A. Tier 1 Capital-
o Elements of Common Equity Tier 1
Capital –
1. Common shares (paid-up equity capital)-
1.1 The paid up amount is classified as
equity capital (i.e. not recognized as a liability).
1.2 Represents the most subordinated claim
in liquidation of the bank.
1.3 Paid up capital is clearly and
separately disclosed in the bank’s balance sheet.
2. Stock surplus-
3. Statutory reserves; - Statutory reserves are the amount of liquid assets that
firms must hold in order to remain solvent and attain partial protection
against a substantial investment loss.
4. Capital reserves- representing surplus arising out of sale
proceeds of assets;
5. Other disclosed free reserves,
if any;
6. Balance in Profit & Loss
Account at the end of the previous financial year;
Or
Retained Earnings.
7. Banks may reckon the profits in
current financial year for CRAR calculation on a quarterly
basis provided the incremental provisions made for non-performing assets at the
end of any of the four quarters of the previous financial year have not
deviated more than 25% from the average of the four quarters. The amount which
can be reckoned would be arrived at by using the following formula:
8. While calculating capital adequacy
at the consolidated level,common shares issued by consolidated subsidiaries
of the bank and held by third parties (i.e. minority interest) which meet the criteria for inclusion in Common Equity Tier 1
capital below-
Minority
interest arising from the issue of common
shares by a fully consolidated subsidiary of the bank may receive recognition
in Common Equity Tier 1 capital only if:
(a) The
instrument giving rise to the minority interest would, if issued by the bank,
meet all of the criteria for classification as common shares for regulatory
capital purposes as mentioned in Common shares (paid-up equity capital);
(b) The
subsidiary that issued the instrument is itself a bank.
The amount
of minority interest meeting the criteria above that will be recognized in
consolidated Common Equity Tier 1 capital will be calculated as follows:
(i) Total minority interest meeting the
two criteria above minus the amount of the surplus Common Equity Tier 1 capital
of the subsidiary attributable to the minority shareholders.
(ii) Surplus Common Equity Tier 1 capital
of the subsidiary is calculated as the Common Equity Tier 1 of the subsidiary
minus the lower of:
a) The minimum Common Equity Tier 1
capital requirement of the subsidiary plus the capital conservation buffer and
b) The portion of the consolidated
minimum Common Equity Tier 1 capital requirement plus the capital conservation
buffer that relates to the subsidiary.
c) The amount of the surplus Common
Equity Tier 1 capital that is attributable to the minority shareholders is
calculated by multiplying the surplus Common Equity Tier 1 by the percentage of
Common Equity Tier 1 that is held by minority shareholders.
9. Less: Regulatory adjustments /
deductions applied in the calculation of Common Equity Tier
1 capital [i.e. to be deducted from the sum of items 1 to 8. (http://rbidocs.rbi.org.in/rdocs/notification/PDFs/70BIIIMC010713.pdf)
1. Goodwill and all Other
Intangible Assets-
I. Goodwill and all other intangible
assets should be deducted from
Common
Equity Tier 1 capital including any goodwill included in
the valuation of significant investments in the capital of banking, financial
and insurance entities which are outside the scope of regulatory consolidation.
In terms of AS 23
–Accounting
for investments in associates, goodwill/capital reserve arising on the acquisition
of an associate by an investor should be included in the carrying amount of
investment in the associate but should be disclosed separately. Therefore,
if the acquisition of equity interest in any associate involves payment which
can be attributable to goodwill, this should be deducted from the Common Equity
Tier 1 of the bank.
II. The full amount of the intangible
assets is to be deducted net of any associated deferred tax liabilities which
would be extinguished if the intangible assets become impaired or derecognized
under the relevant accounting standards. For this purpose, the definition of
intangible assets would be in accordance with the Indian accounting standards. Operating losses in the current period and those brought forward
from previous periods should also be deducted from Common Equity Tier 1 capital.
III. Application of these rules at
consolidated level would mean deduction of any goodwill and other intangible
assets from the consolidated Common Equity which is attributed to the Balance
Sheets of subsidiaries, in addition to deduction of goodwill and other
intangible assets which pertain to the solo bank.
III.
2. Deferred Tax Assets (DTAs)
I. The DTAs computed as under should be
deducted from Common Equity Tier 1 capital:
a) DTA associated with accumulated
losses; and
b) The DTA (excluding DTA associated with
accumulated losses), net of DTL. Where the DTL is in excess of the DTA
(excluding DTA associated with Accumulated losses), the excess shall neither be
adjusted against item (a) nor added to Common Equity Tier 1 capital.
II. Application of these rules at
consolidated level would mean deduction of DTAs from the consolidated Common
Equity which is attributed to the subsidiaries, in addition to deduction of
DTAs which pertain to the solo bank.
3. Cash Flow Hedge Reserve -Cash flow hedging reserve represents
the net gains or losses, net of tax, on effective cash flow hedging instruments
that will be recycled to the income statement when the hedged transaction
affects profit or loss.
I. The amount of the cash flow hedge
(A transaction done to offset risks from the variability of cash flow that would otherwise
negatively affect profits) reserve which relates to the
hedging of Items that are not fair valued on the balance sheet (including
projected cash flows) should be derecognized in the calculation of Common
Equity Tier 1. This means that positive amounts
should be deducted and negative amounts should be added back.
II. Application of these rules at
consolidated level would mean derecognition of cash flow hedge reserve from the consolidated Common
Equity which is attributed to the subsidiaries, in addition to derecognition of
cash flow hedge reserve pertaining to the solo bank.
4. Shortfall of the Stock of
Provisions to Expected Losses
The
deduction from capital in respect of a shortfall of the stock of provisions to
expected losses under the Internal Ratings Based (IRB) approach should be made
in the calculation of Common Equity Tier 1. The full amount is to be deducted
and should not be reduced by any tax effects that could be expected to occur if
provisions were to rise to the level of expected losses.
5. Gain-on-Sale Related to
Securitization Transactions-
As per Basel
III rule text, banks are required to derecognize in the calculation of
Common Equity Tier 1 capital, any increase in equity capital resulting from a
securitization transaction, such as that associated with expected future margin
income (FMI) resulting in a gain-on-sale. However, as per existing guidelines
on
Securitization
of standard assets issued by RBI, banks are not permitted to recognize the
gain-on-sale in the P&L account including cash profits. Therefore, there is
no need for any deduction on account of gain-on-sale on securitization. Banks are allowed to amortize the profit including cash
profit over the period of the securities issued by the SPV. However, if a bank
is following an accounting practice which in substance results in recognition
of realized or unrealized gains at the inception of the securitization
transactions, the treatment stipulated as per Basel III rule text as indicated
in the beginning of the paragraph would be applicable.
6. Cumulative Gains and Losses due
to Changes in Own Credit Risk on Fair
Valued
Financial Liabilities-
I. Banks are required to derecognize
in the calculation of Common Equity Tier 1 capital, all unrealized gains and
losses which have resulted from changes in the fair value of liabilities that
are due to changes in the bank’s own credit risk. In addition, with regard to derivative
liabilities, derecognize all accounting valuation adjustments arising from the
bank's own credit risk. The offsetting between valuation
adjustments arising from the bank's own credit risk and those arising from its
counterparties' credit risk is not allowed. If a bank values its derivatives
and securities financing transactions (SFTs) liabilities taking into account
its own creditworthiness in the form of debit valuation adjustments (DVAs),
then the bank is required to deduct all DVAs from its Common Equity Tier 1
capital, irrespective of whether the DVAs arises due to changes in its own
credit risk or other market factors. Thus, such deduction also includes the
deduction of initial DVA at inception of a new trade. In other words, though
a bank will have to recognize a loss reflecting the credit risk of the
counterparty (i.e. credit valuation adjustments-CVA), the bank will not be
allowed to recognize the corresponding gain due to its own credit risk.
II. Application of these rules at
consolidated level would mean derecognition of unrealized gains and losses
which have resulted from changes in the fair value of liabilities that are due
to changes in the subsidiaries’ credit risk, in the calculation of consolidated
Common Equity Tier 1 capital, in addition to derecognition of any such
unrealized gains and losses attributed to the bank at the solo level.
7. Defined Benefit Pension Fund
Assets and Liabilities-
I. Defined benefit pension fund
liabilities, as included on the balance sheet, must be fully recognized in the
calculation of Common Equity Tier 1 capital (i.e. Common Equity Tier 1 capital
cannot be increased through derecognizing these liabilities). For each defined benefit pension fund that is an asset on the
balance sheet, the asset should be deducted in the calculation of Common Equity
Tier 1 net of any associated deferred tax liability which would be extinguished
if the asset should become impaired or derecognized under the relevant
accounting standards.
II. Application of these rules at
consolidated level would mean deduction of defined benefit pension fund assets and
recognition of defined benefit pension fund liabilities pertaining to
subsidiaries in the consolidated Common Equity Tier 1, in addition to those
pertaining to the solo bank.
8. Investments in Own Shares
(Treasury Stock) –
I. Investment in a bank’s own shares
is tantamount to repayment of capital and therefore, it is necessary to
knock-off such investment from the bank’s capital with a view to improving the
bank’s quality of capital.
II. Banks should not repay their equity
capital without specific approval of
Reserve Bank
of India. Repayment of equity capital can
take place by way of share buy-back, investments in own shares (treasury stock)
or payment of dividends out of reserves, none of which are permissible.
However, banks may end up having indirect
investments in their own stock if they invest in
/ take exposure to mutual funds or index funds / securities which have long
position in bank’s share. In such cases, banks should look through holdings
of index securities to deduct exposures to own shares from their Common Equity
Tier 1 capital. Following the same approach outlined
above, banks must deduct investments in their own Additional Tier 1 capital in
the calculation of their Additional Tier 1 capital and investments in their own
Tier 2 capital in the calculation of their Tier 2 capital. In this regard, the
following rules may be observed:
a) If the amount of investments made
by the mutual funds / index funds / venture capital funds / private equity
funds / investment companies in the capital instruments of the investing bank is known; the indirect investment would be
equal to bank’s investments in such entities multiplied by the percent of
investments of these entities in the investing bank’s respective capital
instruments.
b) If the amount of investments made
by the mutual funds / index funds / venture capital funds / private equity
funds / investment companies in the capital instruments of the investing bank
is not known but, as per the investment policies /
mandate of these entities such investments are permissible; the indirect
investment would be equal to bank’s investments in these entities multiplied by
10%of investments of such entities in the investing bank’s capital instruments.
Banks must note that this method does not follow corresponding deduction
approach i.e. all deductions will be made from the Common Equity Tier 1 capital
even though, the investments of such entities are in the Additional Tier 1 /
Tier 2 capital of the investing banks.
III. Application of these rules at
consolidated level would mean deduction of subsidiaries’ investments in their
own shares (direct or indirect) in addition to bank’s direct or indirect
investments in its own shares while computing consolidated Common Equity Tier
1.
9. Investments in the Capital of
Banking, Financial and Insurance Entities-
o Limits on a Bank’s Investments
in the Capital of Banking, Financial and
Insurance
Entities-
I. A bank’s investment in the capital
instruments issued by banking, financial and insurance entities is subject to
the following limits:
a) A bank’s investments in the capital
instruments issued by banking, financial and insurance entities should not
exceed 10% of its capital funds, but after all deductions mentioned in
paragraph deduction (from 1 to 8).
b) Banks should not acquire any fresh
stake in a bank's equity shares, if by such acquisition, the investing bank's
holding exceeds 5% of the investee bank's equity capital.
c) Under the provisions of Section 19(2)
of the Banking Regulation Act, 1949, a banking company cannot hold shares in
any company whether as pledge or mortgagee or absolute owner of an amount
exceeding 30% of the paid-up share capital of that company or 30% of its own
paid-up share capital and reserves, whichever is less.
d) Equity investment by a bank in a
subsidiary company, financial services company, financial institution, stock
and other exchanges should not exceed 10% of the bank's paid-up share capital
and reserves.
e) Equity investment by a bank in
companies engaged in non-financial services activities would be subject to a
limit of 10% of the investee company’s paid up share capital or 10% of the
bank’s paid up share capital and reserves, whichever is less.
f) Equity investments in any non-financial services company held
by (a) a bank; (b) entities which are bank’s subsidiaries, associates or joint
ventures or entities directly or indirectly controlled by the bank; and (c)
mutual funds managed by AMCs controlled by the bank should in the aggregate not
exceed 20% of the investee company’s paid up share capital.
g) A bank’s equity investments in
subsidiaries and other entities that are engaged in financial services
activities together with equity investments in entities engaged in
non-financial services activities should not exceed 20% of the bank’s paid-up
share capital and reserves. The cap of 20% would not apply for investments
classified under ‘Held for Trading’ category and which are not held beyond 90
days.
II. Investments made by a banking
subsidiary/ associate in the equity or non-equity regulatory capital
instruments issued by its parent bank should be deducted from such subsidiary's
regulatory capital following corresponding deduction approach, in its capital
adequacy assessment on a solo basis. The regulatory treatment of investment by the non-banking
financial subsidiaries / associates in the parent bank's regulatory capital
would, however, be governed by the applicable regulatory capital norms of the
respective regulators of such subsidiaries / associates.
o Treatment of a Bank’s
Investments in the Capital Instruments Issued by Banking, Financial and
Insurance Entities within Limits –
A schematic
representation of treatment of banks’ investments in capital instruments of
financial entities is shown in Figure below. Accordingly, all investments in
the capital instruments issued by banking, financial and insurance entities
within the limits mentioned in paragraph (Limits on a Bank’s Investments
in the Capital of Banking, Financial and Insurance Entities) will be subject to the following
rules:
A) Reciprocal Cross- Holdings in
the Capital of Banking, Financial and Insurance
Entities-
Reciprocal cross holdings of capital might result in
artificially inflating the capital position of banks. Such holdings of
capital will be fully deducted. A holding may be
treated as reciprocal cross holding if the investee entity has also invested in
the any class of bank’s capital instruments which need not necessarily be the
same as the bank’s holdings.
B) Investments in the Capital of
Banking, Financial and Insurance Entities which are outside the Scope of
Regulatory Consolidation and where the Bank does not Own more than 10% of the
Issued Common Share Capital of the Entity-
B)
I. The
regulatory adjustment described in this section applies to
investments in the capital of banking, financial and insurance entities that
are outside the scope of regulatory consolidation and where the bank does not
own more than 10% of the issued common share capital of the entity. In
addition:
a) Investments
include direct, indirect and synthetic holdings of capital instruments. For
example, banks should look through holdings of index securities to determine
their underlying holdings of capital.
b) Holdings
in both the banking book and trading book are to be included. Capital includes
common stock (paid-up equity capital) and all other types of cash and synthetic
capital instruments (e.g. subordinated debt).
c) Underwriting
positions held for five working days or less can be excluded. Underwriting
positions held for longer than five working days must be included.
d) If the
capital instrument of the entity in which the bank has invested does not meet
the criteria for Common Equity Tier 1, Additional Tier 1, or Tier 2 capital of
the bank, the capital is to be considered common shares for the purposes of
this regulatory adjustment.
e) With
the prior approval of RBI a bank can temporarily exclude certain investments
where these have been made in the context of resolving or providing financial
assistance to reorganize a distressed institution.
e)
II. If
the total of all holdings listed in paragraph (I) above, in aggregate exceed
10% of the bank’s Common Equity (after applying all other regulatory
adjustments in full listed prior to this one), then the amount above 10% is
required to be deducted,applying a
corresponding deduction approach. This means the deduction should be applied to
the same component of capital for which the capital would qualify if it was
issued by the bank itself.Accordingly, the amount to be deducted from
common equity should be calculated as the total of all holdings which in
aggregate exceed 10% of the bank’s common equity (as per above) multiplied by
the common equity holdings as a percentage of the total capital holdings. This
would result in a Common Equity deduction which corresponds to the proportion
of total capital holdings held in Common Equity. Similarly, the amount to be
deducted from Additional Tier 1 capital should be calculated as the total of
all holdings which in aggregate exceed 10% of the bank’s Common Equity (as per
above) multiplied by the Additional Tier 1 capital holdings as a percentage of
the total capital holdings. The amount to be deducted from Tier 2 capital
should be calculated as the total of all holdings which in aggregate exceed 10%
of the bank’s Common Equity (as per above) multiplied by the Tier 2 capital
holdings as a percentage of the total capital holdings. (Please refer to
Illustration given in Annex
11-(http://rbidocs.rbi.org.in/rdocs/notification/PDFs/70BIIIMC010713.pdf)
III. If,
under the corresponding deduction approach, a bank is required to make a
deduction from a particular tier of capital and it does not have enough of that
tier of capital to satisfy that deduction, the shortfall will be deducted from
the next higher tier of capital (e.g. if a bank does not have enough Additional
Tier 1 capital to satisfy the deduction, the shortfall will be deducted from
Common Equity Tier 1 capital).
IV. Investments
below the threshold of 10% of bank’s Common Equity, which is not deducted, will
be risk weighted. Thus, instruments in the trading book will be treated as per
the market risk rules and instruments in the banking book should be treated as
per the standardized approach or internal ratings-based approach (as
applicable). For the application of risk weighting the amount of the holdings
which are required to be risk weighted would be allocated on a pro rata basis
between the Banking and Trading Book. However, in certain cases, such
investments in both scheduled and non-scheduled commercial banks will be fully
deducted from Common Equity Tier 1 capital of investing bank as indicated in
paragraphs 5.6, 8.3.5 and 8.4.4.
V. For
the purpose of risk weighting of investments in as indicated in para (iv)
above, investments in securities having comparatively higher risk weights will
be considered for risk weighting to the extent required to be risk weighted,
both in banking and trading books. In other words, investments with
comparatively poor ratings (i.e. higher risk weights) should be considered for
the purpose of application of risk weighting first and the residual investments
should be considered for deduction.
C) Significant Investments in the
Capital of Banking, Financial and Insurance
Entities
which are outside the Scope of Regulatory Consolidation-
o The
regulatory adjustment described in this section applies to investments in the
capital of banking, financial and insurance entities that are outside the scope
of regulatory consolidation where the bank owns more than 10% of the issued
common share capital of the issuing entity or where the entity is an affiliate
of the bank. In addition:
· Investments
include direct, indirect and synthetic holdings of capital instruments. For
example, banks should look through holdings of index securities to determine
their underlying holdings of capital.
· Holdings
in both the banking book and trading book are to be included. Capital includes
common stock and all other types of cash and synthetic capital instruments
(e.g. subordinated debt).
· Underwriting
positions held for five working days or less can be excluded. Underwriting
positions held for longer than five working days must be included.
· If
the capital instrument of the entity in which the bank has invested does not
meet the criteria for Common Equity Tier 1, Additional Tier 1, or Tier 2
capital of the bank, the capital is to be considered common shares for the
purposes of this regulatory adjustment
· With
the prior approval of RBI a bank can temporarily exclude certain investments
where these have been made in the context of resolving or providing financial
assistance to reorganize a distressed institution.
·
o Investments
other than Common Shares All investments included in para (i) above which are
not common shares must be fully deducted following a corresponding deduction
approach. This means the deduction should be applied to the same tier of
capital for which the capital would qualify if it was issued by the bank
itself. If the bank is required to make a deduction from a particular tier of
capital and it does not have enough of that tier of capital to satisfy that
deduction, the shortfall will be deducted from the next higher tier of capital
(e.g. if a bank does not have enough Additional Tier 1 capital to satisfy the
deduction, the shortfall will be deducted from Common Equity Tier 1 capital).
o Investments
which are Common Shares All investments included in para (i) above which are
common shares and which exceed 10% of the bank’s Common Equity (after the
application of all regulatory adjustments) will be deducted while calculating
Common Equity Tier 1 capital. The amount that is not deducted (upto 10% if
bank’s common equity invested in the equity capital of such entities) in the
calculation of Common Equity Tier 1 will be risk weighted at 250% (refer to
illustration in Annex 11). However, in certain cases, such investments in both
scheduled and non-scheduled commercial banks will be fully deducted from Common
Equity Tier 1 capital of investing bank as indicated in paragraphs 5.6, 8.3.5
and 8.4.4.
o With regard to computation of
indirect holdings through mutual funds or index funds, of capital of banking,
financial and insurance entities which are outside the scope of regulatory
consolidation-
I. If
the amount of investments made by the mutual funds / index funds / venture
capital funds / private equity funds / investment companies in the capital
instruments of the financial entities is known; the indirect
investment of the bank in such entities would be equal to bank’s investments in
these entities multiplied by the percent of investments of such entities in the
financial entities’ capital instruments.
II. If
the amount of investments made by the mutual funds / index funds / venture
capital funds / private equity funds / investment companies in the capital
instruments of the investing bank is not known but, as per the
investment policies / mandate of these entities such investments are
permissible; the indirect investment would be equal to bank’s investments in
these entities multiplied by maximum permissible limit which these entities are
authorized to invest in the financial entities’ capital instruments.
III. If neither
the amount of investments made by the mutual funds / index funds / venture
capital funds / private equity funds in the capital instruments of financial entities nor the
maximum amount which these entities can invest in financial entities are known but, as per the
investment policies / mandate of these entities such investments are
permissible; the entire investment of the bank in these entities would be
treated as indirect investment in financial entities. Banks must note that this
method does not follow corresponding deduction approach i.e. all deductions
will be made from the Common Equity Tier 1 capital even though, the investments
of such entities are in the Additional Tier 1 / Tier 2 capital of the investing
banks.
o Application of these rules at
consolidated level would mean:
I. Identifying
the relevant entities below and above threshold of 10% of common share capital
of investee entities, based on aggregate investments of the consolidated group
(parent plus consolidated subsidiaries) in common share capital of individual
investee entities.
II. Applying
the rules as stipulated in above paragraphs and segregating investments into
those which will be deducted from the consolidated capital and those which will
be risk weighted. For this purpose-
· Investments
of the entire consolidated entity in capital instruments of investee entities
will be aggregated into different classes of instrument.
· The
consolidated Common Equity of the group will be taken into account.
o It
has come to our notice that certain investors such as Employee Pension Funds
have subscribed to regulatory capital issues of commercial banks concerned.
These funds enjoy the counter guarantee by the bank concerned in respect of returns.
When returns of the investors of the capital issues are counter guaranteed by
the bank, such investments will not be considered as regulatory capital for the
purpose of capital adequacy.
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