basel ii -an overview credit risk june 08

8/4/2019 Basel II -An Overview Credit Risk June 08

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Basel IIBasel II-- Focus: CreditFocus: Credit

RiskRiskStandardised ApproachStandardised ApproachRBI Guidelines & The NeedRBI Guidelines & The Need

for IRBfor IRB

Usha JanakiramanUsha Janakiraman

NIBM PuneNIBM Pune


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Road to Basel Accord: Basel IRoad to Basel Accord: Basel I

Consultative paper published in December 1987: Proposal forConsultative paper published in December 1987: Proposal forInternational Convergence of Capital Measurement and Capital StandardsInternational Convergence of Capital Measurement and Capital Standards

Document titled : International Convergence of Capital Measurement andDocument titled : International Convergence of Capital Measurement andCapital Standards, popularly known today as Basel I finalised and releasedCapital Standards, popularly known today as Basel I finalised and releasedin July 1988; Implementation by endin July 1988; Implementation by end--19921992


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Amendment in 1996 to incorporateAmendment in 1996 to incorporatemarket risksmarket risks

Market risks: the risk of losses in onMarket risks: the risk of losses in on-- and offand off--balancebalance--sheet positions arising fromsheet positions arising frommovements in market prices. The risks subject to this requirement are:movements in market prices. The risks subject to this requirement are:

the risks pertaining to the risks pertaining to interest rate related instrumentsinterest rate related instruments andand equitiesequities in the tradingin the tradingbook;book;

foreign exchange riskforeign exchange risk andand commodities riskcommodities risk throughout the bank.throughout the bank. Supplement, suitably revised, in the form of an Amendment to the Capital Accord toSupplement, suitably revised, in the form of an Amendment to the Capital Accord to

incorporate capital charges for market risk.incorporate capital charges for market risk. The objective in introducing this significant amendment to the Capital Accord:The objective in introducing this significant amendment to the Capital Accord:

to provide an explicit capital cushion for the price risks to which banks areto provide an explicit capital cushion for the price risks to which banks areexposed, particularly those arising from their trading activities.exposed, particularly those arising from their trading activities.

introducing the discipline that capital requirements impose is seen as anintroducing the discipline that capital requirements impose is seen as animportant further step in strengthening the soundness and stability of theimportant further step in strengthening the soundness and stability of theinternational banking system and of financial markets generally.international banking system and of financial markets generally.

Standardised Measurement & Proprietary inStandardised Measurement & Proprietary in--house modelshouse models Option of Tier 3 capitalOption of Tier 3 capital


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Basel I: wide internationalBasel I: wide internationalacceptabilityacceptability

widespread adoption of the Accord in manywidespread adoption of the Accord in manycountries ( over 100).countries ( over 100).

the Accord was followed by substantialthe Accord was followed by substantial

increases, primarily during the transitional periodincreases, primarily during the transitional periodbetween 1988between 1988--1992, in the capital ratios of1992, in the capital ratios ofnearly all internationally active banksnearly all internationally active banks


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Road to Basel AccordRoad to Basel Accord

June 1999June 1999--First Consultative Paper on AFirst Consultative Paper on ARevised Capital Adequacy Framework:Revised Capital Adequacy Framework: Three Pillar ApproachThree Pillar Approach

Recognition of :Recognition of : the need for a "standardised approach (athe need for a "standardised approach (a

modified version of the existing Accord)modified version of the existing Accord)

use of internal credit ratings and, at a later stage,use of internal credit ratings and, at a later stage,portfolio models for a more accurate assessmentportfolio models for a more accurate assessment

of a bank's capital requirement in relation to itsof a bank's capital requirement in relation to itsparticular risk profile for e sophisticated banks.particular risk profile for e sophisticated banks.

extension of Accords scope of application to fullyextension of Accords scope of application to fullycapture all banking riskscapture all banking risks


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Road to Basel Accord IIRoad to Basel Accord II

June 1999June 1999 -- First draft of Basel II ( CP1)First draft of Basel II ( CP1) --First ConsultativeFirst ConsultativePaper on A Revised Capital Adequacy Framework:Paper on A Revised Capital Adequacy Framework:

Review aimed at:Review aimed at: Improving the way regulatory capital requirement reflect the underlyingImproving the way regulatory capital requirement reflect the underlying

risksrisks Recognising improvements in risk measurement and controlRecognising improvements in risk measurement and control

January 2001January 2001-- The Second Consultative PaperThe Second Consultative Paper April 2003April 2003 --Consultative Package 3 (CP3) and finalizeConsultative Package 3 (CP3) and finalize

Basel IIBasel II Three Quantitative Impact Studies relating to the BaselThree Quantitative Impact Studies relating to the Basel

proposalsproposals June 2004June 2004 -- Final documentFinal document

End 2005End 2005 --Parallel calculations with new andParallel calculations with new andexisting Accord for banks using advancedexisting Accord for banks using advancedapproachesapproaches

End 2006/2007End 2006/2007-- Implement Basel IIImplement Basel II


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ase ap a ccorase ap a ccor r er eHistoryHistory

Basel

Amendment

Proposed: 1993

Effective: 1998

Credit

Risk

+

Market

Risk

Basel 1Proposed: 1986

Effective: 1988

Credit

Risk

Basel 2Proposed: 1999

Effective: 2007

Credit

Risk(Enhanced)

+

Market

Risk

+

Op Risk(New)

Key sources of required

work for affected banks.


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Basel AccordBasel Accord

Three Pillars of Basel AccordThree Pillars of Basel Accord

Pillar I

Minimum CapitalRequirements

Pillar II

SupervisoryReview

Pillar III

MarketDiscipline


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Eligible capital

ON-BALANCE-SHEETCREDIT RISK

+

Off-balance-sheet credit risk

+

Market risk

+

OPERATIONAL RISK

= 8%( 9% in India)

Pillar 1Pillar 1


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Pillar 1Pillar 1

Key changes:Key changes:

Menu of optionsMenu of options

Wider spectrum of credit risk weightsWider spectrum of credit risk weights

Greater recognition of collateralGreater recognition of collateral

Charge for operational risk introducedCharge for operational risk introduced


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Scope of applicationScope of application

All commercial banks ( except LAB and RRBs)All commercial banks ( except LAB and RRBs) Both at solo ( global position ) and at consolidatedBoth at solo ( global position ) and at consolidated

levellevel

Consolidated bank is defined as a group of entitiesConsolidated bank is defined as a group of entitieswhere a licensed bank is the controlling entitywhere a licensed bank is the controlling entity

Consolidated bank includes all group entities under itsConsolidated bank includes all group entities under itscontrol except entities engaged in:control except entities engaged in:

Insurance businessInsurance business Business not pertaining to financial servicesBusiness not pertaining to financial services

Consolidated bank to maintain minimum capitalConsolidated bank to maintain minimum capital

adequacy ratio as applicable to solo bank on ongoingadequacy ratio as applicable to solo bank on ongoingbasisbasis

Minimum 9% CAR to be maintained on an ongoingMinimum 9% CAR to be maintained on an ongoingbasisbasis


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Capital FundsCapital Funds

On implementation ofOn implementation ofBasel II, minimumBasel II, minimumcapital shall becapital shall be

subjected to asubjected to aprudential floorprudential floor

Adequacy & need forAdequacy & need forcapital floors to becapital floors to bereviewed periodicallyreviewed periodically

Pr

dential Fl

r

Mini

capital as per

Basel II

Specified

percent

f

ini

capital as

per Basel I ( credit &

arket)

as bel

w

March 2008/09

100%

March 2009/10

90%

March 2010/11

80%


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Capital FundsCapital Funds

Banks encouraged to maintainTier 1Banks encouraged to maintain

Tier 1CAR of at least6% both at solo andCAR of at least6% both at solo and

consolidated level; banks below thisconsolidated level; banks below thismust attain this by March 2010must attain this by March 2010

Capital Funds= Tier I + Tier IICapital Funds= Tier I + Tier II CARCAR== Capital Funds/ Credit Risk RWA+ Market RiskCapital Funds/ Credit Risk RWA+ Market Risk

RWA+Op Risk RWARWA+Op Risk RWA


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Capital Charge for Credit RiskCapital Charge for Credit Risk--Standardised ApproachStandardised Approach

All commercial banks in India to adoptAll commercial banks in India to adoptStandardised Approach (SA) for credit riskStandardised Approach (SA) for credit risk

Under SA, rating assigned by eligibleUnder SA, rating assigned by eligibleexternal credit rating agencies will largelyexternal credit rating agencies will largelysupport the measure of credit risksupport the measure of credit risk

Exposures to be risk weighted net of specificExposures to be risk weighted net of specificprovisionsprovisions


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an ar se pproacan ar se pproac --GuidelinesGuidelines

Off-Balance

Sheet

Other Assets

Specified

Higher RiskCategories

NPAs

CommercialReal Estate

Residential

Property Regulatory

Retail

Corporates

PDs

Banks

MDBs, BIS &IMF

PSEs

Foreign

Sovereigns

DomesticSovereigns

SA


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Standardised ApproachStandardised Approach--RBIRBI

GuidelinesGuidelines-- Domestic SovereignsDomestic Sovereigns

Claims on central government( FB & NFB): 0% RWClaims on central government( FB & NFB): 0% RW Central government guaranteed claims: 0% RWCentral government guaranteed claims: 0% RW

Investment in state government securities/Loans or creditInvestment in state government securities/Loans or creditexposure or OD exposure to state Govt.: 0% RW Stateexposure or OD exposure to state Govt.: 0% RW Stategovernment guaranteed claims: 20% RWgovernment guaranteed claims: 20% RW

Others:Others: Claims on RBI, DICGC, CGTSI: 0% RWClaims on RBI, DICGC, CGTSI: 0% RW Claims on ECGC: 20% RWClaims on ECGC: 20% RW

Above risk weights apply only for standard performing loans;Above risk weights apply only for standard performing loans;otherwise risk weights as applicable to NPAs will applyotherwise risk weights as applicable to NPAs will apply


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GuidelinesGuidelines-- ForeignForeign

SovereignsSovereigns

Risk weightsRisk weightsas per ratingas per ratingassigned toassigned tothethesovereigns/sosovereigns/so

vereignvereignclaims byclaims byratingratingagenciesagencies

S&P/FitcS&P/Fitc

hh

AAAAAA

ToToAAAA

AA BBBB

BB

BBBB

totoBB

< B< B UnrateUnratedd

MoodysMoodys AaaAaaToTo

AaAa

AA BaBaaa

BaBatoto

BB


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Standardised ApproachStandardised Approach--RBI:RBI:

Public sector entitiesPublic sector entities Domestic PSEs: Risk weighted in the same manner asDomestic PSEs: Risk weighted in the same manner as

corporatescorporates

Foreign PSEs: Risk weighted as per rating assigned byForeign PSEs: Risk weighted as per rating assigned by

international rating agencies:international rating agencies:

S&P/FITCHS&P/FITCH AAA toAAA to

AAAA

AA BBB toBBB toBBBB


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Claims on BIS , IMF & eligible MDBsClaims on BIS , IMF & eligible MDBs

Similar to claims on scheduled banksSimilar to claims on scheduled bankscomplying with minimum capitalcomplying with minimum capitalrequirementsrequirements

Uniform risk weight of20%Uniform risk weight of20%


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Standardised ApproachStandardised Approach--RBI: Claims onRBI: Claims on

Banks:Banks:Banks incorporated in India & foreign bank branches in IndiaBanks incorporated in India & foreign bank branches in India Excluding those qualifying for deduction treatmentExcluding those qualifying for deduction treatment

Claims on scheduled banks complying with minimum CAR & RRBsClaims on scheduled banks complying with minimum CAR & RRBs--20% RW ( except for20% RW ( except forinvestments in capital instruments within the ceiling of 10% which will attract a RW of 100%investments in capital instruments within the ceiling of 10% which will attract a RW of 100%or as per instrument rating whichever is >)or as per instrument rating whichever is >)

Claims on nonClaims on non--scheduled banks complying with minimum CARscheduled banks complying with minimum CAR--100% RW (( except for100% RW (( except forinvestments in capital instruments within the ceiling of 10% which will attract a RW of 100%investments in capital instruments within the ceiling of 10% which will attract a RW of 100%or as per instrument rating whichever is >)or as per instrument rating whichever is >)

Claims on banks not complying with minimum CAR :Claims on banks not complying with minimum CAR : (excluding equity & other instruments(excluding equity & other instrumentseligible for capital status within the 10% ceiling)eligible for capital status within the 10% ceiling)

CAR (%)CAR (%)As on date of last fullAs on date of last fullaudit*audit*

Scheduled BanksScheduled BanksRWRW

NonNon--scheduledscheduledbanks RWbanks RW

6 to < 96 to < 9 50%50% 150%150%3 to < 63 to < 6 100%100% 250%250%

0 to < 30 to < 3 150%150% 350%350%

negativenegative 625%625% 625%625%


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Claims on Banks:Claims on Banks:Claims on banks not complyingClaims on banks not complying

with minimum CAR: investments within the 10% ceiling limitswith minimum CAR: investments within the 10% ceiling limits

CAR (%)CAR (%)As on date of last fullAs on date of last fullaudit*audit*

Scheduled BanksScheduled BanksRWRW

NonNon--scheduledscheduledbanks RWbanks RW

6 to < 96 to < 9 150%150% 250%250%

3 to < 63 to < 6 250%250% 350%350%

0 to < 30 to < 3 350%350% 625%625%

negativenegative625

%625

% Full deductionFull deduction


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Claims on Banks:Claims on Banks: In case of exposure to banks where noIn case of exposure to banks where no

CAR norms prescribed by RBI,CAR norms prescribed by RBI,

investing banks can:investing banks can: Calculate CAR of the cooperative banksCalculate CAR of the cooperative banks

concerned notionally using CAR normsconcerned notionally using CAR norms

applicable to commercial banks ORapplicable to commercial banks ORApply a RW of350% or 625% as per riskApply a RW of350% or 625% as per risk

perception of the investing bankperception of the investing banknotionally to the entire exposurenotionally to the entire exposure


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tan ar se Approactan ar se Approac --RBI:RBI:

Claims on Banks:Claims on Banks:Foreign banksForeign banksAs per the ratings assigned by international rating agenciesAs per the ratings assigned by international rating agencies

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.

S&P/FITS&P/FITCHCH

AAA toAAA to

AAAA

AA BBBBBB BB toBB toBB


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Standardised ApproachStandardised Approach--RBI:RBI:Claims on Primary Dealers:Claims on Primary Dealers:Shall be risk weighted in aShall be risk weighted in a

manner similar to corporatesmanner similar to corporates


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Standardised ApproachStandardised Approach--RBI:RBI:Claims on Corporates:Claims on Corporates:

Corporates:Corporates:

Shall include all exposures (FB & NFB) otherShall include all exposures (FB & NFB) other

than those qualifying for inclusion underthan those qualifying for inclusion undersovereign; bank; regulatory retail; residentialsovereign; bank; regulatory retail; residentialmortgage; nonmortgage; non--performing assets & specifiedperforming assets & specifiedcategory all ofwhich are separately addressedcategory all ofwhich are separately addressed


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Standardised ApproachStandardised Approach--RBI:RBI:Regulatory Retail PortfoliosRegulatory Retail Portfolios

To qualify as retail claims for regulatory capitalTo qualify as retail claims for regulatory capitalpurposes, exposures (FB & NFB) to meet allpurposes, exposures (FB & NFB) to meet all

four criteria:four criteria:

Orientation criteriaOrientation criteria

Product criterionProduct criterion

Granularity criterionGranularity criterion

Low value of individual exposuresLow value of individual exposures


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Following claims to be excluded fromFollowing claims to be excluded fromregulatory retail portfolio ( both FB & NFB):regulatory retail portfolio ( both FB & NFB):

Exposures by way of investment in securities ( such asExposures by way of investment in securities ( such asbonds and equities, whether listed or not)bonds and equities, whether listed or not)

Mortgage loans to the extent they qualify as claimsMortgage loans to the extent they qualify as claimssecured by residential property or claims secured bysecured by residential property or claims secured bycommercial real estatecommercial real estate

Loans & advances to banks own staff fully covered byLoans & advances to banks own staff fully covered by

superannuation benefits and/or mortgage of flat/housesuperannuation benefits and/or mortgage of flat/houseConsumer credit, including personal loans and creditConsumer credit, including personal loans and creditcard receivables ( excluding educational loans which iscard receivables ( excluding educational loans which istreated as part of RR portfolio)treated as part of RR portfolio)

Capital market exposuresCapital market exposures


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Orientation criteriaOrientation criteria

Exposure is to an individual person orExposure is to an individual person orpersons or to small businesspersons or to small business Person as above would mean any legal personPerson as above would mean any legal person

(individual, HUF, partnership, firm, trust, private limited(individual, HUF, partnership, firm, trust, private limitedcompanies, public limited companies, cooperativecompanies, public limited companies, cooperativesocieties, etc.)societies, etc.)

Small business is one where the total average annualSmall business is one where the total average annualturnover for the last three years is < Rs. 50 crore:turnover for the last three years is < Rs. 50 crore: Existing entities: average of the last 3 yearsExisting entities: average of the last 3 years New entities: Projected turnoverNew entities: Projected turnover Entities yet to complete three years: Both Actual & ProjectedEntities yet to complete three years: Both Actual & Projected


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Product criteriaProduct criteria

Exposure takes the form of :Exposure takes the form of : Revolving creditsRevolving credits

Lines of creditsLines of credits

OverdraftsOverdrafts

Term Loans ( installment loans, student loans)Term Loans ( installment loans, student loans)

Small business facilities & commitmentsSmall business facilities & commitments


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Granularity criteriaGranularity criteria

Exposure is sufficiently diversified :Exposure is sufficiently diversified : Aggregate exposure to one counterpart not to exceedAggregate exposure to one counterpart not to exceed

0.2% of the overall regulatory retail portfolio0.2% of the overall regulatory retail portfolio

Aggregate exposure: Gross Amount ( excluding CRM)Aggregate exposure: Gross Amount ( excluding CRM)

One counterpart: one or several entities which can beOne counterpart: one or several entities which can beconsidered as a single beneficiary; banks can use groupconsidered as a single beneficiary; banks can use group

exposure conceptexposure concept NPAs under retail loans to be excluded from the overall RRNPAs under retail loans to be excluded from the overall RR

portfolio when assessing granularity criterionportfolio when assessing granularity criterion


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Individual exposure criteriaIndividual exposure criteria

Maximum aggregatedMaximum aggregated exposureexposure to oneto onecounterpart not to exceed Rs. 5 crorecounterpart not to exceed Rs. 5 crore

Exposure means sanctioned limit or actualExposure means sanctioned limit or actualoutstanding, whichever is higher , for all FB &outstanding, whichever is higher , for all FB &

NFB, including OffNFB, including Off--Balance Sheet exposuresBalance Sheet exposures For Term LoansFor Term Loans-- exposure shall mean actualexposure shall mean actual

outstandingoutstanding


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Standardised ApproachStandardised Approach--RBI:RBI:Claims on Corporates:Claims on Corporates: To be risk weighted as per the ratingTo be risk weighted as per the ratingagencies registered with SEBI and chosen byagencies registered with SEBI and chosen by

RBIRBI

Risk weights for long term & short termRisk weights for long term & short termclaims on corporates specified under theclaims on corporates specified under theguidelines: 20%; 30%; 50%;100%; 150%.guidelines: 20%; 30%; 50%;100%; 150%.Unrated claims upto threshold level: 100%Unrated claims upto threshold level: 100%


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Corporates:Corporates: UNRATED CLAIMSUNRATED CLAIMS No claim on unrated corporate to given a risk weightNo claim on unrated corporate to given a risk weightpreferential to that assigned to the sovereign ofpreferential to that assigned to the sovereign ofincorporationincorporationRBI may increase the standard risk weights forRBI may increase the standard risk weights for

unratedw

herew

arranted by overall defaultunratedw

herew

arranted by overall defaultexperienceexperienceUnder Pillar 2, RBI would consider whether unratedUnder Pillar 2, RBI would consider whether unratedcorporate claims of individual banks warrant acorporate claims of individual banks warrant astandard RW higher than 100%standard RW higher than 100%Thresholds* for 150% RW for unrated exposures toThresholds* for 150% RW for unrated exposures tocorporates:corporates:

For F.Y. 2008For F.Y. 2008--09: all fresh sanctions/renewals of09: all fresh sanctions/renewals ofunrated corporates >Rs. 50 crore will have a RW ofunrated corporates >Rs. 50 crore will have a RW of150%150%

From April 1, 2009: all fresh sanctions/renewals ofFrom April 1, 2009: all fresh sanctions/renewals ofunrated corporates > Rs. 10 crore will have a RW ofunrated corporates > Rs. 10 crore will have a RW of

150%150%Threshold Rs. 50 Rs. 10 crore with reference toThreshold Rs. 50 Rs. 10 crore with reference to a re ate ex osurea re ate ex osure


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Claims on Corporates:Claims on Corporates: UNRATEDUNRATEDCLAIMSCLAIMS

Unrated standard restructured loans toUnrated standard restructured loans tocorporates to be assigned a higher RW ofcorporates to be assigned a higher RW of125% until satisfactory performance under the125% until satisfactory performance under therevised payment schedule for one year fromrevised payment schedule for one year fromthe due date of payment of first interestthe due date of payment of first interest

/principal under the revised schedule./principal under the revised schedule.


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Guidelines:Guidelines:RATED CORPORATESRATED CORPORATES

Domestic credit rating agencies identified byDomestic credit rating agencies identified byRBI:RBI:

Credit Analysis and Research Limited (CARE)Credit Analysis and Research Limited (CARE)

CRISIL LimitedCRISIL Limited

FITCH IndiaFITCH India

ICRA LimitedICRA Limited

International credit rating agencies identifiedInternational credit rating agencies identifiedby RBI:by RBI:

FITCHFITCH

MoodysMoodys

Standard & PoorsStandard & Poors


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Standardised ApproachStandardised Approach--RBI Guidelines: Scope ofRBI Guidelines: Scope ofExternal RatingsExternal Ratings

Banks to choose the rating agenciesBanks to choose the rating agencies

Banks to use chosen credit rating agenciesBanks to use chosen credit rating agencies

ratingsratings consistentlyconsistently for each type of claimfor each type of claim No cherry pickingNo cherry picking assessments of differentassessments of different

rating agenciesrating agencies--picking the most favourablepicking the most favourableratingrating

Banks to disclose the names of ratingBanks to disclose the names of ratingagencies proposed to be used for riskagencies proposed to be used for riskweighting assets by type of claimweighting assets by type of claim


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Standardised ApproachStandardised Approach--RBI Guidelines: Scope ofRBI Guidelines: Scope ofExternal RatingsExternal Ratings

Other issues:Other issues:

A rating for one entity within a group cannot be usedA rating for one entity within a group cannot be usedto risk weight other entities in the groupto risk weight other entities in the group

To be eligible, rating has to be in force; confirmed fromTo be eligible, rating has to be in force; confirmed from

the monthly bulletin of the rating agencythe monthly bulletin of the rating agency Rating agency to have reviewed the rating at leastRating agency to have reviewed the rating at least

once in the last 15 monthsonce in the last 15 months

The credit assessment to be publicly available; to beThe credit assessment to be publicly available; to beincluded in the rating agencys transaction matrix.included in the rating agencys transaction matrix.

Assets with contractual maturity of less than or equalAssets with contractual maturity of less than or equalto one yearto one year-- short term ratings accorded by ratingshort term ratings accorded by ratingagencies relevant.agencies relevant.

Cash creditsCash credits--to be reckoned as longto be reckoned as long--term exposuresterm exposuresand long term ratings accorded by rating agenciesand long term ratings accorded by rating agenciesrelevantrelevant


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Standardised ApproachStandardised Approach--RBI Guidelines: ExternalRBI Guidelines: ExternalRatingsRatings

LONG TERM RATINGS: ( MAPPED BY RBI TO THELONG TERM RATINGS: ( MAPPED BY RBI TO THERISK WEIGHTS UNDER THE STANDARDISEDRISK WEIGHTS UNDER THE STANDARDISEDAPPROACH)APPROACH)

LongLong term Ratingsterm Ratings SA RiskSA Risk

WeightsWeightsAAAAAA 20%20%

AAAA 30%30%

AA 50%50%

BBBBBB 100%100%

BB & BelowBB & Below 150%150%

UnratedUnrated 100%*/150100%*/150

%%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)

an ar se pproacan ar se pproac u e nes:u e nes:


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an ar se pproacan ar se pproac -- u e nes:u e nes:External RatingsExternal Ratings

SHORTTERM RATINGSSHORTTERM RATINGS IssueIssue--specific ; can be used only for the ratedspecific ; can be used only for the rated

facility; ST rating cannot be generalised for other STfacility; ST rating cannot be generalised for other STexposuresexposures

Cannot be applied to unrated longCannot be applied to unrated long--term claim in anyterm claim in any

casecase Can be used for shortCan be used for short--term claims against banks andterm claims against banks and

corporatescorporates Points to be noted:Points to be noted:

Unrated ST claim on borrower to attract RW at least one levelUnrated ST claim on borrower to attract RW at least one levelhigher then rated ST claim on same borrowerhigher then rated ST claim on same borrower

Unrated claims, ST or LT on a borrower shall receive 150%Unrated claims, ST or LT on a borrower shall receive 150%RW , if the borrower/issuer has a ST exposure with anRW , if the borrower/issuer has a ST exposure with anexternal ST rating warranting a RW of 150%, unlessexternal ST rating warranting a RW of 150%, unlessrecognised CRM techniques are availablerecognised CRM techniques are available


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Guidelines:E

xternal RatingsGuidelines:E

xternal RatingsSHORT TERMSHORT TERMRATINGS: (RATINGS: (MAPPED BYMAPPED BY

RBI TO THERBI TO THERISK WEIGHTSRISK WEIGHTSUNDER THEUNDER THESTANDARDISESTANDARDISED APPROACH)D APPROACH)

ShortShortterm Ratingsterm Ratings SA RiskSA Risk

WeightWeightss

PR1+,P1+,F1+,A1+PR1+,P1+,F1+,A1+ 20%20%

PR1,P1,F1,A1PR1,P1,F1,A1 30%30%

PR2, P2,F2,A2PR2, P2,F2,A2 50%50%

PR3, P3, F3, A3PR3, P3, F3, A3 100%100%

PR4&PR5;P4& P5;B, C,PR4&PR5;P4& P5;B, C,

&D; A4& A

5&D; A

4& A

5

150%150%

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


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Standardised ApproachStandardised Approach--RBIRBIGuidelines: External RatingsGuidelines: External Ratings

Exposures/Borrowers with multiple rating assessmentsExposures/Borrowers with multiple rating assessments

If one rating available: use the rating to determineIf one rating available: use the rating to determinethe RWthe RW

If two different ratings available: apply higher RWIf two different ratings available: apply higher RW

If three or more ratings available: apply the secondIf three or more ratings available: apply the second

lowest RWlowest RW


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Applicability of issue specific rating to issuer/otherApplicability of issue specific rating to issuer/otherclaims or issuesclaims or issues

Specific issue rating ( mapping into a lower RW) canSpecific issue rating ( mapping into a lower RW) canapply to the banks unrated claim :apply to the banks unrated claim :

Unrated claim ranks paripassu or seniorUnrated claim ranks paripassu or senior

Maturity of unrated claim is not later than the maturityMaturity of unrated claim is not later than the maturityof aboveof above

( not applicable to rated short term issues)( not applicable to rated short term issues)

Issuer/Issue Rating maps to a risk weightIssuer/Issue Rating maps to a risk weight=/> unrated claims, then the unrated claim=/> unrated claims, then the unrated claimwill also have the same risk weight unless it iswill also have the same risk weight unless it issenior to rated claimsenior to rated claim


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Use of unsolicited ratingsUse of unsolicited ratings

What is a solicited rating?What is a solicited rating? Issuer has requested rating agency for the rating and hasIssuer has requested rating agency for the rating and has

accepted the rating assignedaccepted the rating assigned

Banks to use only solicited ratings from chosenBanks to use only solicited ratings from chosenagenciesagencies

Unsolicited ratings not to be considered for RWUnsolicited ratings not to be considered for RWcalculation under SAcalculation under SA


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Corporates: NonCorporates: Non--resident corporatesresident corporates NonNon--resident corporates: Risk weighted as per the ratingsresident corporates: Risk weighted as per the ratings

assigned by international rating agencies approved by RBIassigned by international rating agencies approved by RBI::

*Unrated exposures could carry higher risk weight of 150%. Thresholds* for*Unrated exposures could carry higher risk weight of 150%. Thresholds* for150% RW for unrated exposures to corporates:150% RW for unrated exposures to corporates:

For F.Y. 2008For F.Y. 2008--09: all fresh sanctions/renewals of unrated corporates09: all fresh sanctions/renewals of unrated corporates>Rs. 50 crore will have a RW of 150%>Rs. 50 crore will have a RW of 150%

From April 1, 2009: all fresh sanctions/renewals of unrated corporates >From April 1, 2009: all fresh sanctions/renewals of unrated corporates >

Rs. 10 crore will have a RW of 150%Rs. 10 crore will have a RW of 150%Threshold Rs. 50 Rs. 10 crore withreference to a re ate ex osure onaThreshold Rs. 50 Rs. 10 crore withreference to a re ate ex osure ona

S&P/FITCHS&P/FITCH AAA toAAA to

AAAA

AA BBBBBB


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Standardised ApproachStandardised Approach--RBI: ClaimsRBI: Claims

secured by residential propertysecured by residential property

Loans to individuals for acquiring residential property fullyLoans to individuals for acquiring residential property fullysecured by mortgages on residential property that is/will besecured by mortgages on residential property that is/will beoccupied by borrower, or rentedoccupied by borrower, or rentedShall be Risk Weighted as below:Shall be Risk Weighted as below:

Amount of loan upto Rs. 30 lakhAmount of loan upto Rs. 30 lakh --50%50% Amount of loan Rs. 30 lakh & >Amount of loan Rs. 30 lakh & > --75%75%Subject to:Subject to:

Loanto Value ratioisnotmore than75%Loanto Value ratioisnotmore than75% BoardapprovedvaluationpolicyBoardapprovedvaluationpolicy LTV: Totalo/sinaccount:(Principal+ Accruedinterest+LTV:Totalo/sinaccount:(Principal+ Accruedinterest+othercharges)/ Realisable value ofpropertymortgagedothercharges)/ Realisable value ofpropertymortgaged

All other claims secured by residential property would attract :All other claims secured by residential property would attract :RW applicable to counterparty or to the purpose for which bankRW applicable to counterparty or to the purpose for which bankhas extended finance, whichever is higher.has extended finance, whichever is higher.

Standardised ApproachStandardised Approach RBI: ClaimsRBI: Claims


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Standardised ApproachStandardised Approach--RBI: ClaimsRBI: Claims

secured by commercial real estatesecured by commercial real estate

Exposures ( FB & NFB) secured by mortgagesExposures ( FB & NFB) secured by mortgageson commercial real estate: office buildings,on commercial real estate: office buildings,

retail space; multiretail space; multi--purpose commercialpurpose commercialpremises; multipremises; multi--family residential buildings;family residential buildings;multimulti--tenanted commercial premises; industrialtenanted commercial premises; industrialor warehouse space; hotels; land acquisition;or warehouse space; hotels; land acquisition;development and construction, etc.Alsodevelopment and construction, etc.Alsoincludes exposures to entities for setting upincludes exposures to entities for setting upSEZs or for acquiring units in SEZs whichSEZs or for acquiring units in SEZs whichincludes real estateincludes real estateSuch exposures to attract RW of 150%Such exposures to attract RW of 150%

Standardised ApproachStandardised Approach RBI: NonRBI: Non


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Standardised ApproachStandardised Approach--RBI: NonRBI: Non--Performing AssetsPerforming Assets

NPANPA (other than a qualifying RM addressed separately)(other than a qualifying RM addressed separately)will carry RW as below:will carry RW as below:

Unsecured Portion, net of specific provisions &Unsecured Portion, net of specific provisions &partial writepartial write--offs:offs: 150% RW: Specific Provisions


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Standardised ApproachStandardised Approach--RBI: NonRBI: Non--Performing AssetsPerforming Assets

Additionally,Additionally,

RW 100% may apply , when provisions reach 15% ofRW 100% may apply , when provisions reach 15% ofoutstanding amount if NPA is secured fully by theoutstanding amount if NPA is secured fully by thefollowing collateral ( not eligible CRM) either alone orfollowing collateral ( not eligible CRM) either alone or

with other eligible collateral:with other eligible collateral: Land & Building ( valuation not more than 3 years old)Land & Building ( valuation not more than 3 years old)

Plant & Machinery ( value not higher then depreciatedPlant & Machinery ( value not higher then depreciatedvalue reflected in the audited balance sheet of thevalue reflected in the audited balance sheet of theborrower, not more than eighteen months)borrower, not more than eighteen months)

Clear title available; well documentedClear title available; well documented

Claims secured by residential property:Claims secured by residential property: RW 100% net of specific provisionsRW 100% net of specific provisions

If specific provisions are >/= 20% but /= 20% but /=50%, RW: 50%If specific provisions >/=50%, RW: 50%

Standardised ApproachStandardised Approach RBI:RBI:


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Standardised ApproachStandardised Approach--RBI:RBI:Specified categoriesSpecified categories

High risk exposures:High risk exposures:

Consumer creditConsumer credit--personal loans & credit cardpersonal loans & credit cardreceivables, excluding educational loans :receivables, excluding educational loans :

RW of 125%RW of 125% More , ifwarranted by external rating of the counterpartyMore , ifwarranted by external rating of the counterparty

Capital market exposures & claims on nonCapital market exposures & claims on non--depositdeposittaking systemically important NBFCs:taking systemically important NBFCs:

RW of 125%RW of 125%

More , ifwarranted by external rating ofMore , ifwarranted by external rating ofthe counterpartythe counterparty

Systemically Important NBFCsSystemically Important NBFCs--ND: a nonND: a non--deposit taking NBFC with andeposit taking NBFC with anasset size of Rs. 100 crore or more as per the latest audited balanceasset size of Rs. 100 crore or more as per the latest audited balancesheetsheet

Standardised ApproachStandardised Approach RBI:RBI:


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Standardised ApproachStandardised Approach--RBI:RBI:Specified categoriesSpecified categories

High risk exposures: ContdHigh risk exposures: Contd

Investments in paidInvestments in paid--up equity of nonup equity of non--financial entitiesfinancial entitiesnot consolidated for capital purposes to attract 125%not consolidated for capital purposes to attract 125%RWRWInvestment up to 30% in paid up equity of financialInvestment up to 30% in paid up equity of financialentities not consolidated for capital purposes: RW:entities not consolidated for capital purposes: RW:125% or RW warranted by external rating) or as125% or RW warranted by external rating) or asdetermined in Para 5.6whichever is >determined in Para 5.6whichever is >Investment in paid up equity of financial entitiesInvestment in paid up equity of financial entities

specifically exempt from capital market exposure: RWspecifically exempt from capital market exposure: RW100%100%Investment in IPDI (eligible Tier 1), Debt capitalInvestment in IPDI (eligible Tier 1), Debt capitalinstruments (eligible Tier II ) of other banks/FIs toinstruments (eligible Tier II ) of other banks/FIs toattract RW as per ratings assigned to the instrumentsattract RW as per ratings assigned to the instrumentsor RW warranted by external rating of counterparty ( oror RW warranted by external rating of counterparty ( orlack of it) or as determined in para 5.6, whichever is >.lack of it) or as determined in para 5.6, whichever is >.

Standardised ApproachStandardised Approach RBI: OtherRBI: Other


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Standardised ApproachStandardised Approach--RBI: OtherRBI: OtherAssetsAssets

Loans & Advances to banks own staff fullyLoans & Advances to banks own staff fully

covered by superannuation benefits/ mortgagecovered by superannuation benefits/ mortgageof flat/house: RW 20%of flat/house: RW 20%

Other loans & advances to bank staff: eligibleOther loans & advances to bank staff: eligiblefor inclusion under RR : RW 75%for inclusion under RR : RW 75%

All other assets: RW 100%All other assets: RW 100%

Standardised ApproachStandardised Approach RBI: OffRBI: Off


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Standardised ApproachStandardised Approach--RBI: OffRBI: Off--balance sheet itemsbalance sheet items

Total RW OffTotal RW OffBalance Sheet Credit Exposure:Balance Sheet Credit Exposure:

RW amount of market related + RW amount ofRW amount of market related + RW amount ofnonnon--market related Offmarket related Off--balance sheet itemsbalance sheet items

Risk Weighted amount of credit exposure ofRisk Weighted amount of credit exposure ofoffoff--balance sheet item is calculated as below:balance sheet item is calculated as below: Calculate Credit Equivalent Amount: (CEA)Calculate Credit Equivalent Amount: (CEA)

Notional amount * specified CCF OR by applyingNotional amount * specified CCF OR by applyingthe Current Exposure Methodthe Current Exposure Method

Multiply CEA by RW applicable toMultiply CEA by RW applicable tocounterparty/purpose of finance/type of asset,counterparty/purpose of finance/type of asset,whichever is higherwhichever is higher

If item is secured by eligible collateral orIf item is secured by eligible collateral or

guarantee, credit risk mitigation can beguarantee, credit risk mitigation can be



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tan ar se Approactan ar se Approac --RBI:RBI:Credit Risk MitigationCredit Risk Mitigation

Wider range of credit risk mitigantsWider range of credit risk mitigantsrecognisedrecognised

Applicable to banking book exposuresApplicable to banking book exposuresand also for calculation of theand also for calculation of thecounterparty risk charges for OTC andcounterparty risk charges for OTC andreporepo--style transactions in the tradingstyle transactions in the trading

book.book.



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tan ar se Approactan ar se Approac RBI:RBI:Credit Risk MitigationCredit Risk Mitigation

Some general principles for use of CRMSome general principles for use of CRM

Effects of CRM will not be double counted.Effects of CRM will not be double counted.

Principal only ratings not allow

edw

ithin CRM .Principal only ratings not allow

edw

ithin CRM . Disclosure requirements to be observed.Disclosure requirements to be observed.

Policies & procedures for collateral valuation &Policies & procedures for collateral valuation &managementmanagement

Description of main types of collateral taken by theDescription of main types of collateral taken by thebankbank

Main types of guarantor counterparty and their creditMain types of guarantor counterparty and their creditworthinessworthiness

Information about concentrations within theInformation about concentrations within themitigation takenmitigation taken

Minimum standards for legal documentation to beMinimum standards for legal documentation to be

met.met.



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What is a collateralised transaction?What is a collateralised transaction?

Bank has a credit exposure that isBank has a credit exposure that is

hedged by collateral posted by thehedged by collateral posted by thecounterparty ( to whom bank has acounterparty ( to whom bank has acredit exposurecredit exposure--on or offon or off--balancebalance

sheet) or a third person on hissheet) or a third person on hisbehalf.behalf.

Bank has a specific lien on theBank has a specific lien on the

collateralcollateral



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FrameworkFramework

Simple Approach: risk weight ofSimple Approach: risk weight of

the collateral substituted for thethe collateral substituted for therisk weight of the counterparty forrisk weight of the counterparty forthe collateralised portionthe collateralised portion--similar tosimilar to

1988 Accord1988 Accord Comprehensive Approach: allowsComprehensive Approach: allows

fuller offset of collateral againstfuller offset of collateral against

ex osuresex osures



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Some minimum conditionsSome minimum conditions

Only eligible financial collateralOnly eligible financial collateral

Allowed only on accountAllowed only on account--byby--account basis ,account basis ,even within regulatory retail portfolioeven within regulatory retail portfolio

Credit quality of counterparty and value ofCredit quality of counterparty and value ofcollateral not to have a material positivecollateral not to have a material positive

correlationcorrelation Clear and robust procedures for timelyClear and robust procedures for timely

liquidation of collateralliquidation of collateral

If held by custodian, bank to ensureIf held by custodian, bank to ensure

segregation of assetssegregation of assets



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Eligible financial collateralEligible financial collateral

Cash, certificate of deposits or instruments issued by lending bank onCash, certificate of deposits or instruments issued by lending bank ondepositwith the bankdepositwith the bank

Gold: (Bullion & jewellery): value of collateralised jewellery to beGold: (Bullion & jewellery): value of collateralised jewellery to be

arrived at after notionally converting to 99.99 purity.arrived at after notionally converting to 99.99 purity. Central & State Government SecuritiesCentral & State Government Securities KVP & NSC: no lockKVP & NSC: no lock--inin--period and can be encashed within the holdingperiod and can be encashed within the holding

periodperiod Life Insurance Policy with a declared surrender valueLife Insurance Policy with a declared surrender value Debt securities rated ( subject to certain conditions)Debt securities rated ( subject to certain conditions) --next slidenext slide Debt securities not rated, where issued by a bankDebt securities not rated, where issued by a bank ( subject to certain( subject to certain

conditions)conditions)--next slidenext slide Mutual Fund investments regulated by securities regulator (price forMutual Fund investments regulated by securities regulator (price for

the units is publicly quoted daily i.e., where the daily NAV is availablethe units is publicly quoted daily i.e., where the daily NAV is availablein public domain; and the mutual fund is limited to investing in thein public domain; and the mutual fund is limited to investing in theeligible instruments,.i.e. investments listed in eligible financialeligible instruments,.i.e. investments listed in eligible financialcollateral)collateral)



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Eligible financial collateralEligible financial collateral Debt securities rated by a chosen credit ratingDebt securities rated by a chosen credit rating

agencyagency and sufficiently liquid attracting 100% or lesserand sufficiently liquid attracting 100% or lesserrisk weight:risk weight:

at least BBB (at least BBB (--) or) or

at least PR3/P3/F3/A3 for shortat least PR3/P3/F3/A3 for short--term debt instrumentsterm debt instruments Debt securities not rated by a chosen CreditDebt securities not rated by a chosen Credit

Rating Agency and sufficiently liquidRating Agency and sufficiently liquid where thesewhere theseare:are:

issued by a bank;issued by a bank; andand listed on a recognised exchange;listed on a recognised exchange;andand classified as senior debt;classified as senior debt; andand all rated issues of theall rated issues of thesame seniority by the issuing bank that are rated at leastsame seniority by the issuing bank that are rated at leastBBB(BBB(--) or PR3/P3/F3/A3 by a chosenCredit Rating Agency;) or PR3/P3/F3/A3 by a chosenCredit Rating Agency;andand the bank holding the securities as collateral has nothe bank holding the securities as collateral has noinformation to suggest that the issue justifies a ratinginformation to suggest that the issue justifies a ratingbelow BBB(below BBB(--) or PR3/P3/F3/A3) or PR3/P3/F3/A3and;and; there is sufficientthere is sufficientconfidence about the market liquidity of the securityconfidence about the market liquidity of the security

tan ar se Approactan ar se Approac --RBIRBI


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tan ar se Approactan ar se Approac RBIRBICredit Risk MitigationCredit Risk Mitigation

Comprehensive approachComprehensive approach

Application of haircuts to exposure and collateral: haircut forApplication of haircuts to exposure and collateral: haircut forexposure will be a premium and for the collateral will be aexposure will be a premium and for the collateral will be adiscountdiscount

Additional downward adjustment for the collateral if exposureAdditional downward adjustment for the collateral if exposureand collateral held in different currenciesand collateral held in different currencies

Calculation of capital for a collateralised transaction:Calculation of capital for a collateralised transaction:E* = max {0, [E x (1 + He)E* = max {0, [E x (1 + He) -- C x (1C x (1 -- HcHc -- Hfx)]}Hfx)]}where:where:

E*= the exposure value after risk mitigationE*= the exposure value after risk mitigationE = current value of the exposureE = current value of the exposure

He= haircut appropriate to the exposureHe= haircut appropriate to the exposureC= the current value of the collateral receivedC= the current value of the collateral receivedHc= haircut appropriate to the collateralHc= haircut appropriate to the collateralHfx= haircut appropriate for currency mismatch between the collateralHfx= haircut appropriate for currency mismatch between the collateral

and exposureand exposureThe exposure amount after risk mitigation will be multiplied by the riskThe exposure amount after risk mitigation will be multiplied by the risk

weight of the counterparty to obtain the riskweight of the counterparty to obtain the risk--weighted asset amount forweighted asset amount forthe collateralised transaction.the collateralised transaction.



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Comprehensive approach: HaircutsComprehensive approach: Haircuts

Standard Supervisory Haircuts:Standard Supervisory Haircuts:

Parameters set out in the AccordParameters set out in the Accord OwnOwn--estimate Hair cuts: Banksestimate Hair cuts: Banks

own internal estimates of marketown internal estimates of market

price volatilityprice volatility

Banks in India to use only the formerBanks in India to use only the formerfor both exposure and collateralfor both exposure and collateral


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Comprehensive approach: StandardComprehensive approach: StandardSupervisory Haircuts:Supervisory Haircuts:

Assumptions:Assumptions:

Daily markDaily mark--toto--marketmarket

Daily reDaily re--marginingmargining

10 business day holding period ( time normally required for10 business day holding period ( time normally required forrealising the collateral value)realising the collateral value)

TableTable--14 ( previous slide) represent the ratings assigned by14 ( previous slide) represent the ratings assigned bydomestic rating agencies. For exposures toward debtdomestic rating agencies. For exposures toward debtsecurities issued by foreign central governments and foreignsecurities issued by foreign central governments and foreigncorporates , the haircut would be based on ratings of thecorporates , the haircut would be based on ratings of theinternational rating agencies as indicated in Table 15 ( nextinternational rating agencies as indicated in Table 15 ( nextslide)slide)


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Standardised ApproachStandardised Approach RBI:RBI:Credit Risk MitigationCredit Risk Mitigation

Comprehensive approach: Standard SupervisoryComprehensive approach: Standard SupervisoryHaircuts:Haircuts:

Sovereign to include RBI, DICGC, CGTSISovereign to include RBI, DICGC, CGTSI NSC, KVP, SV of LIP, Banks own deposits asNSC, KVP, SV of LIP, Banks own deposits as

collateral: 0 haircutcollateral: 0 haircut HC for currency risk: 8% ( daily mHC for currency risk: 8% ( daily m--tt--m & 10m & 10

business day holding period)business day holding period)

Where banks exposures are unrated or bank lendsWhere banks exposures are unrated or bank lendsnonnon--eligible instruments ( i.e. noneligible instruments ( i.e. non--investment gradeinvestment gradecorporate securities), the haircut to be applied oncorporate securities), the haircut to be applied onexposure to be 25%.exposure to be 25%.



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Standardised ApproachStandardised Approach RBI:RBI:Credit Risk MitigationCredit Risk Mitigation

Comprehensive approach: StandardComprehensive approach: StandardSupervisory Haircuts: contdSupervisory Haircuts: contd

If collateral is a basket of assets, haircut onIf collateral is a basket of assets, haircut onbasket:basket:

where ai= weight of the asset ( measured by units ofwhere ai= weight of the asset ( measured by units ofcurrency)currency)

& hi= haircut applicable to that asset& hi= haircut applicable to that asset

Adjustment for differentAdjustment for different


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Adjustment for differentAdjustment for differentholding periodsholding periods Framework for collateral haircuts distinguishesFramework for collateral haircuts distinguishes

between repobetween repo--style transactions, other capitalstyle transactions, other capitalmarket driven transactions and secured lending.market driven transactions and secured lending.

Minimum holding period taken as per table belowMinimum holding period taken as per table below:: ((haircut for transactions with other than 10 business dayhaircut for transactions with other than 10 business day

holding period, to be adjusted by scaling up/down theholding period, to be adjusted by scaling up/down thehaircut for 10 business days ( Table 14) as per formulahaircut for 10 business days ( Table 14) as per formulain the next slide.in the next slide.

Standardised ApproachStandardised Approach--RBI: CreditRBI: Credit


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ppppRisk Mitigation: Haircuts contdRisk Mitigation: Haircuts contd

1010--business day haircuts to be the basis ; also haircut tobusiness day haircuts to be the basis ; also haircut tobe scaled up or down if a transaction has a marginingbe scaled up or down if a transaction has a marginingfrequency different from daily margining assumedfrequency different from daily margining assumed

Type of transactionType of transaction

Frequency of remargining or revaluationFrequency of remargining or revaluation

FormulaFormula::

H=haircutH=haircut

H10=10 businessdaystandardsupervisoryhaircutforH10=10 businessdaystandardsupervisoryhaircutfor

instrumentinstrument NR=actualno. ofbusinessdaysbetweenremarginingforNR=actualno. ofbusinessdaysbetweenremarginingfor

capitalmarkettransactionsorrevaluationforsecuredcapitalmarkettransactionsorrevaluationforsecuredtransactionstransactions

TM=minimumholdingperiodforthe type oftransactionTM=minimumholdingperiodforthe type oftransaction

(adjustingfordifferencesinholdingperiodand(adjustingfordifferencesinholdingperiodandmargining/markmargining/mark--toto--marketfrequency)marketfrequency)

Ri k Miti tiRi k Miti ti


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Risk Mitigation:Risk Mitigation:contdcontd

Collaterals: Maturity MismatchCollaterals: Maturity MismatchWhen residual maturity (RM) of collateral < RM of underlyingWhen residual maturity (RM) of collateral < RM of underlying

exposureexposure Conservative definition of maturity of both exposure &Conservative definition of maturity of both exposure &

collateral:collateral: Exposure maturity: longest possible remaining timeExposure maturity: longest possible remaining time

before obligation is scheduled to be fulfilled, includingbefore obligation is scheduled to be fulfilled, includinggrace periodgrace period

Collateral maturity: shortest possible taking into accountCollateral maturity: shortest possible taking into accountembedded options which may reduce its termembedded options which may reduce its term

Maturity relevant is residual maturityMaturity relevant is residual maturity When is CRM not recognised, when mismatch exists?When is CRM not recognised, when mismatch exists?

If there is a maturity mismatch & CRM has an originalIf there is a maturity mismatch & CRM has an originalmaturity


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Collaterals: Maturity MismatchCollaterals: Maturity Mismatch Loan against banks own deposits:Loan against banks own deposits:

Even if deposit tenor is


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Collaterals: Maturity MismatchCollaterals: Maturity Mismatch

Adjustment to be applied for maturity mismatch with recognisedAdjustment to be applied for maturity mismatch with recognisedCRM ( collateral , onCRM ( collateral , on--balance sheet netting & guarantees):balance sheet netting & guarantees):

Ri k Miti tiRi k Miti ti


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Collaterals: Treatment of pools of CRM:Collaterals: Treatment of pools of CRM:

Multiple collaterals covering a single exposureMultiple collaterals covering a single exposure

Subdivide the exposure into portions covered by each CRMSubdivide the exposure into portions covered by each CRM RW assets of each portion to be calculated separatelyRW assets of each portion to be calculated separately If credit protection of a single provider has differentIf credit protection of a single provider has different

maturities, subdivision into separate protection required.maturities, subdivision into separate protection required.

Capital adequacy framework for repoCapital adequacy framework for repo--


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reverse repo style transactionsreverse repo style transactions

RepoRepo--style transactions to attractstyle transactions to attractcapital for counterparty credit riskcapital for counterparty credit risk(CCR), in addition to credit risk and(CCR), in addition to credit risk andmarket riskmarket risk

CCR defined as the risk of default byCCR defined as the risk of default bycounterparty in a repocounterparty in a repo--stylestyletransaction, resulting in nontransaction, resulting in non--delivery ofdelivery ofthe security lent/pledged/sold or nonthe security lent/pledged/sold or non--

repayment of the cash.repayment of the cash.



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Treatment in books of borrower of funds:Treatment in books of borrower of funds:

Exposure: Amount borrowed by lending/postingExposure: Amount borrowed by lending/postingsecurities as collateral; exposure will be an Offsecurities as collateral; exposure will be an Off--

Balance Sheet exposure equal to market value ofBalance Sheet exposure equal to market value ofsecurities sold/lent as scaled up after applyingsecurities sold/lent as scaled up after applyinghaircut as appropriate. This offhaircut as appropriate. This off--Balance SheetBalance Sheetexposure will be converted into a credit equivalentexposure will be converted into a credit equivalentamount ( CEA) by applying a CCF of 100%amount ( CEA) by applying a CCF of 100%

Collateral: Amount of money received treated asCollateral: Amount of money received treated ascollateral. No haircut as it is cash.collateral. No haircut as it is cash. CEA as arrived at net of cash collateral will attractCEA as arrived at net of cash collateral will attract

appropriate risk weight. ( RW of the counterparty).appropriate risk weight. ( RW of the counterparty). The bank will continue to maintain capital for creditThe bank will continue to maintain capital for credit

risk in the securities if held under HTM and capitalrisk in the securities if held under HTM and capitalfor market risk if held under AFS/HFT.for market risk if held under AFS/HFT.



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Treatment in books of lender of funds:Treatment in books of lender of funds:

Exposure: Amount lent is an onExposure: Amount lent is an on--Balance Sheet orBalance Sheet orfunded exposure on the counterparty collateralisedfunded exposure on the counterparty collateralisedby securities accepted under repo.by securities accepted under repo.

Exposure is in cash, no haircutExposure is in cash, no haircut

Collateral: Adjusted downwards/marked down as perCollateral: Adjusted downwards/marked down as perapplicable haircut.applicable haircut.

Amount of exposure reduced by adjusted amount ofAmount of exposure reduced by adjusted amount ofcollateral to receive a risk weight as applicable to thecollateral to receive a risk weight as applicable to thecounterparty as it is an oncounterparty as it is an on--Balance Sheet exposureBalance Sheet exposure

The bank will not maintain capital for the securities.The bank will not maintain capital for the securities.Only capital for the amount lent, i.e. CCR. This isOnly capital for the amount lent, i.e. CCR. This isbecause such collateral does not enter its Balancebecause such collateral does not enter its BalanceSheet but held only as a bailee.Sheet but held only as a bailee.



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ppppRisk Mitigation: contdRisk Mitigation: contd

OnOn--balance sheet nettingbalance sheet nettingconfined to loans/advances and deposits,confined to loans/advances and deposits,

where :where : Netting arrangements are legally enforceable: specificNetting arrangements are legally enforceable: specific

lien; proof of documentationlien; proof of documentation

Capital requirements can be calculated on basis of netCapital requirements can be calculated on basis of netcredit exposures subject to:credit exposures subject to:

WellWell--founded legal basis for netting/offsettingfounded legal basis for netting/offsettingregardless of bankruptcy/insolvency of counterpartyregardless of bankruptcy/insolvency of counterparty

Able to determine at any time loans/advances &Able to determine at any time loans/advances &deposits with the same counterparty subject todeposits with the same counterparty subject to

nettingnetting Relevant exposures monitored and controlled on netRelevant exposures monitored and controlled on net

basisbasis

Same formula as earlier; loans & advances would beSame formula as earlier; loans & advances would beexposure and deposits would be collateral; haircutsexposure and deposits would be collateral; haircuts

will be 0 except for currency mismatch. Other conditionswill be 0 except for currency mismatch. Other conditions

apply.apply.



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ppppRisk Mitigation: contdRisk Mitigation: contd

GuaranteesGuaranteesDirect, explicit, irrevocable & unconditional can beDirect, explicit, irrevocable & unconditional can betreated as credit protectiontreated as credit protection

Whose guarantees are recognised?Whose guarantees are recognised? Entities with lower risk weight than counterpartyEntities with lower risk weight than counterparty Sovereigns, sovereign entities( BIS, IMF, European centralSovereigns, sovereign entities( BIS, IMF, European central

banks, MDBs, ECGC & CGTSI), banks & PDs with lower riskbanks, MDBs, ECGC & CGTSI), banks & PDs with lower riskweightweight

Other entities rated AA (Other entities rated AA (--) or better. Includes guarantee of) or better. Includes guarantee ofparent, subsidiary & affiliate companies having a lower riskparent, subsidiary & affiliate companies having a lower riskweightweight

Guarantor rating should be an entity rating: factoring allGuarantor rating should be an entity rating: factoring allliabilities & commitments of the entityliabilities & commitments of the entity

Substitution approachSubstitution approach--same as 1988 Accord;same as 1988 Accord;protected portion of the counterparty exposure : RWprotected portion of the counterparty exposure : RWof guarantor; uncovered portion: risk weight ofof guarantor; uncovered portion: risk weight ofunderlying counterparty:underlying counterparty:

Exposures covered by state government guarantees to attractExposures covered by state government guarantees to attracta risk weight of20%a risk weight of20%

If credit protection is denominated in a different currency,If credit protection is denominated in a different currency,


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NEED FOR IRBNEED FOR IRB Internal opinion: more accurateInternal opinion: more accurate

; thanks to non; thanks to non--publicpublic

information available to theinformation available to thebankbankSome of the very flaws of Basel ISome of the very flaws of Basel I

continue to remain under the SAcontinue to remain under the SABanks would like to push for IRB:Banks would like to push for IRB:

Those with a sufficient number ofThose with a sufficient number ofinternal risk rating grades for loansinternal risk rating grades for loans

andw

ith risk managementandw

ith risk management


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Thank YouThank You

basel ii -an overview credit risk june 08

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