, share buybacks and discretionary bonus payments is allowed). 15.2.2 Basel III minimum capital conservation standards apply with reference to the applicable minimum CET1 capital and applicable CCB. Therefore, during the Basel III transition period, banks may refer to the Table 25 for meeting the minimum capital

92

Common Equity Tier 1 must first be used to meet the minimum capital requirements (including the 7% Tier 1 and 9% Total capital requirements, if necessary), before the remainder can contribute to the capital conservation buffer requirement.

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conservation ratios at various levels of the Common Equity Tier 1 capital ratios: Table 25: Minimum capital conservation standards for individual bank Common Equity Tier 1 Ratio after including the current periods Minimum retained earnings Capital Conservation Ratios As on As on As on (expressed March 31, 2015 March 31, 2016 March 31, 2017 as % of earnings) 5.5% - 5.65625% 5.5% - 5.8125% 5.5% - 5.96875% 100% >5.65625% - 5.8125% >5.8125% - 6.125% >5.96875% - 6.4375% 80% >5.8125% - 5.96875% >6.125% - 6.4375% >6.4375% - 6.90625% 60% >5.96875% - 6.125% >6.4375% - 6.75% >6.90625% - 7.375% 40% >6.125% >6.75% >7.375% 0%

15.2.3 The Common Equity Tier 1 ratio includes amounts used to meet the minimum Common Equity Tier 1 capital requirement of 5.5%, but excludes any additional Common Equity Tier 1 needed to meet the 7% Tier 1 and 9% Total Capital requirements. For example, a bank maintains Common Equity Tier 1 capital of 9% and has no Additional Tier 1 or Tier 2 capital. Therefore, the bank would meet all minimum capital requirements, but would have a zero conservation buffer and therefore, the bank would be subjected to 100% constraint on distributions of capital by way of dividends, share-buybacks and discretionary bonuses. 15.2.4 The following represents other key aspects of the capital conservation buffer requirements: (i) Elements subject to the restriction on distributions: Dividends and share buybacks, discretionary payments on other Tier 1 capital instruments and discretionary bonus payments to staff would constitute items considered to be distributions. Payments which do not result in depletion of Common Equity Tier 1 capital, (for example include certain scrip dividends93) are not considered distributions. (ii) Definition of earnings: Earnings are defined as distributable profits before the deduction of elements subject to the restriction on distributions mentioned at (i) above. Earnings are calculated after the tax which would have been reported had none of the distributable items been paid. As such, any tax impact of making such distributions are reversed out. If a bank does not have positive earnings and has a Common Equity Tier 1 ratio less than 8%, it should not make positive net distributions. (iii) Solo or consolidated application: Capital conservation buffer is applicable both at the solo level (global position) as well as at the consolidated level, i.e. restrictions would be imposed on distributions at the level of both the solo bank and the

93

A scrip dividend is a scrip issue made in lieu of a cash dividend. The term ‘scrip dividends’ also includes bonus shares.

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consolidated group. In all cases where the bank is the parent of the group, it would mean that distributions by the bank can be made only in accordance with the lower of its Common Equity Tier 1 Ratio at solo level or consolidated level94. For example, if a bank’s Common Equity Tier 1 ratio at solo level is 6.8% and that at consolidated level is 7.4%. It will be subject to a capital conservation requirement of 60% consistent with the Common Equity Tier 1 range of >6.75% 7.375% as per Table 24 in paragraph 15.2.1 above. Suppose, a bank’s Common Equity Tier 1 ratio at solo level is 6.6% and that at consolidated level is 6%. It will be subject to a capital conservation requirement of 100% consistent with the Common Equity Tier 1 range of >5.5% - 6.125% as per Table 24 on minimum capital conservation standards for individual bank. 15.3 Banks which already meet the minimum ratio requirement during the transition period as indicated in paragraph 4.5, but remain below the target of 8% Common Equity Tier 1 capital ratio (minimum of 5.5% plus conservation buffer of 2.5%) should maintain prudent earnings retention policies with a view to meeting the conservation buffer as soon as possible. However, RBI may consider accelerating the build-up of the capital conservation buffer and shorten the transition periods, if the situation warrants so.

94

If a subsidiary is a bank, it will naturally be subject to the provisions of capita conservation buffer. If it is not a bank, even then the parent bank should not allow the subsidiary to distribute dividend which are inconsistent with the position of CCB at the consolidated level.

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Part E: Leverage Ratio Framework95 16. 16.1 Leverage Ratio Rationale and Objective

One of the underlying features of the crisis was the build-up of excessive on- and offbalance sheet leverage in the banking system. In many cases, banks built up excessive leverage while still showing strong risk based capital ratios. During the most severe part of the crisis, the banking sector was forced by the market to reduce its leverage in a manner that amplified downward pressure on asset prices, further exacerbating the positive feedback loop between losses, declines in bank capital, and contraction in credit availability. Therefore, under Basel III, a simple, transparent, non-risk based leverage ratio has been introduced. The leverage ratio is calibrated to act as a credible supplementary measure to the risk based capital requirements. The leverage ratio is intended to achieve the following objectives: (a) constrain the build-up of leverage in the banking sector, helping avoid destabilising deleveraging processes which can damage the broader financial system and the economy; and (b) reinforce the risk based requirements with a simple, non-risk based “backstop” measure. 16.2 Definition and Calculation of the Leverage Ratio

16.2.1 The provisions relating to leverage ratio contained in the Basel III document 96 are intended to serve as the basis for testing the leverage ratio during the parallel run period. The Basel Committee will test a minimum Tier 1 leverage ratio of 3% during the parallel run period from January 1, 2013 to January 1, 2017. Additional transitional arrangements are set out in paragraph 16.5 below. 16.2.2 During the period of parallel run, banks should strive to maintain their existing level of leverage ratio but, in no case the leverage ratio should fall below 4.5%. A bank whose leverage ratio is below 4.5% may endeavor to bring it above 4.5% as early as possible. Final leverage ratio requirement would be prescribed by RBI after the parallel run taking into account the prescriptions given by the Basel Committee. 16.2.3 The leverage ratio shall be maintained on a quarterly basis. The basis of calculation at the end of each quarter is “the average of the month-end leverage ratio over the quarter based on the definitions of capital (the capital measure) and total exposure (the exposure measure) specified in paragraphs 16.3 and 16.4, respectively”.

95

Annex 5 of Guidelines on Implementation of Basel III Capital Regulations in India issued vide circular DBOD.No.BP.BC.98/21.06.201/2011-12 dated May 2, 2012. 96 Basel III: A global regulatory framework for more resilient banks and banking systems, December 2010 (rev June 2011).

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16.3

Capital Measure

(a) The capital measure for the leverage ratio should be based on the new definition of Tier 1 capital as set out in paragraph 4.297 (b) Items that are deducted completely from capital do not contribute to leverage, and should therefore also be deducted from the measure of exposure. That is, the capital and exposure should be measured consistently and should avoid double counting. This means that deductions from Tier 1 capital (as set out in paragraph 4.4) should also be made from the exposure measure. (c) According to the treatment outlined in paragraph 4.4.9.2(C) where a financial entity is included in the accounting consolidation but not in the regulatory consolidation, the investments in the capital of these entities are required to be deducted to the extent that that they exceed 10% of the bank’s common equity. To ensure that the capital and exposure are measured consistently for the purposes of the leverage ratio, the assets of such entities included in the accounting consolidation should be excluded from the exposure measure in proportion to the capital that is excluded under paragraph 4.4.9.2(C). (d) For example, assume that total assets consolidated by the bank in respect of the subsidiaries which are included in the accounting consolidation but not in the regulatory consolidation (e.g. insurance companies) are Rs.1200 crore. Further assume that the total equity investment of a bank in such subsidiaries is 15% of the bank’s common equity. In this case, investment equal to 10% of the bank’s equity will be risk weighted at 250% and the remaining 5% will be deducted from common equity. Of the consolidated assets of Rs.1200 crore, Rs.400 crore {1200*(5%/15%)} will be excluded from the exposure measure. 16.4 Exposure Measure

16.4.1 General Measurement Principles The exposure measure for the leverage ratio should generally follow the accounting measure of exposure. In order to measure the exposure consistently with financial accounts, the following should be applied by banks: (a) on-balance sheet, non-derivative exposures will be net of specific provisions and valuation adjustments (e.g. prudent valuation adjustments for AFS and HFT positions, credit valuation adjustments); (b) physical or financial collateral, guarantees or credit risk mitigation purchased is not allowed to reduce on-balance sheet exposures; and (c) netting of loans and deposits is not allowed.

97

The Tier 1 capital does not include capital conservation buffer and countercyclical capital buffer for the purpose of leverage ratio.

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16.4.2 On-Balance Sheet Items Banks should include all items of assets reported in their accounting balance sheet for the purposes of calculation of the leverage ratio. In addition, the exposure measure should include the following treatments for Securities Financing Transactions (e.g. repo and reverse repo agreements, CBLO) and derivatives. (i) Repurchase agreements and securities finance

Securities Financing Transactions (SFTs) are a form of secured funding and therefore, an important source of balance sheet leverage that should be included in the leverage ratio. Therefore, banks should calculate SFT for the purposes of the leverage ratio by applying: (a) the accounting measure of exposure; and (b) without netting various long and short positions with the same counterparty. (ii) Derivatives

Derivatives create two types of exposure: an “on-balance sheet” present value reflecting the fair value of the contract (often zero at outset but subsequently positive or negative depending on the performance of the contract), and a notional economic exposure representing the underlying economic interest of the contract. Banks should calculate exposure in respect of derivatives, including where a bank sells protection using a credit derivative, for the purposes of the leverage ratio by applying: (a) the accounting measure of exposure (positive MTM value) plus an add-on for potential future exposure calculated according to the Current Exposure Method; and (b) without netting the MTM values and PFEs in respect of various long and short positions with the same counterparty. (iii) Other Off-Balance Sheet Items

Banks should calculate the off balance sheet items enumerated in paragraph 5.15.2 for the purposes of the leverage ratio by applying a uniform 100% credit conversion factor (CCF). However, for any commitments that are unconditionally cancellable at any time by the bank without prior notice, a CCF of 10% may be applied. 16.5 Transitional Arrangements

16.5.1 The transition period for the leverage ratio has begun on January 1, 2011. The Basel Committee will use the transition period to monitor banks’ leverage data on a semi-annual basis in order to assess whether the proposed design and calibration of the minimum Tier 1 leverage ratio of 3% is appropriate over a full credit cycle and for different types of business models. This assessment will include consideration of whether a wider definition of exposures and an offsetting adjustment

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in the calibration would better achieve the objectives of the leverage ratio. The Committee also will closely monitor accounting standards and practices to address any differences in national accounting frameworks that are material to the definition and calculation of the leverage ratio. The transition period will comprise of a supervisory monitoring period and a parallel run period: 16.5.2 The supervisory monitoring period has commenced January 1, 2011. The supervisory monitoring process will focus on developing templates to track in a consistent manner the underlying components of the agreed definition and resulting ratio. The BCBS would be undertaking the parallel run between January 1, 2013 and January 1, 2017. During this period, the leverage ratio and its components will be tracked, including its behaviour relative to the risk based requirement. Based on the results of the parallel run period, any final adjustments to the definition and calibration of the leverage ratio will be carried out in the first half of 2017, with a view to migrating to a Pillar 1 treatment on January 1, 2018 based on appropriate review and calibration. 16.5.3 Banks are required to calculate their leverage ratio using the definitions of capital and total exposure as defined under this guidelines and their risk based capital requirement. Bank level disclosure of the leverage ratio and its components will start from April 1, 2015. However, banks should report their Tier 1 leverage ratio to the RBI (Department of Banking Operations and Development) along with detailed calculations of capital and exposure measures on a quarterly basis from the quarter ending June 30, 2013.

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Annex 1
[cf. para 4.2.3.1]

Criteria for Classification as Common Shares (Paid-up Equity Capital) for Regulatory Purposes – Indian Banks 1. All common shares should ideally be the voting shares. However, in rare cases, where banks need to issue non-voting common shares as part of Common Equity Tier 1 capital, they must be identical to voting common shares of the issuing bank in all respects except the absence of voting rights. Limit on voting rights will be applicable based on the provisions of respective statutes governing individual banks {i.e. Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 / 1980 in case of nationalized banks; SBI Act, 1955 in case of State Bank of India; State Bank of India (Subsidiary Banks) Act, 1959 in case of associate banks of State Bank of India; Banking Regulation Act, 1949 in case of Private Sector Banks, etc.} Represents the most subordinated claim in liquidation of the bank. Entitled to a claim on the residual assets which is proportional to its share of paid up capital, after all senior claims have been repaid in liquidation (i.e. has an unlimited and variable claim, not a fixed or capped claim). Principal is perpetual and never repaid outside of liquidation (except discretionary repurchases / buy backs or other means of effectively reducing capital in a discretionary manner that is allowable under relevant law as well as guidelines, if any, issued by RBI in the matter). The bank does nothing to create an expectation at issuance that the instrument will be bought back, redeemed or cancelled nor do the statutory or contractual terms provide any feature which might give rise to such an expectation. Distributions are paid out of distributable items (retained earnings included). The level of distributions is not in any way tied or linked to the amount paid up at issuance and is not subject to a contractual cap (except to the extent that a bank is unable to pay distributions that exceed the level of distributable items). There are no circumstances under which the distributions are obligatory. Nonpayment is therefore not an event of default. Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions, including in respect of other elements classified as the highest quality issued capital. It is the paid up capital that takes the first and proportionately greatest share of any losses as they occur98. Within the highest quality capital, each

2. 3.

4.

5.

6.

7.

8.

9.

98

In cases where capital instruments have a permanent write-down feature, this criterion is still deemed to be met by common shares.

- 161 -

instrument absorbs losses on a going concern basis proportionately and pari passu with all the others. 10. The paid up amount is classified as equity capital (i.e. not recognised as a liability) for determining balance sheet insolvency. The paid up amount is classified as equity under the relevant accounting standards. It is directly issued and paid up and the bank cannot directly or indirectly have funded the purchase of the instrument99. Banks should also not extend loans against their own shares. The paid up amount is neither secured nor covered by a guarantee of the issuer or related entity100nor subject to any other arrangement that legally or economically enhances the seniority of the claim. Paid up capital is only issued with the approval of the owners of the issuing bank, either given directly by the owners or, if permitted by applicable law, given by the Board of Directors or by other persons duly authorised by the owners. Paid up capital is clearly and separately disclosed in the bank’s balance sheet.

11.

12.

13.

14.

15.

99

Banks should not grant advances against its own shares as this would be construed as indirect funding of its own capital. 100 A related entity can include a parent company, a sister company, a subsidiary or any other affiliate. A holding company is a related entity irrespective of whether it forms part of the consolidated banking group.

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Annex 2
[cf. para 4.2.3.2]

Criteria for Classification as Common Equity for Regulatory Purposes – Foreign Banks 1. Represents the most subordinated claim in liquidation of the Indian operations of the bank. Entitled to a claim on the residual assets which is proportional to its share of paid up capital, after all senior claims have been repaid in liquidation (i.e. has an unlimited and variable claim, not a fixed or capped claim). Principal is perpetual and never repaid outside of liquidation (except with the approval of RBI). Distributions to the Head Office of the bank are paid out of distributable items (retained earnings included). The level of distributions is not in any way tied or linked to the amount paid up at issuance and is not subject to a contractual cap (except to the extent that a bank is unable to pay distributions that exceed the level of distributable items). Distributions to the Head Office of the bank are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions, including in respect of other elements classified as the highest quality issued capital. This capital takes the first and proportionately greatest share of any losses as they occur101. It is clearly and separately disclosed in the bank’s balance sheet.

2.

3.

4.

5.

6.

7.

101

In cases where capital instruments have a permanent write-down feature, this criterion is still deemed to be met by common shares.

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Annex 3
[cf. para 4.2.4.1]

Criteria for Inclusion of Perpetual Non-cumulative Preference Shares (PNCPS) in Additional Tier 1 Capital The PNCPS will be issued by Indian banks, subject to extant legal provisions only in Indian rupees and should meet the following terms and conditions to qualify for inclusion in Additional Tier 1 Capital for capital adequacy purposes: 1. Terms of Issue of Instruments

1.1 Paid up Status The instruments should be issued by the bank (i.e. not by any ‘SPV’ etc. set up by the bank for this purpose) and fully paid up. 1.2 Amount The amount of PNCPS to be raised may be decided by the Board of Directors of banks. 1.3 Limits 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. However, once this minimum total Tier 1 capital has been complied with, any additional PNCPS and PDI issued by the bank can be included in Total Tier 1 capital reported. Excess PNCPS and PDI can be reckoned to comply with Tier 2 capital if the latter is less than 2% of RWAs. This limit will work in the same way as illustrated in Part A of Annex 14. 1.4 Maturity Period The PNCPS shall be perpetual i.e. there is no maturity date and there are no stepups or other incentives to redeem. 1.5 Rate of Dividend The rate of dividend payable to the investors may be either a fixed rate or a floating rate referenced to a market determined rupee interest benchmark rate 1.6 Optionality PNCPS shall not be issued with a 'put option'. However, banks may issue the instruments with a call option at a particular date subject to following conditions: (a) The call option on the instrument is permissible after the instrument has run for at least ten years; To exercise a call option a bank must receive prior approval of RBI(Department of Banking Operations and Development); and

(b)

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(c)

A bank must not do anything which creates an expectation that the call will be exercised102; and Banks must not exercise a call unless: (i) They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank103; or The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised.104

(d)

(ii)

The use of tax event and regulatory event calls may be permitted. However, exercise of the calls on account of these events is subject to the requirements set out in points (b) to (d) of criterion 1.6. RBI will permit the bank to exercise the call only if the RBI is convinced that the bank was not in a position to anticipate these events at the time of issuance of PNCPS. To illustrate, if there is a change in tax treatment which makes the capital instrument with tax deductible coupons into an instrument with non-tax deductible coupons, then the bank would have the option (not obligation) to repurchase the instrument. In such a situation, a bank may be allowed to replace the capital instrument with another capital instrument that perhaps does have tax deductible coupons. Similarly, if there is a downgrade of the instrument in regulatory classification (e.g. if it is decided by the RBI to exclude an instrument from regulatory capital) the bank has the option to call the instrument and replace it with an instrument with a better regulatory classification, or a lower coupon with the same regulatory classification with prior approval of RBI. However, banks may not create an expectation / signal an early redemption / maturity of the regulatory capital instrument. 1.7 Repurchase / Buy-back / Redemption (i) Principal of the instruments may be repaid (e.g. through repurchase or redemption) only with prior approval of RBI and banks should not assume or create market expectations that supervisory approval will be given ( this repurchase / buy-back /redemption of the principal is in a situation other than in the event of exercise of call option by the bank. One of the major differences is that in the case of the former, the option to offer the instrument for repayment on announcement of the decision to repurchase / buy-back /redeem the instrument, would lie with the investors whereas, in case of the latter, it lies with the bank). (ii) Banks may repurchase / buy-back / redeem the instruments only if:

102

If a bank were to call a capital instrument and replace it with an instrument that is more costly (e.g. has a higher credit spread) this might create an expectation that the bank will exercise calls on its other capital instruments. Therefore, bank may not be permitted to call an instrument if the bank intends to replace it with an instrument issued at a higher credit spread. This is applicable in cases of all Additional Tier 1 and Tier 2 instruments. 103 Replacement issues can be concurrent with but not after the instrument is called. 104 Here, minimum refers to Common Equity Tier 1 of 8% of RWAs (including capital conservation buffer of 2.5% of RWAs) and Total Capital of 11.5% of RWAs including any additional capital requirement identified under Pillar 2.

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(a) They replace such instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank; or (b) The bank demonstrates that its capital position is well above the minimum capital requirements after the repurchase / buy-back / redemption. 1.8 Dividend Discretion (i) The bank must have distributions/payments;105 full discretion at all times to cancel

(ii) Cancellation of discretionary payments must not be an event of default; (iii) Banks must have full access to cancelled payments to meet obligations as they fall due; (iv) Cancellation of distributions/payments must not impose restrictions on the bank except in relation to distributions to common stakeholders; and (v) dividends must be paid out of distributable items. (vii) The dividend shall not be cumulative. i.e., dividend missed in a year will not be paid in future years, even if adequate profit is available and the level of CRAR conforms to the regulatory minimum. When dividend is paid at a rate lesser than the prescribed rate, the unpaid amount will not be paid in future years, even if adequate profit is available and the level of CRAR conforms to the regulatory minimum. (viii) The instrument cannot have a credit sensitive coupon feature, i.e. a dividend that is reset periodically based in whole or in part on the banks’ credit standing. For this purpose, any reference rate including a broad index which is sensitive to changes to the bank’s own creditworthiness and / or to changes in the credit worthiness of the wider banking sector will be treated as a credit sensitive reference rate. Banks desirous of offering floating reference rate may take prior approval of the RBI (DBOD) as regard permissibility of such reference rates. (ix) In general, it may be in order for banks to have dividend stopper arrangement that stop dividend payments on common shares in the event the holders of AT1 instruments are not paid dividend/coupon. However, dividend stoppers must not impede the full discretion that bank must have at all times to cancel distributions/payments on the Additional Tier 1 instrument, nor must they act in a way that could hinder the re-capitalisation of the bank. For example, it would not be permitted for a stopper on an Additional Tier 1 instrument to:

105

Consequence of full discretion at all times to cancel distributions / payments is that “dividend pushers” are prohibited. An instrument with a dividend pusher obliges the issuing bank to make a dividend/coupon payment on the instrument if it has made a payment on another (typically more junior) capital instrument or share. This obligation is inconsistent with the requirement for full discretion at all times. Furthermore, the term “cancel distributions/payments” means extinguish these payments. It does not permit features that require the bank to make distributions/payments in kind.

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attempt to stop payment on another instrument where the payments on this other instrument were not also fully discretionary; prevent distributions to shareholders for a period that extends beyond the point in time that dividends/coupons on the Additional Tier 1 instrument are resumed; impede the normal operation of the bank or any restructuring activity (including acquisitions/disposals). A stopper may act to prohibit actions that are equivalent to the payment of a dividend, such as the bank undertaking discretionary share buybacks, if otherwise permitted. 1.9 Treatment in Insolvency The instrument cannot contribute to liabilities exceeding assets if such a balance sheet test forms part of a requirement to prove insolvency under any law or otherwise. 1.10 Loss Absorption Features

PNCPS should have principal loss absorption through either (i) conversion to common shares at an objective pre-specified trigger point or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger point. The write-down will have the following effects: (a) Reduce the claim of the instrument in liquidation; (b) Reduce the amount re-paid when a call is exercised; and (c) Partially or fully reduce dividend payments on the instrument. Various criteria for loss absorption through conversion / write-down / write-off on breach of pre-specified trigger and at the point of non-viability are furnished in Annex 16. 1.11 Prohibition on Purchase / Funding of PNCPS

Neither the bank nor a related party over which the bank exercises control or significant influence (as defined under relevant Accounting Standards) should purchase PNCPS, nor can the bank directly or indirectly should fund the purchase of the instrument. Banks should also not grant advances against the security of PNCPS issued by them. 1.12 Re-capitalisation

The instrument cannot have any features that hinder re-capitalisation, such as provisions which require the issuer to compensate investors if a new instrument is issued at a lower price during a specified time frame. 1.13 Reporting of Non-payment of Dividends

All instances of non-payment of dividends should be notified by the issuing banks to the Chief General Managers-in-Charge of Department of Banking Operations and

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Development and Department of Banking Supervision of the Reserve Bank of India, Mumbai. 1.14 Seniority of Claim

The claims of the investors in instruments shall be (i) Superior to the claims of investors in equity shares;

(ii) Subordinated to the claims of PDIs, all Tier 2 regulatory capital instruments, depositors and general creditors of the bank; and (iii) is neither secured nor covered by a guarantee of the issuer nor related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors. 1.15 Investment in Instruments Raised in Indian Rupees by Foreign Entities/NRIs

(i) Investment by FIIs and NRIs shall be within an overall limit of 49% and 24% of the issue respectively, subject to the investment by each FII not exceeding 10% of the issue, and investment by each NRI not exceeding 5% of the issue. Investment by FIIs in these instruments shall be outside the ECB limit for rupee-denominated corporate debt, as fixed by Government of India from time to time. The overall non-resident holding of Preference Shares and equity shares in public sector banks will be subject to the statutory / regulatory limit. (ii) Banks should comply with the terms and conditions, if any, stipulated by SEBI / other regulatory authorities in regard to issue of the instruments. 1.16 Compliance with Reserve Requirements

(i) The funds collected by various branches of the bank or other banks for the issue and held pending finalisation of allotment of the Additional Tier 1 Preference Shares will have to be taken into account for the purpose of calculating reserve requirements. (ii) However, the total amount raised by the bank by issue of PNCPS shall not be reckoned as liability for calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will not attract CRR / SLR requirements. 1.17 Reporting of Issuances

(i) Banks issuing PNCPS shall submit a report to the Chief General Manager-incharge, Department of Banking Operations and Development, Reserve Bank of India, Mumbai giving details of the debt raised, including the terms of issue specified at above paragraphs, together with a copy of the offer document soon after the issue is completed. (ii) The issue-wise details of amount raised as PNCPS qualifying for Additional Tier 1 capital by the bank from FIIs / NRIs are required to be reported within 30 days of the issue to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai 400 001 in the proforma given at the end of this Annex. The details

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of the secondary market sales / purchases by FIIs and the NRIs in these instruments on the floor of the stock exchange shall be reported by the custodians and designated banks, respectively, to the Reserve Bank of India through the soft copy of the LEC Returns, on a daily basis, as prescribed in Schedule 2 and 3 of the FEMA Notification No.20 dated 3rd May 2000, as amended from time to time. 1.18 Investment in Additional Tier 1 Capital Instruments PNCPS Issued by Other Banks/ FIs (i) A bank's investment in PNCPS issued by other banks and financial institutions will be reckoned along with the investment in other instruments eligible for capital status while computing compliance with the overall ceiling of 10% of investing banks' capital funds as prescribed vide circular DBOD.BP.BC.No.3/ 21.01.002/ 2004-05 dated July 6, 2004. (ii)Bank's investments in PNCPS issued by other banks / financial institutions will attract risk weight as provided in paragraphs 5.6. and 8.3.5 of the Master Circular on Basel III Capital Regulations, whichever applicable for capital adequacy purposes. (iii) A bank's investments in the PNCPS of other banks will be treated as exposure to capital market and be reckoned for the purpose of compliance with the prudential ceiling for capital market exposure as fixed by RBI. 1.19 Classification in the Balance Sheet

PNCPS will be classified as capital and shown under 'Schedule I - Capital' of the Balance sheet. Reporting Format Details of Investments by FIIs and NRIs in Perpetual Non-Cumulative Preference Shares qualifying as Additional Tier 1 capital
(a) (b) (c) Name of the bank: Total issue size / amount raised (in Rupees) : Date of issue : FIIs No of FIIs Amount raised in Rupees as a percentageof the total issue size No. of NRIs NRIs Amount raised in Rupees as a percentageof the total issue size

It is certified that (i) the aggregate investment by all FIIs does not exceed 49 % of the issue size and investment by no individual FII exceeds 10 % of the issue size. (ii) It is certified that the aggregate investment by all NRIs does not exceed 24 % of the issue size and investment by no individual NRI exceeds 5 % of the issue size Authorised Signatory Date Seal of the bank

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Annex 4
(cf. para 4.2.4)

Criteria for Inclusion of Perpetual Debt Instruments (PDI) in Additional Tier 1 Capital The Perpetual Debt Instruments that may be issued as bonds or debentures by Indian banks should meet the following terms and conditions to qualify for inclusion in Additional Tier 1 Capital for capital adequacy purposes: 1. Terms of Issue of Instruments Denominated in Indian Rupees

1.1 Paid-in Status The instruments should be issued by the bank (i.e. not by any ‘SPV’ etc. set up by the bank for this purpose) and fully paid-in. 1.2 Amount

The amount of PDI to be raised may be decided by the Board of Directors of banks. 1.3 Limits

While complying with minimum Tier 1 of 7% of risk weighted assets, a bank cannot admit, Perpetual Debt Instruments (PDI) together with Perpetual Non-Cumulative Preference Shares (PNCPS) in Additional Tier 1 Capital, more than 1.5% of risk weighted assets. However, once this minimum total Tier 1 capital has been complied with, any additional PNCPS and PDI issued by the bank can be included in Total Tier 1 capital reported. Excess PNCPS and PDI can be reckoned to comply with Tier 2 capital if the latter is less than 2% of RWAs. This limit will work in the same way as illustrated in Annex 14. 1.4 Maturity Period

The PDIs shall be perpetual i.e. there is no maturity date and there are no step-ups or other incentives to redeem. 1.5 Rate of Interest

The interest payable to the investors may be either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate. 1.6 Optionality

PDIs shall not have any ‘put option’. However, banks may issue the instruments with a call option at a particular date subject to following conditions: a. The call option on the instrument is permissible after the instrument has run for at least ten years; b. To exercise a call option a bank must receive prior approval of RBI(Department of Banking Operations and Development); c. A bank must not do anything which creates an expectation that the call will be exercised; and

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d. Banks must not exercise a call unless: (i) They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank106; or (ii) The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised.107 The use of tax event and regulatory event calls may be permitted. However, exercise of the calls on account of these events is subject to the requirements set out in points (b) to (d) of criterion 1.6. RBI will permit the bank to exercise the call only if the RBI is convinced that the bank was not in a position to anticipate these events at the time of issuance of PDIs. To illustrate, if there is a change in tax treatment which makes the capital instrument with tax deductible coupons into an instrument with non-tax deductible coupons, then the bank would have the option (not obligation) to repurchase the instrument. In such a situation, a bank may be allowed to replace the capital instrument with another capital instrument that perhaps does have tax deductible coupons. Similarly, if there is a downgrade of the instrument in regulatory classification (e.g. if it is decided by the RBI to exclude an instrument from regulatory capital) the bank has the option to call the instrument and replace it with an instrument with a better regulatory classification, or a lower coupon with the same regulatory classification with prior approval of RBI. However, banks may not create an expectation / signal an early redemption / maturity of the regulatory capital instrument. 1.7 Repurchase / Buy-back / Redemption (i) Principal of the instruments may be repaid (e.g. through repurchase or redemption) only with prior approval of RBI and banks should not assume or create market expectations that supervisory approval will be given ( this repurchase / buy-back /redemption of the principal is in a situation other than in the event of exercise of call option by the bank. One of the major differences is that in the case of the former, the option to offer the instrument for repayment on announcement of the decision to repurchase / buy-back /redeem the instrument, would lie with the investors whereas, in case of the latter, it lies with the bank). (ii) Banks may repurchase / buy-back / redemption only if: ( a ) They replace the such instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank; or (b) The bank demonstrates that its capital position is well above the minimum capital requirements after the repurchase / buy-back / redemption.

106 107

Replacement issues can be concurrent with but not after the instrument is called. Minimum refers to Common Equity Tier 1 of 8% of RWAs (including capital conservation buffer of 2.5% of RWAs) and Total capital of 11.5% of RWAs including additional capital requirements identified under Pillar 2.

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1.8

Coupon Discretion (a) The bank must have full discretion at all times to cancel distributions/payments108 (b) Cancellation of discretionary payments must not be an event of default (c) Banks must have full access to cancelled payments to meet obligations as they fall due (d) Cancellation of distributions/payments must not impose restrictions on the bank except in relation to distributions to common stakeholders. (e) coupons must be paid out of distributable items. (f) the interest shall not be cumulative. (g) The instrument cannot have a credit sensitive coupon feature, i.e. a dividend that is reset periodically based in whole or in part on the banks’ credit standing. For this purpose, any reference rate including a broad index which is sensitive to changes to the bank’s own creditworthiness and / or to changes in the credit worthiness of the wider banking sector will be treated as a credit sensitive reference rate. Banks desirous of offering floating reference rate may take prior approval of the RBI (DBOD) as regard permissibility of such reference rates. (h) In general, it may be in order for banks to have dividend stopper arrangement that stop dividend payments on common shares in the event the holders of AT1 instruments are not paid dividend/coupon. However, dividend stoppers must not impede the full discretion that bank must have at all times to cancel distributions/payments on the Additional Tier 1 instrument, nor must they act in a way that could hinder the re-capitalisation of the bank. For example, it would not be permitted for a stopper on an Additional Tier 1 instrument to: attempt to stop payment on another instrument where the payments on this other instrument were not also fully discretionary; prevent distributions to shareholders for a period that extends beyond the point in time that dividends/coupons on the Additional Tier 1 instrument are resumed; impede the normal operation of the bank or any restructuring activity (including acquisitions/disposals).

108

Consequence of full discretion at all times to cancel distributions/payments is that “dividend pushers” are prohibited. An instrument with a dividend pusher obliges the issuing bank to make a dividend/coupon payment on the instrument if it has made a payment on another (typically more junior) capital instrument or share. This obligation is inconsistent with the requirement for full discretion at all times. Furthermore, the term “cancel distributions/payments” means extinguish these payments. It does not permit features that require the bank to make distributions/payments in kind.

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A stopper may act to prohibit actions that are equivalent to the payment of a dividend, such as the bank undertaking discretionary share buybacks, if otherwise permitted. 1.9 Treatment in Insolvency The instrument cannot contribute to liabilities exceeding assets if such a balance sheet test forms part of a requirement to prove insolvency under any law or otherwise. 1.10 Loss Absorption Features

PDIs may be classified as liabilities for accounting purposes (not for the purpose of insolvency as indicated in paragraph 1.9 above). In such cases, these instruments must have principal loss absorption through either (i) conversion to common shares at an objective pre-specified trigger point or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger point. The write-down will have the following effects: ( a ) Reduce the claim of the instrument in liquidation; ( b ) Reduce the amount re-paid when a call is exercised; and ( c ) Partially or fully reduce coupon payments on the instrument. Various criteria for loss absorption through conversion / write-down / write-off on breach of pre-specified trigger and at the point of non-viability are furnished in Annex 16. 1.11 Prohibition on Purchase / Funding of Instruments

Neither the bank nor a related party over which the bank exercises control or significant influence (as defined under relevant Accounting Standards) should purchase the instrument, nor can the bank directly or indirectly fund the purchase of the instrument. Banks should also not grant advances against the security of the debt instruments issued by them. 1.12 Re-capitalisation

The instrument cannot have any features that hinder re-capitalisation, such as provisions which require the issuer to compensate investors if a new instrument is issued at a lower price during a specified time frame. 1.13 Reporting of Non-payment of Coupons

All instances of non-payment of coupon should be notified by the issuing banks to the Chief General Managers-in-Charge of Department of Banking Operations and Development and Department of Banking Supervision of the Reserve Bank of India, Mumbai. 1.14 Seniority of Claim

The claims of the investors in instruments shall be (i) superior to the claims of investors in equity shares and perpetual noncumulative preference shares;

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(ii) subordinated to the claims of depositors, general creditors and subordinated debt of the bank; (iii) is neither secured nor covered by a guarantee of the issuer nor related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors. 1.15 Investment in Instruments Raised in Indian Rupees by Foreign Entities/NRIs

(i) Investment by FIIs in instruments raised in Indian Rupees shall be outside the ECB limit for rupee denominated corporate debt, as fixed by the Govt. of India from time to time, for investment by FIIs in corporate debt instruments. Investment in these instruments by FIIs and NRIs shall be within an overall limit of 49% and 24% of the issue, respectively, subject to the investment by each FII not exceeding 10% of the issue and investment by each NRI not exceeding 5% of the issue. (ii) Banks should comply with the terms and conditions, if any, stipulated by SEBI / other regulatory authorities in regard to issue of the instruments. 1.16 Terms of Issue of Instruments Denominated in Foreign Currency

Banks may augment their capital funds through the issue of PDIs in foreign currency without seeking the prior approval of the Reserve Bank of India, subject to compliance with the requirements mentioned below:

(i) Instruments issued in foreign currency should comply with all terms and conditions as applicable to the instruments issued in Indian Rupees.

(ii) Not more than 49% of the eligible amount can be issued in foreign currency. (iii) Instruments issued in foreign currency shall be outside the existing limit for foreign currency borrowings by Authorised Dealers, stipulated in terms of Master Circular No. RBI/2006-07/24 dated July 1, 2006 on Risk Management and Inter-Bank Dealings as updated from time to time. 1.17 Compliance with Reserve Requirements

The total amount raised by a bank through debt instruments shall not be reckoned as liability for calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will not attract CRR / SLR requirements. 1.18 Reporting of Issuances

Banks issuing PDIs shall submit a report to the Chief General Manager-in-charge, Department of Banking Operations and Development, Reserve Bank of India, Mumbai giving details of the debt raised, including the terms of issue specified at paragraph 1 above, together with a copy of the offer document soon after the issue is completed. 1.19 Investment in Additional Tier 1 Debt Capital Instruments PDIs Issued by Other Banks/ FIs

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(i) A bank's investment in debt instruments issued by other banks and financial institutions will be reckoned along with the investment in other instruments eligible for capital status while computing compliance with the overall ceiling of 10% for cross holding of capital among banks/FIs prescribed vide circular DBOD.BP.BC.No.3/ 21.01.002/ 2004-05 dated July 6, 2004 and also subject to cross holding limits. (ii) Bank's investments in debt instruments issued by other banks will attract risk weight for capital adequacy purposes, as prescribed in paragraphs 5.6 and 8.3.5 of the Master Circular on Basel III Capital Regulations, whichever applicable. 1.20 Classification in the Balance Sheet

The amount raised by way of issue of debt capital instrument may be classified under ‘Schedule 4 – Borrowings’ in the Balance Sheet.109 1.21 Raising of Instruments for Inclusion as Additional Tier 1 Capital by Foreign Banks in India

Foreign banks in India may raise Head Office (HO) borrowings in foreign currency for inclusion as Additional Tier 1 capital subject to the same terms and conditions as mentioned in items 1.1 to 1.18 above for Indian banks. In addition, the following terms and conditions would also be applicable: a ) Maturity period: b)

c) d)

e)

f) g)

If the amount of Additional Tier 1 capital raised as Head Office borrowings shall be retained in India on a perpetual basis. Rate of interest: Rate of interest on Additional Tier 1 capital raised as HO borrowings should not exceed the on-going market rate. Interest should be paid at half yearly rests. Withholding tax: Interest payments to the HO will be subject to applicable withholding tax. Documentation: The foreign bank raising Additional Tier 1 capital as HO borrowings should obtain a letter from its HO agreeing to give the loan for supplementing the capital base for the Indian operations of the foreign bank. The loan documentation should confirm that the loan given by HO shall be eligible for the same level of seniority of claim as the investors in debt capital instruments issued by Indian banks. The loan agreement will be governed by and construed in accordance with the Indian law. Disclosure: The total eligible amount of HO borrowings shall be disclosed in the balance sheet under the head ‘Additional Tier 1 capital raised in the form of Head Office borrowings in foreign currency’. Hedging: The total eligible amount of HO borrowing should remain fully swapped in Indian Rupees with the bank at all times. Reporting and certification : Details regarding the total amount of Additional Tier 1 capital raised as HO borrowings, along with a certification to the effect that the borrowing is in accordance with these guidelines, should be advised to the Chief General Managers-in-Charge of the Department of Banking Operations and Development (International Banking Division), Department of External Investments and Operations and Foreign Exchange Department (Forex Markets Division), Reserve Bank of India, Mumbai.

109

Please refer to circular DBOD.No.BP.BC.81/21.01.002/2009-10 dated March 30, 2010

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Annex 5
(cf. para 4.2.5)

Criteria for Inclusion of Debt Capital Instruments as Tier 2 Capital The Tier 2 debt capital instruments that may be issued as bonds / debentures by Indian banks should meet the following terms and conditions to qualify for inclusion as Tier 2 Capital for capital adequacy purposes110: 1. Terms of Issue of Instruments Denominated in Indian Rupees 1.1 Paid-in Status The instruments should be issued by the bank (i.e. not by any ‘SPV’ etc. set up by the bank for this purpose) and fully paid-in. 1.2 Amount The amount of these debt instruments to be raised may be decided by the Board of Directors of banks. 1.3 Maturity Period The debt instruments should have a minimum maturity of 10 years and there are no step-ups or other incentives to redeem. 1.4 Discount The debt instruments shall be subjected to a progressive discount for capital adequacy purposes. As they approach maturity these instruments should be subjected to progressive discount as indicated in the table below for being eligible for inclusion in Tier 2 capital.

Remaining Maturity of Instruments Less than one year One year and more but less than two years Two years and more but less than three years Three years and more but less than four years Four years and more but less than five years 1.5 Rate of Interest

Rate of Discount (%) 100 80 60 40 20

(i) The interest payable to the investors may be either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate. (ii) The instrument cannot have a credit sensitive coupon feature, i.e. a coupon that is reset periodically based in whole or in part on the banks’

110

The criteria relating to loss absorbency through conversion / write-down / write-off at the point of non-viability are furnished in Annex 16.

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credit standing. Banks desirous of offering floating reference rate may take prior approval of the RBI (DBOD) as regard permissibility of such reference rates. 1.6 Optionality The debt instruments shall not have any ‘put option’. However, it may be callable at the initiative of the issuer only after a minimum of five years: (a) To exercise a call option a bank must receive prior approval of RBI (Department of Banking Operations and Development); and (b) A bank must not do anything which creates an expectation that the call will be exercised; and (c) Banks must not exercise a call unless: (i) They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank111; or (ii) The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised.112 The use of tax event and regulatory event calls may be permitted. However, exercise of the calls on account of these events is subject to the requirements set out in points (a) to (c) of criterion 1.6. RBI will permit the bank to exercise the call only if the RBI is convinced that the bank was not in a position to anticipate these events at the time of issuance of these instruments as explained in case of Additional Tier 1 instruments. 1.7 Treatment in Bankruptcy / Liquidation The investor must have no rights to accelerate the repayment of future scheduled payments (coupon or principal) except in bankruptcy and liquidation. 1.8 Prohibition on Purchase / Funding of Instruments Neither the bank nor a related party over which the bank exercises control or significant influence (as defined under relevant Accounting Standards) should purchase the instrument, nor can the bank directly or indirectly should fund the purchase of the instrument. Banks should also not grant advances against the security of the debt instruments issued by them. 1.9 Reporting of Non-payment of Coupons All instances of non-payment of coupon should be notified by the issuing banks to the Chief General Managers-in-Charge of Department of Banking Operations and Development and Department of Banking Supervision of the Reserve Bank of India, Mumbai.

111 112

Replacement issues can be concurrent with but not after the instrument is called. Minimum refers to Common Equity ratio of 8% of RWAs (including capital conservation buffer of 2.5% of RWAs) and Total capital ratio of 11.5% of RWAs including any additional capital requirement identified under Pillar 2.

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1.10

Seniority of Claim

The claims of the investors in instruments shall be (i) senior to the claims of investors in instruments eligible for inclusion in Tier 1 capital; (ii) subordinate to the claims of all depositors and general creditors of the bank; and (iii) is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors. 1.11 Investment in Instruments Raised in Indian Rupees by Foreign Entities/NRIs (i) Investment by FIIs in Tier 2 instruments raised in Indian Rupees shall be outside the limit for investment in corporate debt instruments, as fixed by the Govt. of India from time to time. However, investment by FIIs in these instruments will be subject to a separate ceiling of USD 500 million. In addition, NRIs shall also be eligible to invest in these instruments as per existing policy. (ii) Banks should comply with the terms and conditions, if any, stipulated by SEBI / other regulatory authorities in regard to issue of the instruments. 1.12 Terms of Issue of Tier 2 Debt Capital Instruments in Foreign Currency

Banks may issue Tier 2 Debt Instruments in Foreign Currency without seeking the prior approval of the Reserve Bank of India, subject to compliance with the requirements mentioned below: (i) Tier 2 Instruments issued in foreign currency should comply with all terms and conditions applicable to instruments issued in Indian Rupees. The total amount of Tier 2 Instruments issued in foreign currency shall not exceed 25% of the unimpaired Tier 1 capital. This eligible amount will be computed with reference to the amount of Tier 1 capital as on March 31 of the previous financial year, after deduction of goodwill and other intangible assets but before the deduction of investments, as per paragraph 4.4.9 of the Master Circular on Basel III capital regulations. This will be in addition to the existing limit for foreign currency borrowings by Authorised Dealers stipulated in terms of Master Circular No. 14/201011 dated July 1, 2010 on Risk Management and Inter-Bank Dealings as updated from time to time. Compliance with Reserve Requirements

(ii)

(iii)

1.13

(i) The funds collected by various branches of the bank or other banks for the issue and held pending finalisation of allotment of the Tier 2 Capital instruments will have to be taken into account for the purpose of calculating reserve requirements.

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(ii) The total amount raised by a bank through Tier 2 instruments shall be reckoned as liability for the calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will attract CRR/SLR requirements. 1.14 Reporting of Issuances

Banks issuing debt instruments shall submit a report to the Chief General Managerin-charge, Department of Banking Operations and Development, Reserve Bank of India, Mumbai giving details of the debt raised, including the terms of issue specified at para 1 above, together with a copy of the offer document soon after the issue is completed. 1.15 Investment in Tier 2 Debt Capital Instruments Issued by Other Banks/ FIs (i) A bank's investment in Tier 2 debt instruments issued by other banks and financial institutions will be reckoned along with the investment in other instruments eligible for capital status while computing compliance with the overall ceiling of 10% for cross holding of capital among banks/FIs prescribed vide circular DBOD.BP.BC.No.3/ 21.01.002/ 2004-05 dated 6th July 2004 and also subject to cross holding limits. (ii) Bank's investments in Tier 2 instruments issued by other banks/ financial institutions will attract risk weight as per paragraphs 5.6 and 8.3.5 of the Master Circular on Basel III Capital Regulations, whichever applicable for capital adequacy purposes. 1.16 Classification in the Balance Sheet

The amount raised by way of issue of Tier 2 debt capital instrument may be classified under ‘Schedule 4 – Borrowings’ in the Balance Sheet. 1.17 Debt Capital Instruments to Retail Investors113,114

With a view to enhancing investor education relating to risk characteristics of regulatory capital requirements, banks issuing subordinated debt to retail investors should adhere to the following conditions: (a) For floating rate instruments, banks should not use its Fixed Deposit rate as benchmark. (b) The requirement for specific sign-off as quoted below, from the investors for having understood the features and risks of the instrument may be

113 114

Please refer to circular DBOD.BP.BC.No.69 / 21.01.002/ 2009-10 dated January 13, 2010. Please also refer to the circular DBOD.BP.BC.No.72/21.01.002/2012-13 dated January 24, 2013 on ‘Retail Issue of Subordinated Debt for Raising Tier 2 Capital’, in terms of which banks were advised that with a view to deepening the corporate bond market in India through enhanced retail participation, banks, while issuing subordinated debt for raising Tier 2 capital, are encouraged to consider the option of raising such funds through public issue to retail investors. However, while doing so banks are advised to adhere to the conditions prescribed in circular dated January 13, 2010 so as to ensure that the investor is aware of the risk characteristics of regulatory capital instruments.

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incorporated in the common application form of the proposed debt issue. "By making this application, I / We acknowledge that I/We have understood the terms and conditions of the Issue of [ insert the name of the instruments being issued ] of [Name of The Bank ] as disclosed in the Draft Shelf Prospectus, Shelf Prospectus and Tranche Document ". (c) All the publicity material, application form and other communication with the investor should clearly state in bold letters (with font size 14) how a subordinated bond is different from fixed deposit particularly that it is not covered by deposit insurance. Raising of Instruments for Inclusion as Tier 2 Capital by Foreign Banks in India

1.18

Foreign banks in India may raise Head Office (HO) borrowings in foreign currency for inclusion as Tier 2 capital subject to the same terms and conditions as mentioned in items 1.1 to 1.17 above for Indian banks. In addition, the following terms and conditions would also be applicable: (a) Maturity period: If the amount of Tier 2 debt capital raised as HO borrowings is in tranches, each tranche shall be retained in India for a minimum period of ten years. (b) Rate of interest: Rate of interest on Tier 2 capital raised as HO borrowings should not exceed the on-going market rate. Interest should be paid at half yearly rests. (c) Withholding tax: Interest payments to the HO will be subject to applicable withholding tax. (d) Documentation: The foreign bank raising Tier 2 debt capital as HO borrowings should obtain a letter from its HO agreeing to give the loan for supplementing the capital base for the Indian operations of the foreign bank. The loan documentation should confirm that the loan given by HO shall be eligible for the same level of seniority of claim as the investors in debt capital instruments issued by Indian banks. The loan agreement will be governed by and construed in accordance with the Indian law. (e) Disclosure: The total eligible amount of HO borrowings shall be disclosed in the balance sheet under the head ‘Tier 2 debt capital raised in the form of Head Office borrowings in foreign currency’. (f) Hedging: The total eligible amount of HO borrowing should remain fully swapped in Indian Rupees with the bank at all times. (g) Reporting and certification: Details regarding the total amount of Tier 2 debt capital raised as HO borrowings, along with a certification to the effect that the borrowing is in accordance with these guidelines, should be advised to the Chief General Managers-in-Charge of the Department of Banking Operations and Development (International Banking Division), Department of External Investments and Operations and Foreign Exchange Department (Forex Markets Division), Reserve Bank of India, Mumbai. (h) Features: The HO borrowings should be fully paid up, i.e. the entire borrowing or each tranche of the borrowing should be available in full to the

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branch in India. It should be unsecured, subordinated to the claims of other creditors of the foreign bank in India, free of restrictive clauses and should not be redeemable at the instance of the HO. (i) Rate of discount: The HO borrowings will be subjected to progressive discount as they approach maturity at the rates indicated below: Remaining maturity of borrowing Rate of discount (%) Not Applicable (the entire amount can be included as subordinated debt in Tier 2 capital) 20 40 60 80 100 (No amount can be treated as subordinated debt for Tier 2 capital)

More than 5 years More than 4 years and less than 5 years More than 3 years and less than 4 years More than 2 years and less than 3 years More than 1 year and less than 2 years Less than 1 year 1.19 Requirements

The total amount of HO borrowings is to be reckoned as liability for the calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will attract CRR/SLR requirements. 1.20 Hedging

The entire amount of HO borrowing should remain fully swapped with banks at all times. The swap should be in Indian rupees. 1.21 Reporting and Certification

Such borrowings done in compliance with the guidelines set out above would not require prior approval of Reserve Bank of India. However, information regarding the total amount of borrowing raised from Head Office under this Annex, along with a certification to the effect that the borrowing is as per the guidelines, should be advised to the Chief General Managers-in-Charge of the Department of Banking Operations and Development (International Banking Division), Department of External Investments and Operations and Foreign Exchange Department (Forex Markets Division), Reserve Bank of India, Mumbai.

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Annex 6
(cf. para 4.2.5.1.A(iii)

Criteria for Inclusion of Perpetual Cumulative Preference Shares (PCPS)/ Redeemable Non-Cumulative Preference Shares (RNCPS) / Redeemable Cumulative Preference Shares (RCPS) as Part of Tier 2 Capital 1 1.1 Terms of Issue of Instruments115 Paid-in Status

The instruments should be issued by the bank (i.e. not by any ‘SPV’ etc. set up by the bank for this purpose) and fully paid-in. 1.2 Amount The amount to be raised may be decided by the Board of Directors of banks. 1.3 Maturity Period These instruments could be either perpetual (PCPS) or dated (RNCPS and RCPS) instruments with a fixed maturity of minimum 10 years and there should be no stepups or other incentives to redeem. The perpetual instruments shall be cumulative. The dated instruments could be cumulative or non-cumulative. 1.4 Amortisation The Redeemable Preference Shares (both cumulative and non-cumulative) shall be subjected to a progressive discount for capital adequacy purposes over the last five years of their tenor, as they approach maturity as indicated in the table below for being eligible for inclusion in Tier 2 capital. Remaining Maturity of Instruments Less than one year One year and more but less than two years Two years and more but less than three years Three years and more but less than four years Four years and more but less than five years 1.5 Coupon The coupon payable to the investors may be either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate. Banks desirous of offering floating reference rate may take prior approval of the RBI (DBOD) as regard permissibility of such reference rates. 1.6 Optionality These instruments shall not be issued with a 'put option'. However, banks may issue the instruments with a call option at a particular date subject to following conditions: (a) The call option on the instrument is permissible after the instrument has run for at least five years; and Rate of Discount (%) 100 80 60 40 20

115

The criteria relating to loss absorbency through conversion / write-down / write-off at the point of non-viability are furnished in Annex 16.

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(b) (c) (d)

To exercise a call option a bank must receive prior approval of RBI (Department of Banking Operations and Development); and A bank must not do anything which creates an expectation that the call will be exercised; and Banks must not exercise a call unless: (i) They replace the called instrument with capital of the same or better quality and the replacement of this capital is done at conditions which are sustainable for the income capacity of the bank116; or The bank demonstrates that its capital position is well above the minimum capital requirements after the call option is exercised.117

(ii)

The use of tax event and regulatory event calls may be permitted. However, exercise of the calls on account of these events is subject to the requirements set out in points (b) to (d) of criterion 1.6. RBI will permit the bank to exercise the call only if the RBI is convinced that the bank was not in a position to anticipate these events at the time of issuance of these instruments as explained in case of Additional Tier 1 instruments. 1.7 Treatment in Bankruptcy / Liquidation

The investor must have no rights to accelerate the repayment of future scheduled payments (coupon or principal) except in bankruptcy and liquidation. 1.8 Prohibition on Purchase / Funding Neither the bank nor a related party over which the bank exercises control or significant influence (as defined under relevant Accounting Standards) should purchase these instruments, nor can the bank directly or indirectly should fund the purchase of the instrument. Banks should also not grant advances against the security of these instruments issued by them. 1.9 Reporting of Non-payment of Coupon All instances of non-payment of coupon should be notified by the issuing banks to the Chief General Managers-in-Charge of Department of Banking Operations and Development and Department of Banking Supervision of the Reserve Bank of India, Mumbai. 1.10 Seniority of Claim The claims of the investors in instruments shall be: (i) senior to the claims of investors in instruments eligible for inclusion in Tier 1 capital; (ii) subordinate to the claims of all depositors and general creditors of the bank; and

116 117

Replacement issues can be concurrent with but not after the instrument is called. Minimum refers to Common Equity Tier 1 of 8% of RWAs (including capital conservation buffer of 2.5% of RWAs) and Total Capital of 11.5% of RWAs including and additional capital identifies under Pillar 2.

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(iii) is neither secured nor covered by a guarantee of the issuer or related entity or other arrangement that legally or economically enhances the seniority of the claim vis-à-vis bank creditors. 1.11 Investment in Instruments Raised in Indian Rupees by Foreign Entities/NRIs

(i) Investment by FIIs and NRIs shall be within an overall limit of 49% and 24% of the issue respectively, subject to the investment by each FII not exceeding 10% of the issue and investment by each NRI not exceeding 5% of the issue. Investment by FIIs in these instruments shall be outside the ECB limit for rupee denominated corporate debt as fixed by Government of India from time to time. However, investment by FIIs in these instruments will be subject to separate ceiling of USD 500 million. The overall non-resident holding of Preference Shares and equity shares in public sector banks will be subject to the statutory / regulatory limit. (ii) Banks should comply with the terms and conditions, if any, stipulated by SEBI / other regulatory authorities in regard to issue of the instruments. 1.12 Compliance with Reserve Requirements (a) The funds collected by various branches of the bank or other banks for the issue and held pending finalization of allotment of these instruments will have to be taken into account for the purpose of calculating reserve requirements. (b) The total amount raised by a bank through the issue of these instruments shall be reckoned as liability for the calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will attract CRR / SLR requirements. 1.13 Reporting of Issuances Banks issuing these instruments shall submit a report to the Chief General Managerin-charge, Department of Banking Operations and Development, Reserve Bank of India, Mumbai giving details of the debt raised, including the terms of issue specified in para 1 above (1.1 to 1.14), together with a copy of the offer document soon after the issue is completed. 1.14 Investment in these Instruments Issued by other Banks/ FIs (i) A bank's investment in these instruments issued by other banks and financial institutions will be reckoned along with the investment in other instruments eligible for capital status while computing compliance with the overall ceiling of 10% of investing banks' total capital funds prescribed vide circular DBOD.BP.BC.No.3/21.01.002/ 2004-05 dated July 6, 2004 and also subject to cross holding limits. (ii) Bank's investments in these instruments issued by other banks / financial institutions will attract risk weight for capital adequacy purposes as provided vide paragraphs 5.6 and 8.3.5 of the Master Circular on Basel III Capital Regulations, whichever applicable. 1.15 Classification in the Balance Sheet These instruments will be classified as ‘Borrowings’ under Schedule 4 of the Balance Sheet under item No. I (i.e. Borrowings).

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Annex 7
(cf para 5.17)

Prudential Guidelines on Credit Default Swaps (CDS) (DBOD.BP.BC.NO.61/21.06.203/2011-12 dated November 30, 2011) 1. Introduction

With a view to providing market participants a tool to transfer and manage credit risk associated with corporate bonds, Reserve Bank of India has introduced single name CDS on corporate bonds. Banks can undertake transactions in such CDS, both as market-makers as well as users. As users, banks can buy CDS to hedge a Banking Book or Trading Book exposure. The prudential guidelines dealing with CDS are dealt with in the following paragraphs. 2. Definitions

The following definitions are used in these guidelines: (i) Credit event payment - the amount which is payable by the credit protection provider to the credit protection buyer under the terms of the credit derivative contract following the occurrence of a credit event. The payment can be in the form of physical settlement (payment of par in exchange for physical delivery of a deliverable obligation of the reference entity) or cash settlement (either a payment determined on a par-less-recovery basis, i.e. determined using the par value of the reference obligation less that obligation’s recovery value, or a fixed amount, or a fixed percentage of the par amount). Deliverable asset / obligation - any obligation118 of the reference entity which can be delivered, under the terms of the contract, if a credit event occurs. [A deliverable obligation is relevant for credit derivatives that are to be physically settled.] Reference obligation - the obligation119 used to calculate the amount payable when a credit event occurs under the terms of a credit derivative contract. [A reference obligation is relevant for obligations that are to be cash settled (on a par-less-recovery basis).] Underlying asset / obligation - The asset120 which a protection buyer is seeking to hedge.

(ii)

(iii)

(iv) 3.

Classification of CDS into Trading Book and Banking Book Positions

For the purpose of capital adequacy for CDS transactions, Trading Book would comprise Held for Trading positions and Banking Book would comprise Held to Maturity and Available for Sale positions. A CDS being a financial derivative will be classified in the Trading Book except when it is contracted and designated as a

118

For the present, only the deliverable obligations specified in the guidelines on CDS vide circular IDMD.PCD.No. 5053 /14.03.04/2010-11 dated May 23, 2011 will be permitted. 119 Please refer to paragraph 2.4 of the circular IDMD.PCD.No. 5053 /14.03.04/2010-11 dated May 23, 2011. 120 Please refer to paragraph 2.4 of the circular IDMD.PCD.No. 5053 /14.03.04/2010-11 dated May 23, 2011.

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hedge for a Banking Book exposure. Thus, the CDS positions held in the Trading Book would include positions which: (a) arise from market-making; (b) are meant for hedging the exposures in the Trading Book; (c) are held for short-term resale; and (d) are taken by the bank with the intention of benefiting in the short-term from the actual and / or expected differences between their buying and selling prices CDS positions meant for hedging Banking Book exposures will be classified in the Banking Book. However, all CDS positions, either in Banking Book or Trading Book, should be marked-to-market. All CDS positions should meet the operational requirements indicated in paragraph 4 below. 4. Operational requirements for CDS to be recognised as eligible External / Third-party hedges for Trading Book and Banking Book (a) A CDS contract should represent a direct claim on the protection provider and should be explicitly referenced to specific exposure, so that the extent of the cover is clearly defined and incontrovertible. (b) Other than non-payment by a protection purchaser of premium in respect of the credit protection contract it should be irrevocable. (c) There should be no clause in the contract that would allow the protection provider unilaterally to cancel the credit cover or that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure. (d) The CDS contract should be unconditional; there should be no clause in the protection contract outside the direct control of the bank (protection buyer) that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the payment(s) due. (e) The credit events specified by the contracting parties should at a minimum cover: (i) failure to pay the amounts due under terms of the underlying obligation that are in effect at the time of such failure (with a grace period that is closely in line with the grace period in the underlying obligation); (ii) bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and (iii) restructuring of the underlying obligation (as contemplated in the IDMD guidelines on CDS dated May 23, 2011) involving forgiveness or postponement of principal, interest or fees that results in a credit loss event (i.e. charge-off, specific provision or other similar debit to the profit and loss account);

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(iv) when the restructuring of the underlying obligation is not covered by the CDS, but the other requirements in paragraph 4 are met, partial recognition of the CDS will be allowed. If the amount of the CDS is less than or equal to the amount of the underlying obligation, 60% of the amount of the hedge can be recognised as covered. If the amount of the CDS is larger than that of the underlying obligation, then the amount of eligible hedge is capped at 60% of the amount of the underlying obligation. (f) If the CDS specifies deliverable obligations that are different from the underlying obligation, the resultant asset mismatch will be governed under paragraph (k) below. (g) The CDS shall not terminate prior to expiration of any grace period required for a default on the underlying obligation to occur as a result of a failure to pay121. (h) The CDS allowing for cash settlement are recognised for capital purposes insofar as a robust valuation process is in place in order to estimate loss reliably. There should be a clearly specified period for obtaining post-credit event valuations of the underlying obligation. If the reference obligation specified in the CDS for purposes of cash settlement is different than the underlying obligation, the resultant asset mismatch will be governed under paragraph (k) below. (i) If the protection purchaser’s right/ability to transfer the underlying obligation to the protection provider is required for settlement, the terms of the underlying obligation should provide that any required consent to such transfer may not be unreasonably withheld. (j) The identity of the parties responsible for determining whether a credit event has occurred should be clearly defined. This determination should not be the sole responsibility of the protection seller. The protection buyer should have the right/ability to inform the protection provider of the occurrence of a credit event. (k) A mismatch between the underlying obligation and the reference obligation or deliverable obligation under the CDS (i.e. the obligation used for purposes of determining cash settlement value or the deliverable obligation) is permissible if (1) the reference obligation or deliverable obligation ranks pari passu with or is junior to the underlying obligation, and (2) the underlying obligation and reference obligation or deliverable obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place. (l) A mismatch between the underlying obligation and the obligation used for

121

The maturity of the underlying exposure and the maturity of the hedge should be defined conservatively. The effective maturity of the underlying should be gauged as the longest possible remaining time before the counterparty is scheduled to fulfill its obligation, taking into account any applicable grace period.

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purposes of determining whether a credit event has occurred is permissible if (1) the latter obligation ranks pari passu with or is junior to the underlying obligation, and (2) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable crossdefault or cross acceleration clauses are in place. 5. 5.1 Capital Adequacy Requirement for CDS Positions in the Banking Book Recognition of External/Third-party CDS Hedges

5.1.1 In case of Banking Book positions hedged by bought CDS positions, no exposure will be reckoned against the reference entity / underlying asset in respect of the hedged exposure, and exposure will be deemed to have been substituted by the protection seller, if the following conditions are satisfied: (a) Operational requirements mentioned in paragraph 4 are met; (b) The risk weight applicable to the protection seller under the Basel II122 Standardised Approach for credit risk is lower than that of the underlying asset; and (c) There is no maturity mismatch between the underlying asset and the reference / deliverable obligation. If this condition is not satisfied, then the amount of credit protection to be recognised should be computed as indicated in paragraph 5.1.3 (ii) below. 5.1.2 If the conditions (a) and (b) above are not satisfied or the bank breaches any of these conditions subsequently, the bank shall reckon the exposure on the underlying asset; and the CDS position will be transferred to Trading Book where it will be subject to specific risk, counterparty credit risk and general market risk (wherever applicable) capital requirements as applicable to Trading Book. 5.1.3 The unprotected portion of the underlying exposure should be risk-weighted as applicable under Basel II framework. The amount of credit protection shall be adjusted if there are any mismatches between the underlying asset/ obligation and the reference / deliverable asset / obligation with regard to asset or maturity. These are dealt with in detail in the following paragraphs. (i) Asset mismatches Asset mismatch will arise if the underlying asset is different from the reference asset or deliverable obligation. Protection will be reckoned as available by the protection buyer only if the mismatched assets meet the requirements specified in paragraph 4 (k) above. (ii) Maturity mismatches The protection buyer would be eligible to reckon the amount of protection if the maturity of the credit derivative contract were to be equal or more than the maturity of the underlying asset. If, however, the maturity of the CDS contract is less than the

122

Basel II Framework has been modified and enhanced by Basel III capital regulations. Therefore, a reference to Basel II Framework in this Annex should now be construed as reference to Basel III guidelines as contained in this Master Circular.

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maturity of the underlying asset, then it would be construed as a maturity mismatch. In case of maturity mismatch the amount of protection will be determined in the following manner: a. If the residual maturity of the credit derivative product is less than three months no protection will be recognized. b. If the residual maturity of the credit derivative contract is three months or more protection proportional to the period for which it is available will be recognised. When there is a maturity mismatch the following adjustment will be applied. Pa = P x (t- .25) ÷ (T- .25) Where: Pa = value of the credit protection adjusted for maturity mismatch P = credit protection t = min (T, residual maturity of the credit protection arrangement) expressed in years T= min (5, residual maturity of the underlying exposure) expressed in years Example: Suppose the underlying asset is a corporate bond of Face Value of Rs. 100 where the residual maturity is of 5 years and the residual maturity of the CDS is 4 years. The amount of credit protection is computed as under: 100 * {(4-.25) ÷ (5-.25)} = 100*(3.75÷ 4.75) = 78.95 c. Once the residual maturity of the CDS contract reaches three months, protection ceases to be recognised. 5.2 Internal Hedges Banks can use CDS contracts to hedge against the credit risk in their existing corporate bonds portfolios. A bank can hedge a Banking Book credit risk exposure either by an internal hedge (the protection purchased from the trading desk of the bank and held in the Trading Book) or an external hedge (protection purchased from an eligible third party protection provider). When a bank hedges a Banking Book credit risk exposure (corporate bonds) using a CDS booked in its Trading Book (i.e. using an internal hedge), the Banking Book exposure is not deemed to be hedged for capital purposes unless the bank transfers the credit risk from the Trading Book to an eligible third party protection provider through a CDS meeting the requirements of paragraph 5.1 vis-à-vis the Banking Book exposure. Where such third party protection is purchased and is recognised as a hedge of a Banking Book exposure for regulatory capital purposes, no capital is required to be maintained on internal and external CDS hedge. In such cases, the external CDS will act as indirect hedge for the Banking Book exposure and the capital adequacy in terms of paragraph 5.1, as applicable for external / third party hedges, will be applicable.

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6.

Capital Adequacy for CDS in the Trading Book

6.1 General Market Risk A credit default swap does not normally create a position for general market risk for either the protection buyer or protection seller. However, the present value of premium payable / receivable is sensitive to changes in the interest rates. In order to measure the interest rate risk in premium receivable/payable, the present value of the premium can be treated as a notional position in Government securities of relevant maturity. These positions will attract appropriate capital charge for general market risk. The protection buyer / seller will treat the present value of the premium payable / receivable equivalent to a short / long notional position in Government securities of relevant maturity. 6.2 Specific Risk for Exposure to Reference Entity A CDS creates a notional long / short position for specific risk in the reference asset / obligation for protection seller / protection buyer. For calculating specific risk capital charge, the notional amount of the CDS and its maturity should be used. The specific risk capital charge for CDS positions will be as per Table-1 and Table-2 below. Table-1: Specific risk capital charges for bought and sold CDS positions in the Trading Book: Exposures to entities other than Commercial Real Estate Companies/ NBFC-ND-SI Upto 90 days Ratings by the ECAI* Residual Maturity of the instrument 6 months or less Greater than 6 months and up to and including 24 months Exceeding 24 months All maturities All maturities Capital charge 0.28 % 1.14% After 90 days123 Ratings by the ECAI* AAA AA A BBB BB and below Unrated (if permitted) Capital charge 1.8 % 2.7% 4.5% 9.0% 13.5% 9.0%

AAA to BBB

1.80% 13.5% 9.0%

BB and below Unrated (if permitted)

* These ratings indicate the ratings assigned by Indian rating agencies / ECAIs or foreign rating agencies. In the case of foreign ECAIs, the rating symbols used here correspond to Standard and Poor. The modifiers “+” or “-“ have been subsumed within the main category.

123

Under Basel II, the specific risk capital charge for risk exposures to corporate bonds, CDS contracts, etc., held in Trading Book have been calibrated, keeping in view the generally short time horizon of the Trading Book. In case such positions remain in the Trading Book for longer time horizons, these are exposed to higher credit risk. In such cases, the normal specific risk capital charge will be inadequate. Hence, the specific risk capital charges on exposures remaining in Trading Book beyond 90 days have been suitably increased.

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Table-2: Specific risk capital charges for bought and sold CDS positions in the Trading Book: Exposures to Commercial Real Estate Companies/ NBFC-ND-SI# Ratings by the ECAI* Residual Maturity of the instrument 6 months or less Greater than 6 months and up to and including 24 months Exceeding 24 months All maturities All maturities Capital charge 1.4% 7.7% 9.0% 9.0% 9.0%

AAA to BBB

BB and below Unrated (if permitted)

# The above table will be applicable for exposures upto 90 days. Capital charge for exposures to Commercial Real Estate Companies / NBFC-ND-SI beyond 90 days shall be taken at 9.0%, regardless of rating of the reference /deliverable obligation. * These ratings indicate the ratings assigned by Indian rating agencies / ECAIs or foreign rating agencies. In the case of foreign ECAIs, the rating symbols used here correspond to Standard and Poor. The modifiers “+” or “-“ have been subsumed within the main category. 6.2.1 Specific Risk Capital Charges for Positions Hedged by CDS124

(i) Banks may fully offset the specific risk capital charges when the values of two legs (i.e. long and short in CDS positions) always move in the opposite direction and broadly to the same extent. This would be the case when the two legs consist of completely identical CDS. In these cases, no specific risk capital requirement applies to both sides of the CDS positions. (ii) Banks may offset 80 per cent of the specific risk capital charges when the value of two legs (i.e. long and short) always moves in the opposite direction but not broadly to the same extent125. This would be the case when a long cash position is hedged by a credit default swap and there is an exact match in terms of the reference / deliverable obligation, and the maturity of both the reference / deliverable obligation and the CDS. In addition, key features of the CDS (e.g. credit event definitions, settlement mechanisms) should not cause the price movement of the

124

This paragraph will be applicable only in those cases where a CDS position is explicitly meant for hedging a Trading Book exposure. In other words, a bank cannot treat a CDS position as a hedge against any other Trading Book exposure if it was not intended to be as such ab initio. 125 A cash position in corporate bond in Trading Book hedged by a CDS position, even where the reference obligation and the underlying bonds are the same, will not qualify for 100% offset because a CDS cannot guarantee a 100% match between the market value of CDS and the appreciation / depreciation in the underlying bond at all times. This paragraph will apply only when two legs consist of completely identical CDS instruments.

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CDS to materially deviate from the price movements of the cash position. To the extent that the transaction transfers risk, an 80% specific risk offset will be applied to the side of the transaction with the higher capital charge, while the specific risk requirement on the other side will be zero126. (iii) Banks may offset partially the specific risk capital charges when the value of the two legs (i.e. long and short) usually moves in the opposite direction. This would be the case in the following situations: (a) The position is captured in paragraph 6.2.1 (ii) but there is an asset mismatch between the cash position and the CDS. However, the underlying asset is included in the (reference / deliverable) obligations in the CDS documentation and meets the requirements of paragraph 4 (k). (b) The position is captured in paragraph 6.2.1 (ii) but there is maturity mismatch between credit protection and the underlying asset. However, the underlying asset is included in the (reference / deliverable) obligations in the CDS documentation. (c) In each of the cases in paragraph (a) and (b) above, rather than applying specific risk capital requirements on each side of the transaction (i.e. the credit protection and the underlying asset), only higher of the two capital requirements will apply. 6.2.2 Specific Risk Charge in CDS Positions which are not meant for Hedging In cases not captured in paragraph 6.2.1, a specific risk capital charge will be assessed against both sides of the positions. 7. Capital Charge for Counterparty Credit Risk The credit exposure for the purpose of counterparty credit risk on account of CDS transactions in the Trading Book will be calculated according to the Current Exposure Method127 under Basel II framework.

126

For example, if specific risk charge on long position (corporate bond) comes to Rs.1000 and that on the short position (credit protection bought through CDS) comes to Rs.700, there will be no capital change on the short position and the long position will attract specific risk capital charge of Rs.200 (1000-80% of 1000). Banks will not be allowed to offset specific risk charges between two opposite CDS positions which are not completely identical. 127 A CDS contract, which is required to be marked-to-market, creates bilateral exposure for the parties to the contract. The mark-to-market value of a CDS contract is the difference between the default-adjusted present value of protection payment (called “protection leg” / “credit leg”) and the present value of premium payable called (“premium leg”). If the value of credit leg is less than the value of the premium leg, then the marked-to-market value for the protection seller in positive. Therefore, the protection seller will have exposure to the counterparty (protection buyer) if the value of premium leg is more than the value of credit leg. In case, no premium is outstanding, the value of premium leg will be zero and the mark-tomarket value of the CDS contract will always be negative for the protection seller and therefore, protection seller will not have any exposure to the protection buyer. In no case, the protection seller’s exposure on protection buyer can exceed the amount of the premium unpaid. For the purpose of capital adequacy as well as exposure norms, the measure of counterparty exposures in case of CDS transaction held in Trading Book is the Potential Future Exposure (PFE) which is measured and recognised as per Current Exposure Method.

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7.1 Protection Seller A protection seller will have exposure to the protection buyer only if the fee / premia are outstanding. In such cases, the counterparty credit risk charge for all single name long CDS positions in the Trading Book will be calculated as the sum of the current marked-to-market value, if positive (zero, if marked-to-market value is negative) and the potential future exposure add-on factors based on Table 3 given below. However, the add-on will be capped to the amount of unpaid premia. Table 3: Add-on factors for Protection sellers
(As % of Notional Principal of CDS)

Type of Reference Obligation Obligations rated BBB- and above Below BBB- and unrated

128

Add-on factor 10% 20%

7.2 Protection Buyer A CDS contract creates a counterparty exposure on the protection seller on account of the credit event payment. The counterparty credit risk charge for all short CDS positions in the Trading Book will be calculated as the sum of the current marked-tomarket value, if positive (zero, if marked-to-market value is negative) and the potential future exposure add-on factors based on Table 4 given below: Table 4: Add-on factors for Protection Buyers
(As % of Notional Principal of CDS)

Type of Reference Obligation Obligations rated BBB- and above Below BBB- and unrated

129

Add-on factor 10% 20%

7.3 CDS

Capital Charge for Counterparty risk for Collateralised Transactions in

As mentioned in paragraph 3.3 of the circular IDMD.PCD.No. 5053/14.03.04/2010-11 dated May 23, 2011, collaterals and margins would be maintained by the individual market participants. The counterparty exposure for CDS traded in the OTC market will be calculated as per the Current Exposure Method. Under this method, the calculation of the counterparty credit risk charge for an individual contract, taking into account the collateral, will be as follows: Counterparty risk capital charge = [(RC + add-on) – CA] x r x 9% where: RC = the replacement cost, add-on = the amount for potential future exposure calculated according to

128

The add-on factors will be the same regardless of maturity of the reference obligations or CDS contract. 129 The add-on factors will be the same regardless of maturity of the reference obligations or CDS contract.

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paragraph 7 above. CA = the volatility adjusted amount of eligible collateral under the comprehensive approach prescribed in paragraphs 7.3 “Credit Risk Mitigation TechniquesCollateralised Transactions” of these guidelines, or zero if no eligible collateral is applied to the transaction, and r = the risk weight of the counterparty. 8. Treatment of Exposures Below Materiality Thresholds

Materiality thresholds on payments below which no payment is made in the event of loss are equivalent to retained first loss positions and should be assigned risk weight of 1111%130 for capital adequacy purpose by the protection buyer. 9. General Provisions Requirements At present, general provisions (standard asset provisions) are required only for Loans and Advances and the positive marked-to-market values of derivatives contracts. For all CDS positions including the hedged positions, both in the Banking Book and Trading Book, banks should hold general provisions for gross positive marked-tomarket values of the CDS contracts. 10. Prudential Treatment Post-Credit Event

10.1 Protection Buyer In case the credit event payment is not received within the period as stipulated in the CDS contract, the protection buyer shall ignore the credit protection of the CDS and reckon the credit exposure on the underlying asset and maintain appropriate level of capital and provisions as warranted for the exposure. On receipt of the credit event payment, (a) the underlying asset shall be removed from the books if it has been delivered to the protection seller or (b) the book value of the underlying asset shall be reduced to the extent of credit event payment received if the credit event payment does not fully cover the book value of the underlying asset and appropriate provisions shall be maintained for the reduced value. 10.2 Protection Seller

10.2.1 From the date of credit event and until the credit event payment in accordance with the CDS contract, the protection seller shall debit the Profit and Loss account and recognise a liability to pay to the protection buyer, for an amount equal to fair value of the contract (notional of credit protection less expected recovery value). In case, the fair value of the deliverable obligation (in case of physical settlement) / reference obligation (in case of cash settlement) is not available after the date of the credit event, then until the time that value is available, the protection seller should

130

As per Basel II framework the first loss positions are required to be deducted from capital. However, according to Basel III, the risk weight for such positions consistent with minimum 8% capital requirement is 1250%. Since in India, minimum capital requirement is 9%, the risk weight has been capped at 1111% (100/9) so as to equate the capital charge to the exposure value.

- 194 -

debit the Profit and Loss account for the full amount of the protection sold and recognise a liability to pay to the protection buyer equal to that amount. 10.2.2. In case of physical settlement, after the credit event payment, the protection seller shall recognise the assets received, if any, from the protection buyer at the fair value. These investments will be classified as non-performing investments and valued in terms of paragraph 3.10 of the Master Circular on “Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks”. Thereafter, the protection seller shall subject these assets to the appropriate prudential treatment as applicable to corporate bonds. 11. Exposure Norms

11.1 For the present, the CDS is primarily intended to provide an avenue to investors for hedging credit risk in the corporate bonds, after they have invested in the bonds. It should, therefore, not be used as a substitute for a bank guarantee. Accordingly, a bank should not sell credit protection by writing a CDS on a corporate bond on the date of its issuance in the primary market or undertake, before or at the time of issuance of the bonds, to write such protection in future131. 11.2 Exposure on account of all CDS contracts will be aggregated and combined with other on-balance sheet and off-balance sheet exposures against the reference entity for the purpose of complying with the exposure norms. 11.3 Protection Seller (i) A protection seller will recognise an exposure to the reference entity of the CDS contract equal to the amount of credit protection sold, subject to paragraph (ii) below. (ii) If a market maker has two completely identical opposite positions in CDS forming a hedged position which qualifies for capital adequacy treatment in terms of paragraph 6.2.1(i), no exposure would be reckoned against the reference entity. (iii) Protection seller will also recognise an exposure to the counterparty equal to the total credit exposure calculated under Current Exposure Method as prescribed in Basel II framework in the case of all CDS positions held in the Trading Book. 11.4 Protection Buyer (i) In respect of obligations hedged in the Banking Book as indicated in paragraph 5.1 and Trading Book as indicated in paragraph 6.2.1 (ii), the protection buyer will not reckon any exposure on the reference entity. The exposure will be deemed to have been transferred on the protection seller to

131

As per extant instructions issued by RBI, banks are not permitted to guarantee the repayment of principal and/or interest due on corporate bonds. Considering this restriction, writing credit protection through CDS on a corporate bond on the date of its issuance or undertaking, before or at the time of issuance, to write such protection in future, will be deemed to be a violation of the said instructions.

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the extent of protection available. (ii) In all other cases where the obligations in Banking Book or Trading Book are hedged by CDS positions, the protection buyer will continue to reckon the exposure on the reference entity equal to the outstanding position of the underlying asset. (iii) For all bought CDS positions (hedged and un-hedged) held in Trading Book, the protection buyer will also reckon exposure on the counterparties to the CDS contracts as measured by the Current Exposure Method. (iv) The protection buyer needs to adhere to all the criteria required for transferring the exposures fully to the protection seller in terms of paragraph (i) above on an on-going basis so as to qualify for exposure relief on the underlying asset. In case any of these criteria are not met subsequently, the bank will have to reckon the exposure on the underlying asset. Therefore, banks should restrict the total exposure to an obligor including that covered by way of various unfunded credit protections (guarantees, LCs, standby LCs, CDS, etc.) within an internal exposure ceiling considered appropriate by the Board of the bank in such a way that it does not breach the single / group borrower exposure limit prescribed by RBI. In case of the event of any breach in the single / group borrower exposure limit, the entire exposure in excess of the limit will be risk weighted at 1111%. In order to ensure that consequent upon such a treatment, the bank does not breach the minimum capital requirement prescribed by RBI, it should keep sufficient cushion in capital in case it assumes exposures in excess of normal exposure limit. (v) In respect of bought CDS positions held in Trading Book which are not meant for hedging, the protection buyer will not reckon any exposure against the reference entity132. 12. Netting of Exposures

No netting of positive and negative marked-to-market values of the contracts with the same counterparty, including that in the case of hedged positions will be allowed for the purpose of capital adequacy for counterparty credit risk, provisioning and exposure norms in terms of circular DBOD.No.BP.BC.48/21.06.001/2010-11 October 1, 2010. 13. Reporting Requirements Banks should report “total exposure” in all cases where they have assumed exposures against borrowers in excess of the normal single / group exposure limits due to the credit protections obtained by them through CDS, guarantees or any other instruments of credit risk transfer, to the Department of Banking Supervision (DBS) on a quarterly basis.

132

In a CDS transaction, the protection buyer does not suffer a loss when reference entity defaults; it rather gains in such a situation.

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Annex 8
(Cf. para 7.3.6)

Part – A Illustrations on Credit Risk Mitigation (Loan- Exposures) Calculation of Exposure amount for collateralised transactions E * = Max { 0, [ E x (1 + He ) – C x ( 1 – Hc – HFX ) ] } Where, E* E He C Hc = Exposure value after risk mitigation = Current value of the exposure = Haircut appropriate to the exposure = Current value of the collateral received = Haircut appropriate to the collateral

HFX = Haircut appropriate for currency mismatch between the collateral and exposure
Sly. No. (1) 1 2 3 4 5

Particulars (2) Exposure Maturity of the exposure Nature of the exposure Currency Exposure in rupees Rating of exposure Applicable Risk weight Haircut for exposure* Collateral Currency Collateral in Rs.

Case I (3) 100 2 Corporate Loan INR 100 BB 150 0 100 INR 100

Case 2 (4) 100 3 Corporat e Loan INR 100 A 50 0 100 INR 100

Case 3 (5) 100 6 Corporate Loan USD 4000 (Row 1 x exch. rate##) BBB100@ 0 4000 INR 4000

Case 4 (6) 100 3 Corporate Loan INR 100 AA 30 0 2 USD 80 (Row 1 x Exch. Rate) 3 Foreign Corporate Bonds AAA (S & P) 0.04

Case 5 (7) 100 3 Corporat e Loan INR 100 B150 0 100 INR 100

6

7 8 9

10

11

Residual maturity of collateral (years) Nature of collateral Rating of Collateral Haircut for

2 Sovereign (GoI) Security NA 0.02

3 Bank Bonds Unrated 0.06

6 Corporate Bonds BBB 0.12

5 Units of Mutual Funds AA 0.08

12

13 14

- 197 -

15

16

17

18

19 20

collateral (%) Haircut for currency mismatches ( %) [cf. para 7.3.7 (vi) of circular] Total Haircut on collateral [Row 10 x (row 14+15)] Collateral after haircut ( Row 10 - Row 16) Net Exposure (Row 5 – Row 17 ) Risk weight ( %) RWA (Row 18 x 19) ## # @

0

0

0.08

0.08

0

2

6

800

9.6

8.0

98

94

3200

70.4

92

2 150 3

6 50 3

800 100@ 800

29.6 30 8.88

8 150 12

Exchange rate assumed to be 1 USD = Rs.40 Not applicable In case of long term ratings, as per para 6.4.2 of the circular, where “+” or “-“ notation is attached to the rating, the corresponding main rating category risk weight is to be used. Hence risk weight is 100 per cent. ( * ) Haircut for exposure is taken as zero because the loans are not marked to market and hence are not volatile Case 4: Haircut applicable as per Table – 14 of Basel III Capital Regulations Case 5: It is assumed that the Mutual Fund meets the criteria specified in paragraph 7.3.5(viii) and has investments in the securities all of which have residual maturity of more than five years are rated AA and above – which would attract a haircut of eight per cent in terms of Table 14.

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Part - B Illustrations on computation of capital charge for Counterparty Credit Risk (CCR) – Repo Transactions An illustration showing computation of total capital charge for a repo transaction comprising the capital charge for CCR and Credit/Market risk for the underlying security, under Basel-II is furnished below: A. Particulars of a Repo Transaction: Let us assume the following parameters of a hypothetical repo transaction: Type of the Security Residual Maturity Coupon Current Market Value Cash borrowed Modified Duration of the security Assumed frequency of margining Haircut for security Haircut on cash Minimum holding period Change in yield for computing the capital charge for general market risk GOI security 5 years 6% Rs.1050 Rs.1000 4.5 years Daily 2% (Cf. Item A(i), Table 14 Circular) Zero (Cf. Item C in Table 14 of the Circular) 5 business-days (Cf. para 7.3.7 (ix) of the Circular) 0.7 % p.a. (Cf. Zone 3 in Table 17 of the Circular)

B. Computation of total capital charge comprising the capital charge for Counterparty Credit Risk (CCR) and Credit / Market risk for the underlying security B.1 In the books of the borrower of funds (for the off-balance sheet exposure due to lending of the security under repo) (In this case, the security lent is the exposure of the security lender while cash borrowed is the collateral) Sl.N Items Particulars Amount (in Rs.) o. A. Capital Charge for CCR 1. Exposure MV of the security 1050 2. CCF for Exposure 100 % 3. On-Balance Sheet Credit Equivalent 1050 * 100 % 1050 4. Haircut 1.4 % @ 5. Exposure adjusted for haircut as per 1050 * 1.014 1064.70 Table 14 of the circular 6. Collateral for the security lent Cash 1000 7. Haircut for exposure 0% 8. Collateral adjusted for haircut 1000 * 1.00 1000 9. Net Exposure ( 5- 8) 1064.70 – 1000 64.70 10. Risk weight (for a Scheduled CRAR20 % compliant bank)

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11. Risk weighted assets for CCR (9 x 10) 64.70 * 20 % 12. Capital Charge for CCR (11 x 9%) 12.94 * 0.09 B. Capital for Credit/ market Risk of the security Capital for credit risk 1. Credit risk (if the security is held under HTM) Specific Risk Capital for market risk (if the security is held under AFS / HFT) General Market Risk (4.5 * 0.7 % * 1050) {Modified duration * assumed yield change (%) * market value of security}

12.94 1.16 Zero (Being Govt. security) Zero (Being Govt. security)

2.

33.07

Total capital required (for CCR + credit risk + specific risk + general market risk) @ The supervisory haircut of 2 per cent has been scaled down using the formula indicated in paragraph 7.3.7 of the circular.

34.23

B.2 In the books of the lender of funds (for the on-balance sheet exposure due to lending of funds under repo) (In this case, the cash lent is the exposure and the security borrowed is collateral) Sl.No Items Particulars Amount (in Rs.) A. Capital Charge for CCR 1. Exposure Cash 1000 2. Haircut for exposure 0% 3. Exposure adjusted for haircut 1000 * 1.00 1000 as per Table 14 of the circular 4. Collateral for the cash lent Market value of the security 1050 5. Haircut for collateral 1.4 % @ 6. Collateral adjusted for haircut 1050 * 0.986 1035.30 7. Net Exposure ( 3 - 6) Max { 1000 -1035.30} 0 8. Risk weight (for a Scheduled 20 % CRAR-compliant bank) 9. Risk weighted assets for CCR ( 0 * 20 % 0 7 x 8) 10. Capital Charge for CCR 0 0 B. Capital for Credit/ market Risk of the security 1. Capital for credit risk Credit Risk Not applicable, as it is (if the security is held under maintained by the HTM) borrower of funds 2. Capital for market risk Specific Risk Not applicable, as it is (if the security is held under maintained by the AFS/HFT) borrower of funds General Market Risk Not applicable, as it is maintained by the borrower of funds

@ The supervisory haircut of 2 per cent has been scaled down using the formula indicated in paragraph 7.3.7 of the circular.

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Annex 9
(cf. para 8.3.10)

Measurement of capital charge for Market Risks in respect of Interest Rate Derivatives and Options A. Interest Rate Derivatives The measurement system should include all interest rate derivatives and off-balancesheet instruments in the trading book, which react to changes in interest rates, (e.g. forward rate agreements (FRAs), other forward contracts, bond futures, interest rate and cross-currency swaps and forward foreign exchange positions). Options can be treated in a variety of ways as described in para B.1 below. A summary of the rules for dealing with interest rate derivatives is set out in the Table at the end of this section. 1. Calculation of positions The derivatives should be converted into positions in the relevant underlying and be subjected to specific and general market risk charges as described in the guidelines. In order to calculate the capital charge, the amounts reported should be the market value of the principal amount of the underlying or of the notional underlying. For instruments where the apparent notional amount differs from the effective notional amount, banks must use the effective notional amount. (a) Futures and Forward Contracts, including Forward Rate Agreements These instruments are treated as a combination of a long and a short position in a notional government security. The maturity of a future or a FRA will be the period until delivery or exercise of the contract, plus - where applicable - the life of the underlying instrument. For example, a long position in a June three-month interest rate future (taken in April) is to be reported as a long position in a government security with a maturity of five months and a short position in a government security with a maturity of two months. Where a range of deliverable instruments may be delivered to fulfill the contract, the bank has flexibility to elect which deliverable security goes into the duration ladder but should take account of any conversion factor defined by the exchange. (b) Swaps Swaps will be treated as two notional positions in government securities with relevant maturities. For example, an interest rate swap under which a bank is receiving floating rate interest and paying fixed will be treated as a long position in a floating rate instrument of maturity equivalent to the period until the next interest fixing and a short position in a fixed-rate instrument of maturity equivalent to the residual life of the swap. For swaps that pay or receive a fixed or floating interest rate against some other reference price, e.g. a stock index, the interest rate component should be slotted into the appropriate repricing maturity category, with the equity component being included in the equity framework. Separate legs of cross-currency swaps are to be reported in the relevant maturity ladders for the currencies concerned.

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2. Calculation of capital charges for derivatives under the Standardised Methodology (a) Allowable offsetting of Matched Positions Banks may exclude the following from the interest rate maturity framework altogether (for both specific and general market risk); Long and short positions (both actual and notional) in identical instruments with exactly the same issuer, coupon, currency and maturity. A matched position in a future or forward and its corresponding underlying may also be fully offset, (the leg representing the time to expiry of the future should however be reported) and thus excluded from the calculation. When the future or the forward comprises a range of deliverable instruments, offsetting of positions in the future or forward contract and its underlying is only permissible in cases where there is a readily identifiable underlying security which is most profitable for the trader with a short position to deliver. The price of this security, sometimes called the "cheapest-to-deliver", and the price of the future or forward contract should in such cases move in close alignment. No offsetting will be allowed between positions in different currencies; the separate legs of cross-currency swaps or forward foreign exchange deals are to be treated as notional positions in the relevant instruments and included in the appropriate calculation for each currency. In addition, opposite positions in the same category of instruments can in certain circumstances be regarded as matched and allowed to offset fully. To qualify for this treatment the positions must relate to the same underlying instruments, be of the same nominal value and be denominated in the same currency. In addition: for Futures: offsetting positions in the notional or underlying instruments to which the futures contract relates must be for identical products and mature within seven days of each other; for Swaps and FRAs: the reference rate (for floating rate positions) must be identical and the coupon closely matched (i.e. within 15 basis points); and for Swaps, FRAs and Forwards: the next interest fixing date or, for fixed coupon positions or forwards, the residual maturity must correspond within the following limits: o o o less than one month hence: same day; between one month and one year hence: within seven days; over one year hence: within thirty days.

Banks with large swap books may use alternative formulae for these swaps to calculate the positions to be included in the duration ladder. The method would be to calculate the sensitivity of the net present value implied by the change in yield used in the duration method and allocate these sensitivities into the time-bands set out in Table 17 in paragraph 8.3.9 of the Basel III Capital Regulations. (b) Specific Risk Interest rate and currency swaps, FRAs, forward foreign exchange contracts and

- 202 -

interest rate futures will not be subject to a specific risk charge. This exemption also applies to futures on an interest rate index (e.g. LIBOR). However, in the case of futures contracts where the underlying is a debt security, or an index representing a basket of debt securities, a specific risk charge will apply according to the credit risk of the issuer as set out in paragraphs above. (c) General Market Risk General market risk applies to positions in all derivative products in the same manner as for cash positions, subject only to an exemption for fully or very closely matched positions in identical instruments as defined in paragraphs above. The various categories of instruments should be slotted into the maturity ladder and treated according to the rules identified earlier. Table - Summary of Treatment of Interest Rate Derivatives Instrument Exchange-traded Future - Government debt security - Corporate debt security - Index on interest rates (e.g. MIBOR) OTC Forward - Government debt security - Corporate debt security - Index on interest rates (e.g. MIBOR) FRAs, Swaps Forward Foreign Exchange Options - Government debt security - Corporate debt security - Index on interest rates (e.g. MIBOR) - FRAs, Swaps B. Treatment of Options 1. In recognition of the wide diversity of banks’ activities in options and the difficulties of measuring price risk for options, alternative approaches are permissible as under: those banks which solely use purchased options133 will be free to use the simplified approach described in Section I below; those banks which also write options will be expected to use one of the intermediate approaches as set out in Section II below. 2. In the simplified approach, the positions for the options and the associated underlying, cash or forward, are not subject to the standardised methodology but rather are "carved-out" and subject to separately calculated capital charges that incorporate both general market risk and specific risk. The risk numbers thus generated are then added to the capital charges for the relevant category, i.e. Specific risk charge No Yes No No Yes No No No General Market risk charge Yes, as two positions Yes, as two positions Yes, as two positions Yes, as two positions Yes, as two positions Yes, as two positions Yes, as two positions Yes, as one position in each currency

No Yes No No

133

Unless all their written option positions are hedged by perfectly matched long positions in exactly the same options, in which case no capital charge for market risk is required

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interest rate related instruments, equities, and foreign exchange as described in paragraph 8.3 to 8.5 of the Basel III Capital Regulations. The delta-plus method uses the sensitivity parameters or "Greek letters" associated with options to measure their market risk and capital requirements. Under this method, the delta-equivalent position of each option becomes part of the standardised methodology set out in paragraph 8.3 to 8.5 of the Basel III Capital Regulations with the delta-equivalent amount subject to the applicable general market risk charges. Separate capital charges are then applied to the gamma and Vega risks of the option positions. The scenario approach uses simulation techniques to calculate changes in the value of an options portfolio for changes in the level and volatility of its associated underlyings. Under this approach, the general market risk charge is determined by the scenario "grid" (i.e. the specified combination of underlying and volatility changes) that produces the largest loss. For the delta-plus method and the scenario approach the specific risk capital charges are determined separately by multiplying the delta-equivalent of each option by the specific risk weights set out in paragraph 8.3 to 8.4 of the Basel III Capital Regulations. I. Simplified Approach 3. Banks which handle a limited range of purchased options only will be free to use the simplified approach set out in Table A below, for particular trades. As an example of how the calculation would work, if a holder of 100 shares currently valued at Rs.10 each holds an equivalent put option with a strike price of Rs.11, the capital charge would be: Rs.1,000 x 18 per cent (i.e. 9 per cent specific plus 9 per cent general market risk) = Rs.180, less the amount the option is in the money (Rs.11 – Rs.10) x 100 = Rs.100, i.e. the capital charge would be Rs.80. A similar methodology applies for options whose underlying is a foreign currency or an interest rate related instrument. Table A - Simplified approach: capital charges Position Treatment The capital charge will be the market value of the Long cash and Long put underlying security134 multiplied by the sum of Or specific and general market risk charges135 for the Short cash and Long call underlying less the amount the option is in the money (if any) bounded at zero136 The capital charge will be the lesser of: Long call (i) the market value of the underlying security Or multiplied by the sum of specific and general market Long put risk charges3 for the underlying (ii) the market value of the option137

134

In some cases such as foreign exchange, it may be unclear which side is the "underlying security"; this should be taken to be the asset which would be received if the option were exercised. In addition the nominal value should be used for items where the market value of the underlying instrument could be zero, e.g. caps and floors, swaptions etc. 135 Some options (e.g. where the underlying is an interest rate or a currency) bear no specific risk, but specific risk will be present in the case of options on certain interest rate-related instruments (e.g. options on a corporate debt security or corporate bond index; see Section B for the relevant capital charges) and for options on equities and stock indices (see Section C). The charge under this measure for currency options will be 9 per cent. 136 For options with a residual maturity of more than six months, the strike price should be compared with the forward, not current, price. A bank unable to do this must take the "in-themoney" amount to be zero. 137 Where the position does not fall within the trading book (i.e. options on certain foreign

- 204 -

II. Intermediate Approaches (a) Delta-plus Method 4. Banks which write options will be allowed to include delta-weighted options positions within the standardised methodology set out in paragraph 8.3 to 8.5 of this Master Circular. Such options should be reported as a position equal to the market value of the underlying multiplied by the delta. However, since delta does not sufficiently cover the risks associated with options positions, banks will also be required to measure gamma (which measures the rate of change of delta) and Vega (which measures the sensitivity of the value of an option with respect to a change in volatility) sensitivities in order to calculate the total capital charge. These sensitivities will be calculated according to an approved exchange model or to the bank’s proprietary options pricing model subject to oversight by the Reserve Bank of India138. 5. Delta-weighted positions with debt securities or interest rates as the underlying will be slotted into the interest rate time-bands, as set out in Table 17 of paragraph 8.3 of the Basel III Capital Regulations, under the following procedure. A two-legged approach should be used as for other derivatives, requiring one entry at the time the underlying contract takes effect and a second at the time the underlying contract matures. For instance, a bought call option on a June three-month interestrate future will in April be considered, on the basis of its delta-equivalent value, to be a long position with a maturity of five months and a short position with a maturity of two months139. The written option will be similarly slotted as a long position with a maturity of two months and a short position with a maturity of five months. Floating rate instruments with caps or floors will be treated as a combination of floating rate securities and a series of European-style options. For example, the holder of a threeyear floating rate bond indexed to six month LIBOR with a cap of 15 per cent will treat it as: (i) a debt security that reprices in six months; and (ii) a series of five written call options on a FRA with a reference rate of 15 per cent, each with a negative sign at the time the underlying FRA takes effect and a positive sign at the time the underlying FRA matures140. 6. The capital charge for options with equities as the underlying will also be based on the delta-weighted positions which will be incorporated in the measure of market risk described in paragraph 8.4 of the Basel III Capital Regulations. For purposes of this calculation each national market is to be treated as a separate underlying. The capital charge for options on foreign exchange and gold positions will be based on the method set out in paragraph 8.5 of the Basel III Capital Regulations.

exchange or commodities positions not belonging to the trading book), it may be acceptable to use the book value instead.
138

Reserve Bank of India may wish to require banks doing business in certain classes of exotic options (e.g. barriers, digitals) or in options "at-the-money" that are close to expiry to use either the scenario approach or the internal models alternative, both of which can accommodate more detailed revaluation approaches. 139 Two-months call option on a bond future, where delivery of the bond takes place in September, would be considered in April as being long the bond and short a five-month deposit, both positions being delta-weighted. 140 The rules applying to closely-matched positions set out in paragraph 2 (a) of this Annex will also apply in this respect.

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For delta risk, the net delta-based equivalent of the foreign currency and gold options will be incorporated into the measurement of the exposure for the respective currency (or gold) position.

7. In addition to the above capital charges arising from delta risk, there will be further capital charges for gamma and for Vega risk. Banks using the delta-plus method will be required to calculate the gamma and Vega for each option position (including hedge positions) separately. The capital charges should be calculated in the following way: (i) for each individual option a "gamma impact" should be calculated according to a Taylor series expansion as: Gamma impact = ½ x Gamma x VU² where VU = Variation of the underlying of the option. (ii) VU will be calculated as follows: for interest rate options if the underlying is a bond, the price sensitivity should be worked out as explained. An equivalent calculation should be carried out where the underlying is an interest rate. for options on equities and equity indices; which are not permitted at present, the market value of the underlying should be multiplied by 9 per cent141; for foreign exchange and gold options: the market value of the underlying should be multiplied by 9 per cent; (iii) For the purpose of this calculation the following positions should be treated as the same underlying: for interest rates,142 each time-band as set out in Table 17 of the Basel III Capital Regulations;143 for equities and stock indices, each national market; for foreign currencies and gold, each currency pair and gold; (iv) Each option on the same underlying will have a gamma impact that is either positive or negative. These individual gamma impacts will be summed, resulting in a net gamma impact for each underlying that is either positive or negative. Only those net gamma impacts that are negative will be included in the capital calculation. (v) The total gamma capital charge will be the sum of the absolute value of the net negative gamma impacts as calculated above. (vi) For volatility risk, banks will be required to calculate the capital charges by multiplying the sum of the Vegas for all options on the same underlying, as defined above, by a proportional shift in volatility of ± 25 per cent.

141

The basic rules set out here for interest rate and equity options do not attempt to capture specific risk when calculating gamma capital charges. However, Reserve Bank may require specific banks to do so. 142 Positions have to be slotted into separate maturity ladders by currency. 143 Banks using the duration method should use the time-bands as set out in Table 18 of the Basel III Capital Regulations.

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(vi) The total capital charge for Vega risk will be the sum of the absolute value of the individual capital charges that have been calculated for Vega risk.

(b) Scenario Approach 8. More sophisticated banks will also have the right to base the market risk capital charge for options portfolios and associated hedging positions on scenario matrix analysis. This will be accomplished by specifying a fixed range of changes in the option portfolio’s risk factors and calculating changes in the value of the option portfolio at various points along this "grid". For the purpose of calculating the capital charge, the bank will revalue the option portfolio using matrices for simultaneous changes in the option’s underlying rate or price and in the volatility of that rate or price. A different matrix will be set up for each individual underlying as defined in paragraph 7 above. As an alternative, at the discretion of each national authority, banks which are significant traders in options for interest rate options will be permitted to base the calculation on a minimum of six sets of time-bands. When using this method, not more than three of the time-bands as defined in paragraph 8.3 of this Master Circular should be combined into any one set. 9. The options and related hedging positions will be evaluated over a specified range above and below the current value of the underlying. The range for interest rates is consistent with the assumed changes in yield in Table - 17 of paragraph 8.3 of this Master Circular. Those banks using the alternative method for interest rate options set out in paragraph 8 above should use, for each set of time-bands, the highest of the assumed changes in yield applicable to the group to which the timebands belong.144 The other ranges are ±9 per cent for equities and ±9 per cent for foreign exchange and gold. For all risk categories, at least seven observations (including the current observation) should be used to divide the range into equally spaced intervals. 10. The second dimension of the matrix entails a change in the volatility of the underlying rate or price. A single change in the volatility of the underlying rate or price equal to a shift in volatility of + 25 per cent and - 25 per cent is expected to be sufficient in most cases. As circumstances warrant, however, the Reserve Bank may choose to require that a different change in volatility be used and / or that intermediate points on the grid be calculated. 11. After calculating the matrix, each cell contains the net profit or loss of the option and the underlying hedge instrument. The capital charge for each underlying will then be calculated as the largest loss contained in the matrix. 12. In drawing up these intermediate approaches it has been sought to cover the major risks associated with options. In doing so, it is conscious that so far as specific risk is concerned, only the delta-related elements are captured; to capture other risks would necessitate a much more complex regime. On the other hand, in other areas

144

If, for example, the time-bands 3 to 4 years, 4 to 5 years and 5 to 7 years are combined, the highest assumed change in yield of these three bands would be 0.75.

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the simplifying assumptions used have resulted in a relatively conservative treatment of certain options positions. 13. Besides the options risks mentioned above, the RBI is conscious of the other risks also associated with options, e.g. rho (rate of change of the value of the option with respect to the interest rate) and theta (rate of change of the value of the option with respect to time). While not proposing a measurement system for those risks at present, it expects banks undertaking significant options business at the very least to monitor such risks closely. Additionally, banks will be permitted to incorporate rho into their capital calculations for interest rate risk, if they wish to do so.

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Annex 10
(cf. para 13.5)

An Illustrative Approach for Measurement of Interest Rate Risk in the Banking Book (IRRBB) under Pillar 2 The Basel-II Framework145 (Paragraphs 739 and 762 to 764) require the banks to measure the interest rate risk in the banking book (IRRBB) and hold capital commensurate with it. If supervisors determine that banks are not holding capital commensurate with the level of interest rate risk, they must require the bank to reduce its risk, to hold a specific additional amount of capital or some combination of the two. To comply with the requirements of Pillar 2 relating to IRRBB, the guidelines on Pillar 2 issued by many regulators contain definite provisions indicating the approach adopted by the supervisors to assess the level of interest rate risk in the banking book and the action to be taken in case the level of interest rate risk found is significant. In terms of para 764 of the Basel II framework, the banks can follow the indicative methodology prescribed in the supporting document "Principles for the Management and Supervision of Interest Rate Risk" issued by BCBS for assessment of sufficiency of capital for IRRBB. 2. The approach prescribed in the BCBS Paper on “Principles for the Management and Supervision of Interest Rate Risk" The main components of the approach prescribed in the above mentioned supporting document are as under: a) The assessment should take into account both the earnings perspective and economic value perspective of interest rate risk. b) The impact on income or the economic value of equity should be calculated by applying a notional interest rate shock of 200 basis points. c) The usual methods followed in measuring the interest rate risk are : a) Earnings perspective Gap Analysis, simulation techniques and Internal Models based on VaR b) Economic perspective Gap analysis combined with duration gap analysis, simulation techniques and Internal Models based on VaR 3. Methods for measurement of the IRRBB

3.1 Impact on Earnings The major methods used for computing the impact on earnings are the gap Analysis, Simulations and VaR based Techniques. Banks in India have been using the Gap
145

International Convergence of Capital Measurement and Capital Standards (June 2006) released by the Basel Committee on Banking Supervision.

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Reports to assess the impact of adverse movements in the interest rate on income through gap method. The banks may continue with the same. However, the banks may use the simulations also. The banks may calculate the impact on the earnings by gap analysis or any other method with the assumed change in yield on 200 bps over one year. However, no capital needs to be allocated for the impact on the earnings. 3.2 Impact of IRRBB on the Market Value of Equity (MVE) The banks may use the Method indicated in the Basel Committee on Banking Supervision (BCBS) Paper "Principles for the Management and Supervision of Interest rate Risk" (July 2004) for computing the impact of the interest rate shock on the MVE. 3.2.1 Method indicated in the BCBS Paper on "Principles for the Management and Supervision of Interest Rate Risk" The following steps are involved in this approach: a) The variables such as maturity/re-pricing date, coupon rate, frequency, principal amount for each item of asset/liability (for each category of asset / liability) are generated. b) The longs and shorts in each time band are offset. c) The resulting short and long positions are weighted by a factor that is designed to reflect the sensitivity of the positions in the different time bands to an assumed change in interest rates. These factors are based on an assumed parallel shift of 200 basis points throughout the time spectrum, and on a proxy of modified duration of positions situated at the middle of each time band and yielding 5 per cent. d) The resulting weighted positions are summed up, offsetting longs and shorts, leading to the net short- or long-weighted position. e) The weighted position is seen in relation to capital. For details banks may refer to the Annex 3 and 4 of captioned paper issued by the BCBS146. 3.2.2 Other techniques for Interest rate risk measurement The banks can also follow different versions / variations of the above techniques or entirely different techniques to measure the IRRBB if they find them conceptually sound. In this context, Annex 1 and 2 of the BCBS paper referred to above provide broad details of interest rate risk measurement techniques and overview of some of the factors which the supervisory authorities might consider in obtaining and analysing the information on individual bank’s exposures to interest rate risk.

146

Principles for the Management and Supervision of Interest Rate Risk (July 2004).

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4.

Suggested approach for measuring the impact of IRRBB on capital

4.1 As per Basel II Framework, if the supervisor feels that the bank is not holding capital commensurate with the level of IRRBB, it may either require the bank to reduce the risk or allocate additional capital or a combination of the two. 4.2 The banks can decide, with the approval of the Board, on the appropriate level of interest rate risk in the banking book which they would like to carry keeping in view their capital level, interest rate management skills and the ability to re-balance the banking book portfolios quickly in case of adverse movement in the interest rates. In any case, a level of interest rate risk which generates a drop in the MVE of more than 20 per cent with an interest rate shock of 200 basis points, will be treated as excessive and such banks would normally be required by the RBI to hold additional capital against IRRBB as determined during the SREP. The banks which have IRRBB exposure equivalent to less than 20 per cent drop in the MVE may also be required to hold additional capital if the level of interest rate risk is considered, by the RBI, to be high in relation to their capital level or the quality of interest rate risk management framework obtaining in the bank. While the banks may on their own decide to hold additional capital towards IRRBB keeping in view the potential drop in their MVE, the IRR management skills and the ability to re-balance the portfolios quickly in case of adverse movement in the interest rates, the amount of exact capital add-on, if considered necessary, will be decided by the RBI as part of the SREP, in consultation with the bank. 5. Limit setting The banks would be well advised to consider setting the internal limits for controlling their IRRBB. The following are some of the indicative ways for setting the limits: a) Internal limits could be fixed in terms of the maximum decline in earnings (as a percentage of the base-scenario income) or decline in capital (as a percentage of the base-scenario capital position) as a result of 200 or 300 basis point interest-rate shock. The limits could also be placed in terms of PV01 value (present value of a basis point) of the net position of the bank as a percentage of net worth/capital of the bank.

b)

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Annex 11 (cf para 4.4.9.2) Investments in the Capital of Banking, Financial and Insurance Entities which are Outside the Scope of Regulatory Consolidation PART A: Details of Regulatory Capital Structure of a Bank
Paid-up equity capital Eligible Reserve and Surplus Total common equity Eligible Additional Tier 1 capital Total Tier 1 capital Eligible Tier 2 capital Total Eligible capital 300 100 400 15 415 135 550 (Rs. in Crore)

PART B: Details of Capital Structure and Bank's Investments in Unconsolidated Entities

Entity

Total Capital of the Investee entities Common equity Additional Tier 1 Tier 2 Total capital

Investments of bank in these entities Common Equity Additional Tier 1 Tier 2 Total investment

Investments in the capital of banking, financial and insurance entities which are outside the scope of regulatory consolidation and where the bank does not own more than 10% of the issued common share capital of the entity 250 0 80 12 0 15 A 330 27 300 10 0 14 10 0 B 310 24 Total 550 10 80 640 26 10 15 51 Significant investments in the capital of banking, financial and insurance entities which are outside the scope of regulatory consolidation 150 20 10 20 10 0 C 180 30 D Total 200 350 10 30 5 15 215 395 25 45 5 15 5 5 35 65

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PART C: Regulatory Adjustments on Account of Investments in Entities where Bank Does not own more than 10% of the Issued Common Share Capital of the Entity
C-1: Bifurcation of Investments of bank into Trading and Banking Book
Common Equity Additional Tier 1 Tier 2 Total investments

Total investments in A & B held in Banking Book Total investments in A & B held in Trading Book Total of Banking and Trading Book Investments in A & B

11 15 26

6 4 10

10 5 15

27 24 51

C-2: Regulatory adjustments Bank's aggregate investment in Common Equity of A & B Bank's aggregate investment in Additional Tier 1 capital of A & B Bank's aggregate investment in Tier 2 capital of A & B Total of bank's investment in A and B Bank common equity 10% of bank's common equity Bank's total holdings in capital instruments of A & B in excess of 10% of banks common equity (51-40) 26 10 15 51 400 40 11

Note: Investments in both A and B will qualify for this treatment as individually, both of them are less than 10% of share capital of respective entity. Investments in C & D do not qualify; as bank's investment is more than 10% of their common shares capital.

C-3: Summary of Regulatory Adjustments Amount to be deducted from common equity of the bank (26/51)*11 Amount to be deducted from Additional Tier 1 of the bank (10/51)*11 Amount to be deducted from Tier 2 of the bank (15/51)*11 Total Deduction Common equity investments of the bank in A & B to be risk weighted Additional Tier 1 capital investments of the bank in A & B to be risk weighted Tier 2 capital investments of the bank in A & B to be risk weighted Total allocation for risk weighting 5.60 2.16 3.24 11.00 20.40 (26-5.60) 7.84 (10-2.16) 11.76 (15-3.24) 40.00

Banking Book

Trading Book

8.63 (11/26)*20 .40 4.70 7.84 21.17

11.77

3.14 3.92 18.83

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PART D: Regulatory Adjustments on Account of Significant Investments in the Capital of Banking, Financial and Insurance Entities which are outside the Scope of Regulatory Consolidation
Bank aggregate investment in Common Equity of C & D Bank's aggregate investment in Additional Tier 1 capital of C & D Bank's aggregate investment in Tier 2 capital of C & D Total of bank's investment in C and D Bank's common equity 10% of bank's common equity Bank's investment in equity of C & D in excess of 10% of its common equity (45-40) D-1: Summary of regulatory adjustments Amount to be deducted from common equity of the bank (excess over 10%) Amount to be deducted from Additional Tier 1 of the bank (all Additional Tier 1 investments to be deducted) Amount to be deducted from Tier 2 of the bank (all Tier 2 investments to be deducted) Total deduction Common equity investments of the bank in C & D to be risk weighted (upto 10%) 5 15 5 25 40 45 15 5 65 400 40 5

PART E: Total Regulatory Capital of the Bank after Regulatory Adjustments Deductions as per Table C-3 5.61 2.16 3.24 11.00

Common Equity Additional Tier capital

Before deduction 400.00 1 15.00 135.00 550.00

Deductions as per Table D-1 5.00 15.00 5.00 25.00

After deductions 387.24* 0.00 126.76 514.00

Tier 2 capital Total Regulatory capital

*Since there is a shortfall of 2.16 in the Additional Tier 1 capital of the bank after deduction, which has to be deducted from the next higher category of capital i.e. common equity.

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Annex 12 (cf para 4.5.6) Illustration of Transitional Arrangements - Capital Instruments Which No Longer Qualify as Non-Common Equity Tier 1 Capital or Tier 2 Capital Date of Issue: April 14, 2005 Debt Capital Instrument: Notional amount = Rs. 1000 crore Date of maturity – April 15, 2022 Date of call - April 15, 2015 Features: 1. Call with step-up and meeting the non-viability criteria of conversion / write-off 2. No step-up or other incentives to redeem but not meeting the non-viability criteria

Residual maturity of instrument as on (in years) January 1, 2013

the Amortised amount 1000

March 31, 2014 March 31, 2015 March 31, 2016

More than 9 but less than 10 More than 8 but less than 9 More than 7 but less than 8 More than 6 but less than 7 More than 5 but less than 6 More than 4 but less than 5

Amount to be recognized for capital adequacy purpose Feature 1 Feature 2 900 900

1000 1000 1000

800 700 1000 (restored- call not exercised) 1000 800 (discounted value- for Tier 2 debt instrument) 600 400 200 0

800 700 600 (call not exercised) 500 400

March 31, 2017 March 31, 2018

1000 800

March 31, 2019 March 31, 2020 March 31, 2021 March 31, 2022

More than 3 but less than 4 More than 2 but less than 3 More than 1 but less than 2 Less than 1

600 400 200 0

300 200 100 0

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Annex 13 (cf para 5.15.3.6) CALCULATION OF CVA RISK CAPITAL CHARGE
(Rs. in crore)
Derivatives Counter party Notional principal of trades whose MTM is negative 3 150 Notional principal of trades whose MTM is positive 4 150 Total Notional Principal (column 3+4) 5 300 Weighted average residual maturity Positive MTM value of trades (column 4) 7 1.5 PFE Total current credit exposure as per CEM 9 4.5 External rating of counter party

1 Interest rate swaps

2 A

6 1.85 years

8 1%

10 A (risk weight 50%) AAA (risk weight 20%)

Currency swaps

B

300

200

500

5.01 years

2.8

10%

52.8

Formula to be used for calculation of capital charge for CVA risk:

Bi is the notional of purchased single name CDS hedges - nil Bind is the full notional of one or more index CDS of purchased protection, used to hedge CVA risk. - nil wind is the weight applicable to index hedges - nil Mihedge is the maturity of the hedge instrument with notional Bi Mi is the effective maturity of the transactions with counterparty ‘i’ EADitotal is the exposure at default of counterparty ‘i’ (summed across its netting sets). For non-IMM banks the exposure should be discounted by applying the factor: (1-exp(-0.05*Mi))/(0.05*Mi).

h = 1 year Assumptions: Applicable coupon rate on both legs of swap with exchange of coupon at yearly intervals for swap with counterparty A = 6% p.a.

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Applicable coupon rate on both legs of swap with exchange of coupon at yearly intervals for swap with counterparty =7% p.a.

Calculation: Discount factor to be applied to counterparty A: (1-exp (-0.05*MA))/(0.05*MA) = 0.95551 Discounted EADA = 4.5*0.95551=4.2981 Discount factor to be applied to counterparty B: (1-exp (-0.05*MB))/(0.05*MB) =0.8846 Discounted EADB = 52.8*0.8846=46.7061 K= 2.33*1*[{(0.5*.008*(1.85*4.2981-0) + (0.5*0.007*(5.01*46.7061-0))-0}2+ (0.75*0.0082*(1.85*4.2981-0)2 + (0.75*0.0072*(5.01*46.7061-0)2]1/2 = 2.33*1.66 = 3.86 Therefore, total capital charge for CVA risk on portfolio basis = Rs. 3.86 crore

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Annex 14 (cf para 4.2.2(vii)) Calculation of Admissible Excess Additional Tier 1 (AT1) and Tier 2 Capital for the Purpose of Reporting and Disclosing Minimum Total Capital Ratios Part A: Calculation of Admissible Additional Tier 1 / Tier 2 Capital Capital Ratios as on March 31, 2018 Common Equity Tier 1 7.5% of RWAs CCB 2.5% of RWAs Total CET1 10% of RWAs PNCPS / PDI 3.0% of RWAs PNCPS / PDI eligible for Tier 1 capital 2.05 % of RWAs {(1.5/5.5)*7.5% of CET1} PNCPS / PDI ineligible for Tier 1 capital 0.95% of RWAs (3-2.05) Eligible Total Tier 1 capital 9.55% of RWAs Tier 2 issued by the bank 2.5% of RWAs Tier 2 capital eligible for CRAR 2.73% of RWAs {(2/5.5)*7.5% of CET1} PNCPS / PDI eligible for Tier 2 capital 0.23% of RWAs (2.73-2.5) PNCPS / PDI not eligible Tier 2 capital 0.72% of RWAs (0.95-.23) Total available capital 15.50% Total capital 14.78% (12.28% +2.5%) (CET1 -10%+AT1-2.05% +Tier 2-2.73)

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Part B: Computation of Capital for Market Risk (Rs. crore) 1. Capital Funds Common Equity Tier 1 capital Capital Conservation Buffer PNCPS / PDI Eligible PNCPS / PDI Eligible Tier 1 capital Tier 2 capital available Tier 2 capital eligibility Excess PNCPS/ PDI eligible for Tier 2 capital Total eligible capital Total Risk Weighted Assets (RWA) RWA for credit and operational risk RWA for market risk Minimum Common Equity Tier 1 capital required to support credit and operational risk (900*5.5%) Maximum Additional Tier 1 capital within Tier 1 capital required to support credit and operational risk (900*1.5%) Maximum Tier 2 capital within Total capital required to support credit and operational risk (900*2%) Total eligible capital required to support credit and operational risk Minimum Common Equity Tier 1 capital available to support market risk Maximum Additional Tier 1 capital within Tier 1 capital available to support market risk Maximum Tier 2 capital within Total capital available to support market risk Total eligible capital available to support market risk 75 25 30 20.5 95.5 25 27.3 2.73 122.8 900 100

2.

3.

49.5 13.5 18

81 (49.5+13.5+18) 25.5 (75-49.5)

4.

7 (20.5-13.5)

9.3(27.3-18) 41.8(122.8-81)

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Annex 15
(cf. para 12.3.3.7)

An illustrative outline of the ICAAP Document 1. What is an ICAAP document?

The ICAAP Document would be a comprehensive Paper furnishing detailed information on the ongoing assessment of the bank’s entire spectrum of risks, how the bank intends to mitigate those risks and how much current and future capital is necessary for the bank, reckoning other mitigating factors. The purpose of the ICAAP document is to apprise the Board of the bank on these aspects as also to explain to the RBI the bank’s internal capital adequacy assessment process and the banks’ approach to capital management. The ICAAP could also be based on the existing internal documentation of the bank. The ICAAP document submitted to the RBI should be formally approved by the bank’s Board. It is expected that the document would be prepared in a format that would be easily understood at the senior levels of management and would contain all the relevant information necessary for the bank and the RBI to make an informed judgment as to the appropriate capital level of the bank and its risk management approach. Where appropriate, technical information on risk measurement methodologies, capital models, if any, used and all other work carried out to validate the approach (e.g. board papers and minutes, internal or external reviews) could be furnished to the RBI as appendices to the ICAAP Document. 2. Contents

The ICAAP Document should contain the following sections: I. II. III. IV. V. VI. VII. VIII. I. Executive Summary Background Summary of current and projected financial and capital positions Capital Adequacy Key sensitivities and future scenarios Aggregation and diversification Testing and adoption of the ICAAP Use of the ICAAP within the bank

Executive Summary

The purpose of the Executive Summary is to present an overview of the ICAAP methodology and results. This overview would typically include: a) b) the purpose of the report and the regulated entities within a banking group that are covered by the ICAAP; the main findings of the ICAAP analysis: i. how much and what composition of internal capital the bank considers it should hold as compared with the minimum CRAR requirement (CRAR) under ‘Pillar 1’ calculation, and ii. the adequacy of the bank’s risk management processes;

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c) d)

e)

f) g) II.

a summary of the financial position of the bank, including the strategic position of the bank, its balance sheet strength, and future profitability; brief descriptions of the capital raising and dividend plan including how the bank intends to manage its capital in the days ahead and for what purposes; commentary on the most material risks to which the bank is exposed, why the level of risk is considered acceptable or, if it is not, what mitigating actions are planned; commentary on major issues where further analysis and decisions are required; and who has carried out the assessment, how it has been challenged / validated / stress tested, and who has approved it.

Background

This section would cover the relevant organisational and historical financial data for the bank. e.g., group structure (legal and operational), operating profit, profit before tax, profit after tax, dividends, shareholders’ funds, capital funds held vis-à-vis the regulatory requirements, customer deposits, deposits by banks, total assets, and any conclusions that can be drawn from trends in the data which may have implications for the bank’s future. III. Summary of current and projected financial and capital positions

This section would explain the present financial position of the bank and expected changes to the current business profile, the environment in which it expects to operate, its projected business plans (by appropriate lines of business), projected financial position, and future planned sources of capital. The starting balance sheet used as reference and date as of which the assessment is carried out should be indicated. The projected financial position could reckon both the projected capital available and projected capital requirements based on envisaged business plans. These might then provide a basis against which adverse scenarios might be compared. IV. Capital Adequacy

This section might start with a description of the bank’s risk appetite, in quantitative terms, as approved by the bank’s Board and used in the ICAAP. It would be necessary to clearly spell out in the document whether what is being presented represents the bank’s view of the amount of capital required to meet minimum regulatory needs or whether represents the amount of capital that a bank believes it would need to meet its business plans. For instance, it should be clearly brought out whether the capital required is based on a particular credit rating desired by the bank or includes buffers for strategic purposes or seeks to minimise the chance of breaching regulatory requirements. Where economic capital models are used for internal capital assessment, the confidence level, time horizon, and description of the event to which the confidence level relates, should also be enumerated. Where scenario analyses or other means are used for capital assessment, then the basis / rationale for selecting the chosen severity of scenarios used, should also be included.

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The section would then include a detailed review of the capital adequacy of the bank. The information provided would include the following elements: Timing the effective date of the ICAAP calculations together with details of any events between this date and the date of submission to the Board / RBI which would materially impact the ICAAP calculations together with their effects; and details of, and rationale for, the time period selected for which capital requirement has been assessed. Risks Analysed an identification of the major risks faced by the bank in each of the following categories: a) b) c) d) e) f) g) h) i) j) k) l) m) credit risk market risk operational risk liquidity risk concentration risk interest rate risk in the banking book residual risk of securitisation strategic risk business risk reputation risk pension obligation risk other residual risk; and any other risks that might have been identified

for each of these risks, an explanation of how the risk has been assessed and o the extent possible, the quantitative results of that assessment; where some of these risks have been highlighted in the report of the RBI’s onsite inspection of the bank, an explanation of how the bank has mitigated these; where relevant, a comparison of the RBI-assessed CRAR during on-site inspection with the results of the CRAR calculations of the bank under the ICAAP; a clear articulation of the bank’s risk appetite, in quantitative terms, by risk category and the extent of its consistency (its ‘fit’) with the overall assessment of bank’s various risks; and where relevant, an explanation of any other methods, apart from capital, used by the bank to mitigate the risks. Methodology and Assumptions A description of how assessments for each of the major risks have been approached and the main assumptions made. For instance, banks may choose to base their ICAAP on the results of the CRAR calculation with the capital for additional risks (e.g. concentration risk, interest rate

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risk in the banking book, etc.) assessed separately and added to the Pillar 1 computations. Alternatively, banks could choose to base their ICAAP on internal models for all risks, including those covered under the CRAR (i.e. Credit, Market and Operational Risks). The description here would make clear which risks are covered by which modelling or calculation approach. This would include details of the methodology and process used to calculate risks in each of the categories identified and reason for choosing the method used in each case. Where the bank uses an internal model for the quantification of its risks, this section should explain for each of those models: the key assumptions and parameters within the capital modelling work and background information on the derivation of any key assumptions; how parameters have been chosen, including the historical period used and the calibration process; the limitations of the model; the sensitivity of the model to changes in those key assumptions or parameters chosen; and the validation work undertaken to ensure the continuing adequacy of the model. Where stress tests or scenario analyses have been used to validate, supplement, or probe the results of other modelling approaches, then this section should provide: details of simulations to capture risks not well estimated by the bank’s internal capital model (e.g. non-linear products, concentrations, illiquidity and shifts in correlations in a crisis period); details of the quantitative results of stress tests and scenario analyses the bank carried out and the confidence levels and key assumptions behind those analyses, including, the distribution of outcomes obtained for the main individual risk factors; details of the range of combined adverse scenarios which have been applied, how these were derived and the resulting capital requirements; and where applicable, details of any additional business-unit-specific or business-plan-specific stress tests selected. Capital Transferability In case of banks with conglomerate structure, details of any restrictions on the management’s ability to transfer capital into or out of the banking business(es) arising from, for example, by contractual, commercial, regulatory or statutory constraints that apply, should be furnished. Any restrictions applicable and flexibilities available for distribution of dividend by the entities in the Group could also be enumerated. In case of overseas banking subsidiaries of the banks, the regulatory

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restrictions would include the minimum regulatory capital level acceptable to the host-country regulator of the subsidiary, after declaration of dividend. V. Firm-wide risk oversight and specific aspects of risk management V.1 Risk Management System in the bank This section would describe the risk management infrastructure within the bank along the following lines: • • • • • V.2 The oversight of board and senior management Policies, Procedures and Limits identification, measurement, mitigation, controlling and reporting of risks MIS at the firm wide level Internal controls
147

Off-balance Sheet Exposures with a focus on Securitisation This section would comprehensively discuss and analyse underlying risks inherent in the off-balance sheet exposures particularly its investment in structured products. When assessing securitisation exposures, bank should thoroughly analyse the credit quality and risk characteristics of the underlying exposures. This section should also comprehensively explain the maturity of the exposures underlying securitisation transactions relative to issued liabilities in order to assess potential maturity mismatches.

V.3 Assessment of Reputational Risk and Implicit Support This section should discuss the possibilities of reputational risk leading to provision of implicit support, which might give rise to credit, market and legal risks. This section should thoroughly discuss potential sources of reputational risk to the bank. V. 4 Assessment of valuation and Liquidity Risk This section would describe the governance structures and control processes for valuing exposures for risk management and financial reporting purposes, with a special focus on valuation of illiquid positions. This section will have relevant details leading to establishment and verification of valuations for instruments and transactions in which it engages. V. 5 Stress Testing practices This section would explain the role of board and senior management in setting stress testing objectives, defining scenarios, discussing the results of stress

147

Master Circular DBOD.No.BP.BC.73/21.06.001/2009-10 dated Feb 8, 2010.

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tests, assessing potential actions and decision making on the basis of results of stress tests. This section would also describe the rigorous and forward looking stress testing that identifies possible events or changes in market conditions that could adversely the bank. RBI would assess the effectiveness of banks’ stress testing programme in identifying relevant vulnerabilities. V. 6 Sound compensation practices This section should describe the compensation practices followed by the bank and how far the compensation practices are linked to long-term capital preservation and the financial strength of the firm. The calculation of riskadjusted performance measure for the employees and its link, if any, with the compensation should clearly be disclosed in this section VI. Key sensitivities and future scenarios

This section would explain how a bank would be affected by an economic recession or downswings in the business cycle or markets relevant to its activities. The RBI would like to be apprised as to how a bank would manage its business and capital so as to survive a recession while meeting the minimum regulatory standards. The analysis would include future financial projections for, say, three to five years based on business plans and solvency calculations. For the purpose of this analysis, the severity of the recession reckoned should typically be one that occurs only once in a 25 year period. The time horizon would be from the day of the ICAAP calculation to at least the deepest part of the recession envisaged. Typical scenarios would include: how an economic downturn would affect:   the bank’s capital funds and future earnings; and the bank’s CRAR taking into account future changes in its projected balance sheet.

In both cases, it would be helpful if these projections show separately the effects of management actions to change the bank’s business strategy and the implementation of contingency plans. projections of the future CRAR would include the effect of changes in the credit quality of the bank’s credit risk counterparties (including migration in their ratings during a recession) and the bank’s capital and its credit risk capital requirement; an assessment by the bank of any other capital planning actions to enable it to continue to meet its regulatory capital requirements throughout a recession such as new capital injections from related companies or new share issues; This section would also explain which key macroeconomic factors are being stressed, and how those have been identified as drivers of the bank’s earnings. The bank would also explain how the macroeconomic factors affect

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the key parameters of the internal model by demonstrating, for instance, how the relationship between the two has been established. Management Actions This section would elaborate on the management actions assumed in deriving the ICAAP, in particular: the quantitative impact of management actions – sensitivity testing of key management actions and revised ICAAP figures with management actions excluded. evidence of management actions implemented in the past during similar periods of economic stress. VII. Aggregation and Diversification

This section would describe how the results of the various separate risk assessments are brought together and an overall view taken on capital adequacy. At a technical level, this would, therefore, require some method to be used to combine the various risks using some appropriate quantitative techniques. At the broader level, the overall reasonableness of the detailed quantification approaches might be compared with the results of an analysis of capital planning and a view taken by senior management as to the overall level of capital that is considered appropriate. In enumerating the process of technical aggregation, the following aspects could be covered: i) any allowance made for diversification, including any assumed correlations within risks and between risks and how such correlations have been assessed, including in stressed conditions; the justification for any credit taken for diversification benefits between legal entities, and the justification for the free movement of capital, if any assumed, between them in times of financial stress; the impact of diversification benefits with management actions excluded. It might be helpful to work out revised ICAAP figures with all correlations set to ‘1’ i.e., no diversification; and similar figures with all correlations set to ‘0’ i.e. assuming all risks are independent i.e., full diversification.

ii)

iii)

As regards the overall assessment, this should describe how the bank has arrived at its overall assessment of the capital it needs taking into account such matters as: i) ii) the inherent uncertainty in any modelling approach; weaknesses in the bank’s risk management procedures, systems or controls;

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iii) iv)

the differences between regulatory capital and internal capital; and the differing purposes that capital serves: shareholder returns, rating objectives for the bank as a whole or for certain debt instruments the bank has issued, avoidance of regulatory intervention, protection against uncertain events, depositor protection, working capital, capital held for strategic acquisitions, etc.

VIII.

Testing and Adoption of the ICAAP

This section would describe the extent of challenging and testing that the ICAAP has been subjected to. It would thus include the testing and control processes applied to the ICAAP models and calculations. It should also describe the process of review of the test results by the senior management or the Board and the approval of the results by them. A copy of any relevant report placed before the senior management or the Board of the bank in this regard, along with their response, could be attached to the ICAAP Document sent to the RBI. Details of the reliance placed on any external service providers or consultants in the testing process, for instance, for generating economic scenarios, could also be detailed here. In addition, a copy of any report obtained from an external reviewer or internal audit should also be sent to the RBI. IX. Use of the ICAAP within the bank

This section would contain information to demonstrate the extent to which the concept of capital management is embedded within the bank, including the extent and use of capital modelling or scenario analyses and stress testing within the bank’s capital management policy. For instance, use of ICAAP in setting pricing and charges and the level and nature of future business, could be an indicator in this regard. This section could also include a statement of the bank’s actual operating philosophy on capital management and how this fits in to the ICAAP Document submitted. For instance, differences in risk appetite used in preparing the ICAAP Document vis-à-vis that used for business decisions might be discussed. Lastly, the banks may also furnish the details of any anticipated future refinements envisaged in the ICAAP (highlighting those aspects which are work-in-progress) apart from any other information that the bank believes would be helpful to the RBI in reviewing the ICAAP Document.

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Annex 16 (cf para 4.2) Minimum Requirements to Ensure Loss Absorbency of Additional Tier 1 Instruments at Pre-specified Trigger and of All Non-equity Regulatory Capital Instruments at the Point of Non-viability

1.

INTRODUCTION

1.1 As indicated in paragraph 4.2.4 of Basel III Capital Regulations, under Basel III non-common equity elements to be included in Tier 1 capital should absorb losses while the bank remains a going concern. Towards this end, one of the important criteria for Additional Tier 1 instruments is that these instruments should have principal loss absorption through either (i) conversion into common shares at an objective pre-specified trigger point or (ii) a write-down mechanism which allocates losses to the instrument at a pre-specified trigger point. 1.2 Further, during the financial crisis a number of distressed banks were rescued by the public sector injecting funds in the form of common equity and other forms of Tier 1 capital. While this had the effect of supporting depositors it also meant that Tier 2 capital instruments (mainly subordinated debt), and in some cases Tier 1 instruments, did not absorb losses incurred by certain large internationally-active banks that would have failed had the public sector not provided support. Therefore, the Basel III requires that the terms and conditions of all non-common Tier 1 and Tier 2 capital instruments issued by a bank must have a provision that requires such instruments, at the option of the relevant authority, to either be written off or converted into common equity upon the occurrence of the trigger event. 1.3 Therefore, in order for an instrument issued by a bank to be included in Additional (i.e. non-common) Tier 1 or in Tier 2 capital, in addition to criteria for individual types of non-equity regulatory capital instruments mentioned in Annex 3, 4, 5 and 6, it must also meet or exceed minimum requirements set out in the following paragraphs. 2. LOSS ABSORPTION OF ADDITIONAL TIER 1 INSTRUMENTS (AT1) AT THE PRESPECIFIED TRIGGER Level of Pre-specified Trigger and Amount of Equity to be Created by Conversion / Write-down

I.

2.1 As a bank’s capital conservation buffer falls to 0.625% of RWA, it will be subject to 100% profit retention requirements. One of the important objectives of capital conservation buffer is to ensure that a bank always operates above minimum Common Equity Tier 1 (CET1) level. Therefore, a pre-specified trigger for loss absorption through conversion / write-down of the level of Additional Tier 1 (AT1) instruments (PNCPS and PDI) at CET1 of 6.125% of RWAs (minimum CET1 of 5.5% + 25% of capital conservation buffer of 2.5% i.e. 0.625%) has been fixed.

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2.2 The write-down / conversion must generate CET1 under applicable Indian Accounting Standard equal to the written-down / converted amount net of tax, if any. 2.3 The aggregate amount to be written-down / converted for all such instruments on breaching the trigger level must be at least the amount needed to immediately return the bank’s CET1 ratio to the trigger level or, if this is not sufficient, the full principal value of the instruments. Further, the issuer should have full discretion to determine the amount of AT1 instruments to be converted/written-down subject to the amount of conversion/write-down not exceeding the amount which would be required to bring the total Common Equity ratio to 8% of RWAs (minimum CET1 of 5.5% + capital conservation buffer of 2.5%). 2.4 The conversion / write-down of AT1 instruments are primarily intended to replenish the equity in the event it is depleted by losses. Therefore, banks should not use conversion / write-down of AT1 instruments to support expansion of balance sheet by incurring further obligations / booking assets. Accordingly, a bank whose total Common Equity ratio slips below 8% due to losses and is still above 6.125% i.e. trigger point, should seek to expand its balance sheet further only by raising fresh equity from its existing shareholders or market and the internal accruals. However, fresh exposures can be taken to the extent of amortization of the existing ones. If any expansion in exposures, such as due to draw down of sanctioned borrowing limits, is inevitable, this should be compensated within the shortest possible time by reducing other exposures148. The bank should maintain proper records to facilitate verification of these transactions by its internal auditors, statutory auditors and Inspecting Officers of RBI. II Types of Loss Absorption Features

2.5 Banks may issue AT1 instruments with conversion / temporary written-down / permanent write-off features. Further, banks may issue single AT1 instrument having both conversion and write-down features with the option for conversion or write-down to be exercised by the bank. However, whichever option is exercised, it should be exercised across all investors of a particular issue. 2.6 The instruments subject to temporary write-down may be written-up subsequently subject to the following conditions: (i) It should be done at least one year after the bank made the first payment of dividends to common shareholders after breaching the prespecified trigger.

148

For the purpose of determination of breach of trigger, the fresh equity, if any, raised after slippage of CET1 below 8% will not be subtracted. In other words, if CET1 of the bank now is above the trigger level though it would have been below the trigger had it not raised the fresh equity which it did, the trigger will not be treated as breached.

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(ii)

Aggregate write-up in a year should be restricted to a percentage of dividend declared during a year, the percentage being the ratio of the ‘equity created by written-down instruments’ to ‘the total equity minus the equity created by written-down instruments’ (Please see illustration at the end of this Annex). Aggregate write-up in a year, should also not exceed 25% of the amount paid as dividend to the common shareholders in a particular year. A bank can pay coupon / dividend on written-up amount from the distributable surplus as and when due subject to the normal rules applicable to AT1 instruments. However, both the amount written-up and paid as coupon in a year will be reckoned as amount distributed for the purpose of complying with restrictions on distributing earnings as envisaged in the capital conservation buffer framework. If the bank is amalgamated with or acquired by another bank after a temporary write-down and the equity holders get positive compensation on amalgamation / acquisition, the holders of AT1 instruments which have been temporarily written-down should also be appropriately compensated.

(iii)

(iv)

(v)

2.7 When a bank breaches the pre-specified trigger of loss absorbency of AT1 and the equity is replenished either through conversion or write-down, such replenished amount of equity will be excluded from the total equity of the bank for the purpose of determining the proportion of earnings to be paid out as dividend in terms of rules laid down for maintaining capital conservation buffer. However, once the bank has attained total Common Equity ratio of 8% without counting the replenished equity capital, that point onwards, the bank may include the replenished equity capital for all purposes149. 2.8 The conversion / write-down may be allowed more than once in case a bank hits the pre-specified trigger level subsequent to the first conversion / write-down which was partial. Also, the instrument once written-up can be written-down again. III. Treatment of AT1 Instruments in the event of Winding-Up, Amalgamation, Acquisition, Re-Constitution etc. of the Bank

2.9 If a bank goes into liquidation before the AT1 instruments have been writtendown/ converted, these instruments will absorb losses in accordance with the order of seniority indicated in the offer document and as per usual legal provisions governing priority of charges.

149

If the total CET1 ratio of the bank falls again below the 8%, it would include the replenished capital for the purpose of applying the capital conservation buffer framework.

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2.10 If a bank goes into liquidation after the AT1 instruments have been writtendown temporarily but yet to be written-up, the holders of these instruments will have a claim on the proceeds of liquidation pari-passu with the equity holders in proportion to the amount written-down. 2.11 If a bank goes into liquidation after the AT1 instruments have been writtendown permanently, the holders of these instruments will have no claim on the proceeds of liquidation. (a) Amalgamation of a banking company: (Section 44 A of BR Act, 1949) 2.12 If a bank is amalgamated with any other bank before the AT1 instruments have been written-down/converted, these instruments will become part of the corresponding categories of regulatory capital of the new bank emerging after the merger. 2.13 If a bank is amalgamated with any other bank after the AT1 instruments have been written-down temporarily, the amalgamated entity can write-up these instruments as per its discretion. 2.14 If a bank is amalgamated with any other bank after the non-equity regulatory capital instruments have been written-off permanently, these cannot be written-up by the amalgamated entity. (b) Scheme of reconstitution or amalgamation of a banking company: (Section 45 of BR Act, 1949)

2.15 If the relevant authorities decide to reconstitute a bank or amalgamate a bank with any other bank under the Section 45 of BR Act, 1949, such a bank will be deemed as non-viable or approaching non-viability and both the pre-specified trigger and the trigger at the point of non-viability for conversion / write-down of AT1 instruments will be activated. Accordingly, the AT1 instruments will be converted / written-off before amalgamation / reconstitution in accordance with these rules. IV. Fixation of Conversion Price, Capping of Number of Shares / Voting Rights

2.16 Banks may issue AT1 instruments with conversion features either based on price fixed at the time of issuance or based on the market price prevailing at the time of conversion150. 2.17 There will be possibility of the debt holders receiving a large number of shares in the event the share price is very low at the time of conversion. Thus, debt holders will end up holding the number of shares and attached voting rights

150

Market price here does not mean the price prevailing on the date of conversion; banks can use any pricing formula such as weighted average price of shares during a particular period before conversion.

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exceeding the legally permissible limits. Banks should therefore, always keep sufficient headroom to accommodate the additional equity due to conversion without breaching any of the statutory / regulatory ceilings especially that for maximum private shareholdings and maximum voting rights per investors / group of related investors. In order to achieve this, banks should cap the number of shares and / or voting rights in accordance with relevant laws and regulations on Ownership and Governance of banks. Banks should adequately incorporate these features in the terms and conditions of the instruments in the offer document. In exceptional circumstances, if the breach is inevitable, the bank should immediately inform the Reserve Bank of India (DBOD) about it. The investors will be required to bring the shareholdings below the statutory / regulatory ceilings within the specific time frame as determined by the Reserve Bank of India. 2.18 In the case of unlisted banks, the conversion price should be determined based on the fair value of the bank’s common shares to be estimated according to a mutually acceptable methodology which should be in conformity with the standard market practice for valuation of shares of unlisted companies. 2.19 In order to ensure the criteria that the issuing bank must maintain at all times all prior authorisation necessary to immediately issue the relevant number of shares specified in the instrument's terms and conditions should the trigger event occur, the capital clause of each bank will have to be suitably modified to take care of conversion aspects. V. Order of Conversion / Write-down of Various Types of AT1 Instruments

2.20 The instruments should be converted / written-down in order in which they would absorb losses in a gone concern situation. Banks should indicate in the offer document clearly the order of conversion / write-down of the instrument in question vis-à-vis other capital instruments which the bank has already issued or may issue in future, based on the advice of its legal counsels. 3. Minimum Requirements to Ensure Loss Absorbency of Non-equity Regulatory Capital Instruments at the Point of Non-Viability Mode of Loss Absorption and Trigger Event

I.

3.1 The terms and conditions of all non-common equity Tier 1 and Tier 2 capital instruments issued by banks in India must have a provision that requires such instruments, at the option of the Reserve Bank of India, to either be written off or converted into common equity upon the occurrence of the trigger event, called the ‘Point of Non-Viability (PONV) Trigger’ stipulated below:

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The PONV Trigger event is the earlier of: a. a decision that a conversion or temporary/permanent write-off151, without which the firm would become non-viable, is necessary, as determined by the Reserve Bank of India; and b. the decision to make a public sector injection of capital, or equivalent support, without which the firm would have become non-viable, as determined by the relevant authority. Such a decision would invariably imply that the write-off or issuance of any new shares as a result of conversion or consequent upon the trigger event must occur prior to any public sector injection of capital so that the capital provided by the public sector is not diluted. The AT1 instruments with write-off clause will be permanently written-off when there is public sector injection of funds152. II. A Non-viable Bank

3.2

For the purpose of these guidelines, a non-viable bank will be:

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. 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 nonviable. 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 Bank153. III. Restoring Viability

3.3 A bank facing financial difficulties and approaching a PONV will be deemed to achieve viability if within a reasonable time in the opinion of Reserve Bank, it will be able to come out of the present difficulties if appropriate measures are taken to revive it. The measures including augmentation of equity capital through writeoff/conversion/public sector injection of funds are likely to:

151

In cases of temporary write-off, it will be possible to write-up the instruments subject to the same conditions as in the case of pre-specified trigger for AT1 instruments as explained in paragraph 2.6. 152 The option of temporary write-off will not be available in case there is public sector injection of funds. 153 In rare situations, a bank may also become non-viable due to non-financial problems, such as conduct of affairs of the bank in a manner which is detrimental to the interest of depositors, serious corporate governance issues, etc. In such situations raising capital is not considered a part of the solution and therefore, may not attract provisions of this framework.

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a. Restore depositors’/investors’ confidence; b. Improve rating /creditworthiness of the bank and thereby improve its borrowing capacity and liquidity and reduce cost of funds; and c. Augment the resource base to fund balance sheet growth in the case of fresh injection of funds. IV. Other Requirements to be met by the Non-common Capital Instruments so as to Absorb Losses at the PONV A single instrument may have one or more of the following features: a. conversion; b. temporary/permanent write-off in cases where there is no public sector injection of funds; and c. permanent write-off in cases where there is public sector injection of funds. 3.5 The amount of non-equity capital to be converted / written-off will be determined by RBI. 3.6 When a bank breaches the PONV trigger and the equity is replenished either through conversion or write-down / write-off, such replenished amount of equity will be excluded from the total equity of the bank for the purpose of determining the proportion of earnings to be paid out as dividend in terms of rules laid down for maintaining capital conservation buffer. However, once the bank has attained total Common Equity ratio of 8% without counting the replenished equity capital, that point onwards, the bank may include the replenished equity capital for all purposes154. 3.7 The provisions regarding treatment of AT1 instruments in the event of winding-up, amalgamation, acquisition, re-constitution etc. of the bank as given in paragraphs 2.9 to 2.15 will also be applicable to all non-common equity capital instruments when these events take place after conversion/write-off at the PONV. 3.8 The provisions regarding fixation of conversion price, capping of number of shares/voting rights applicable to AT1 instruments in terms of paragraphs 2.16 to 2.19 above will also be applicable for conversion at the PONV. 3.9 The provisions regarding order of conversion/write-down/write-off of AT1 instruments as given in paragraph 2.20 above will also be applicable for conversion/ write-down/write-off of non-common equity capital instruments at the PONV. Equity

3.4

154

If the total CET1 ratio of the bank falls again below the total Common Equity ratio of 8%, it would include the replenished capital for the purpose of applying the capital conservation buffer framework.

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V.

Criteria to Determine the PONV

3.10 The above framework will be invoked when a bank is adjudged by Reserve Bank of India to be approaching the point of non-viability, or has already reached the point of non-viability, but in the views of RBI: a) there is a possibility that a timely intervention in form of capital support, with or without other supporting interventions, is likely to rescue the bank; and b) if left unattended, the weaknesses would inflict financial losses on the bank and, thus, cause decline in its common equity level. 3.11 The purpose of write-off and / or conversion of non-equity regulatory capital elements will be to shore up the capital level of the bank. RBI would follow a twostage approach to determine the non-viability of a bank. The Stage 1 assessment would consist of purely objective and quantifiable criteria to indicate that there is a prima facie case of a bank approaching non-viability and, therefore, a closer examination of the bank’s financial situation is warranted. The Stage 2 assessment would consist of supplementary subjective criteria which, in conjunction with the Stage 1 information, would help in determining whether the bank is about to become non-viable. These criteria would be evaluated together and not in isolation. 3.12 Once the PONV is confirmed, the next step would be to decide whether rescue of the bank would be through write-off/conversion alone or writeoff/conversion in conjunction with a public sector injection of funds. 3.13 The trigger at PONV will be evaluated both at consolidated and solo level and breach at either level will trigger conversion / write-down. 3.14 As the capital adequacy is applicable both at solo and consolidated levels, the minority interests in respect of capital instruments issued by subsidiaries of banks including overseas subsidiaries can be included in the consolidated capital of the banking group only if these instruments have pre-specified triggers/loss absorbency at the PONV155. In addition, where a bank wishes the instrument issued by its subsidiary to be included in the consolidated group’s capital, the terms and conditions of that instrument must specify an additional trigger event. The additional trigger event is the earlier of: (1) a decision that a conversion or temporary/permanent write-off, without

155

The cost to the parent of its investment in each subsidiary and the parent’s portion of equity of each subsidiary, at the date on which investment in each subsidiary is made, is eliminated as per AS-21. So, in case of wholly-owned subsidiaries, it would not matter whether or not it has same characteristics as the bank’s capital. However, in the case of less than wholly owned subsidiaries, minority interests constitute additional capital for the banking group over and above what is counted at solo level; therefore, it should be admitted only when it (and consequently the entire capital in that category) has the same characteristics as the bank’s capital.

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which the bank or the subsidiary would become non-viable, is necessary, as determined by the Reserve Bank of India; and (2) the decision to make a public sector injection of capital, or equivalent support, without which the bank or the subsidiary would have become nonviable, as determined by the Reserve Bank of India. Such a decision would invariably imply that the write-off or issuance of any new shares as a result of conversion or consequent upon the trigger event must occur prior to any public sector injection of capital so that the capital provided by the public sector is not diluted. The AT1 instruments with write-off clause will be permanently written-off when there is public sector injection of funds. 3.15 In such cases, the subsidiary should obtain its regulator’s approval/noobjection for allowing the capital instrument to be converted/written-off at the additional trigger point referred to in paragraph 3.14 above. 3.16 Any common stock paid as compensation to the holders of the instrument must be common stock of either the issuing subsidiary or the parent bank (including any successor in resolution). 3.17 The conversion / write-down should be allowed more than once in case a bank hits the pre-specified trigger level subsequent to the first conversion / writedown which was partial. Also, the instrument once written-up can be written-down again.

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1 (i) (ii) (iii) (iv) 2 (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) 3 (i) (ii) (iii) (iv) (v) (vi)

(vii) (viii) (ix) 4 (i) (ii) (iii) (iv) (v) (vi)

Calculation of Write-Up in Case of Temporarily Written-down Instruments Basic details Book value of the equity Market value of the debt with an assumed coupon of 10% at the time of write-down Equity created from write-down Fresh equity issued after write-down Position at the end of first year after write-down Total book value of the equity in the beginning of the period: [1(i)+1(iii)+1(iv)] Equity belonging to equity holders in the beginning of the period Balance of equity created out of write-down Accretion to reserves/distributable surplus during the first year Dividend paid during the first year to the equity holders Amount to be written-up Interest payable on written-up amount Total book value of the equity at the end of the period: [(i)+(iv)] Equity belonging to equity holders at the end of the period: [2(ii)+(2(iv)] Balance of equity created out of write-down at the end of the period : 2(iii) Position at the end of second year Accretion to reserves/distributable surplus during the second year Dividend paid during the second year to the equity holders Amount to be written-up :[3(ii)/2(ix)]* 2(x): (20/145)*30 Total amount written-up at the end of the year: 3(iii) Interest payable on written-up amount Total distribution to be considered for complying with the restriction on capital distribution under the capital conservation buffer requirement:[(3(ii)+(3(iii)]: 20+4.14 Net equity after distributions at the end of the period:[(2(viii)+3(i)-3(vi): 175+40-24.14 Equity belonging to equity holders at the end of the period: [2(ix) +3(i)3(vi)+(3(iii)]:145+40-24.14+4.14157 Balance of equity created out of write-down at the end of the period : 2(ix)3(iii):30-4.14 Position at the end of third year Accretion to reserves/distributable surplus during the third year Dividend paid during the third year to the equity holders Amount to be written-up :[4(ii)/3(viii)]* 3(ix): (35/165)*25.86 Total written-up amount at the end of the year [(3(iv)+(4(iii)]: 4.14+5.49 Interest payable on written-up amount: 4.14*0.1 Total distribution to be considered for complying with the restriction on capital distribution under the capital conservation buffer requirement:[(4(ii)+(4(iii)]: 35+5.49

Amount 70 30 30 50 150 120 30 25 Nil Nil Nil 175 145 30 40 20 4.14 4.14 Nil 24.14156 190.86 165 25.86

75 35 5.49 9.63 0.414 40.49

156

If a bank is not comfortable with a cash outflow of 24.14, it has the discretion to reduce both the dividend and write-up proportionately. For instance, if the bank was comfortable with cash outflow of only 15, then it would have declared a dividend of only 12.43 and written-up AT1 instruments to an extent of 2.57. 157 Even though the write-up is done out of distributable surplus, it is assumed to be return of the equity to the AT1 holders which was created out of the write-down. Therefore, on write-up, the balance of equity created out of write-down would come down and equity belonging to equity holders would increase to that extent.

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Annex 17 (cf para 4.3.5) Calculation of Minority Interest - Illustrative Example This Annex illustrates the treatment of minority interest and other capital issued out of subsidiaries to third parties, which is set out in paragraph 4.3 of Basel III Capital Regulations. A banking group for this purpose consists of two legal entities that are both banks. Bank P is the parent and Bank S is the subsidiary and their unconsolidated balance sheets are set out below: Bank P Balance Sheet Assets Loans to customers Investment in CET1 of Bank S Investment in the AT1 of Bank S Investment in the T2 of Bank S Total Liabilities and equity Depositors Tier 2 Additional Tier 1 Common equity Total Bank S Balance Sheet Assets Loans to customers 150

100 7 4 2 113 70 10 7 26 113

Total Liabilities and equity Depositors Tier 2 Additional Tier 1 Common equity Total

150 127 8 5 10 150

The balance sheet of Bank P shows that in addition to its loans to customers, it owns 70% of the common shares of Bank S, 80% of the Additional Tier 1 of Bank S and 25% of the Tier 2 capital of Bank S. The ownership of the capital of Bank S is therefore as follows: Capital issued by Bank S Amount issued to parent (Bank P) 1 7 4 11 2 13

Common Equity Tier (CET1) Additional Tier 1 (AT1) Tier 1 (T1) Tier 2 (T2) Total capital (TC)

Amount issued to third parties 3 1 4 6 10

Total

10 5 15 8 23

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Assets Loans to customers

Consolidated Balance Sheet Remarks 250 Investments of P in S aggregating Rs.13 will be cancelled during accounting consolidation. 197 6 10 1 7 3 26 250

Liabilities and equity Depositors Tier 2 issued by subsidiary to third parties Tier 2 issued by parent Additional Tier 1 issued by subsidiary to third parties Additional Tier 1 issued by parent Common equity issued by subsidiary to third parties (i.e. minority interest) Common equity issued by parent Total

(8-2)

(5-4)

(10-7)

For illustrative purposes Bank S is assumed to have risk weighted assets of 100 against the actual value of assets of 150. In this example, the minimum capital requirements of Bank S and the subsidiary’s contribution to the consolidated requirements are the same. This means that it is subject to the following minimum plus capital conservation buffer requirements and has the following surplus capital:

Minimum and surplus capital of Bank S Minimum plus capital Actual conservation buffer capital required158 available 1 2 3 Common Equity 7.0 10 Tier 1capital (= 7.0% of 100) Tier 1 capital 8.5 15 (= 8.5% of 100) (10+5) Total capital 10.5 23 (= 10.5% of 100) (10+5+8)

Surplus (3-2) 4 3.0 6.5 12.5

The following table illustrates how to calculate the amount of capital issued by Bank S to include in consolidated capital, following the calculation procedure set out in paragraph 4.3.4 of Basel III Capital Regulations:

158

Illustration is based on Basel III minima. The Common Equity Tier 1 in the example should be read to include issued common shares plus retained earnings and reserves in Bank S.

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Bank S: Amount of capital issued to third parties included in consolidated capital Total Amount Surplus Surplus attributable to Amount amount issued (c) third parties (i.e. included in issued to third amount excluded from consolidated (a) parties consolidated capital) capital (b) (d) = (c) * (b)/(a) (e) = (b) – (d) Common Equity Tier 1 capital Tier 1 capital Total capital 10 3 3.0 0.90 2.10

15 23

4 10

6.5 12.5

1.73 5.43

2.27 4.57

The following table summarises the components of capital for the consolidated group based on the amounts calculated in the table above. Additional Tier 1 is calculated as the difference between Common Equity Tier 1 and Tier 1 and Tier 2 is the difference between Total Capital and Tier 1. Total amount issued by parent (all of which is to be included in consolidated capital) 26 7 33 10 43 Amount issued by subsidiaries to third parties to be included in consolidated capital 2.10 0.17 2.27 2.30 4.57 Total amount issued by parent and subsidiary to be included in consolidated capital 28.10 7.17 35.27 12.30 47.57

Common Equity Tier 1 capital Additional Tier 1 capital Tier 1 capital Tier 2 capital Total capital

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Annex 18
(cf para 14.15)

Pillar 3 Disclosure Requirements
1 Scope of Application and Capital Adequacy Table DF-1: Scope of Application Name of the head of the banking group to which the framework applies_________ (i) Qualitative Disclosures: Name of the entity / Country of incorporation Whether the Explain the entity is method of included consolidation under accounting scope of consolidation (yes / no) Whether the Explain the entity is method of included under consolidation regulatory scope of consolidation159 (yes / no) Explain the reasons for difference in the method of consolidation Explain the reasons if consolidated under only one of the scopes of consolidation 160

a. List of group entities considered for consolidation b. List of group entities not considered for consolidation both under the accounting and regulatory scope of consolidation Name of the Principle Total entity / country activity of balance of the entity sheet equity incorporation (as stated in the accounting balance sheet of the legal entity) % of bank’s holding in the total equity Regulatory treatment of bank’s investments in the capital instruments of the entity Total balance sheet assets (as stated in the accounting balance sheet of the legal entity)

159

If the entity is not consolidated in such a way as to result in its assets being included in the calculation of consolidated risk-weighted assets of the group, then such an entity is considered as outside the regulatory scope of consolidation. 160 Also explain the treatment given i.e. deduction or risk weighting of investments under regulatory scope of consolidation.

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(ii) Quantitative Disclosures: c. List of group entities considered for consolidation Name of the entity / Principle activity of country of the entity incorporation (as indicated in (i)a. above) Total balance sheet equity (as stated in the accounting balance sheet of the legal entity) Total balance sheet assets (as stated in the accounting balance sheet of the legal entity)

d. The aggregate amount of capital deficiencies161 in all subsidiaries which are not included in the regulatory scope of consolidation i.e. that are deducted: Name of the Principle activity subsidiaries / of the entity country of incorporation Total balance % of bank’s Capital sheet equity holding in the deficiencies (as stated in the total equity accounting balance sheet of the legal entity)

e. The aggregate amounts (e.g. current book value) of the bank’s total interests in insurance entities, which are risk-weighted: Name of the Principle activity insurance of the entity entities / country of incorporation Total balance sheet equity (as stated in the accounting balance sheet of the legal entity) % of bank’s holding in the total equity / proportion of voting power Quantitative impact on regulatory capital of using risk weighting method versus using the full deduction method

f. Any restrictions or impediments on transfer of funds or regulatory capital within the banking group:

161

A capital deficiency is the amount by which actual capital is less than the regulatory capital requirement. Any deficiencies which have been deducted on a group level in addition to the investment in such subsidiaries are not to be included in the aggregate capital deficiency.

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Table DF-2: Capital Adequacy Qualitative disclosures (a) A summary discussion of the bank's approach to assessing the adequacy of its capital to support current and future activities Quantitative disclosures (b) Capital requirements for credit risk: • Portfolios subject to standardised approach • Securitisation exposures (c) Capital requirements for market risk: • Standardised duration approach; - Interest rate risk - Foreign exchange risk (including gold) - Equity risk (d) Capital requirements for operational risk: • Basic Indicator Approach • The Standardised Approach (if applicable) (e) Common Equity Tier 1, Tier 1and Total Capital ratios: • For the top consolidated group; and • For significant bank subsidiaries (stand alone or sub-consolidated depending on how the Framework is applied)

2.

Risk exposure and assessment

The risks to which banks are exposed and the techniques that banks use to identify, measure, monitor and control those risks are important factors market participants consider in their assessment of an institution. In this section, several key banking risks are considered: credit risk, market risk, and interest rate risk in the banking book and operational risk. Also included in this section are disclosures relating to credit risk mitigation and asset securitisation, both of which alter the risk profile of the institution. Where applicable, separate disclosures are set out for banks using different approaches to the assessment of regulatory capital. 2.1 General qualitative disclosure requirement For each separate risk area (e.g. credit, market, operational, banking book interest rate risk) banks must describe their risk management objectives and policies, including: (i) (ii) (iii) (iv) strategies and processes; the structure and organisation of the relevant risk management function; the scope and nature of risk reporting and/or measurement systems; policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants.

Credit risk General disclosures of credit risk provide market participants with a range of information about overall credit exposure and need not necessarily be based on information prepared for regulatory purposes. Disclosures on the capital assessment techniques give information on the specific nature of the exposures, the means of capital assessment and data to assess the reliability of the information disclosed.

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Table DF-3: Credit Risk: General Disclosures for All Banks Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to credit risk, including: Definitions of past due and impaired (for accounting purposes); Discussion of the bank’s credit risk management policy; Quantitative Disclosures (b) Total gross credit risk exposures162, Fund based and Non-fund based separately. (c) Geographic distribution of exposures163, Fund based and Non-fund based separately Overseas Domestic (d) Industry164 type distribution of exposures, fund based and non-fund based separately (e) Residual contractual maturity breakdown of assets,165 (f) Amount of NPAs (Gross)
Substandard Doubtful 1 Doubtful 2 Doubtful 3 Loss

(g) Net NPAs (h) NPA Ratios
Gross NPAs to gross advances Net NPAs to net advances

(i) Movement of NPAs (Gross)
Opening balance Additions Reductions Closing balance

(j) Movement of provisions for NPAs
Opening balance Provisions made during the period Write-off Write-back of excess provisions Closing balance

(k) Amount of Non-Performing Investments (l) Amount of provisions held for non-performing investments (m) Movement of provisions for depreciation on investments
Opening balance Provisions made during the period Write-off Write-back of excess provisions Closing balance

162

That is after accounting offsets in accordance with the applicable accounting regime and without taking into account the effects of credit risk mitigation techniques, e.g. collateral and netting. 163 That is, on the same basis as adopted for Segment Reporting adopted for compliance with AS 17. 164 The industries break-up may be provided on the same lines as prescribed for DSB returns. If the exposure to any particular industry is more than 5 per cent of the gross credit exposure as computed under (b) above it should be disclosed separately. 165 Banks shall use the same maturity bands as used for reporting positions in the ALM returns.

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Table DF-4 - Credit Risk: Disclosures for Portfolios Subject to the Standardised Approach Qualitative Disclosures (a) For portfolios under the standardised approach:
Names of credit rating agencies used, plus reasons for any changes; Types of exposure for which each agency is used; and A description of the process used to transfer public issue ratings onto comparable assets in the banking book;

Quantitative Disclosures (b) For exposure166 amounts after risk mitigation subject to the standardised approach, amount of a bank’s outstandings (rated and unrated) in the following three major risk buckets as well as those that are deducted;
Below 100 % risk weight 100 % risk weight More than 100 % risk weight Deducted

Table DF-5: Credit Risk Mitigation: Disclosures for Standardised Approaches 167 Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to credit risk mitigation including: a) Policies and processes for, and an indication of the extent to which the bank makes use of, on- and off-balance sheet netting; policies and processes for collateral valuation and management; a description of the main types of collateral taken by the bank; the main types of guarantor counterparty and their credit worthiness; and information about (market or credit) risk concentrations within the mitigation taken Quantitative Disclosures (b) For each separately disclosed credit risk portfolio the total exposure (after, where applicable, on- or off balance sheet netting) that is covered by eligible financial collateral after the application of haircuts. (c) For each separately disclosed portfolio the total exposure (after, where applicable, on- or off-balance sheet netting) that is covered by guarantees/credit derivatives (whenever specifically permitted by RBI)

166 167

As defined for disclosures in Table 3. At a minimum, banks must give the disclosures in this Table in relation to credit risk mitigation that has been recognised for the purposes of reducing capital requirements under this Framework. Where relevant, banks are encouraged to give further information about mitigants that have not been recognised for that purpose.

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Table DF-6: Securitisation Exposures: Disclosure for Standardised Approach Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to securitisation including a discussion of: • the bank’s objectives in relation to securitisation activity, including the extent to which these activities transfer credit risk of the underlying securitised exposures away from the bank to other entities. • the nature of other risks (e.g. liquidity risk) inherent in securitised assets; • the various roles played by the bank in the securitisation process (For example: originator, investor, servicer, provider of credit enhancement, liquidity provider, swap provider@, protection provider#) and an indication of the extent of the bank’s involvement in each of them; • a description of the processes in place to monitor changes in the credit and market risk of securitisation exposures (for example, how the behaviour of the underlying assets impacts securitisation exposures as defined in paragraph 5.16.1 of Basel III Capital Regulations). • a description of the bank’s policy governing the use of credit risk mitigation to mitigate the risks retained through securitisation exposures; @ A bank may have provided support to a securitisation structure in the form of an interest rate swap or currency swap to mitigate the interest rate/currency risk of the underlying assets, if permitted as per regulatory rules. # A bank may provide credit protection to a securitisation transaction through guarantees, credit derivatives or any other similar product, if permitted as per regulatory rules. (b) Summary of the bank’s accounting policies for securitisation activities, including: • whether the transactions are treated as sales or financings; • methods and key assumptions (including inputs) applied in valuing positions retained or purchased • changes in methods and key assumptions from the previous period and impact of the changes; • policies for recognising liabilities on the balance sheet for arrangements that could require the bank to provide financial support for securitised assets. (c) In the banking book, the names of ECAIs used for securitisations and the types of securitisation exposure for which each agency is used. Quantitative disclosures: Banking Book (d) The total amount of exposures securitised by the bank. (e) For exposures securitised losses recognised by the bank during the current period broken by the exposure type (e.g. Credit cards, housing loans, auto loans etc. detailed by underlying security) Amount of assets intended to be securitised within a year Of (f), amount of assets originated within a year before securitisation. The total amount of exposures securitised (by exposure type) and unrecognised gain or losses on sale by exposure type. Aggregate amount of: • on-balance sheet securitisation exposures retained or purchased broken down by exposure type and • off-balance sheet securitisation exposures broken down by exposure type (i) Aggregate amount of securitisation exposures retained or purchased and the associated capital charges, broken down between exposures and further broken down into different risk weight bands for each regulatory capital

(f) (g) (h) (i)

(j)

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approach (ii) Exposures that have been deducted entirely from Tier 1 capital, credit enhancing I/Os deducted from total capital, and other exposures deducted from total capital (by exposure type). Quantitative Disclosures: Trading book (k) Aggregate amount of exposures securitised by the bank for which the bank has retained some exposures and which is subject to the market risk approach, by exposure type. (l) Aggregate amount of: • on-balance sheet securitisation exposures retained or purchased broken down by exposure type; and • off-balance sheet securitisation exposures broken down by exposure type. (m) Aggregate amount of securitisation exposures retained or purchased separately for: • securitisation exposures retained or purchased subject to Comprehensive Risk Measure for specific risk; and • securitisation exposures subject to the securitisation framework for specific risk broken down into different risk weight bands. (n) Aggregate amount of: • the capital requirements for the securitisation exposures, subject to the securitisation framework broken down into different risk weight bands. • securitisation exposures that are deducted entirely from Tier 1 capital, credit enhancing I/Os deducted from total capital, and other exposures deducted from total capital(by exposure type). Table DF-7: Market Risk in Trading Book Qualitative disclosures (a) The general qualitative disclosure requirement for market risk including the portfolios covered by the standardised approach.

Quantitative disclosures (b) The capital requirements for: interest rate risk; equity position risk; and foreign exchange risk;

Table DF-8: Operational Risk Qualitative disclosures In addition to the general qualitative disclosure requirement, the approach(es) for operational risk capital assessment for which the bank qualifies.

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Table DF-9: Interest Rate Risk in the Banking Book (IRRBB) Qualitative Disclosures (a) The general qualitative disclosure requirement including the nature of IRRBB and key assumptions, including assumptions regarding loan prepayments and behaviour of non-maturity deposits, and frequency of IRRBB measurement. Quantitative Disclosures (b) The increase (decline) in earnings and economic value (or relevant measure used by management) for upward and downward rate shocks according to management’s method for measuring IRRBB, broken down by currency (where the turnover is more than 5% of the total turnover).

Table DF-10: General Disclosure for Exposures Related to Counterparty Credit Risk (a) The general qualitative disclosure requirement with respect to derivatives and CCR, including: Discussion of methodology used to assign economic capital and credit limits for counterparty credit exposures; Discussion of policies for securing collateral and establishing credit reserves; Discussion of policies with respect to wrong-way risk exposures; Discussion of the impact of the amount of collateral the bank would have to provide given a credit rating downgrade. Quantitative (b) Gross positive fair value of contracts, netting benefits168, netted current credit exposure, collateral held (including type, e.g. cash, Disclosures government securities, etc.), and net derivatives credit exposure169. Also report measures for exposure at default, or exposure amount, under CEM. The notional value of credit derivative hedges, and the distribution of current credit exposure by types of credit exposure170. (c) Credit derivative transactions that create exposures to CCR (notional value), segregated between use for the institution’s own credit portfolio, as well as in its intermediation activities, including the distribution of the credit derivatives products used171, broken down further by protection bought and sold within each product group Qualitative Disclosures

168 169

Please refer to the circular DBOD.No.BP.BC.48/21.06.001/2010-11 dated October 1, 2010. Net credit exposure is the credit exposure on derivatives transactions after considering both the benefits from legally enforceable netting agreements and collateral arrangements. The notional amount of credit derivative hedges alerts market participants to an additional source of credit risk mitigation. 170 For example, interest rate contracts, FX contracts, credit derivatives, and other contracts. 171 For example, credit default swaps.

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3 3.1

Composition of Capital Disclosure Templates Post March 31, 2017 Disclosure Template

(i) The template is designed to capture the capital positions of banks after the transition period for the phasing-in of deductions ends on March 31, 2017. Certain rows are in italics. These rows will be deleted after all the ineligible capital instruments have been fully phased out (i.e. from April 1, 2022 onwards). (ii) The reconciliation requirement in terms of paragraph 14.14 of Basel III Capital Regulations results in the decomposition of certain regulatory adjustments. For example, the disclosure template below includes the adjustment of ‘Goodwill net of related tax liability’. The requirements will lead to the disclosure of both the goodwill component and the related tax liability component of this regulatory adjustment. (iii) Certain rows of the template are shaded as explained below: a. b. c. each dark grey row introduces a new section detailing a certain component of regulatory capital. the light grey rows with no thick border represent the sum cells in the relevant section. the light grey rows with a thick border show the main components of regulatory capital and the capital ratios.

(iv) Also provided along with the Table, an explanation of each line of the template, with references to the appropriate paragraphs of the text of the Basel III capital regulations.

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Table DF-11: Composition of Capital Part I: Template to be used only from March 31, 2017 (Rs. in million) Basel III common disclosure template to be used from March 31, 2017 1 2 3 4 5 6 Common Equity Tier 1 capital: instruments and reserves Directly issued qualifying common share capital plus related stock surplus (share premium) Retained earnings Accumulated other comprehensive income (and other reserves) Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies1) Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) Common Equity Tier 1 capital before regulatory adjustments Common Equity Tier 1 capital: regulatory adjustments 7 8 9 10 11 12 13 14 15 16 17 Prudential valuation adjustments Goodwill (net of related tax liability) Intangibles (net of related tax liability) Deferred tax assets2 Cash-flow hedge reserve Shortfall of provisions to expected losses Securitisation gain on sale Gains and losses due to changes in own credit risk on fair valued liabilities Defined-benefit pension fund net assets Investments in own shares (if not already netted off paid-up capital on reported balance sheet) Reciprocal cross-holdings in common equity Ref No

1

Not Applicable to commercial banks in India. In terms of Basel III rules text issued by the Basel Committee (December 2010), DTAs that rely on future profitability of the bank to be realized are to be deducted. DTAs which relate to temporary differences are to be treated under the “threshold deductions” as set out in paragraph 87. However, banks in India are required to deduct all DTAs, irrespective of their origin, from CET1 capital.
2

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Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) 19 Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold)3 20 Mortgage servicing rights4 (amount above 10% threshold) 21 Deferred tax assets arising from temporary differences5 (amount above 10% threshold, net of related tax liability) 22 Amount exceeding the 15% threshold6 23 of which: significant investments in the common stock of financial entities 24 of which: mortgage servicing rights 25 of which: deferred tax assets arising from temporary differences 26 National specific regulatory adjustments7 (26a+26b+26c+26d) 26a of which: Investments in the equity capital of unconsolidated insurance subsidiaries 26b of which: Investments in the equity capital of unconsolidated nonfinancial subsidiaries8 26c of which: Shortfall in the equity capital of majority owned financial entities which have not been consolidated with the bank9 26d of which: Unamortised pension funds expenditures 27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions 28 Total regulatory adjustments to Common equity Tier 1 29 Common Equity Tier 1 capital (CET1) Additional Tier 1 capital: instruments 30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus (share premium) (31+32)

18

3

Only significant investments other than in the insurance and non-financial subsidiaries should be reported here. The insurance and non-financial subsidiaries are not consolidated for the purpose of capital adequacy. The equity and other regulatory capital investments in insurance subsidiaries are fully deducted from consolidated regulatory capital of the banking group. However, in terms of Basel III rules text of the Basel Committee, insurance subsidiaries are included under significant investments and thus, deducted based on 10% threshold rule instead of full deduction. 4 Not applicable in Indian context. 5 Please refer to Footnote 2 above. 6 Not applicable in Indian context. 7 Adjustments which are not specific to the Basel III regulatory adjustments (as prescribed by the Basel Committee) will be reported under this row. However, regulatory adjustments which are linked to Basel III i.e. where there is a change in the definition of the Basel III regulatory adjustments, the impact of these changes will be explained in the Notes of this disclosure template. 8 Non-financial subsidiaries are not consolidated for the purpose of capital adequacy. The equity and other regulatory capital investments in the non-financial subsidiaries are deducted from consolidated regulatory capital of the group. These investments are not required to be deducted fully from capital under Basel III rules text of the Basel Committee. 9 Please refer to paragraph 3.3.5 of the Master Circular on Basel III Capital Regulations. Please also refer to the Paragraph 34 of the Basel II Framework issued by the Basel Committee (June 2006). Though this is not national specific adjustment, it is reported here.

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of which: classified as equity under applicable accounting standards (Perpetual Non-Cumulative Preference Shares) 32 of which: classified as liabilities under applicable accounting standards (Perpetual debt Instruments) 33 Directly issued capital instruments subject to phase out from Additional Tier 1 34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1) 35 of which: instruments issued by subsidiaries subject to phase out 36 Additional Tier 1 capital before regulatory adjustments Additional Tier 1 capital: regulatory adjustments 37 Investments in own Additional Tier 1 instruments 38 Reciprocal cross-holdings in Additional Tier 1 instruments 39 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold) 40 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions)10 41 National specific regulatory adjustments (41a+41b) 41a of which: Investments in the Additional Tier 1 capital of unconsolidated insurance subsidiaries 41b of which: Shortfall in the Additional Tier 1 capital of majority owned financial entities which have not been consolidated with the bank 42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions 43 Total regulatory adjustments to Additional Tier 1 capital 44 Additional Tier 1 capital (AT1) 44a Additional Tier 1 capital reckoned for capital adequacy11 45 46 47 48 Tier 1 capital (T1 = CET1 + Admissible AT1) (29 + 44a) Tier 2 capital: instruments and provisions Directly issued qualifying Tier 2 instruments plus related stock surplus Directly issued capital instruments subject to phase out from Tier 2 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2) of which: instruments issued by subsidiaries subject to phase out Provisions12 Tier 2 capital before regulatory adjustments

31

49 50 51

10 11

Please refer to Footnote 3 above. Please refer paragraph 4.2.2(vii) of the Master Circular on Basel III Capital Regulations. 12 Eligible Provisions and revaluation Reserves in terms of paragraph 4.2.5.1 of the Master Circular on Basel III Capital Regulations, both to be reported and break-up of these two items to be furnished in Notes.

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Tier 2 capital: regulatory adjustments 52 Investments in own Tier 2 instruments 53 Reciprocal cross-holdings in Tier 2 instruments 54 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold) 55 Significant investments13 in the capital banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) 56 National specific regulatory adjustments (56a+56b) 56a of which: Investments in the Tier 2 capital of unconsolidated insurance subsidiaries 56b of which: Shortfall in the Tier 2 capital of majority owned financial entities which have not been consolidated with the bank 57 Total regulatory adjustments to Tier 2 capital 58 Tier 2 capital (T2) 58a Tier 2 capital reckoned for capital adequacy14 58b Excess Additional Tier 1 capital reckoned as Tier 2 capital 58c 59 Total Tier 2 capital admissible for capital adequacy (58a + 58b) Total capital (TC = T1 + Admissible T2) (45 + 58c) 60 Total risk weighted assets (60a + 60b + 60c) 60a of which: total credit risk weighted assets 60b of which: total market risk weighted assets 60c of which: total operational risk weighted assets Capital ratios and buffers 61 Common Equity Tier 1 (as a percentage of risk weighted assets) 62 Tier 1 (as a percentage of risk weighted assets) 63 Total capital (as a percentage of risk weighted assets) 64 Institution specific buffer requirement (minimum CET1 requirement plus capital conservation plus countercyclical buffer requirements plus G-SIB buffer requirement, expressed as a percentage of risk weighted assets) 65 of which: capital conservation buffer requirement 66 of which: bank specific countercyclical buffer requirement 67 of which: G-SIB buffer requirement 68 Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted assets) National minima (if different from Basel III) 69 National Common Equity Tier 1 minimum ratio (if different from Basel III minimum) 70 National Tier 1 minimum ratio (if different from Basel III minimum) 71 National total capital minimum ratio (if different from Basel III

13 14

Please refer to Footnote 3 above. Please refer paragraph 4.2.2(vii) of the Master Circular on Basel III Capital Regulations.

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minimum) Amounts below the thresholds for deduction (before risk weighting) Non-significant investments in the capital of other financial entities Significant investments in the common stock of financial entities Mortgage servicing rights (net of related tax liability) Deferred tax assets arising from temporary differences (net of related tax liability) Applicable caps on the inclusion of provisions in Tier 2 76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap) 77 Cap on inclusion of provisions in Tier 2 under standardised approach 78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach (prior to application of cap) 79 Cap for inclusion of provisions in Tier 2 under internal ratings-based approach Capital instruments subject to phase-out arrangements (only applicable between March 31, 2017 and March 31, 2022 80 Current cap on CET1 instruments subject to phase out arrangements 81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) 82 Current cap on AT1 instruments subject to phase out arrangements 83 Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) 84 Current cap on T2 instruments subject to phase out arrangements 85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) 72 73 74 75

Notes to the Template
Row No. Particular of the template 10 Deferred tax assets associated with accumulated losses Deferred tax assets (excluding those associated with accumulated losses) net of Deferred tax liability Total as indicated in row 10 19 If investments in insurance subsidiaries are not deducted fully from capital and instead considered under 10% threshold for deduction, the resultant increase in the capital of bank of which: Increase in Common Equity Tier 1 capital of which: Increase in Additional Tier 1 capital of which: Increase in Tier 2 capital 26b If investments in the equity capital of unconsolidated non-financial subsidiaries are not deducted and hence, risk weighted then: (i) Increase in Common Equity Tier 1 capital (ii) Increase in risk weighted assets 44a Excess Additional Tier 1 capital not reckoned for capital adequacy (difference between Additional Tier 1 capital as reported in row 44 and admissible Additional Tier 1 capital as reported in 44a) of which: Excess Additional Tier 1 capital which is considered as (Rs. in million)

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50

58a

Tier 2 capital under row 58b Eligible Provisions included in Tier 2 capital Eligible Revaluation Reserves included in Tier 2 capital Total of row 50 Excess Tier 2 capital not reckoned for capital adequacy (difference between Tier 2 capital as reported in row 58 and T2 as reported in 58a) Explanation of each row of the Common Disclosure Template Explanation Instruments issued by the parent bank of the reporting banking group which meet all of the CET1 entry criteria set out in paragraph 4.2.3 (read with Annex 1 / Annex 2) of the Master Circular. This should be equal to the sum of common shares (and related surplus only) which must meet the common shares criteria. This should be net of treasury stock and other investments in own shares to the extent that these are already derecognised on the balance sheet under the relevant accounting standards. Other paid-up capital elements must be excluded. All minority interest must be excluded. Retained earnings, prior to all regulatory adjustments in accordance with paragraph 4.2.3 of the Master Circular Accumulated other comprehensive income and other disclosed reserves, prior to all regulatory adjustments. Banks must report zero in this row. Common share capital issued by subsidiaries and held by third parties. Only the amount that is eligible for inclusion in group CET1 should be reported here, as determined by the application of paragraph 4.3.4 of the Master Circular (Also see Annex 17 of the Master Circular for illustration). Sum of rows 1 to 5. Valuation adjustments according to the requirements of paragraph 8.8 of the Master Circular Goodwill net of related tax liability, as set out in paragraph 4.4.1 of the Master Circular Intangibles (net of related tax liability), as set out in paragraph 4.4.1 of the Master Circular Deferred tax assets (net of related tax liability), as set out in paragraph 4.4.2 of the Master Circular The element of the cash-flow hedge reserve described in paragraph 4.4.3 of the Master Circular Shortfall of provisions to expected losses as described in paragraph 4.4.4 of the Master Circular Securitisation gain on sale as described in paragraph 4.4.5 of the Master Circular Gains and losses due to changes in own credit risk on fair valued liabilities as described in paragraph 4.4.6 of the Master Circular Defined benefit pension fund net assets, the amount to be deducted, as set out in paragraphs 4.4.7 of the Master Circular Investments in own shares (if not already netted off paid-in capital on reported balance sheet), as set out in paragraph 4.4.8 of the Master Circular Reciprocal cross-holdings in common equity as set out in paragraph 4.4.9.2(A) of the Master Circular Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation where the bank does not own more than 10% of the issued share capital (amount above 10% threshold), amount to be deducted from CET1 in accordance with paragraph 4.4.9.2(B) of the Master Circular

Row No. 1

2 3 4 5

6 7 8 9 10 11 12 13 14 15 16 17 18

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19

20 21 22 23 24 25 26

27

28 29 30

31 32 33 34

35 36 37 38 39

40

41

42

43 44

Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation (amount above 10% threshold), amount to be deducted from CET1 in accordance with paragraph 4.4.9.2(C) of the Master Circular Not relevant Not relevant Not relevant Not relevant Not relevant Not relevant Any national specific regulatory adjustments that are required by national authorities to be applied to CET1 in addition to the Basel III minimum set of adjustments [i.e. in terms of December 2010 (rev June 2011) document issued by the Basel Committee on Banking Supervision]. Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 to cover deductions. If the amount reported in row 43 exceeds the amount reported in row 36 the excess is to be reported here. Total regulatory adjustments to Common equity Tier 1, to be calculated as the sum of rows 7 to 22 plus row 26 and 27. Common Equity Tier 1 capital (CET1), to be calculated as row 6 minus row 28. Instruments that meet all of the AT1 entry criteria set out in paragraph 4.2.4. All instruments issued of subsidiaries of the consolidated group should be excluded from this row. The amount in row 30 classified as equity under applicable Accounting Standards. The amount in row 30 classified as liabilities under applicable Accounting Standards. Directly issued capital instruments subject to phase out from Additional Tier 1 in accordance with the requirements of paragraph 4.5.4 of the Master Circular Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties, the amount allowed in group AT1 in accordance with paragraph 4.3.4 of the Master Circular (please see Annex 17 for illustration). The amount reported in row 34 that relates to instruments subject to phase out from AT1 in accordance with the requirements of paragraph 4.5.4 of the Master Circular The sum of rows 30, 33 and 34. Investments in own Additional Tier 1 instruments, amount to be deducted from AT1 in accordance with paragraph 4.4.8 of the Master Circular Reciprocal cross-holdings in Additional Tier 1 instruments, amount to be deducted from AT1 in accordance with paragraph 4.4.9.2 (A) of the Master Circular Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation where the bank does not own more than 10% of the issued common share capital of the entity (net of eligible short positions), amount to be deducted from AT1 in accordance with paragraph 4.4.9.2(B) of the Master Circular Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions), amount to be deducted from AT1 in accordance with paragraph 4.4.9.2(C) of the Master Circular Any national specific regulatory adjustments that are required by national authorities to be applied to Additional Tier 1 in addition to the Basel III minimum set of adjustments [i.e. in terms of December 2010 (rev June 2011) document issued by the Basel Committee on Banking Supervision. Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions. If the amount reported in row 57 exceeds the amount reported in row 51 the excess is to be reported here. The sum of rows 37 to 42. Additional Tier 1 capital, to be calculated as row 36 minus row 43.

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45 46

47 48

49 50 51 52 53 54

55

56

57 58 59 60 61 62 63 64

65 66

Tier 1 capital, to be calculated as row 29 plus row 44a. Instruments that meet all of the Tier 2 entry criteria set out in paragraph 4.2.5 of the Master Circular. All instruments issued of subsidiaries of the consolidated group should be excluded from this row. Provisions and Revaluation Reserves should not be included in Tier 2 in this row. Directly issued capital instruments subject to phase out from Tier 2 in accordance with the requirements of paragraph 4.5.4 of the Master Circular Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 32) issued by subsidiaries and held by third parties (amount allowed in group Tier 2) in accordance with paragraph 4.3.4 of the Master Circular The amount reported in row 48 that relates to instruments subject to phase out from Tier 2 in accordance with the requirements of paragraph 4.5.4 of the Master Circular Provisions and Revaluation Reserves included in Tier 2 calculated in accordance with paragraph 4.2.5 of the Master Circular The sum of rows 46 to 48 and row 50. Investments in own Tier 2 instruments, amount to be deducted from Tier 2 in accordance with paragraph 4.4.8 of the Master Circular Reciprocal cross-holdings in Tier 2 instruments, amount to be deducted from Tier 2 in accordance with paragraph 4.4.9.2(A) of the Master Circular Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation where the bank does not own more than 10% of the issued common share capital of the entity (net of eligible short positions), amount to be deducted from Tier 2 in accordance with paragraph 4.4.9.2(B) of the Master Circular Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions), amount to be deducted from Tier 2 in accordance with paragraph 4.4.9.2(C) of the Master Circular Any national specific regulatory adjustments that are required by national authorities to be applied to Tier 2 in addition to the Basel III minimum set of adjustments [i.e. in terms of December 2010 (rev June 2011) document issued by the Basel Committee on Banking Supervision]. The sum of rows 52 to 56. Tier 2 capital, to be calculated as row 51 minus row 57. Total capital, to be calculated as row 45 plus row 58c. Total risk weighted assets of the reporting group. Details to be furnished under rows 60a, 60b and 60c. Common Equity Tier 1ratio (as a percentage of risk weighted assets), to be calculated as row 29 divided by row 60 (expressed as a percentage). Tier 1 ratio (as a percentage of risk weighted assets), to be calculated as row 45 divided by row 60 (expressed as a percentage). Total capital ratio (as a percentage of risk weighted assets), to be calculated as row 59 divided by row 60 (expressed as a percentage). Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical buffer requirements plus G-SIB buffer requirement, expressed as a percentage of risk weighted assets). To be calculated as 5.5% plus 2.5% capital conservation buffer plus the bank specific countercyclical buffer requirement whenever activated and applicable plus the bank G-SIB requirement (where applicable) as set out in Global systemically important banks: assessment methodology and the additional loss absorbency requirement: Rules text (November 2011) issued by the Basel Committee. This row will show the CET1 ratio below which the bank will become subject to constraints on distributions. The amount in row 64 (expressed as a percentage of risk weighed assets) that relates to the capital conservation buffer), i.e. banks will report 2.5% here. The amount in row 64 (expressed as a percentage of risk weighed assets) that relates to the bank specific countercyclical buffer requirement.

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67 68

69 70 71 72 73 74 75 76

77 78

79 80 81 82 83 84 85

The amount in row 64 (expressed as a percentage of risk weighed assets) that relates to the bank’s G-SIB requirement. Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted assets). To be calculated as the CET1 ratio of the bank, less any common equity used to meet the bank’s minimum Tier 1 and minimum Total capital requirements. National Common Equity Tier 1 minimum ratio (if different from Basel III minimum). 5.5% should be reported. National Tier 1 minimum ratio (if different from Basel III minimum). 7% should be reported. National total capital minimum ratio (if different from Basel III minimum). 9% should be reported. Non-significant investments in the capital of other financial entities, the total amount of such holdings that are not reported in row 18, row 39 and row 54. Significant investments in the common stock of financial entities, the total amount of such holdings that are not reported in row 19 Mortgage servicing rights, the total amount of such holdings that are not reported in row 19 and row 23. - Not Applicable in India. Deferred tax assets arising from temporary differences, the total amount of such holdings that are not reported in row 21 and row 25. – Not applicable in India. Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach calculated in accordance paragraph 4.2.5 of the Master Circular, prior to the application of the cap. Cap on inclusion of provisions in Tier 2 under standardised approach calculated in accordance paragraph 4.2.5 of the Master Circular. Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach calculated in accordance paragraph 4.2.5 of the Master Circular. Cap for inclusion of provisions in Tier 2 under internal ratings-based approach calculated in accordance paragraph 4.2.5 of the Master Circular Current cap on CET1 instruments subject to phase out arrangements see paragraph 4.5.5 of the Master Circular Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities), see paragraph 4.5.5 of the Master Circular Current cap on AT1 instruments subject to phase out arrangements see paragraph 4.5.4 of the Master Circular Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) see paragraph 4.5.4 of the Master Circular Current cap on T2 instruments subject to phase out arrangements see paragraph 4.5.4 of the Master Circular Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) see paragraph 4.5.4 of the Master Circular

3.2 Disclosure Template during the Basel III Transition Phase (i.e. before March 31, 2017)
(i) The template that banks must use during the transition phase is the same as the Post March 31, 2017 disclosure template set out in Part A above, except for the following additions (all of which are highlighted in the template below using cells with dotted borders): A new column has been added for banks to report the amount of each regulatory adjustment that is subject to the existing national treatment (i.e. before implementation of Basel III capital regulations) during the transition phase (labelled as the “pre-Basel III treatment”).

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– Example 1: In 2013, banks are required to make 20% of the regulatory adjustments in terms of transitional arrangements provided in accordance with Basel III capital regulations. Consider a bank with ‘goodwill, net of related tax liability’ of Rs.10 million. Currently, this is not required to be deducted from Common Equity Tier 1. Therefore, banks will report Rs. 2 million in the first of the two empty cells in row 8 and report Rs. 8 million in the second of the two cells. The sum of the two cells will therefore equal the total Basel III regulatory adjustment. While the new column shows the amount of each regulatory adjustment that is subject to the existing treatment, it is necessary to show how this amount is included under existing treatment in the calculation of regulatory capital. Therefore, new rows have been added in each of the three sections on regulatory adjustments to show the existing treatment. – Example 2: Continuing from the above example, in terms of existing treatment goodwill is to be deducted from Tier 1 capital. Therefore, a new row is inserted in between rows 41 and 42 (please refer to Table DF-11, Part II below), to indicate that during the transition phase some goodwill will continue to be deducted from Tier 1 (i.e. in effect from Additional Tier 1). Therefore, Rs. 8 million which is reported in the last cell of row 8 will be reported in this new row inserted between rows 41 and 42. (ii) In addition to the phasing-in of some regulatory adjustments described above, the transition period of Basel III will in some cases result in the phasing-out of previous prudential adjustments. In these cases the new rows added in each of the three sections on regulatory adjustments will be used by jurisdictions to set out the impact of the phase-out. – Example 3: Consider a jurisdiction that currently filters out unrealised gains and losses on holdings of AFS debt securities and consider a bank in that jurisdiction that has an unrealised loss of $50 mn. The transitional arrangements provided by the Basel Committee require this bank to recognise 20% of this loss (i.e. $10 mn) in 2014. This means that 80% of this loss (i.e. $40 mn) is not recognised. The jurisdiction will therefore include a row between rows 26 and 27 that allows banks to add back this unrealised loss. The bank will then report $40 mn in this row as an addition to Common Equity Tier 1. To take account of the fact that the existing treatment of a Basel III regulatory adjustment may be to apply a risk weighting, new rows have been added immediately prior to the row on risk weighted assets (row 60). – Example 4: Consider that a bank currently risk weights defined benefit pension fund net assets at 100%. In 2013 the bank has Rs. 50 million of these assets. The transitional arrangements require this bank to deduct 20% of the assets in 2013. This means that the bank will report Rs. 10 million in the first empty cell in row 15 and Rs. 40 million in the second empty cell (the total of the two cells therefore, equals the total Basel III regulatory adjustment). The bank will disclose in one of the rows inserted between row 59 and 60 that such assets are risk weighted at 100% during the transitional phase. The bank will then be required to report a figure of Rs. 40 million (Rs. 40 million * 100%) in that row. – Example 5: Consider a case wherein the investments in the capital of financial entity of Rs. 100 million qualify for risk weighting of 125% under existing treatment. Consider that these investments will now be deducted from Common Equity Tier 1 capital under Basel III. In 2013, in terms of transitional arrangements, the bank needs to deduct Rs. 20 million of investments and report in the first empty cell in row 18 and Rs. 80 million in the second

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empty cell. Then the bank will disclose in one of the row inserted between row 59 and row 60 that such assets are risk weighted at 125% during the transitional phase. The bank will then be required to report an amount of Rs. 100 million (Rs. 80 million * 125%) in that row. As explained in above examples and as can be seen from the reporting template (Table 2 below), new rows have been added in each of the three sections on regulatory adjustments to show the existing treatment. These three sections are between row 26 and 27, row 41 and 42 and row 56 and 57. Banks have the flexibility to add as many rows as required to show each of the pre-Basel III treatment (i.e. treatment before implementation of Basel III capital regulations) during the transition period. Similarly, another section is added between row 59 and row 60, in respect of risk weighted assets to show existing treatment of risk weighting. Banks have the flexibility to add as many rows as required to show each of the pre-Basel III (i.e. prior to April 1, 2013 treatment) of risk weighting during the transition period.

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Table DF-11: Composition of Capital Part II: Template to be used before March 31, 2017 (i.e. during the transition period of Basel III regulatory adjustments) (Rs. in million) Amounts Ref Subject to No. Basel III common disclosure template to be used during the transition of Pre-Basel regulatory adjustments (i.e. from April 1, 2013 to December 31, 2017) III Treatment Common Equity Tier 1 capital: instruments and reserves 1 Directly issued qualifying common share capital plus related stock surplus (share premium) 2 Retained earnings 3 Accumulated other comprehensive income (and other reserves) 4 Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies1) Public sector capital injections grandfathered until January 1, 2018 5 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) 6 Common Equity Tier 1 capital before regulatory adjustments Common Equity Tier 1 capital: regulatory adjustments 7 Prudential valuation adjustments 8 Goodwill (net of related tax liability) 9 Intangibles other than mortgage-servicing rights (net of related tax liability) 10 Deferred tax assets 2 11 Cash-flow hedge reserve 12 Shortfall of provisions to expected losses 13 Securitisation gain on sale 14 Gains and losses due to changes in own credit risk on fair valued liabilities 15 Defined-benefit pension fund net assets 16 Investments in own shares (if not already netted off paid-in capital on reported balance sheet) 17 Reciprocal cross-holdings in common equity 18 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) 19 Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of

1

Not applicable to commercial banks in India. In terms of Basel III rules text issued by the Basel Committee (December 2010), DTAs that rely on future profitability of the bank to be realized are to be deducted. DTAs which relate to temporary differences are to be treated under the “threshold deductions” as set out in paragraph 87. However, banks in India are required to deduct all DTAs, irrespective of their origin, from CET1 capital.
2

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regulatory consolidation, net of eligible short positions (amount above 10% threshold)3 20 Mortgage servicing rights4 (amount above 10% threshold) 21 Deferred tax assets arising from temporary differences5 (amount above 10% threshold, net of related tax liability) 22 Amount exceeding the 15% threshold6 23 of which: significant investments in the common stock of financial entities 24 of which: mortgage servicing rights 25 of which: deferred tax assets arising from temporary differences 26 National specific regulatory adjustments7 (26a+26b+26c+26d) 26a of which: Investments in the equity capital of the unconsolidated insurance subsidiaries 26b of which: Investments in the equity capital of unconsolidated non-financial subsidiaries8 26c of which: Shortfall in the equity capital of majority owned financial entities which have not been consolidated with the bank9 26d of which: Unamortised pension funds expenditures Regulatory Adjustments Applied to Common Equity Tier 1 in respect of Amounts Subject to Pre-Basel III Treatment of which: [INSERT TYPE OF ADJUSTMENT] For example: filtering out of unrealised losses on AFS debt securities (not relevant in Indian context) of which: [INSERT TYPE OF ADJUSTMENT] of which: [INSERT TYPE OF ADJUSTMENT] 27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions 28 Total regulatory adjustments to Common equity Tier 1 29 Common Equity Tier 1 capital (CET1)

3

Only significant investments other than in the insurance and non-financial subsidiaries should be reported here. The insurance and non-financial subsidiaries are not consolidated for the purpose of capital adequacy. The equity and other regulatory capital investments in insurance subsidiaries are fully deducted from consolidated regulatory capital of the banking group. However, in terms of Basel III rules text of the Basel Committee, insurance subsidiaries are included under significant investments and thus, deducted based on 10% threshold rule instead of full deduction. 4 Not applicable in Indian context. 5 Please refer to Footnote 2. 6 Not applicable in Indian context. 7 Adjustments which are not specific to the Basel III regulatory adjustments (as prescribed by the Basel Committee) will be reported under this row. However, regulatory adjustments which are linked to Basel III i.e. where there is a change in the definition of the Basel III regulatory adjustments, the impact of these changes will be explained in the Notes of this disclosure template. 8 Non-financial subsidiaries are not consolidated for the purpose of capital adequacy. The equity and other regulatory capital investments in the non-financial subsidiaries are deducted from consolidated regulatory capital of the group. These investments are not required to be fully deducted from capital under Basel III rules text of the Basel Committee. 9 Please refer to paragraph 3.3.5 of Master Circular on Basel III Capital Regulations. Please also refer to the Paragraph 34 of the Basel II Framework issued by the Basel Committee (June 2006). Though this is not national specific adjustment, it is reported here.

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Additional Tier 1 capital: instruments 30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus (31+32) 31 of which: classified as equity under applicable accounting standards (Perpetual Non-Cumulative Preference Shares) 32 of which: classified as liabilities under applicable accounting standards (Perpetual debt Instruments) 33 Directly issued capital instruments subject to phase out from Additional Tier 1 34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1) 35 of which: instruments issued by subsidiaries subject to phase out 36 Additional Tier 1 capital before regulatory adjustments Additional Tier 1 capital: regulatory adjustments 37 Investments in own Additional Tier 1 instruments 38 Reciprocal cross-holdings in Additional Tier 1 instruments 39 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold) 40 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions)10 41 National specific regulatory adjustments (41a+41b) 41a Investments in the Additional Tier 1 capital of unconsolidated insurance subsidiaries 41b Shortfall in the Additional Tier 1 capital of majority owned financial entities which have not been consolidated with the bank Regulatory Adjustments Applied to Additional Tier 1 in respect of Amounts Subject to Pre-Basel III Treatment of which: [INSERT TYPE OF ADJUSTMENT e.g. DTAs] of which: [INSERT TYPE OF ADJUSTMENT e.g. existing adjustments which are deducted from Tier 1 at 50%] of which: [INSERT TYPE OF ADJUSTMENT] 42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions 43 Total regulatory adjustments to Additional Tier 1 capital 44 Additional Tier 1 capital (AT1) 44a Additional Tier 1 capital reckoned for capital adequacy11 45 Tier 1 capital (T1 = CET1 + AT1) (29 + 44a) Tier 2 capital: instruments and provisions 46 Directly issued qualifying Tier 2 instruments plus related stock surplus

10 11

Please refer to Footnote 3 above. Please refer paragraph 4.2.2(vii) of the Master Circular on Basel III Capital Regulations.

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Directly issued capital instruments subject to phase out from Tier 2 48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2) 49 of which: instruments issued by subsidiaries subject to phase out 50 Provisions12 51 Tier 2 capital before regulatory adjustments Tier 2 capital: regulatory adjustments 52 Investments in own Tier 2 instruments 53 Reciprocal cross-holdings in Tier 2 instruments 54 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold) 55 Significant investments13 in the capital banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions) 56 National specific regulatory adjustments (56a+56b) 56a of which: Investments in the Tier 2 capital of unconsolidated subsidiaries 56b of which: Shortfall in the Tier 2 capital of majority owned financial entities which have not been consolidated with the bank Regulatory Adjustments Applied To Tier 2 in respect of Amounts Subject to Pre-Basel III Treatment of which: [INSERT TYPE OF ADJUSTMENT e.g. existing adjustments which are deducted from Tier 2 at 50%] of which: [INSERT TYPE OF ADJUSTMENT 57 Total regulatory adjustments to Tier 2 capital 58 Tier 2 capital (T2) 58a Tier 2 capital reckoned for capital adequacy14 58b Excess Additional Tier 1 capital reckoned as Tier 2 capital 58c 59 Total Tier 2 capital admissible for capital adequacy (58a + 58b) Total capital (TC = T1 + T2) (45 + 58c) Risk Weighted Assets in respect of Amounts Subject to PreBasel III Treatment of which: [INSERT TYPE OF ADJUSTMENT] of which: … Total risk weighted assets (60a + 60b + 60c)

47

60

12

Eligible Provisions and revaluation Reserves in terms of paragraph 4.2.5.1 of the Master Circular on Basel III Capital Regulations, both to be reported and break-up of these two items to be furnished in Notes. 13 Please refer to Footnote 3 above. 14 Please refer paragraph 4.2.2(vii) of the Master Circular on Basel III Capital Regulations.

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60a of which: total credit risk weighted assets 60b of which: total market risk weighted assets 60c of which: total operational risk weighted assets Capital ratios 61 Common Equity Tier 1 (as a percentage of risk weighted assets) 62 Tier 1 (as a percentage of risk weighted assets) 63 Total capital (as a percentage of risk weighted assets) 64 Institution specific buffer requirement (minimum CET1 requirement plus capital conservation and countercyclical buffer requirements, expressed as a percentage of risk weighted assets) 65 of which: capital conservation buffer requirement 66 of which: bank specific countercyclical buffer requirement 67 of which: G-SIB buffer requirement 68 Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted assets) National minima (if different from Basel III) 69 National Common Equity Tier 1 minimum ratio (if different from Basel III minimum) 70 National Tier 1 minimum ratio (if different from Basel III minimum) 71 National total capital minimum ratio (if different from Basel III minimum) Amounts below the thresholds for deduction (before risk weighting) 72 Non-significant investments in the capital of other financial entities 73 Significant investments in the common stock of financial entities 74 Mortgage servicing rights (net of related tax liability) 75 Deferred tax assets arising from temporary differences (net of related tax liability) Applicable caps on the inclusion of provisions in Tier 2 76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap) 77 Cap on inclusion of provisions in Tier 2 under standardised approach 78 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach (prior to application of cap) 79 Cap for inclusion of provisions in Tier 2 under internal ratings-based approach Capital instruments subject to phase-out arrangements (only applicable between March 31, 2017 and March 31, 2022) 80 Current cap on CET1 instruments subject to phase out arrangements 81 Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities) 82 Current cap on AT1 instruments subject to phase out

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83 84 85

arrangements Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities) Current cap on T2 instruments subject to phase out arrangements Amount excluded from T2 due to cap (excess over cap after redemptions and maturities)

Notes to the Template Row No. of Particular the template 10 Deferred tax assets associated with accumulated losses Deferred tax assets (excluding those associated with accumulated losses) net of Deferred tax liability Total as indicated in row 10 19 If investments in insurance subsidiaries are not deducted fully from capital and instead considered under 10% threshold for deduction, the resultant increase in the capital of bank of which: Increase in Common Equity Tier 1 capital of which: Increase in Additional Tier 1 capital of which: Increase in Tier 2 capital 26b If investments in the equity capital of unconsolidated non-financial subsidiaries are not deducted and hence, risk weighted then: (i) Increase in Common Equity Tier 1 capital (ii) Increase in risk weighted assets 44a Excess Additional Tier 1 capital not reckoned for capital adequacy (difference between Additional Tier 1 capital as reported in row 44 and admissible Additional Tier 1 capital as reported in 44a) of which: Excess Additional Tier 1 capital which is considered as Tier 2 capital under row 58b 50 Eligible Provisions included in Tier 2 capital Eligible Revaluation Reserves included in Tier 2 capital Total of row 50 58a Excess Tier 2 capital not reckoned for capital adequacy (difference between Tier 2 capital as reported in row 58 and T2 as reported in 58a) (Rs. in million)

Row No. 1

Explanation of each row of the common disclosure template Explanation Instruments issued by the parent bank of the reporting banking group which meet all of the CET1 entry criteria set out in paragraph 4.2.3 of the Master Circular (read with Annex 1 / Annex 2), as applicable. This should be equal to the sum of common shares (and related surplus only) which must meet the common shares criteria. This should be net of treasury stock and other investments in own shares to the extent that these are already derecognised on the balance sheet under the relevant accounting standards. Other paid-up capital elements must be excluded. All minority interest must be excluded.

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2 3 4 5

6 7 8 9 10 11 12 13 14 15 16 17 18

19

20 21 22 23 24 25 26

27

28

Retained earnings, prior to all regulatory adjustments in accordance with paragraph 4.2.3 of the Master Circular Accumulated other comprehensive income and other disclosed reserves, prior to all regulatory adjustments. Banks must report zero in this row. Common share capital issued by subsidiaries and held by third parties. Only the amount that is eligible for inclusion in group CET1 should be reported here as determined by the application of paragraph 4.3.4 of the Master Circular (Also see Annex 17 for illustration). Sum of rows 1 to 5. Valuation adjustments according to the requirements of paragraph 8.8 of the Master Circular Goodwill net of related tax liability as set out in paragraph 4.4.1 of the Master Circular Intangibles (net of related tax liability) as set out in paragraph 4.4.1 of the Master Circular Deferred tax assets (net of related tax liability) as set out in paragraph 4.4.2 of the Master Circular The element of the cash-flow hedge reserve described in paragraph 4.4.3 of the Master Circular Shortfall of provisions to expected losses as described in paragraph 4.4.4 of the Master Circular Securitisation gain on sale as described in paragraph 4.4.5 of the Master Circular Gains and losses due to changes in own credit risk on fair valued liabilities as described in paragraph 4.4.6 of the Master Circular Defined-benefit pension fund net assets, the amount to be deducted as set out in paragraphs 4.4.7 of the Master Circular Investments in own shares (if not already netted off paid-in capital on reported balance sheet) as set out in paragraph 4.4.8 of the Master Circular Reciprocal cross-holdings in common equity as set out in paragraph 4.4.9.2(A) of the Master Circular Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation where the bank does not own more than 10% of the issued share capital (amount above 10% threshold), amount to be deducted from CET1 in accordance with paragraph 4.4.9.2 (B) of the Master Circular Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation (amount above 10% threshold), amount to be deducted from CET1 in accordance with paragraph 4.4.9.2 (C) of the Master Circular Not relevant Not relevant Not relevant Not relevant Not relevant Not relevant Any national specific regulatory adjustments that are required by national authorities to be applied to CET1 in addition to the Basel III minimum set of adjustments [i.e. in terms of December 2010 (rev June 2011) document issued by the Basel Committee on Banking Supervision]. Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 to cover deductions. If the amount reported in row 43 exceeds the amount reported in row 36 the excess is to be reported here. Total regulatory adjustments to Common equity Tier 1, to be calculated as the sum of rows 7 to 22 plus row 26 and 27.

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29 30

31 32 33 34

35 36 37 38 39

40

41

42

43 44 45 46

47 48

49 50 51 52 53

Common Equity Tier 1 capital (CET1), to be calculated as row 6 minus row 28. Instruments that meet all of the AT1 entry criteria set out in paragraph 4.2.4 of the Master Circular. All instruments issued of subsidiaries of the consolidated group should be excluded from this row. The amount in row 30 classified as equity under applicable Accounting Standards. The amount in row 30 classified as liabilities under applicable Accounting Standards. Directly issued capital instruments subject to phase out from Additional Tier 1 in accordance with the requirements of paragraph 4.5.4 of the Master Circular Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties, the amount allowed in group AT1 in accordance with paragraph 4.3.4 of the Master Circular (please see Annex 17 for illustration). The amount reported in row 34 that relates to instruments subject to phase out from AT1 in accordance with the requirements of paragraph 4.5.4 of the Master Circular The sum of rows 30, 33 and 34. Investments in own Additional Tier 1 instruments, amount to be deducted from AT1 in accordance with paragraph 4.4.8 of the Master Circular Reciprocal cross-holdings in Additional Tier 1 instruments, amount to be deducted from AT1 in accordance with paragraph 4.4.9.2 (A) of the Master Circular Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation where the bank does not own more than 10% of the issued common share capital of the entity (net of eligible short positions), amount to be deducted from AT1 in accordance with paragraph 4.4.9.2 (B) of the Master Circular Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions), amount to be deducted from AT1 in accordance with paragraph 4.4.9.2 (C) of the Master Circular Any national specific regulatory adjustments that are required by national authorities to be applied to Additional Tier 1 in addition to the Basel III minimum set of adjustments [i.e. in terms of December 2010 (rev June 2011) document issued by the Basel Committee on Banking Supervision]. Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions. If the amount reported in row 57 exceeds the amount reported in row 51 the excess is to be reported here. The sum of rows 37 to 42. Additional Tier 1 capital, to be calculated as row 36 minus row 43. Tier 1 capital, to be calculated as row 29 plus row 44a. Instruments that meet all of the Tier 2 entry criteria set out in paragraph 4.2.5 of the Master Circular. All instruments issued of subsidiaries of the consolidated group should be excluded from this row. Provisions and Revaluation Reserves should not be included in Tier 2 in this row Directly issued capital instruments subject to phase out from Tier 2 in accordance with the requirements of paragraph 4.5.4 of the Master Circular Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 32) issued by subsidiaries and held by third parties (amount allowed in group Tier 2), in accordance with paragraph 4.3.4 of the Master Circular The amount reported in row 48 that relates to instruments subject to phase out from Tier 2 in accordance with the requirements of paragraph 4.5.4 of the Master Circular Provisions and Revaluation Reserves included in Tier 2, calculated in accordance with paragraph 4.2.5 of the Master Circular The sum of rows 46 to 48 and row 50. Investments in own Tier 2 instruments, amount to be deducted from Tier 2 in accordance with paragraph 4.4.8 of the Master Circular Reciprocal cross-holdings in Tier 2 instruments, amount to be deducted from Tier 2 in

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54

55

56

57 58 59 60 61 62 63 64

65 66 67 68

69 70 71 72 73 74

accordance with paragraph 4.4.9.2 (A) of the Master Circular Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation where the bank does not own more than 10% of the issued common share capital of the entity (net of eligible short positions), amount to be deducted from Tier 2 in accordance with paragraph 4.4.9.2(B) of the Master Circular Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation (net of eligible short positions), amount to be deducted from Tier 2 in accordance with paragraph 4.4.9.2(C) of the Master Circular Any national specific regulatory adjustments that are required by national authorities to be applied to Tier 2 in addition to the Basel III minimum set of adjustments [i.e. in terms of December 2010 (rev June 2011) document issued by the Basel Committee on Banking Supervision].. The sum of rows 52 to 56. Tier 2 capital, to be calculated as row 51 minus row 57. Total capital, to be calculated as row 45 plus row 58c. Total risk weighted assets of the reporting group. Details to be furnished under rows 60a, 60b and 60c. Common Equity Tier 1 ratio (as a percentage of risk weighted assets), to be calculated as row 29 divided by row 60 (expressed as a percentage). Tier 1 ratio (as a percentage of risk weighted assets), to be calculated as row 45 divided by row 60 (expressed as a percentage). Total capital ratio (as a percentage of risk weighted assets), to be calculated as row 59 divided by row 60 (expressed as a percentage). Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical buffer requirements plus G-SIB buffer requirement, expressed as a percentage of risk weighted assets). To be calculated as 5.5% plus 2.5% capital conservation buffer plus the bank specific countercyclical buffer requirement whenever activated and applicable plus the bank G-SIB requirement (where applicable) as set out in document ‘Global systemically important banks: assessment methodology and the additional loss absorbency requirement’: Rules text (November 2011) issued by the Basel Committee. This row will show the CET1 ratio below which the bank will become subject to constraints on distributions. The amount in row 64 (expressed as a percentage of risk weighed assets) that relates to the capital conservation buffer), i.e. banks will report 2.5% here. The amount in row 64 (expressed as a percentage of risk weighed assets) that relates to the bank specific countercyclical buffer requirement. The amount in row 64 (expressed as a percentage of risk weighed assets) that relates to the bank’s G-SIB requirement. Common Equity Tier 1 available to meet buffers (as a percentage of risk weighted assets). To be calculated as the CET1 ratio of the bank, less any common equity used to meet the bank’s minimum Tier 1 and minimum Total capital requirements. National Common Equity Tier 1 minimum ratio (if different from Basel III minimum). 5.5% should be reported. National Tier 1 minimum ratio (if different from Basel III minimum). 7% should be reported. National total capital minimum ratio (if different from Basel III minimum). 9% should be reported. Non-significant investments in the capital of other financial entities, the total amount of such holdings that are not reported in row 18, row 39 and row 54. Significant investments in the common stock of financial entities, the total amount of such holdings that are not reported in row 19 Mortgage servicing rights, the total amount of such holdings that are not reported in row 19 and row 23 - Not Applicable in India.

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75 76

77 78

79 80 81 82 83 84 85

Deferred tax assets arising from temporary differences, the total amount of such holdings that are not reported in row 21 and row 25. – Not applicable in India. Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach, calculated in accordance paragraph 4.2.5 of the Master Circular, prior to the application of the cap. Cap on inclusion of provisions in Tier 2 under standardised approach, calculated in accordance paragraph 4.2.5 of the Master Circular Provisions eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach, calculated in accordance paragraph 4.2.5 of the Master Circular. Cap for inclusion of provisions in Tier 2 under internal ratings-based approach, calculated in accordance paragraph 4.2.5 of the Master Circular Current cap on CET1 instruments subject to phase out arrangements, see paragraph 4.5.5. Amount excluded from CET1 due to cap (excess over cap after redemptions and maturities), see paragraph 4.5.5 of the Master Circular Current cap on AT1 instruments subject to phase out arrangements, see paragraph 4.5.4 of the Master Circular Amount excluded from AT1 due to cap (excess over cap after redemptions and maturities), see paragraph 4.5.4 of the Master Circular Current cap on T2 instruments subject to phase out arrangements, see paragraph 4.5.4 of the Master Circular Amount excluded from T2 due to cap (excess over cap after redemptions and maturities), see paragraph 4.5.4 of the Master Circular

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3.3 Step 1

Three Step Approach to Reconciliation Requirements

Under Step 1, banks are required to take their balance sheet in their financial statements (numbers reported the middle column below) and report the numbers when the regulatory scope of consolidation is applied (numbers reported in the right hand column below). If there are rows in the regulatory consolidation balance sheet that are not present in the published financial statements, banks are required to give a value of zero in the middle column and furnish the corresponding amount in the column meant for regulatory scope of consolidation. Banks may however, indicate what the exact treatment is for such amount in the balance sheet. Table DF-12: Composition of Capital- Reconciliation Requirements (Rs. in million) Balance sheet under regulatory scope of consolidation As on reporting date

Balance sheet as in financial statements As on reporting date A i Capital & Liabilities Paid-up Capital Reserves & Surplus Minority Interest Total Capital Deposits of which: Deposits from banks of which: Customer deposits of which: Other deposits (pl. specify) Borrowings of which: From RBI of which: From banks of which: From other institutions & agencies of which: Others (pl. specify) of which: Capital instruments Other liabilities & provisions Total B i Assets Cash and balances with Reserve Bank of India Balance with banks and money at call and short notice Investments: of which: Government securities of which: Other approved

ii

iii

iv

ii

- 271 -

iii

iv v

vi vii

securities of which: Shares of which: Debentures & Bonds of which: Subsidiaries / Joint Ventures / Associates of which: Others (Commercial Papers, Mutual Funds etc.) Loans and advances of which: Loans and advances to banks of which: Loans and advances to customers Fixed assets Other assets of which: Goodwill and intangible assets of which: Deferred tax assets Goodwill on consolidation Debit balance in Profit & Loss account Total Assets

Step 2 Under Step 2 banks are required to expand the regulatory-scope balance sheet (revealed in Step 1) to identify all the elements that are used in the definition of capital disclosure template set out in Table DF-11 (Part I / Part II whichever, applicable). Set out below are some examples of elements that may need to be expanded for a particular banking group. The more complex the balance sheet of the bank, the more items would need to be disclosed. Each element must be given a reference number/letter that can be used in Step 3. (Rs. in million) Balance sheet under regulatory scope of consolidation As on reporting date

Balance sheet as in financial statements As on reporting date A i Capital & Liabilities Paid-up Capital of which: Amount eligible for CET1 of which: Amount eligible for AT1 Reserves & Surplus Minority Interest Total Capital Deposits of which: Deposits from banks of which: Customer deposits of which: Other deposits (pl. specify)

e f

ii

- 272 -

iii

iv

Borrowings of which: From RBI of which: From banks of which: From other institutions & agencies of which: Others (pl. specify) of which: Capital instruments Other liabilities & provisions of which: DTLs related to goodwill of which: DTLs related to intangible assets Total

c d

B i

ii

iii

iv v

vi vii

Assets Cash and balances with Reserve Bank of India Balance with banks and money at call and short notice Investments of which: Government securities of which: Other approved securities of which: Shares of which: Debentures & Bonds of which: Subsidiaries / Joint Ventures / Associates of which: Others (Commercial Papers, Mutual Funds etc.) Loans and advances of which: Loans and advances to banks of which: Loans and advances to customers Fixed assets Other assets of which: Goodwill and intangible assets Out of which: Goodwill Other intangibles (excluding MSRs) Deferred tax assets Goodwill on consolidation Debit balance in Profit & Loss account Total Assets

a b

Step 3: Under Step 3 banks are required to complete a column added to the Table DF-11 (Part I / Part II whichever, applicable) disclosure template to show the source of every input.

- 273 -

(iii) For example, the definition of capital disclosure template includes the line “goodwill net of related deferred tax liability”. Next to the disclosure of this item in the disclosure template under Table DF-11 (Part I / Part II whichever, applicable), the bank would be required to put ‘a – c’ to show that row 8 of the template has been calculated as the difference between component ‘a’ of the balance sheet under the regulatory scope of consolidation, illustrated in step 2, and component ‘c’. Extract of Basel III common disclosure template (with added column) – Table DF-11 (Part I / Part II whichever, applicable) Common Equity Tier 1 capital: instruments and reserves Component of regulatory capital reported by bank Source based on reference numbers/letters of the balance sheet under the regulatory scope of consolidation from step 2 e

1 2 3 4

5 6 7 8

Directly issued qualifying common share (and equivalent for non-joint stock companies) capital plus related stock surplus Retained earnings Accumulated other comprehensive income (and other reserves) Directly issued capital subject to phase out from CET1 (only applicable to nonjoint stock companies) Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) Common Equity Tier 1 capital before regulatory adjustments Prudential valuation adjustments Goodwill (net of related tax liability)

a-c

3.2 Main Features Template (i) Template which banks must use to ensure that the key features of regulatory capital instruments are disclosed is set out below. Banks will be required to complete all of the shaded cells for each outstanding regulatory capital instrument (banks should insert “NA” if the question is not applicable).

- 274 -

Table DF-13: Main Features of Regulatory Capital Instruments Disclosure template for main features of regulatory capital instruments Issuer Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) Governing law(s) of the instrument Regulatory treatment Transitional Basel III rules Post-transitional Basel III rules Eligible at solo/group/ group & solo Instrument type Amount recognised in regulatory capital (Rs. in million, as of most recent reporting date) Par value of instrument Accounting classification Original date of issuance Perpetual or dated Original maturity date Issuer call subject to prior supervisory approval Optional call date, contingent call dates and redemption amount Subsequent call dates, if applicable Coupons / dividends Fixed or floating dividend/coupon Coupon rate and any related index Existence of a dividend stopper Fully discretionary, partially discretionary or mandatory Existence of step up or other incentive to redeem Noncumulative or cumulative Convertible or non-convertible If convertible, conversion trigger(s) If convertible, fully or partially If convertible, conversion rate If convertible, mandatory or optional conversion If convertible, specify instrument type convertible into If convertible, specify issuer of instrument it converts into Write-down feature If write-down, write-down trigger(s) If write-down, full or partial If write-down, permanent or temporary If temporary write-down, description of write-up mechanism Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Non-compliant transitioned features If yes, specify non-compliant features

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

(ii) Using the reference numbers in the left column of the table above, the following table provides a more detailed explanation of what banks would be required to report in each of the grey cells, including, where relevant, the list of options contained in the spread sheet’s drop down menu.

- 275 -

Further explanation of items in main features disclosure template Identifies issuer legal entity. 1 Free text Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) 2 Free text Specifies the governing law(s) of the instrument 3 Free text Specifies transitional Basel III regulatory capital treatment. 4 Select from menu: [Common Equity Tier 1] [Additional Tier 1] [Tier 2] Specifies regulatory capital treatment under Basel III rules not taking into account 5 transitional treatment. Select from menu: [Common Equity Tier 1] [Additional Tier 1] [Tier 2] [Ineligible] Specifies the level(s) within the group at which the instrument is included in capital. 6 Select from menu: [Solo] [Group] [Solo and Group] Specifies instrument type, varying by jurisdiction. Helps provide more granular understanding of features, particularly during transition. Select from menu: [Common Shares] [Perpetual Non-cumulative Preference Shares] 7 [Perpetual Debt Instruments] [Upper Tier 2 Capital Instruments] [Perpetual Cumulative Preference Shares] [ Redeemable Non-cumulative Preference Shares] [Redeemable Cumulative Preference Shares] [Tier 2 Debt Instruments] [Others- specify] Specifies amount recognised in regulatory capital. 8 Free text Par value of instrument 9 Free text Specifies accounting classification. Helps to assess loss absorbency. 10 Select from menu: [Shareholders’ equity] [Liability ] [Non-controlling interest in consolidated subsidiary] Specifies date of issuance. 11 Free text Specifies whether dated or perpetual. 12 Select from menu: [Perpetual] [Dated] For dated instrument, specifies original maturity date (day, month and year). For 13 perpetual instrument put “no maturity”. Free text Specifies whether there is an issuer call option. Helps to assess permanence. 14 Select from menu: [Yes] [No] For instrument with issuer call option, specifies first date of call if the instrument has a call option on a specific date (day, month and year) and, in addition, specifies if the 15 instrument has a tax and/or regulatory event call. Also specifies the redemption price. Helps to assess permanence. Free text Specifies the existence and frequency of subsequent call dates, if applicable. Helps to 16 assess permanence. Free text Specifies whether the coupon/dividend is fixed over the life of the instrument, floating over the life of the instrument, currently fixed but will move to a floating rate in the 17 future, currently floating but will move to a fixed rate in the future. Select from menu: [Fixed], [Floating] [Fixed to floating], [Floating to fixed] Specifies the coupon rate of the instrument and any related index that the 18 coupon/dividend rate references. Free text Specifies whether the non-payment of a coupon or dividend on the instrument prohibits 19 the payment of dividends on common shares (i.e. whether there is a dividend stopper).

- 276 -

20

21 22 23

24

25

26

27

28 29 30

31

32

33 34

Select from menu: [Yes], [No] Specifies whether the issuer has full discretion, partial discretion or no discretion over whether a coupon/dividend is paid. If the bank has full discretion to cancel coupon/dividend payments under all circumstances it must select “fully discretionary” (including when there is a dividend stopper that does not have the effect of preventing the bank from cancelling payments on the instrument). If there are conditions that must be met before payment can be cancelled (e.g. capital below a certain threshold), the bank must select “partially discretionary”. If the bank is unable to cancel the payment outside of insolvency the bank must select “mandatory”. Select from menu: [Fully discretionary] [Partially discretionary] [Mandatory] Specifies whether there is a step-up or other incentive to redeem. Select from menu: [Yes] [No] Specifies whether dividends / coupons are cumulative or noncumulative. Select from menu: [Noncumulative] [Cumulative] Specifies whether instrument is convertible or not. Helps to assess loss absorbency. Select from menu: [Convertible] [Nonconvertible] Specifies the conditions under which the instrument will convert, including point of nonviability. Where one or more authorities have the ability to trigger conversion, the authorities should be listed. For each of the authorities it should be stated whether it is the terms of the contract of the instrument that provide the legal basis for the authority to trigger conversion (a contractual approach) or whether the legal basis is provided by statutory means (a statutory approach). Free text Specifies whether the instrument will always convert fully, may convert fully or partially, or will always convert partially Select from menu: [Always Fully] [Fully or Partially] [Always partially] Specifies rate of conversion into the more loss absorbent instrument. Helps to assess the degree of loss absorbency. Free text For convertible instruments, specifies whether conversion is mandatory or optional. Helps to assess loss absorbency. Select from menu: [Mandatory] [Optional] [NA] For convertible instruments, specifies instrument type convertible into. Helps to assess loss absorbency. Select from menu: [Common Equity Tier 1] [Additional Tier 1] [Tier 2] [Other] If convertible, specify issuer of instrument into which it converts. Free text Specifies whether there is a write down feature. Helps to assess loss absorbency. Select from menu: [Yes] [No] Specifies the trigger at which write-down occurs, including point of non-viability. Where one or more authorities have the ability to trigger write-down, the authorities should be listed. For each of the authorities it should be stated whether it is the terms of the contract of the instrument that provide the legal basis for the authority to trigger writedown (a contractual approach) or whether the legal basis is provided by statutory means (a statutory approach). Free text Specifies whether the instrument will always be written down fully, may be written down partially, or will always be written down partially. Helps assess the level of loss absorbency at write-down. Select from menu: [Always Fully] [Fully or Partially] [Always partially] For write down instrument, specifies whether write down is permanent or temporary. Helps to assess loss absorbency. Select from menu: [Permanent] [Temporary] [NA] For instrument that has a temporary write-down, description of write-up mechanism.

- 277 -

Free text Specifies instrument to which it is most immediately subordinate. Helps to assess loss absorbency on gone-concern basis. Where applicable, banks should specify the 35 column numbers of the instruments in the completed main features template to which the instrument is most immediately subordinate. Free text Specifies whether there are non-compliant features. 36 Select from menu: [Yes] [No] If there are non-compliant features, banks to specify which ones. Helps to assess 37 instrument loss absorbency. Free text 3.3 Full Terms and Conditions of Regulatory Capital Instruments Under this template, banks are required to disclose the full terms and conditions of all instruments included in the regulatory capital Table DF-14: Full Terms and Conditions of Regulatory Capital Instruments Instruments Full Terms and Conditions

3.6

Disclosure Requirements for Remuneration

Please refer to the Guidelines on Compensation of Whole Time Directors / Chief Executive Officers / Other Risk Takers issued vide circular DBOD.No.BC.72/29.67.001/2011-12 dated January 13, 2012 addressed to all private sector and foreign banks operating in India. Private sector and foreign banks operating in India are required to make disclosure on remuneration on an annual basis at the minimum, in their Annual Financial Statements in the following template:

- 278 -

Table DF-15: Disclosure Requirements for Remuneration Remuneration Qualitative disclosures (a) Information relating to the composition and mandate of the Remuneration Committee. (b) Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy. (c) Description of the ways in which current and future risks are taken into account in the remuneration processes. It should include the nature and type of the key measures used to take account of these risks. (d) Description of the ways in which the bank seeks to link performance during a performance measurement period with levels of remuneration. (e) A discussion of the bank's policy on deferral and vesting of variable remuneration and a discussion of the bank's policy and criteria for adjusting deferred remuneration before vesting and after vesting. (f) Description of the different forms of variable remuneration (i.e. cash, shares, ESOPs and other forms) that the bank utilizes and the rationale for using these different forms. * Number of meetings held by the Remuneration Committee during the financial year and remuneration paid to its members. Number of employees having received a variable remuneration award during the financial year. Number and total amount of sign-on awards made during the financial year. Details of guaranteed bonus, if any, paid as joining / sign on bonus. Details of severance pay, in addition to accrued benefits, if any. Total amount of outstanding deferred remuneration, split into cash, shares and share-linked instruments and other forms. Total amount of deferred remuneration paid out in the financial year. Breakdown of amount of remuneration awards for the financial year to show fixed and variable, deferred and non-deferred. Total amount of outstanding deferred remuneration and retained remuneration exposed to ex post explicit and / or implicit adjustments. Total amount of reductions during the financial year due to ex- post explicit adjustments. Total amount of reductions during the financial year due to ex- post implicit adjustments.

(g) Quantitative disclosures (The quantitative disclosures (h) should only cover Whole Time Directors / Chief Executive Officer / Other Risk Takers) (i)

* * * * * *

(j) (k)

* *

* *

- 279 -

Annex 19 TRANSITIONAL ARRANGEMENTS FOR NON-EQUITY REGULATORY CAPITAL INSTRUMENTS #

- 280 -

Annex 20 GLOSSARY
Asset Available for Sale An asset is anything of value that is owned by a person or business The securities available for sale are those securities where the intention of the bank is neither to trade nor to hold till maturity. These securities are valued at the fair value which is determined by reference to the best available source of current market quotations or other data relative to current value. A balance sheet is a financial statement of the assets and liabilities of a trading concern, recorded at a particular point in time. The banking book comprises assets and liabilities, which are contracted basically on account of relationship or for steady income and statutory obligations and are generally held till maturity. The Basel Committee is a committee of bank supervisors consisting of members from each of the G10 countries. The Committee is a forum for discussion on the handling of specific supervisory problems. It coordinates the sharing of supervisory responsibilities among national authorities in respect of banks' foreign establishments with the aim of ensuring effective supervision of banks' activities worldwide. Update with latest An operational risk measurement technique permitted under Basel II. The approach sets a charge for operational risk as a fixed percentage ("alpha factor") of a single indicator. The indicator serves as a proxy for the bank's risk exposure. The risk that the interest rate of different assets, liabilities and off-balance sheet items may change in different magnitude is termed as basis risk. Capital refers to the funds (e.g., money, loans, equity, etc.) which are available to carry on a business, make an investment, and generate future revenue. Capital also refers to physical assets which can be used to generate future returns. A measure of the adequacy of an entity's capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent. For example, under BIS (Bank for International Settlements) rules, banks are required to maintain a certain level of capital against their risk-adjusted assets. Capital reserves Convertible Bond Credit risk That portion of a company's profits not paid out as dividends to shareholders. They are also known as undistributable reserves. A bond giving the investor the option to convert the bond into equity at a fixed conversion price or as per a pre-determined pricing formula. Risk that a party to a contractual agreement or transaction will be unable to meet their obligations or will default on commitments. Credit risk can be associated with almost any transaction or instrument such as swaps, repos, CDs, foreign exchange transactions, etc. Specific types of credit risk include sovereign risk, country risk, legal or force majeure risk, marginal risk and settlement risk. Debentures Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on a particular date on redemption of the debentures.

Balance Sheet

Banking Book

Basel Committee on Banking Supervision

Basic Indicator Approach

Basis Risk Capital

Capital adequacy

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Deferred Assets

Tax

Unabsorbed depreciation and carry forward of losses which can be set-off against future taxable income which is considered as timing differences result in deferred tax assets. The deferred Tax Assets are accounted as per the Accounting Standard 22. Deferred Tax Assets have an effect of decreasing future income tax payments, which indicates that they are prepaid income taxes and meet definition of assets. Whereas deferred tax liabilities have an effect of increasing future year's income tax payments, which indicates that they are accrued income taxes and meet definition of liabilities

Delta (∆)

The delta of an option / a portfolio of options is the rate of change in the value of the option / portfolio with respect to change in the price of the asset(s) underlying the option(s). A derivative instrument derives much of its value from an underlying product. Examples of derivatives include futures, options, forwards and swaps. For example, a forward contract can be derived from the spot currency market and the spot markets for borrowing and lending. In the past, derivative instruments tended to be restricted only to those products which could be derived from spot markets. However, today the term seems to be used for any product that can be derived from any other. Duration (Macaulay duration) measures the price volatility of fixed income securities. It is often used in the comparison of the interest rate risk between securities with different coupons and different maturities. It is the weighted average of the present value of all the cash flows associated with a fixed income security. It is expressed in years. The duration of a fixed income security is always shorter than its term to maturity, except in the case of zero coupon securities where they are the same. An institution established or incorporated outside India which proposes to make investment in India insecurities; provided that a domestic asset management company or domestic portfolio manager who manages funds raised or collected or brought from outside India for investment in India on behalf of a sub-account, shall be deemed to be a Foreign Institutional Investor. A forward contract is an agreement between two parties to buy or sell an agreed amount of a commodity or financial instrument at an agreed price, for delivery on an agreed future date. In contrast to a futures contract, a forward contract is not transferable or exchange tradable, its terms are not standardized and no margin is exchanged. The buyer of the forward contract is said to be long the contract and the seller is said to be short the contract. The gamma of an option / portfolio of options is the rate of change of the option’s / portfolio’s delta with respect to the change in the price of the asset(s) underlying the option (s). Such reserves, if they are not attributable to the actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, can be included in Tier II capital. Risk that relates to overall market conditions while specific risk is risk that relates to the issuer of a particular security Taking action to eliminate or reduce exposure to risk Securities where the intention is to trade by taking advantage of short-term price / interest rate movements. A disallowance of offsets to required capital used the BIS Method for assessing market risk for regulatory capital. In order to calculate the capital required for interest rate risk of a trading portfolio, the BIS Method allows

Derivative

Duration

Foreign Institutional Investor

Forward Contract

Gamma(Г)

General provisions & loss reserves General risk Hedging Held for Trading Horizontal Disallowance market

- 282 offsets of long and short positions. Yet interest rate risk of instruments at different horizontal points of the yield curve are not perfectly correlated. Hence, the BIS Method requires that a portion of these offsets be disallowed. Interest rate risk Risk that the financial value of assets or liabilities (or inflows/outflows) will be altered because of fluctuations in interest rates. For example, the risk that future investment may have to be made at lower rates and future borrowings at higher rates. A long position refers to a position where gains arise from a rise in the value of the underlying. Risk of loss arising from movements in market prices or rates away from the rates or prices set out in a transaction or agreement. The modified duration or volatility of an interest bearing security is its Macaulay duration divided by one plus the coupon rate of the security. It represents the percentage change in a securities' price for a 100 basis points change in yield. It is generally accurate for only small changes in the yield.

Long Position Market risk Modified Duration

where: MD = Modified duration P = Gross price (i.e. clean price plus accrued interest). dP = Corresponding small change in price. dY = Small change in yield compounded with the frequency of the coupon payment.

Mortgage-backed security Mutual Fund

A bond-type security in which the collateral is provided by a pool of mortgages. Income from the underlying mortgages is used to meet interest and principal repayments. Mutual Fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. A fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments. Net interest margin is the net interest income divided by average interest earning assets Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held)‘ Foreign currency settlement accounts that a bank maintains with its overseas correspondent banks. These accounts are assets of the domestic bank. Off-Balance Sheet exposures refer to the business activities of a bank that generally do not involve booking assets (loans) and taking deposits. Offbalance sheet activities normally generate fees, but produce liabilities or assets that are deferred or contingent and thus, do not appear on the institution's balance sheet until or unless they become actual assets or liabilities. It is the net difference between the amounts payable and amounts receivable in a particular instrument or commodity. It results from the existence of a net long or net short position in the particular instrument or commodity.

Net Margin Net NPA

Interest

Nostro accounts Off-Balance Sheet expos-ures

Open position

- 283 -

Option

An option is a contract which grants the buyer the right, but not the obligation, to buy (call option) or sell (put option) an asset, commodity, currency or financial instrument at an agreed rate (exercise price) on or before an agreed date (expiry or settlement date). The buyer pays the seller an amount called the premium in exchange for this right. This premium is the price of the option. Rho of an option / a portfolio of options is the rate of change in the value of an option / portfolio with respect to change in the level of interest rates. The possibility of an outcome not occurring as expected. It can be measured and is not the same as uncertainty, which is not measurable. In financial terms, risk refers to the possibility of financial loss. It can be classified as credit risk, market risk and operational risk. A bank's risk asset ratio is the ratio of a bank's risk assets to its capital funds. Risk assets include assets other than highly rated government and government agency obligations and cash, for example, corporate bonds and loans. The capital funds include capital and undistributed reserves. The lower the risk asset ratio the better the bank's 'capital cushion' Basel II sets out a risk-weighting schedule for measuring the credit risk of obligors. The risk weights are linked to ratings given to sovereigns, financial institutions and corporations by external credit rating agencies. The process whereby similar debt instruments/assets are pooled together and repackaged into marketable securities which can be sold to investors. The process of loan securitisation is used by banks to move their assets off the balance sheet in order to improve their capital asset ratios. A short position refers to a position where gains arise from a decline in the value of the underlying. It also refers to the sale of a security in which the seller does not have a long position. Within the framework of the BIS proposals on market risk, specific risk refers to the risk associated with a specific security, issuer or company, as opposed to the risk associated with a market or market sector (general risk). Refers to the status of the debt. In the event of the bankruptcy or liquidation of the debtor, subordinated debt only has a secondary claim on repayments, after other debt has been repaid. The theta of an option / a portfolio of options is the rate of change in the value of the option / portfolio with respect to passage of time, with all else remaining the same. It is also called the “time decay” of the option. A trading book or portfolio refers to the book of financial instruments held for the purpose of short-term trading, as opposed to securities that would be held as a long-term investment. The trading book refers to the assets that are held primarily for generating profit on short-term differences in prices/yields. The price risk is the prime concern of banks in trading book. Generally, to underwrite means to assume a risk for a fee. Its two most common contexts are: a) Securities: a dealer or investment bank agrees to purchase a new issue of securities from the issuer and distribute these securities to investors. The underwriter may be one person or part of an underwriting syndicate. Thus the issuer faces no risk of being left with unsold securities. b) Insurance: a person or company agrees to provide financial compensation against the risk of fire, theft, death, disability, etc., for a fee called a premium. It is a method for calculating and controlling exposure to market risk. VAR is a single number (currency amount) which estimates the maximum expected

Rho(ρ) Risk

Risk Asset Ratio

Risk Weights

Securitis-ation

Short position

Specific risk

Subordinated debt Theta(θ)

Trading Book

Underwrite

Value at risk (VAR)

- 284 loss of a portfolio over a given time horizon (the holding period) and at a given confidence level. The Vega of an option / a portfolio of options is the rate of change in the value of the option / portfolio with respect to volatility of the asset(s) underlying the option(s). A fund with the purpose of investing in start-up businesses that is perceived to have excellent growth prospects but does not have access to capital markets. In the BIS Method for determining regulatory capital necessary to cushion market risk, a reversal of the offsets of a general risk charge of a long position by a short position in two or more securities in the same time band in the yield curve where the securities have differing credit risks.

Vega (ν)

Venture Fund

capital

Vertical Disallowance

- 285 -

Annex 21
(Cf. Para 2 of the covering circular)

List of Circulars Consolidated in the Master Circular
Sl. No

Circular No.
DBOD.No.BP.BC.16 /21.06.001/2012-13

Subject
Master Circular - Prudential Guidelines on Capital Adequacy and Market Discipline- New Capital Adequacy Framework (NCAF) Guidelines on Compensation of Whole Time Directors / Chief Executive Officers / Risk takers and Control function Staff, etc. Guidelines on Implementation of Basel III Capital Regulations in India

Updated Para No. of the Master Circular

1.

2.

DBOD.No.BC.72/29.6 7.001/2011-12 dated January 13, 2012

Table DF-15 on Disclosure Requirements for Remuneration Scope of Application (paragraph 3) is replaced by subparagraph 3.1 of Section B of Annex 1; • Definition of Capital (paragraph 4) is replaced by Annex 1 (excluding subparagraph 3.1of Section B) ; • Risk Coverage : Capital Charge for Credit Risk (paragraph 5), External Credit Assessments (paragraph 6), Credit Risk Mitigation (paragraph 7) and Capital Charge for Market Risk (paragraph 8) will be modified as indicated in Annex 2; • Supervisory Review and Evaluation Process under Pillar 2 (paragraphs 12 & 13) is modified as indicated in Annex 3. Para 4.2.3.2.(B)(iv)

3.

DBOD.No.BP.BC.98 /21.06.201/2011-12 dated May 2, 2012

4.

DBOD.No.BP.BC.28/2 1.06.001/201213 dated July 9, 2012

Prudential Guidelines on Capital Adequacy Treatment of Head Office Debit Balance - Foreign Banks

- 286 -

5.

DBOD.No.BP.BC.41/2 1.06.009/201213 dated September 13, 2012

Prudential Guidelines on Capital Adequacy and Market Discipline New Capital Adequacy Framework (NCAF) Eligible Credit Rating Agencies - SME Rating Agency of India Ltd. (SMERA)

Para 6.1.2 Para 7.3.5.(vi) (b) Para 7.3.5.(vii) (d) and (e) Table 6:Part B, 12, 13

6.

DBOD.No.BP.BC.54/2 1.06.007/2012-13 dated November 5, 2012

Prudential Guidelines on Capital Adequacy and Market Discipline New Capital Adequacy Framework (NCAF) - Change of Name of Fitch Ratings to India Ratings and Research Private Limited (India Ratings) Retail Issue of Subordinated Debt for Raising Tier II Capital Guidelines on Implementation of Basel III Capital Regulations in India - Clarifications

Para 6.1.2 Para 7.3.5.(vi) (b) Para 7.3.5.(vii) (d) and (e) Table 6:Part B, 12, 13 Footnote 111 under para 1.17 Footnote 8 under para 4.2.2.(vii) Paragraphs 3.3.2, 4.4.6.(i), 4.4.9.2 .B.(iv) , 4.4.9.2 .C.(iii), 4.5.4.2, 4.5.4.2 (C), 4.5.4.3, 7.5.6, 8.4.4, 15.2.2, 16.5.3 Table 4, Table 16 - Part C, Table 16 - Part D Annex 16, 21 and 24 Paragraph 5.15.2.(vii)

7. 8.

DBOD.BP.BC.No.72/2 1.01.002/2012-13 dated January 1, 2013 DBOD.No.BP.BC.88/2 1.06.201/2012-13 dated March 28, 2013

9.

DBOD.No.BP.BC.89.2 1.04.009/201213 dated April 2, 2013

10. DBOD.No.BP.BC90/21.04.048/2012-13 dated April 16, 2013

11. DBOD.BP.BC.No.95/2
1.06.001/201213 dated May 27, 2013

12. DBOD.No.BP.BC.98/2
1.06.201/201213 dated May 28, 2013

New Capital Adequacy Framework - Non-market related Off Balance Sheet Items - Bank Guarantees Advances Guaranteed by Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) - Risk Weights and Provisioning Prudential Guidelines on Capital Adequacy and Market Discipline New Capital Adequacy Framework (NCAF) - Parallel Run and Prudential Floor Guidelines on Composition of Capital Disclosure Requirements

Para 5.2.3

Paragraph 2.4

Part – C : Market Discipline (Pillar 3) and Annex 22

- 287 -

13. DBOD.BP.BC.
No.103/21.06.001/201 2-13 dated June 20, 2013

14. DBOD.BP.BC.No.
104/08.12.015/201213 dated June 21, 2013

Risk Weights on deposits placed with NABARD/SIDBI/NHB in lieu of shortfall in achievement of priority sector lending targets/subtargets Housing Sector: New sub-sector CRE (Residential Housing) within CRE and Rationalisation of provisioning, risk-weight and LTV ratios

Para 6.8.2

Para 5.10.1 and Table 7A