Basel II- RBI Guidelines Summary

Basel II- RBI Guidelines
Usha Janakiraman
NIBM Pune
Scope of application
All commercial banks ( except LAB and RRBs)

Both at solo ( global position ) and at consolidated level
Consolidated bank is defined as a group of entities where a

licensed bank is the controlling entity
Consolidated bank includes all group entities under its control

except entities engaged in:
Insurance business
Business not pertaining to financial services
Consolidated bank to maintain minimum capital adequacy ratio

as applicable to solo bank on ongoing basis
Capital Funds
Minimum 9% CAR to be maintained on an ongoing basis

Role of Pillar 2 to be critical:
RBI to take into account internal capital adequacy assessments

of individual banks to ensure adequacy of capital
commensurate with risk profile
Banks to effectively manage other risks interest rate risk in
banking book, liquidity risk, concentration risk and residual risk
Higher than minimum capital ratio for individual banks can be
prescribed by RBI if warranted by individual risk profiles and
risk management
Banks expected to operate at a level above the minimum
requirement
Capital Funds
On implementation of Basel
II, minimum capital shall be
subjected to a prudential
floor
Adequacy & need for
capital floors to be
reviewed periodically
Prudential Floor
Specified
percent
of minimum capital as
Minimum capital as per
per Basel I ( credit & market)
Basel II
as below
March 2008/09
100%
March 2009/10
90%
March 2010/11
80%
Capital Funds
Banks encouraged to maintain Tier 1 CAR of at least

6% both at solo and consolidated level; banks below
this must attain this by March 2010
Capital Funds= Tier I + Tier II
CAR= Capital Funds/ Credit Risk RWA+ Market Risk RWA+Op Risk RWA
Capital Charge for Credit Risk-Standardised

Approach
All commercial banks in India to adopt Standardised

Approach (SA) for credit risk
Under SA, rating assigned by eligible external credit

rating agencies will largely support the measure of
credit risk
Exposures to be risk weighted net of specific
provisions
Exposures not explicitly addressed to retain current
treatment
Standardised Approach-RBI Guidelines

Domestic
OffSovereigns Foreign
Balance
Sovereigns
Sheet
PSEs
Other Assets
Specified
Higher Risk
Categories
MDBs, BIS &

IMF
SA
Banks
NPAs
Commercial
Real Estate
PDs
Residential
Corporates
Property Regulatory
Retail
Standardised Approach-RBI
Guidelines- Domestic Sovereigns
Claims on central government( FB & NFB): 0% RW

Central government guaranteed claims: 0% RW
Investment in state government securities: 0% RW
State government guaranteed claims: 20% RW
Others:
Claims on RBI, DICGC, CGTSI: 0% RW

Claims on ECGC: 20% RW
Above risk weights apply only for standard performing loans;

otherwise risk weights as applicable to NPAs will apply
Guidelines- Foreign Sovereigns

A
BB
B
BB to < B
B
Unrated
Aaa
To
Aa
Ba
a
Ba to <B
B
Unrated
20
50
100
100
S&P/Fitch AAA
To
AA
Moodys
Risk weights
as per rating
assigned to the
sovereigns/sov
ereign claims Risk
by rating
Weight
agencies
(%)
Claims in domestic currency of foreign sovereign met out of resources in the same currency
raised in the jurisdiction Of that sovereign will attract RW of 0%
150
Standardised Approach-RBI:
Public sector entities
10
Domestic PSEs: Risk weighted in the same manner as

corporates
Foreign PSEs: Risk weighted as per rating assigned by
international rating agencies:
S&P/FITCH
AAA to
AA
BBB
<BB
Unra
ted
Moodys
Aaa to
Aa
Baa to
Ba
<Ba
Unra
ted
50
100
150
100
Risk Weight 20
(%)
Claims on BIS , IMF & eligible MDBs
11
Similar to claims on scheduled banks

Uniform risk weight of 20%
Standardised Approach-RBI: Claims on

Banks:
Banks incorporated in India & foreign bank branches in India
Excludes investment in equity shares and other instruments eligible for capital
status
Claims on scheduled banks complying with minimum CAR & RRBs-20% RW

Claims on non-scheduled banks complying with minimum CAR-100% RW
Claims on banks not complying with minimum CAR : ( includes equity & other
instruments eligible for capital status )
CAR (%)
Scheduled Banks RW
Non-scheduled banks
RW
50%
100%
150%
625%
150%
250%
350%
625%
As on date of last full audit*
12
6 to < 9
3 to < 6
0 to < 3
negative
* Fresh subsequent capital raised can be reckoned
Standardised Approach-RBI: Claims

on Banks:
Foreign banks
As per the ratings assigned by international rating agencies
13
S&P/FITC
H
AAA to
AA
BBB
BB to B <B
Unrated
Moodys
Aaa to
Aa
Baa
Ba to B
<B
Unrated
Risk
Weight
(%)
20
50
50
100
150
50
Claims on a bank in domestic foreign currency met out of resources in the same currency
raised in that jurisdiction will be risk weighted at 20% provided the bank meets the prescribed
minimum CAR of that country; if host supervisor requires a more conservative treatment
for such claims in the books of foreign branches of Indian banks, that should prevail.

on Primary Dealers:
Shall be risk weighted in a manner

similar to corporates
14

on Corporates:
Corporates:
Shall include all exposures (FB & NFB) other than
those qualifying for inclusion under sovereign; bank;
regulatory retail; residential mortgage; non-performing
assets & specified category all of which are separately
addressed
15

on Corporates:
To be risk weighted as per the rating agencies
registered with SEBI and chosen by RBI
Risk
weights for long term & short term claims on

corporates specified under the guidelines: 20%; 30%;
50%;100%; 150%. Unrated claims upto threshold level:
100%
16

on Corporates: UNRATED CLAIMS
No claim on unrated corporate to given a risk weight preferential
to that assigned to the sovereign of incorporation
RBI may increase the standard risk weights for unrated where
warranted by overall default experience
Under Pillar 2, RBI would consider whether unrated corporate
claims of individual banks warrant a standard RW higher than
100%
Thresholds* for 150% RW for unrated exposures to corporates:
For F.Y. 2008-09: all fresh sanctions/renewals of unrated

corporates >Rs. 50 crore will have a RW of 150%
From April 1, 2009: all fresh sanctions/renewals of unrated
corporates > Rs. 10 crore will have a RW of 150%
Threshold ( Rs. 50/Rs. 10 crore) with reference to aggregate exposure on a single

counterparty for bank as a whole
17

on Corporates: UNRATED CLAIMS
Unrated standard restructured loans to corporates to
be assigned a higher RW of 125% until satisfactory
performance under the revised payment schedule for
one year from the due date of payment of first interest
/principal under the revised schedule.
18
Standardised Approach-RBI Guidelines:

RATED CORPORATES
Domestic credit rating agencies identified by RBI:
Credit Analysis and Research Limited (CARE)
CRISIL Limited
FITCH India
ICRA Limited
International credit rating agencies identified by RBI:
19
FITCH
Moodys
Standard & Poors
Standardised Approach-RBI Guidelines: Scope of External Ratings
Banks to choose the rating agencies
Banks to use chosen credit rating agencies ratings consistently

for each type of claim-for risk weighting & risk management
purposes
No cherry picking assessments of different rating agenciespicking the most favourable rating
Banks to disclose the names of rating agencies proposed to be
used for risk weighting assets by type of claim
20
How to avoid inconsistency and cherry picking?
21
Nominate one or more rating agencies whose ratings will be used by

the bank for deriving risk weights for exposures in each of the external ratingsbased portfolios- bank to take into account whether the
nominated rating agency can provide reasonable coverage on banks exposures
within portfolios in terms of types of counterparties, and geographical regions
Formalise /document the above and obtain Board /Top Management approval for
application of external rating agencies to each of the banks external-rating
based portfolios
Use the ratings of the nominated rating agencies within each of the external
rating-based portfolios consistently; seek approval of Board/Top Management for
any subsequent changes
If bank has exposure to a person and the exposure or the person does not have
a rating assigned by the agency chosen by the bank, treat the exposure or the
person as unrated for risk weighting purposes
Unless exposures are rated by only one of the nominated credit rating agencies,
do not use one agencys rating for one corporate bond and another agency for
another exposure to the same customer
Other issues:
22
A rating for one entity within a group cannot be used to risk

weight other entities in the group
To be eligible, rating has to be in force; confirmed from the
monthly bulletin of the rating agency
Rating agency to have reviewed the rating at least once in the last
15 months
The credit assessment to be publicly available; to be included in
the rating agencys transaction matrix.
Assets with contractual maturity of less than or equal to one
year- short term ratings accorded by rating agencies relevant.
Cash credits-to be reckoned as long-term exposures and long
term ratings accorded by rating agencies relevant
Standardised Approach-RBI Guidelines: External Ratings

LONG TERM RATINGS: ( MAPPED BY RBI TO THE RISK
WEIGHTS UNDER THE STANDARDISED APPROACH)
Long term Ratings
23
AAA
SA Risk
Weights
20%
AA
30%
50%
BBB
100%
BB & Below
150%
Unrated
100%*
If issuer has an external long term/short term rating warranting a RW of 150%, all unrated claims (ST & LT)
shall receive 150% RW ( unless recognised CRM are available)

SHORT TERM RATINGS
Issue-specific ; can be used only for the rated facility; ST rating

cannot be generalised for other ST exposures
Cannot be applied to unrated long-term claim in any case

Can be used for short-term claims against banks and
corporates
Points to be noted:
24
Unrated ST claim on borrower to attract RW at least one level higher

then rated ST claim on same borrower
Unrated claims, ST or LT on a borrower shall receive 150% RW , if the
borrower/issuer has a ST exposure with an external ST rating
warranting a RW of 150%, unless recognised CRM techniques are
available
Standardised Approach-RBI Guidelines: External

Ratings
SHORT TERM
RATINGS: (
MAPPED BY RBI
TO THE RISK
WEIGHTS UNDER
THE
STANDARDISED
APPROACH)
Shortterm Ratings
SA Risk
Weights
PR1+,P1+,F1+,A1+
20%
30%
50%
100%
150%
PR1,P1,F1,A1
PR2, P2,F2,A2
PR3, P3, F3, A3
PR4&PR5;P4& P5;B, C, &D;
A4& A5
CARE, CRISIL, FITCH & ICRA
25
RW mapping of both LT & ST of these rating agencies to be reviewed annually by RBI

Exposures/Borrowers with multiple rating assessments
26
If one rating available: use the rating to determine the RW

If two different ratings available: apply higher RW
If three or more ratings available: apply the second lowest RW

Applicability of issue specific rating to issuer/other claims or issues
Specific issue rating ( mapping into a lower RW) can apply to

the banks unrated claim :
Unrated claim ranks paripassu or senior
Maturity of unrated claim is not later than the maturity of above
( not applicable to rated short term issues)
27
Issuer/Issue Rating maps to a risk weight =/> unrated

claims, then the unrated claim will also have the same risk
weight unless it is senior to rated claim
Use of unsolicited ratings
What is a solicited rating?
28
Issuer has requested rating agency for the rating and has accepted
the rating assigned
Banks to use only solicited ratings from chosen agencies

Unsolicited ratings not to be considered for RW calculation
under SA

on Corporates: Non-resident
corporates
Non-resident corporates: Risk weighted as per the ratings assigned by
international rating agencies approved by RBI:
S&P/FITCH
AAA to
AA
BBB
<BB
Unrated*
Moodys
Aaa to
Aa
Baa to
Ba
<Ba
Unrated
Risk Weight
(%)
20
50
100
150
100*
*Unrated exposures could carry higher risk weight of 150%. Thresholds* for 150% RW for unrated
exposures to corporates:
For F.Y. 2008-09: all fresh sanctions/renewals of unrated corporates >Rs. 50 crore will have a
RW of 150%
From April 1, 2009: all fresh sanctions/renewals of unrated corporates > Rs. 10 crore will have
a RW of 150%
29
Threshold ( Rs. 50/Rs. 10 crore) with reference to aggregate exposure on a single counterparty for bank as a
whole
Standardised Approach-RBI: Regulatory

Retail Portfolios
To qualify as retail claims for regulatory capital
purposes, exposures (FB & NFB) to meet all four
criteria:
Orientation
criteria
Product criterion
Granularity criterion
Low value of individual exposures
30

Retail Portfolios
Orientation criteria
Exposure is to an individual person or persons or to

small business
Person as above would mean any legal person (individual, HUF,
partnership, firm, trust, private limited companies, public limited companies,

cooperative societies, etc.)
Small business is one where the total average annual turnover is < Rs. 50 crore:
31
Existing entities: average of the last 3 years

New entities: Projected turnover
Entities yet to complete three years: Both Actual & Projected

Retail Portfolios
Product criteria
Exposure takes the form of :
32
Revolving credits
Lines of credits
Overdrafts
Term Loans ( installment loans, student loans)
Small business facilities & commitments

Retail Portfolios
Granularity criteria
Exposure is sufficiently diversified :
Aggregate exposure to one counterpart not to exceed 0.2% of the

overall regulatory retail portfolio
Aggregate exposure: Gross Amount ( excluding CRM)
One counterpart: one or several entities which can be considered as a
single beneficiary; banks can use group exposure concept
NPAs under retail loans to be excluded from the overall RR portfolio when
assessing granularity criterion
33

Retail Portfolios
Individual exposure criteria
Maximum
aggregated exposure to one counterpart

not to exceed Rs. 5 crore
34
Exposure means sanctioned limit or actual outstanding,

whichever is higher , for all FB & NFB, including OffBalance Sheet exposures
For Term Loans- exposure shall mean actual outstanding

Retail Portfolios
RBI
to play a crucial role under Pillar 2 in respect of

risks in the RR portfolio of individual banks
If warranted, may mandate a RW higher than 75% for
individual banks
35
Standardised Approach-RBI: Claims secured

by residential property
Loans
to individuals for acquiring residential property fully

secured by mortgages on residential property that is/will be
occupied by borrower, or rented
Shall be Risk Weighted as below:
Amount of loan upto Rs. 20 lakh -50%
Amount of loan Rs. 20 lakh & > -75%
Subject to:
All
36
Loan to Value ratio is not more than 75%

Board approved valuation policy
LTV: Total o/s in account: (Principal + Accrued interest+ other
charges )/ Realisable value of property mortgaged
other claims secured by residential property would attract :

RW applicable to counterparty or to the purpose for which bank
has extended finance, whichever is higher.
Standardised Approach-RBI: Claims secured

by commercial real estate
Exposures
( FB & NFB) secured by mortgages on

commercial real estate: office buildings, retail space;
multi-purpose commercial premises; multi-family
residential buildings; multi-tenanted commercial
premises; industrial or warehouse space; hotels; land
acquisition; development and construction, etc.Also
includes exposures to entities for setting up SEZs or for
acquiring units in SEZs which includes real estate
Such exposures to attract RW of 150%
37
Standardised Approach-RBI: Non-Performing

Assets
NPA ( other than a qualifying RM addressed separately)
will
carry RW as below:
Unsecured Portion, net of specific provisions & partial writeoffs:
38
150% RW: Specific Provisions <20% of outstanding amount of

NPA
100%* RW: Specific Provisions are at least 20% of
outstanding amount of NPA
50% RW : Specific Provisions are at least 50% of outstanding
amount of NPA
Specific Provisions: All funded exposures of a single

counterparty w/o netting off eligible collateral to be reckoned
in the denominator
For computing secured portion of NPA, eligible collateral will
be the same as reckoned for CRM
Standardised Approach-RBI: Non-Performing

Assets
Additionally,
RW 100% may apply , when provisions reach 15% of

outstanding amount if NPA is secured fully by the
following collateral ( not eligible CRM) either alone or with
other eligible collateral:
Land & Building ( valuation not more than 3 years old)

Plant & Machinery ( value not higher then depreciated value
reflected in the audited balance sheet of the borrower, not
more than eighteen months)
Clear title available; well documented
Claims secured by residential property:
39
RW 100% net of specific provisions

If specific provisions are >/= 20% but <50% of
outstanding, RW net of specific provisions : 75%
If specific provisions >/=50%, RW: 50%
Standardised Approach-RBI: Specified

categories
High risk exposures:
Consumer
credit-personal loans & credit card

receivables :
RW of 125%
More , if warranted by external rating of the counterparty
Loans upto Rs. 1 lakh against gold & silver ornaments:

concessional RW of 50%
Capital
market exposures & claims on non-deposit

taking systemically important NBFCs:
40
RW of 125%
More , if warranted by external rating of
the counterparty
Systemically Important NBFCs-ND: a non-deposit taking NBFC with an

asset size of Rs. 100 crore or more as per the latest audited balance
sheet
Standardised Approach-RBI: Specified

categories
High risk exposures: Contd
Investments
in paid-up equity of non-financial entities not

consolidated for capital purposes to attract 125% RW
Investment up to 30% in paid up equity of financial entities not
consolidated for capital purposes: RW: 125% or RW warranted by
external rating) or as determined in Para 5.6 whichever is >
Investment in paid up equity of financial entities specifically
exempt from capital market exposure: RW 100%
Investment in IPDI (eligibel Tier 1), Debt capital instruments
(eligible Tier II ) of other banks/FIs to attract RW as per ratings
assigned to the instruments or RW warranted by external rating of
counterparty ( or lack of it) or as determined in para 5.6, whichever
is >.
41
Standardised Approach-RBI: Other Assets
Loans
& Advances to banks own staff fully covered by

superannuation benefits/ mortgage of flat/house: RW
20%
Other loans & advances to bank staff: eligible for
inclusion under RR : RW 75%
All other assets: RW 100%
42
Standardised Approach-RBI: Off-balance

sheet items
RW Off Balance Sheet Credit Exposure:

RW amount of market related + RW amount of nonmarket related Off-balance sheet items
Risk Weighted amount of credit exposure of off-balance
sheet item is calculated as below:
Total
Calculate Credit Equivalent Amount: (CEA)
If
Notional amount * specified CCF OR by applying the

Current Exposure Method
Multiply CEA by RW applicable to counterparty/purpose of

finance/type of asset, whichever is higher
item is secured by eligible collateral or guarantee,

credit risk mitigation can be applied.
43

sheet items : Non-market related
Broadly
categorised into direct credit substitutes , trade &

performance related contingent items & other commitments,
Multiply contracted amount by relevant CCF
If item is an undrawn or partially drawn facility, amount of
undrawn commitment to be included in the above category is:
maximum unused portion of commitment that could be drawn
during the remaining period to maturity; Drawn portion would be
on-balance sheet credit exposure
Irrevocable commitments: original maturity would be from the
commencement of commitment until the time the associated
facility expires. Irrevocable commitments to provide off-balance
sheet facilities should be assigned the lower of the two applicable
CCFs
44

CCFs
range from 0 to 100%

CCF: 100% in respect of the following instruments:
Direct credit substitutes: risk of loss depends on creditworthiness of
counterparty or the party against whom a potential claim is acquired e.g.
financial guarantees, credit enhancements, liquidity facilities for
securitisation transactions & acceptances-CCF 100%
Sale & repurchase agreement and asset sales with recourse where credit
risk remains with the bank : risk weighted according to tyoe of asset and
not the type of counterparty
Forward asset purchases, forward deposits, partly paid shares 7 securities:
represent commitments with certain drawdown: risk weighted according to
type of asset & not type of counterparty-CCF 100%
Lending of banks securities/posting of securities as collateral by banks,
including repo style transactions ( repurchase/reverse repurchase and
securities lending/borrowing transactions)
Commitments with certain drawdown
Unconditional take-out finance in the books of taking-over institution
45

CCFs

CCF: 50 % in respect of the following instruments:
Transaction-related contingent items: performance bonds, bid
bonds, warranties, indemnities and standby L/Cs related to
particular transaction
Note issuance facilities and revolving underwriting facilities
Other commitemnts ( e.g. formal standby facilities and credit lines )
with original maturity of over one year.
Conditional take-out finance in the books of taking-over institution
46

CCFs

Trade letters of credit arising from movement of goods for both
issuing bank and confirming banks-short term and self liquidating:
e.g. documentary credits collaterised by underlying shipment
Other commitments (e.g. formal standby facilities and credit lines )
with an original maturity of upto one year
47

CCFs

Other commitments ( eg. Formal standby facilities and credit lines)
which are unconditionally cancellable at any time by banks:
48
without prior notice or

Effectively provide for automatic cancellation due to deterioration in
credit worthiness of borrower
Standardised Approach-RBI: Offbalance sheet items : Market related

of market related off-balance sheet items:
Interest rate contracts-single currency interest rate swaps,
basis swaps, FRAs, interest rate futures
Foreign exchange contracts- cross currency swaps, forward
forex contracts, currency futures & options
Any other market related contracts allowed by RBI giving
rise to credit risk
Bank to include all market-related transactions held in banking
and trading book which give rise to off-balance sheet credit risk
Credit risk in such items is the cost of replacing the cash flow
specified by the contract in the event of default of the counterparty.
Factors responsible: maturity of contract, volatility of rates
underlying the type of instrument etc.
Examples
49
Exemptions
from capital requirements:

Forex ( except gold) contracts having an original
maturity of </= 14 days
Instruments traded on futures and options
exchanges subject to daily mark-to-market and
margin payments
Credit Equivalent Amount (CEA) : To be determined
by Current Exposure Method
50

Current Exposure Method
Current Credit Exposure (CCE) + Potential Future Credit Exposure (PFCE)
51
CCE: Sum of positive mark-to-market value of these contracts

PFCE: Notional Principal amount of each of these contracts ( whether +ve, -ve or 0
M-T-M)* Add-on Factor prescribed:
Residual
Maturity
Add-on
Factor:
interest rate
contract
Add-on
Factor: Gold
& Exchange
rate contract
</= 1 year
0.25%
1.0%
>1 year </= 5

years
0.5%
5.0%
> 5 years
1.5%
7.5%
Standardised Approach-RBI: Credit Risk

Mitigation
52
Wider range of credit risk mitigants

recognised
Applicable to banking book exposures and

also for calculation of the counterparty risk
charges for OTC and repo-style transactions
in the trading book.

Mitigation
Some general principles for use of CRM
Effects of CRM will not be double counted.

Principal only ratings not allowed within CRM .
Disclosure requirements to be observed.
53
Policies & procedures for collateral valuation &

management
Description of main types of collateral taken by the bank
Main types of guarantor counterparty and their credit
worthiness
Information about concentrations within the mitigation
taken
Minimum standards for legal documentation to be

met.

Mitigation
What is a collateralised transaction?
Bank has a credit exposure that is
hedged by collateral posted by the
counterparty ( to whom bank has a
credit exposure-on or off-balance
sheet) or a third person on his behalf.
Bank has a specific lien on the
collateral
Requirements of legal certainty are met
54

Mitigation
Framework
Simple Approach: risk weight of the
collateral substituted for the risk weight
of the counterparty for the collateralised
portion-similar to 1988 Accord
Comprehensive Approach: allows fuller
offset of collateral against exposures
55

Mitigation
Some minimum conditions
56
Only eligible financial collateral

Allowed only on account-by-account basis , even
within regulatory retail portfolio
Credit quality of counterparty and value of collateral
not to have a material positive correlation
Clear and robust procedures for timely liquidation of
collateral
If held by custodian, bank to ensure segregation of
assets
Capital requirement to be applied to bank on either
side of the collateralised transaction

Mitigation
Eligible financial collateral
57
Cash, certificate of deposits or instruments issued by lending bank on

deposit with the bank
Gold: (Bullion & jewellery): value of collateralised jewellery to be
arrived at after notionally converting to 99.99 purity.
Central & State Government Securities
KVP & NSC: no lock-in-period and can be encashed within the holding
period
Life Insurance Policy with a declared surrender value
Debt securities rated ( subject to certain conditions) -next slide
Debt securities not rated, where issued by a bank ( subject to certain
conditions)-next slide
Listed equities-including convertible bonds ( listed on a recognised
stock exchange ans included in the BSE-SENSEX & BSE 200 of BSE;
S& P CNX NIFTY and Junior NIFTY of NSE and tha main index of any
other recognised stock exchange, in the jurisdiction of banks
operation)
Mutual Fund investments regulated by securities regulator (price for
the units is publicly quoted daily i.e., where the daily NAV is available
in public domain; and the mutual fund is limited to investing in the
eligible instruments,.i.e. investments listed in eligible financial

Mitigation
Eligible financial collateral
Debt securities rated by a chosen credit rating agency and

sufficiently liquid attracting 100% or lesser risk weight:
Debt securities not rated by a chosen Credit Rating

Agency and sufficiently liquid where these are:
58
at least BBB (-) or

at least PR3/P3/F3/A3 for short-term debt instruments
issued by a bank; and listed on a recognised exchange; and

classified as senior debt; and all rated issues of the same
seniority by the issuing bank that are rated at least BBB(-) or
PR3/P3/F3/A3 by a chosenCredit Rating Agency; and the bank
holding the securities as collateral has no information to suggest
that the issue justifies a rating below BBB(-) or PR3/P3/F3/A3
and; there is sufficient confidence about the market liquidity of
the security
Credit Risk Mitigation
Comprehensive approach
Application of haircuts to exposure and collateral: haircut for

exposure will be a premium and for the collateral will be a
discount
Additional downward adjustment for the collateral if exposure
and collateral held in different currencies
Calculation of capital for a collateralised transaction:
E* = max {0, [E x (1 + He) - C x (1 - Hc - Hfx)]}
where:
E*= the exposure value after risk mitigation
E = current value of the exposure
He= haircut appropriate to the exposure
C= the current value of the collateral received
Hc= haircut appropriate to the collateral
Hfx= haircut appropriate for currency mismatch between the collateral and
exposure
The exposure amount after risk mitigation will be multiplied by the risk weight of
the counterparty to obtain the risk-weighted asset amount for the
collateralised transaction.
59

Mitigation
Comprehensive approach: Haircuts
Standard Supervisory Haircuts:
Parameters set out in the Accord
Own-estimate Hair cuts: Banks own
internal estimates of market price
volatility
Banks in India to use only the former for
both exposure and collateral
60

Mitigation
Comprehensive approach: Standard
Supervisory Haircuts:
Assumptions:
Daily mark-to-market
Daily re-margining
10 business day
holding period ( time normally
required for realising the collateral value)
Unrated bank exposures or bank lends
non-eligible instruments, eg.NI grade corp
sec, haircut on exposure to be same as for
equity traded on recognised SE not part
of main index,i.e 25%
61

Mitigation
Comprehensive approach: Standard Supervisory Haircuts:
Prescribed haircuts would apply to security w.r.t rating of the

issuer and to exposure w.r.t rating of the counterparty
Exposure/Eligible unrated securities issued by Central or State
Governments: same as AAA debt
Sovereign to include RBI, DICGC, CGTSI
Haircut will be determined by:
62
Maturity of exposure
External rating assigned to exposure
Counterparty category
NSC, KVP, SV of LIP, Banks own deposits as collateral: 0

haircut
HC for currency risk: 8% ( daily m-t-m & 10 business day
holding period)

Mitigation
Comprehensive approach: Standard Supervisory

Haircuts: contd
If collateral is a basket of assets, haircut on basket:
where ai= weight of the asset ( measured by units of currency)

& hi= haircut applicable to that asset
63
Standardised Approach-RBI: Credit Risk Mitigation:

Haircuts contd
10-business day haircuts to be the basis ; haircut to be scaled up or
down depending on:
Type of transaction
Frequency of remargining or revaluation
Formula:
H=haircut
H10=10 business day standard supervisory haircut for instrument
NR= actual no. of business days between remargining for capital
market transactions or revaluation for secured transactions
TM= minimum holding period for the type of transaction
( adjusting for differences in holding period and

revaluation frequency)
64

contd
On-balance sheet netting
Confined to loans/advances and deposits, where :
Netting arrangements are legally enforceable: specific lien;

proof of documentation
Capital requirements can be calculated on basis of net credit
exposures subject to:
65
Well-founded legal basis for netting/offsetting regardless of

bankruptcy/insolvency of counterparty
Able to determine at any time loans/advances & deposits
with the same counterparty subject to netting
Relevant exposures monitored and controlled on net basis
Same formula as earlier; loans & advances would be

exposure and deposits would be collateral; haircuts will be
0 except for currency mismatch. Other conditions apply.

contd
Guarantees
Direct, explicit, irrevocable & unconditional can be treated as

credit protection
Whose guarantees are recognised?
Substitution approach-same as 1988 Accord; protected portion

of the counterparty exposure : RW of guarantor; uncovered
portion: risk weight of underlying counterparty:
66
Entities with lower risk weight than counterparty

Sovereigns, sovereign entities( BIS, IMF, European central banks,
MDBs, ECGC & CGTSI), banks & PDs with lower risk weight
Other entities rated AA (-) or better. Includes guarantee of parent,
subsidiary & affiliate companies having a lower risk weight
Guarantor rating should be an entity rating: factoring all liabilities &
commitments of the entity
Exposures covered by state government guarantees to attract a risk

weight of 20%
If credit protection is denominated in a different currency, amount of
exposure deemed to be protected to be reduced by application of a
haircut Hfx: 8%

contd
Guarantees: Operational requirements
67
Must represent a direct claim on protection provider

Explicitly referenced to specific exposures or pool of exposures:
extent of cover clearly defined
Irrevocable: no clause for unilateral cancellation of cover of for
increase in effective cost of cover on deterioration of credit
quality of guaranteed exposure
Unconditional: no clause that could prevent the guarantor form
obligation to pay in a timely manner in the event of
counterparty's default
When exposure is classified as non-performing: guarantee shall
cease to be a credit risk mitigant
Explicitly documented
Guarantee to cover all types of payments governing the
transaction: notional amount, margin payments, etc. If
guarantee covers principal only, interests and uncovered
payments to be treated as unsecured amount

contd
Collaterals: Maturity Mismatch
68
When residual maturity (RM) of collateral < RM of underlying exposure

Conservative definition of maturity of both exposure & collateral:
Exposure maturity: longest possible remaining time before
obligation is scheduled to be fulfilled, including grace period
Collateral maturity: shortest possible taking into account
embedded options which may reduce its term
Maturity relevant is residual maturity
When is CRM not recognised, when mismatch exists?
If there is a maturity mismatch & CRM has an original maturity
<1 year, CRM not recognised; i.e. maturity of collateral for
exposures with original maturities of <1 year to be matched to
be recognised
Collateral with maturity mismatches will not be recognised if
collateral has a RM </= 3 months
Other cases of maturity mismatches, partial recognition given
to CRM

contd
Collaterals: Maturity Mismatch
Adjustment to be applied for maturity mismatch with recognised
CRM ( collateral , on-balance sheet netting & guarantees):
69

contd
Collaterals: Treatment of pools of CRM:
Multiple collaterals covering a single exposure
70
Subdivide the exposure into portions covered by each CRM

RW assets of each portion to be calculated separately
If credit protection of a single provider has different maturities,
subdivision into separate protection required.

Basel II- RBI Guidelines Summary

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Basel II- RBI Guidelines

All commercial banks ( except LAB and RRBs)

Consolidated bank is defined as a group of entities where a

Consolidated bank includes all group entities under its control

Consolidated bank to maintain minimum capital adequacy ratio

Minimum 9% CAR to be maintained on an ongoing basis

RBI to take into account internal capital adequacy assessments

Banks encouraged to maintain Tier 1 CAR of at least

Capital Charge for Credit Risk-Standardised

All commercial banks in India to adopt Standardised

Under SA, rating assigned by eligible external credit

Standardised Approach-RBI Guidelines

MDBs, BIS &

Guidelines- Domestic Sovereigns

Claims on central government( FB & NFB): 0% RW

Claims on RBI, DICGC, CGTSI: 0% RW

Above risk weights apply only for standard performing loans;

Guidelines- Foreign Sovereigns

Public sector entities

Domestic PSEs: Risk weighted in the same manner as

Similar to claims on scheduled banks

Standardised Approach-RBI: Claims on

Claims on scheduled banks complying with minimum CAR & RRBs-20% RW

As on date of last full audit*

* Fresh subsequent capital raised can be reckoned

Standardised Approach-RBI: Claims

Standardised Approach-RBI: Claims

Shall be risk weighted in a manner

Standardised Approach-RBI: Claims

Standardised Approach-RBI: Claims

weights for long term & short term claims on

Standardised Approach-RBI: Claims

For F.Y. 2008-09: all fresh sanctions/renewals of unrated

Threshold ( Rs. 50/Rs. 10 crore) with reference to aggregate exposure on a single

Standardised Approach-RBI: Claims

Standardised Approach-RBI Guidelines:

Domestic credit rating agencies identified by RBI:

Credit Analysis and Research Limited (CARE)

International credit rating agencies identified by RBI:

Standardised Approach-RBI Guidelines: Scope of External Ratings

Banks to choose the rating agencies

Banks to use chosen credit rating agencies ratings consistently

Standardised Approach-RBI Guidelines: Scope of External Ratings

How to avoid inconsistency and cherry picking?

Nominate one or more rating agencies whose ratings will be used by

Standardised Approach-RBI Guidelines: Scope of External Ratings

A rating for one entity within a group cannot be used to risk

Standardised Approach-RBI Guidelines: External Ratings

Long term Ratings

Standardised Approach-RBI Guidelines: External Ratings

Issue-specific ; can be used only for the rated facility; ST rating

Cannot be applied to unrated long-term claim in any case

Unrated ST claim on borrower to attract RW at least one level higher

Standardised Approach-RBI Guidelines: External

RW mapping of both LT & ST of these rating agencies to be reviewed annually by RBI

Standardised Approach-RBI Guidelines: External Ratings

If one rating available: use the rating to determine the RW

Standardised Approach-RBI Guidelines: External Ratings

Specific issue rating ( mapping into a lower RW) can apply to

Issuer/Issue Rating maps to a risk weight =/> unrated

Standardised Approach-RBI Guidelines: External Ratings

Use of unsolicited ratings