Capital Management

1
Capital Management Profit Planning
2
Basel II

• Tier I-Core Capital
• Paid up capital ,Free Reserves and unallocated
  surpluses
• Tier II-Supplementary Capital
• Subordinated debt of more than 5 years maturity
  ,loan loss reserve, revaluation
  reserve,investment fluctuation reserve,limited
  life preference share-restricted to 100 of tier
  I capital
• Tier III Capital
• subordinated debt with shot term maturity min 2
  years for market risk

3
Total Risk weighted Assets

• Risk weighted assets of credit risk
• plus
• 12.5 Capital requirement for market risk
• plus
• 12.5 capital requirement for for operational risk

4
Three pillars

• First Pillar-minimum capital requirements
• Second pillar-supervisory process
• Third pillar-market discipline

5
Capital Charge for Credit Risk

• Standardized Approach

• Internal rating based approach
• 1Foundation Approach
• 2Advanced IRB Approach

6
Credit rating of sovereign Risk weight for sovereign Risk weight for banks in that country
AAA TO AA 0 20
A TO A 20 50
BBB TO BBB- 50 100
BB TO BB- 100 100
BELOW B- 150 150
7
Risk Weight
Retail SME EXPOSURE 75
Mortgage on Residential Property 35
Past Due Loans 150 When specific provisions are less than 20 of the loan amount
-do- 100 If provision is higher than 20
8
Capital Charge for Operational Risk

• The Basic Indicator Approach
• The Standardized Approach
• Advanced Management Approach

9
Standardized Approach for Operational Risk

• Beta factor- a fixed percentage set by Basel
  committee
• Maximum 18
• Minimum 12
• Banks activities are divided into 8 business
  lines-corporate finance,trading,retail banking,
  commercial banking, payment settlement, agency
  services, asset management, retail brokering

10
Asset Classification

• Standard Assets
• Sub Standard Assets
• Doubtful Assts
• Loss Assets

11
Provisioning

• Standard Assts 0.40
• Substandard-
• Secured -provision 10
• Unsecuredrealisable value is not more than 10
  of o/s provision 20

12
Provision

• Doubtful I- first 12 months
• Provision 20 realizable value of security plus
  100 shortfall of security
• Doubtful II-further 24 months
• Provision 30 realizable value of security plus
  100 shortfall of security
• Doubtful III-for over 36 months
• 100 provision
• Loss Assets 100

13
Thank you

• ravindran_at_iibf.org.in