First return developed on XBRL Report on Capital Adequacy Under Basel II – RCA 2 First return developed on XBRL Anujit Mitra (amitra@rbi.org.in) Department of Banking Supervision, RBI

Approach for Basel II All commercial banks in India (excluding Local Area Banks and Regional Rural Banks) to adopt Standardised Approach (SA) for credit risk Basic Indicator Approach (BIA) for operational risk Standardised Duration Approach (SDA) for computing capital requirement for market risks

Timeline - achieved Mar 31, 2008 for all Foreign Banks operating in India and other Indian Banks having operational presence outside India All other commercial banks (except Local Area Banks and Regional Rural Banks) were encouraged to migrate to these approaches under the Revised Framework in alignment with them but in any case not later than March 31, 2009

Parallel Run Banks migrating to the revised framework were advised to have parallel run and they have been submitting the quarterly reports to their board and to RBI Detailed return for the same has been introduced in December 2009, this was the first return implemented on XBRL platform by RBI The same was re-launched over Internet in March 2009

Migration to the Advanced approaches - Flexibility Banks, at their discretion, would have the option of adopting the advanced approaches for one or more of the risk categories, as per their preparedness, while continuing with the simpler approaches for other risk categories It would not be necessary to adopt the advanced approaches for all the risk categories simultaneously.

Time Schedule for Advanced Approaches The earliest date of making application by banks to the RBI Likely date of approval by the RBI Internal Models Approach (IMA) for Market Risk 01-Apr-10 31-Mar-11 The Standardised Approach (TSA) for Operational Risk 30-Sep-10 Advanced Measurement Approach (AMA) for Operational Risk 01-Apr-12 31-Mar-14 Internal Ratings-Based (IRB) Approaches for Credit Risk (Foundation- as well as Advanced IRB)

Presenting the system – Users From RBI Administrator Manages Bank Master and creates Administrators for those banks View system MIS reports and log Has full access right over all banks to view their returns May Reject returns submitted by the bank (s) Users Has predefined access right to view returns and generate reports

Users from Banks Administrator Creates / deletes users from the banks and defines the role of each user (maker-checker) Users Maker - Enabled to enter, modify and view data but would not be able to submit data to RBI Checker - Enabled to view and submit data

Banks’ view of the system Accessible through the ORFS page – secure access Data Preparation Login Download Excel Template Fill in data Validate - debug

Submission of Data Create Instance Document XBRL instance created – transparent to the user Save document Submit to RBI Encrypt with digital signature or symmetric encryption Print for records, if required

Retrieve submitted returns After logging in user may be able to view / download returns already submitted He may download the same and modify He may resubmit

Advanced approach Use the MIS to create the XML output or even better – make use of the XBRL Upload document Submit to RBI Encrypt with digital signature or symmetric encryption

Expected developments in RBI Further versions of RCA II – next one possibly by December 2009 Working group on OSMOS re-devolopment Reviewing the return structures May suggest quick XBRL adoption for all OSMOS returns May suggest few new returns for Basel II

At RBI - Analysis of returns Through Standard reports Fixed format Frequently used Easy to generate and use Through Adhoc reports User to choose elements Downloadable to Excel for further Analysis

Analysis - A look at Capital Adequacy Need for capital Acceptable capital standards Initiatives of Basel (BCBS) Basel I Accord Basel II Accord Risk assessment under Basel II

Need for capital Supports bank’s operations (source of funds) • Provides cushion against unexpected losses stemming from credit, market and operational risks – thus maintains solvency of a bank • Encourages depositors’ confidence • Encourages shareholders’ interest in governance of the bank • Regulatory comfort as bank insolvency is costly to the economy

How much capital?? Before Basel standards, regulators set minimum capital requirements in absolute terms or as gearing ratio. After Basel, capital is aligned to the quantum of risks carried by a bank. Elimination of probability of bank insolvency is not possible hence the present capital standards aim to ensure that a bank would not be insolvent under an acceptable probability. Measuring losses to quantify the level of capital requirement is the core issue.

Basel I Capital Accord Pioneered the international convergence on measuring banking risks and defining capital standards Essentially focused on standards for measuring credit risk (biggest risk faced by banks) Added explicit capital charge for market risks in 1996 Specified the minimum level of capital as a function of risk weighted assets Defined components of regulatory capital Easy to understand and simple to implement Helped to recognise the importance of capital in managing banking risk Besides G-10, adopted by over 100 countries

Basel I to Basel II Weaknesses of Basel I Hence the need for Basel II One size fits all approach Crude method of credit risk measurement However, measurement of market risks is more scientific and aligned to reality Inadequate differentiation of credit risk Risk mitigation techniques not recognised No incentives for better risk management Not addressed all risks Encouraged regulatory arbitrage (securitisation and credit derivatives) Hence the need for Basel II

Basel II Accord Extensive consultative process beginning June 1999 Rests on three mutually reinforcing Pillars Quantum of capital linked to riskiness of exposure Covers capital charge for operational risk besides credit and market risks Provides a menu of options to calculate credit risk and operational risk Incorporates supervisory review process to address risks not covered under Pillar I and allows risk based supervision Incentives for better risk management and control environment through lesser capital requirement Ensures market discipline through comprehensive disclosure requirements

Basel I Vs. Basel II – All Banks CRAR (as of Mar 2009)  (Amounts in Rs.Cr.) Basel I Basel II Tier I Capital 331,494 333,810 Tier II Capital 157,143 154,016 Total Capital 488,637 487,826   Total RWA 3704,827 3488,303 CRAR 13.19 13.98 Core CRAR 8.95 9.57

Basel I Vs. Basel II - Foreign Banks (as of Mar 2009)  (Amounts in Rs.Cr.) Basel I Basel II Tier I Capital 51407 51811 Tier II Capital 9203 9105 Total Capital 60609 60916   Total RWA 403033 425327 CRAR 15.04 14.32 Core CRAR 12.75 12.18

Basel I Vs. Basel II – Nationalised Banks (as of Mar 2009)  (Amounts in Rs.Cr.) Basel I Basel II Tier I Capital 191053 192268 Tier II Capital 116692 114063 Total Capital 307745 306331   Total RWA 2498398 2271344 CRAR 12.32 13.49 Core CRAR 7.65 8.46

Basel I Vs. Basel II – NPBs (as of Mar 2009)  (Amounts in Rs.Cr.) Basel I Basel II Tier I Capital 72602 73152 Tier II Capital 27944 27756 Total Capital 100546 100908   Total RWA 665762 658331 CRAR 15.10 15.33 Core CRAR 10.91 11.11

Basel I Vs. Basel II – OPBs (as of Mar 2009)  (Amounts in Rs.Cr.) Basel I Basel II Tier I Capital 16360 16579 Tier II Capital 3301 3092 Total Capital 19662 19671   Total RWA 137180 133301 CRAR 14.33 14.76 Core CRAR 11.93 12.44

Basel I Vs. Basel II – who benefitted (as of Mar 2009) Out of the 80 banks 49 banks shown higher CRAR 17 out of 30 foreign banks got CRAR lower under Basel II 9 out of 15 Old Private Sector Banks and 2 out of 7 New Private Sector Banks shown higher CRAR under Basel II Only 6 out of 27 Nationalised Banks including SBI Group have shown lower CRAR 35 banks have shown higher RWA under Basel II

Assessment of Capital Adequacy – Standardised Approach A bank’s capital base is dynamic reflecting the success or otherwise of the bank’s ongoing business of managing risks through its control environment Analysis should broadly include Regulatory capital and Risk assets – on and off balance sheet Regulatory capital Level of capital adequacy ratio and trend over periods Quality – proportion of Tier I capital to total capital and trend over periods Components of Tier I capital

Assessment of Capital Adequacy – Standardised Approach Extent of fixed charge on profitability and available headroom – level of preference shares and debt instruments Quality of Tier II capital – extent of revaluation reserves, upper Tier II & lower Tier II components, available headroom to raise further capital Trends in deductions from regulatory capital especially on account of securitisation related exposures and intangible assets

Assessment of Capital Adequacy – Standardised Approach Risk Assets - on balance sheet – trends Absolute quantum, Composition, Quality, and Riskiness Movements in credit, market and operational risk Reflects the direction of business strategy and risk appetite Growth in quantum of risk assets to be compared in relation to total assets and regulatory capital

Assessment of Capital Adequacy – Standardised Approach Credit Risk Exposure (excluding securitisation) Counter party wise distribution Rating wise distribution Risk weight wise distribution Extent of credit risk mitigation (CRM) used to reduce risk Credit Risk Exposure (Securitisation) Level of exposures as originator and other than originator Rating wise & risk weight wise distribution Extent of exposures backed by commercial real estate, liquidity facilities (drawn and undrawn) Risk adjusted exposures as % of total credit risk exposure, total risk weighted assets and total assets

Assessment of Capital Adequacy – Standardised Approach Credit Risk – Off Balance Sheet (OBS) Exposures Non Market related Trends in quantum and composition of contingent credits & commitments Volume of financial guarantees, undrawn committed lines of credit, Letter of credits Share in total off balance sheet exposures Market related (Derivatives) Quantum and composition Maturity & potential future CCF wise distribution Trend in potential and current exposure Total OBS exposures as % of total on balance sheet assets

Assessment of Capital Adequacy Capital charge for failed transactions Securities transactions Foreign exchange transactions Market Risk Exposures Trends in capital charge Specific risk for securities held in HFT and AFS General market risk for securities held in HFT & AFS Equity position Foreign exchange and gold position

Assessment of Capital Adequacy Residual maturity wise securities held in (reflect potential market risk exposure) HFT category AFS category Bonds of banks attracting higher capital charge due to adverse CRAR Operational Risk Trends in capital charge

Assessment of Capital Adequacy Issues To provide input for Supervisory Review & Evaluation Process (SREP) under Pillar II So deciding the trade off between granularity to be captured and ease of compilation / data management is crucial

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