Calculating CRAR & Capital

Adequacy Ratio
Prof.b.p.mishra
XIMB

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LIABILITIES735 AMOU ASSET AMO RISK WEIGHTS
NT UNT (%)

CAPITAL/RESERVE 74 CASH 3 O
DEPOSITS 735 BALANCES WITH RBI 90 0
BORROWINGS 69 BALANCE WITH BANKS 100 20= 20
OTHER LIABILITIES 53 HTM SECURITIES IN 0 0
GOVT
GENERAL PROVISION 62 HTM SECURITIES 97 100= 97
CORPORATE
SUBORDINATED DEBT -LT 3 AFS INVESTMENT 200 NO CR CHARGE
SUBORDINATED DEBT ST 4 AFT SECURITIES 92 -DO-

ADVANCES 360 100= 360

FIXED ASSETS 8 100= 8
OTHER ASSETS 50 100=50
TOTAL 1000 1000 535
(CAPITAL ADEQUACY RATIO FOR CREDIT RISK OF ABC BANK LTD )

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 CONTINGENT LIABILITIES

AMOUNT COUNTER CCF (%) RISK (%)

PARTIES WEIGHTS
GUARANTEES 47 PRIVATE 100 100 = 47
ACCEPTANCES 39 PRIVATE 100 100 =39
FORWARD EXCHANE 520 PRIVATE 2 100 = 10 .4
<1YR
RESIDUALMATURITY

FORWARD XCHANGE 130 PRIVATE 5 100 = 6.5

CONTRACT > 1YR
RESIDUAL MATURITY

TOTAL 0FF-BALANCE SHEET RISK WEIGHTED ASSETS = 103

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 TOTAL ON BALANCE SHEET RISK WEIGHTED ASSET- 535
TOTAL OFF BALANCE SHEET RISK WEIGHTED ASSET- 103
TOTAL- 638

TIER-I CAPITAL 74
TIER- II CAPITAL 11
MINIMUM CAPITAL REQUIREMENT 51
AVAILABLE CAPITAL 85
CAPITAL ADEQUACY RATIO OF ABC BANK 13.33%
(85/ 638 )

TIER-II CAPITAL IS
LONG TERM SUBORDINATED DEBT PLUS GENERAL PROVISIONS TO
THE EXTENT OF 1.25 % OF RISK WEIGHTED ASSET
( 3+ 1.25% OF 638)

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 A bank May have the following position:
Assumptions-
Sl No Details Amount (Rs
A) crore)
1 Cash & Balances with RBI 200
2 Bank Balances 200
3 Investments 2000
3.1 Held for Trading( Market value) 500
3.2 Available For sale (Market value) 1000
3.3 Held to Maturity 500
4 Advances (Net) 2000
5 Other assets 300
6 Total Assets 4700

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B) In Terms of Counter party, the Investments are
assumed to be as under:

Government- Rs 1000 crores,

Banks Rs 500 crore
Others - Rs 500 crores.

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 C) For simplicity shake the details of investments are assumed
to be as under-
(i) Government Securities
Date of Date of Date of Amount Coupon
Issue Reporting Maturity in Crore ( %) Type

01/03/1992 31/03/2013 01/03/2014 100 12.50 AFS

01/05/1993 31/03/2013 01/05/2013 100 12.00 AFS
01/03/1994 31/03/2013 31/05/2013 100 12.00 AFS
01/03/1995 31/03/2013 01/03/2025 100 12.00 AFS
01/03/1998 31/03/2013 01/03/2020 100 11.50 AFS
01/03/1 999 31/03/2013 01/03/2019 100 11.00 AFS
01/03/2000 31/03/2013 01/03/2015 100 10.50 HFT
01/03/2001 31/03/2013 01/03/2016 100 10.00 HTM
01/03/2002 31/03/2013 01/03/2022 100 8.00 HTM
01/03/2003 31/03/2013 01/03/2033 100 6.50 HTM
Total 1000

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(ii) Bank Bonds
Date of Date of Date of Amount Coupon
issue Reporting maturity in crore (%) Type

01/03/1992 31/03/2013 01/03/2014 100 12.50 AFS

01/05/1993 31/03/2013 01/05/2013 100 12.00 AFS

01/03/1994 31/03/2013 31/05/2013 100 12.00 AFS

01/03/1995 31/03/2013 01/03/2016 100 12.50 AFS

01/03/1998 31/03/2013 01/03/2017 100 11.50 HFT

Total 500

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 Bank Bonds Residual maturity
AMOUNT ( IN
Rs crores)
For residual term to final maturity 6 months 200
or less

For residual term to final maturity between 6 100

and 24 months

For residual term to final maturity exceeding 200

24months

TOTAL 500
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 (iii) Other securities

Date of Date of Maturity Amount in

Issue Reporting Date Crores Coupon
(%) Type
01/03/1992 31/03/2013 01/03/2014 100 12.50 HFT
01/05/1993 31/03/2013 01/05/2013 100 12.00 HFT
01/03/1994 31/03/2013 31/05/2013 100 12.00 HFT
01/03/1995 31/03/2013 01/03/2016 100 12.50 HTM
01/03/1998 31/03/2013 01/03/2027 100 11.50 HTM
Total 500

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 (iv) Overall Position:
Break-up of Total investment Position (in Rs Crores)

Government Bank Other

Securities Bonds Securities
Total
HFT 100 100 300 500
AFS 600 400 0 1000
Trading
Book 700 500 300 1500

HTM 300 0 200 500

Total 1000 500 500 2000

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For the bank , The gross income for last three years
are given as under
Rs 9000. crores March, 2014
Rs11000 crores March, 2015
Rs 4000crores March, 2016. F its
operationally risk weighted asset has to be calculated
under basic indicator approach

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Computation of Risk weighted Asset

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 A. Risk Weighted Assets for Credit Risk
As per the guidelines, Held for Trading and Available for Sale securities would qualify to be
categorized as Trading Book. Thus, trading book in the instant case would be Rs1500 crore
as indicated above. While computing the credit risk, the securities held under trading book
would be excluded and hence the risk-weighted assets for credit risks would be as under:

S. No. Details of Assets Market * Risk Risk weighted

Value Weights(%) Assets
1 Cash & balances 200 0 0
With RBI
2 Bank balances 200 20 40
3 Investments:
Government 300 0 0
Banks 0 20 0
Others 200 100 200
4 Advances (net) 2000 100 2000
5 Other Assets 300 100 300
6 Total Assets 3200 2540
*Assumed as Market Value for illustration
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 a) Specific Risk
(i) Government securities: ` 700 crore Nil

(ii) Bank bonds:

Capital Amount Capital
charge (%) (In Crores) charge

For residual term to final maturity 6 0.30 200 0.60

months or less
For residual term to final maturity 1.125 100 1.125
between 6 and 24 months

For residual term to final maturity 1.80 200 3.60

exceeding 24 months

TOTAL 500 5.325

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(iii) Other securities: Rs 300 crore @ 9% =Rs 27 crore

Total charge for specific risk (i)+(ii)+(iii)

= Rs 0 crore+ Rs 5.325 crore + 27 crore = Rs 32.325 crore

Therefore, capital charge

for specific risk in trading
book is Rs 32.33 crore.

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 b) General Market Risk
Modified duration is used to arrive at the price sensitivity of an interest rate related
instrument. For all the securities listed below, date of reporting is taken as 31/3/2013.

Capital Charge
Counter Maturity Amount ( %) For general
Party Date (market Value) COUPON market risk
Govt. 01/03/2014 100 12.50 0.84
Govt. 01/05/2013 100 12.00 0.08
Govt. 31/05/2013 100 12.00 0.16
Govt. 01/03/2025 100 12.50 3.63
Govt. 01/03/2020 100 11.50 2.79
Govt. 01/03/2019 100 11.00 2.75
Govt. 01/03/2015 100 10.50 1.35
Banks 01/03/2014 100 12.50 0.84
Banks 01/05/2013 100 12.00 0.08
Banks 31/05/2013 100 12.00 0.16
Banks 01/03/2016 100 12.50 1.77
Banks 01/03/2017 100 11.50 2.29
Others 01/03/2014 100 12.50 0.84
Others 01/05/2013 100 12.00 0.08
Others 31/05/2013 100 12.00 0.16
Total 1500 17.82 17
C. Total Charge for Market Risk :

Adding the capital charges for specific risk as well as

general market risk would give the total capital charge for
the trading book of interest rate related instruments.
Therefore, capital charge for Market Risks
= Rs 32.33 crore + Rs 17.82 crore, i.e., Rs 50.15 crore.

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d) To facilitate computation of CRAR for the whole book, this
capital charge needs to be converted into equivalent risk
weighted assets.

In India, the minimum CRAR is 9%. Hence, the capital charge

could be converted to risk weighted assets by multiplying the
capital charge by (100 9),

Thus risk weighted assets for market risk is -

50.15 X (100 9) = Rs557.23 crore.

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 Computing the Capital Adequacy Ratio

(Amount in Rs Crore)

1 Total Capital 400

2 Risk weighted assets for Credit Risk 2540

3 Risk weighted assets for Market Risk 557.23

3 Risk weighted asset for operational Risk 150

(1200 x12.5%)

4 Total Risk weighted assets (2+3) 3247.23

5 CRAR [(14)*100] (400/3247.23) 12.31 %

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THANKS
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