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Equity contribution of owners. The basic approach of capital adequacy framework
is that a bank should have sufficient capital to provide a stable resource to absorb
any losses arising from the risks in its business. Capital is divided into different
tiers according to the characteristics / qualities of each qualifying instrument.
For supervisory purposes capital is split into two categories: Tier I and Tier II. |
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A term used to refer to one of the components of regulatory capital. It consists
mainly of share capital and disclosed reserves (minus goodwill, if any). Tier I
items are deemed to be of the highest quality because they are fully available to
cover losses Hence it is also termed as core capital. |
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Refers to one of the components of regulatory capital. Also known as supplementary
capital, it consists of certain reserves and certain types of subordinated debt.
Tier II items qualify as regulatory capital to the extent that they can be used
to absorb losses arising from a bank's activities. Tier II's capital loss absorption
capacity is lower than that of Tier I capital. |
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Revaluation reserves are a part of Tier-II capital. These reserves arise from revaluation
of assets that are undervalued on the bank's books, typically bank premises and
marketable securities. The extent to which the revaluation reserves can be relied
upon as a cushion for unexpected losses depends mainly upon the level of certainty
that can be placed on estimates of the market values of the relevant assets and
the subsequent deterioration in values under difficult market conditions or in a
forced sale. |
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Ratio of assets to capital. |
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That portion of a company's profits not paid out as dividends to shareholders. They
are also known as undistributable reserves and are ploughed back into the business. |
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Unabsorbed depreciation and carry forward of losses which can be set-off against
future taxable income which is considered as timing differences result in deferred
tax assets. The deferred Tax Assets are accounted as per the Accounting Standard
22. |
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Deferred tax liabilities have an effect of increasing future year's income tax payments,
which indicates that they are accrued income taxes and meet definition of liabilities. |
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Refers to the status of the debt. In the event of the bankruptcy or liquidation
of the debtor, subordinated debt only has a secondary claim on repayments, after
other debt has been repaid. |
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In this category, fall a number of capital instruments, which combine certain characteristics
of equity and certain characteristics of debt. Each has a particular feature, which
can be considered to affect its quality as capital. Where these instruments have
close similarities to equity, in particular when they are able to support losses
on an ongoing basis without triggering liquidation, they may be included in Tier
II capital. |
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The BASEL Committee is a committee of bank supervisors consisting of members from
each of the G10 countries. The Committee is a forum for discussion on the handling
of specific supervisory problems. It coordinates the sharing of supervisory responsibilities
among national authorities in respect of banks' foreign establishments with the
aim of ensuring effective supervision of banks' activities worldwide. |
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The BASEL Capital Accord is an Agreement concluded among country representatives
in 1988 to develop standardised risk-based capital requirements for banks across
countries. The Accord was replaced with a new capital adequacy framework (BASEL
II), published in June 2004. BASEL II is based on three mutually reinforcing pillars
hat allow banks and supervisors to evaluate properly the various risks that banks
face. These three pillars are:
Minimum capital requirements, which seek to refine the present measurement framework
supervisory review of an institution's capital adequacy and internal assessment
process;
market discipline through effective disclosure to encourage safe and sound banking
practices |
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The notional amount of the asset is multiplied by the risk weight assigned to the
asset to arrive at the risk weighted asset number. Risk weight for different assets
vary e.g. 0% on a Government Dated Security and 20% on a AAA rated foreign bank
etc. |
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Capital to risk weighted assets ratio is arrived at by dividing the capital of the
bank with aggregated risk weighted assets for credit risk, market risk and operational
risk. The higher the CRAR of a bank the better capitalized it is. |
The risk that a party to a contractual agreement or transaction will be unable to
meet its obligations or will default on commitments. Credit risk can be associated
with almost any financial transaction. BASEL-II provides two options for measurement
of capital charge for credit risk
1.standardised approach (SA) - Under the SA, the banks use a risk-weighting schedule
for measuring the credit risk of its assets by assigning risk weights based on the
rating assigned by the external credit rating agencies.
2. Internal rating based approach (IRB) - The IRB approach, on the other hand, allows
banks to use their own internal ratings of counterparties and exposures, which permit
a finer differentiation of risk for various exposures and hence delivers capital
requirements that are better aligned to the degree of risks. The IRB approaches
are of two types:
a) Foundation IRB (FIRB):The bank estimates the Probability of Default (PD)
associated with each borrower, and the supervisor supplies other inputs such as
Loss Given Default (LGD) and Exposure At Default (EAD).
b) Advanced IRB (AIRB):In addition to Probability of Default (PD), the bank
estimates other inputs such as EAD and LGD. The requirements for this approach are
more exacting. The adoption of advanced approaches would require the banks to meet
minimum requirements relating to internal ratings at the outset and on an ongoing
basis such as those relating to the design of the rating system, operations, controls,
corporate governance, and estimation and validation of credit risk components, viz.,
PD for both FIRB and AIRB and LGD and EAD for AIRB. The banks should have, at the
minimum, PD data for five years and LGD and EAD data for seven years. In India,
banks have been advised to compute capital requirements for credit risk adopting
the SA. |
Market risk is defined as the risk of loss arising from movements in market prices
or rates away from the rates or prices set out in a transaction or agreement. The
capital charge for market risk was introduced by the BASEL Committee on Banking
Supervision through the Market Risk Amendment of January 1996 to the capital accord
of 1988 (BASEL I Framework). There are two methodologies available to estimate the
capital requirement to cover market risks:
1) The Standardised Measurement Method: This method, currently implemented by the
Reserve Bank, adopts a 'building block' approach for interest-rate related and equity
instruments which differentiate capital requirements for 'specific risk' from those
of 'general market risk'. The 'specific risk charge' is designed to protect against
an adverse movement in the price of an individual security due to factors related
to the individual issuer. The 'general market risk charge' is designed to protect
against the interest rate risk in the portfolio.
2) The Internal Models Approach (IMA): This method enables banks to use their proprietary
in-house method which must meet the qualitative and quantitative criteria set out
by the BCBS and is subject to the explicit approval of the supervisory authority. |
The revised BASEL II framework offers the following three approaches for estimating
capital charges for operational risk:
1) The Basic Indicator Approach (BIA): This approach sets a charge for operational
risk as a fixed percentage ("alpha factor") of a single indicator, which serves
as a proxy for the bank's risk exposure.
2) The Standardised Approach (SA): This approach requires that the institution separate
its operations into eight standard business lines, and the capital charge for each
business line is calculated by multiplying gross income of that business line by
a factor (denoted beta) assigned to that business line.
3) Advanced Measurement Approach (AMA): Under this approach, the regulatory capital
requirement will equal the risk measure generated by the banks' internal operational
risk measurement system. In India, the banks have been advised to adopt the BIA
to estimate the capital charge for operational risk and 15% of average gross income
of last three years is taken for calculating capital charge for operational risk. |
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In terms of the guidelines on BASEL II, the banks are required to have a board-approved
policy on internal capital adequacy assessment process (ICAAP) to assess the capital
requirement as per ICAAP at the solo as well as consolidated level. The ICAAP is
required to form an integral part of the management and decision-making culture
of a bank. ICAAP document is required to clearly demarcate the quantifiable and
qualitatively assessed risks. The ICAAP is also required to include stress tests
and scenario analyses, to be conducted periodically, particularly in respect of
the bank's material risk exposures, in order to evaluate the potential vulnerability
of the bank to some unlikely but plausible events or movements in the market conditions
that could have an adverse impact on the bank's capital. |
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Supervisory review process envisages the establishment of suitable risk management
systems in banks and their review by the supervisory authority. The objective of
the SRP is to ensure that the banks have adequate capital to support all the risks
in their business as also to encourage them to develop and use better risk management
techniques for monitoring and managing their risks. |
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Market Discipline seeks to achieve increased transparency through expanded disclosure
requirements for banks. |
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Techniques used to mitigate the credit risks through exposure being collateralised
in whole or in part with cash or securities or guaranteed by a third party. |
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A bond-type security in which the collateral is provided by a pool of mortgages.
Income from the underlying mortgages is used to meet interest and principal repayments. |
A derivative instrument derives its value from an underlying product. There are
basically three derivatives
a) Forward Contract- A forward contract is an agreement between two parties to buy
or sell an agreed amount of a commodity or financial instrument at an agreed price,
for delivery on an agreed future date. Future Contract- Is a standardized exchange
tradable forward contract executed at an exchange. In contrast to a futures contract,
a forward contract is not transferable or exchange tradable, its terms are not standardized
and no margin is exchanged. The buyer of the forward contract is said to be long
on the contract and the seller is said to be short on the contract.
b) Options- An option is a contract which grants the buyer the right, but not the
obligation, to buy (call option) or sell (put option) an asset, commodity, currency
or financial instrument at an agreed rate (exercise price) on or before an agreed
date (expiry or settlement date). The buyer pays the seller an amount called the
premium in exchange for this right. This premium is the price of the option.
c) Swaps- Is an agreement to exchange future cash flow at pre-specified Intervals.
Typically one cash flow is based on a variable price and other on affixed one. |
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Duration (Macaulay duration) measures the price volatility of fixed income securities.
It is often used in the comparison of interest rate risk between securities with
different coupons and different maturities. It is defined as the weighted average
time to cash flows of a bond where the weights are nothing but the present value
of the cash flows themselves. It is expressed in years. The duration of a fixed
income security is always shorter than its term to maturity, except in the case
of zero coupon securities where they are the same. |
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Modified Duration = Macaulay Duration/ (1+y/m), where 'y' is the yield (%), 'm'
is the number of times compounding occurs in a year. For example if interest is
paid twice a year m=2. Modified Duration is a measure of the percentage change in
price of a bond for a 1% change in yield. |
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An asset, including a leased asset, becomes non performing when it ceases to generate
income for the bank. |
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Gross NPA - (Balance in Interest Suspense account + DICGC/ECGC claims received and
held pending adjustment + Part payment received and kept in suspense account + Total
provisions held). |
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Equity minus net NPA divided by total assets minus intangible assets. |
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(Fresh accretion of NPAs during the year/Total standard assets at the beginning
of the year)*100 |
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A restructured account is one where the bank, grants to the borrower concessions
that the bank would not otherwise consider. Restructuring would normally involve
modification of terms of the advances/securities, which would generally include,
among others, alteration of repayment period/ repayable amount/ the amount of installments
and rate of interest. It is a mechanism to nurture an otherwise viable unit, which
has been adversely impacted, back to health. |
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A substandard asset would be one, which has remained NPA for a period less than
or equal to 12 months. Such an asset will have well defined credit weaknesses that
jeopardize the liquidation of the debt and are characterised by the distinct possibility
that the banks will sustain some loss, if deficiencies are not corrected. |
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An asset would be classified as doubtful if it has remained in the substandard category
for a period of 12 months. A loan classified as doubtful has all the weaknesses
inherent in assets that were classified as substandard, with the added characteristic
that the weaknesses make collection or liquidation in full, - on the basis of currently
known facts, conditions and values - highly questionable and improbable. |
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An asset would be classified as doubtful if it has remained in the substandard category
for a period of 12 months. A loan classified as doubtful has all the weaknesses
inherent in assets that were classified as substandard, with the added characteristic
that the weaknesses make collection or liquidation in full, - on the basis of currently
known facts, conditions and values - highly questionable and improbable. |
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A loss asset is one where loss has been identified by the bank or internal or external
auditors or the RBI inspection but the amount has not been written off wholly. In
other words, such an asset is considered uncollectible and of such little value
that its continuance as a bankable asset is not warranted although there may be
some salvage or recovery value. |
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Off-Balance Sheet exposures refer to the business activities of a bank that generally
do not involve booking assets (loans) and taking deposits. Off-balance sheet activities
normally generate fees, but produce liabilities or assets that are deferred or contingent
and thus, do not appear on the institution's balance sheet until and unless they
become actual assets or liabilities. |
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The credit equivalent amount of a market related off-balance sheet transaction is
calculated using the current exposure method by adding the current credit exposure
to the potential future credit exposure of these contracts. Current credit exposure
is defined as the sum of the positive mark to market value of a contract. The Current
Exposure Method requires periodical calculation of the current credit exposure by
marking the contracts to market, thus capturing the current credit exposure. Potential
future credit exposure is determined by multiplying the notional principal amount
of each of these contracts irrespective of whether the contract has a zero, positive
or negative mark-to-market value by the relevant add-on factor prescribed by RBI,
according to the nature and residual maturity of the instrument. |
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Sum of interest/discount earned, commission, exchange, brokerage and other operating
income. |
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Sum of interest expended, staff expenses and other overheads. |
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Net of total income and total operating expenses. |
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Operating profit before provision minus provision for loan losses, depreciation
in investments, write off and other provisions. |
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(Net operating profit +/- realized gains/losses on sale of assets) |
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Profit before tax - provision for tax. |
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Profit after tax - dividend paid/proposed. |
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(Interest and discount earned/average interest earning assets)*100 |
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(Interest expended on deposits and borrowings/Average interest bearing liabilities)*100 |
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Return on Assets (ROA) is a profitability ratio which indicates the net profit (net
income) generated on total assets. It is computed by dividing net income by average
total assets. Formula- (Profit after tax/Av. Total assets)*100 |
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Return on Equity (ROE) is a ratio relating net profit (net income) to shareholders'
equity. Here the equity refers to share capital reserves and surplus of the bank.
Formula- Profit after tax/(Total equity + Total equity at the end of previous year)/2}*100 |
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(Retained earnings/Total equity at the end of previous year)*100 |
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The differential (surplus or deficit) between non-interest income and non-interest
expenses as a percentage to average total assets. |
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The NII is the difference between the interest income and the interest expenses. |
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Net interest margin is the net interest income divided by average interest earning
assets. |
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The cost income ratio reflects the extent to which non-interest expenses of a bank
make a charge on the net total income (total income - interest expense). The lower
the ratio, the more efficient is the bank. Formula: Non interest expenditure / Net
Total Income * 100. |
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Deposit in bank in current and Savings account. |
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Deposits accepted above card rate (for the deposits) of the bank. |
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Liquid assets consists of: cash, balances with RBI, balances in current accounts
with banks, money at call and short notice, inter-bank placements due within 30
days and securities under "held for trading" and "available for sale" categories
excluding securities that do not have ready market. |
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Liquid assets [as above] to current and savings deposits - (Higher the ratio, the
better) |
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Inter-bank and money market deposit liabilities to Average Total Assets |
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Asset Liability Management (ALM) is concerned with strategic balance sheet management
involving all market risks. It also deals with liquidity management, funds management,
trading and capital planning. |
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Asset-Liability Management Committee (ALCO) is a strategic decision making body,
formulating and overseeing the function of asset liability management (ALM) of a
bank. |
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The banking book comprises assests and liabilities, which are contracted basically
on account of relationship or for steady income and statutory obligations and are
generally held till maturity. |
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A fund set up for the purpose of investing in startup businesses that is perceived
to have excellent growth prospects but does not have access to capital markets. |
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The securities acquired by the banks with the intention to hold them up to maturity. |
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Securities where the intention is to trade by taking advantage of short-term price
/ interest rate movements. |
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The securities available for sale are those securities where the intention of the
bank is neither to trade nor to hold till maturity. These securities are valued
at the fair value which is determined by reference to the best available source
of current market quotations or other data relative to current value. |
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The Yield to maturity (YTM) is the yield promised to the bondholder on the assumption
that the bond will be held to maturity and coupon payments will be reinvested at
the YTM. It is a measure of the return of the bond. |
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This represents the rate of change of duration. It is the difference between actual
price of a bond and the price estimated by modified duration. |
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A bond issued in foreign currency abroad giving the investor the option to convert
the bond into equity at a fixed conversion price or as per a pre-determined pricing
formula. |
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Investments in trading book are held for generating profits on the short term differences
in prices/yields. Held for trading (HFT) and Available for sale (AFS) category constitute
trading book. |
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Cash reserve ratio is the cash parked by the banks in their specified current account
maintained with RBI. |
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Statutory liquidity ratio is in the form of cash (book value), gold (current market
value) and balances in unencumbered approved securities. |
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Stress testing is used to evaluate a bank's potential vulnerability to certain unlikely
but plausible events or movements in financial variables. The vulnerability is usually
measured with reference to the bank's profitability and /or capital adequacy. |
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A method in which the earnings or value impact is computed for different interest
rate scenario. |
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London Inter Bank Offered Rate. The interest rate at which banks offer to lend funds
in the interbank market. |
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Is one hundredth of one percent. 1 basis point means 0.01%. Used for measuring change
in interest rate/yield. |
Frauds have been classified as under, based mainly on the provisions of the Indian
Penal Code
(a) Misappropriation and criminal breach of trust.
(b) Fraudulent encashment through forged instruments, manipulation of books of account
or through fictitious accounts and conversion of property.
(c) Unauthorised credit facilities extended for reward or for illegal gratification.
(d) Negligence and cash shortages.
(e) Cheating and forgery.
(f) Irregularities in foreign exchange transactions.
(g) Any other type of fraud not coming under the specific heads as above. |
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A process by which a single asset or a pool of assets are transferred from the balance
sheet of the originator (bank) to a bankruptcy remote SPV (trust) in return for
an immediate cash payment. |
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An entity which may be a trust, company or other entity constituted or established
by a 'Deed' or 'Agreement' for a specific purpose. |
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The legal position with reference to the creation of the SPV should be such that
the SPV and its assets would not be touched in case the originator of the securitization
goes bankrupt and its assets are liquidated. |
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These are the facilities offered to an SPV to cover the probable losses from the
pool of securitized assets. It is a credit risk cover given by the originator or
a third party and meant for the investors in any securitization process. |
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An entity, usually a bank that actually holds the receivables as agent and bailee
of the trustee. |
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First level of credit enhancement offered to an SPV as part of the process in bringing
the securities issued by SPV to investment grade. |
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Credit enhancement providing the second or subsequent tier of protection to an SPV
against potential losses. |
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VAR is a single number (currency amount) which estimates the maximum expected loss
of a portfolio over a given time horizon (the holding period) and at a given confidence
level. VaR is defined as an estimate of potential loss in a position or asset/liability
or portfolio of assets/liabilities over a given holding period at a given level
of certainty. The following are the three main methodologies used to calculate VaR:
Parametric Estimates - Estimates VaR using parameters such as volatility and correlation.
Accurate for traditional assets and linear derivatives, but less accurate for non
linear derivatives. Monte Carlo simulation- Estimates VaR by simulating random scenarios
and revaluing positions in the portfolio. Appropriate for all types of instruments,
linear and nonlinear. Historical simulation- Estimates VaR by reliving history;
takes actual historical rates and revalues positions for each change in the market |
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commercial real estate is defined as "fund based and non-fund based exposures secured
by mortgages on commercial real estates (office buildings, retail space, multi-purpose
commercial premises, multi-family residential buildings, multi-tenanted commercial
premises, industrial or warehouse space, hotels, land acquisition, development and
construction etc.)" |
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A member of NDS-OM (having Constituent Subsidiary General Ledger (CSGL) and current
account with RBI) who authorizes their Gilt Account Holders to have direct access
to the web enabled NDS-OM system. |
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Non-NDS members who have gilt account and current account with PMs are termed as
GAHs. GAHs permitted by RBI include NBFCs, Provident Funds, Pension Funds, Mutual
Funds, Insurance Companies, Cooperative Banks, Regional Rural Banks, Trusts, Corporates,
Individuals etc. |
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Dedicated URL is a secure site, i.e., https// accessible only through deployment
of requisite digital certificates and tokens (for non-repudiation of transactions).
The issuance and management of digital certificates and security tokens would be
the responsibility of the PM as part of GAH creation and activation process. Regular
renewals thereof would also be the PM’s responsibility. |
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Digital certificates are digital signatures to be obtained by PM from any Government
Recognized Certifying Authority designated by RBI, on behalf of GAH. For added security,
the certificates need to be installed in an e-token as per specifications approved.
The digital certificate and token specifications needs to be SHA 2 (2048 bit) compliant.
Without the Digital certificate and e-token, the GAH cannot log in to the NDS OM
web based module. The Primary member will be responsible for obtaining/renewal and
intimating revocation to RBI/CCIL of the Digital Certificate for such GAH users. |
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The Administrator (CCIL) is the person who creates and activates the GAH in the
web-based system on the request of the PM and also authorizes the employees of GAH
(GAH Users created by PM) to access the system by generating login and password. |
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Once GAH is created as a client of PM in the web-based system by CCIL (the NDS OM
Admin), Users of GAH are created by PM and later authorized by CCIL to access and
operate the system. While authorizing, CCIL generates the login ID and password
for the GAH Users and forwards the same to PM. PM in turn forwards the same to GAH
to enable its employees (GAH Users) to log-in to the Web Based Application (https://www.ndsind.com). |
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The ‘Client Head’ is the super user at the PM end. Only ‘Client
Head’ has privileges to perform actions like create GAH users, modify users,
suspend users, unlock, log-off users, reset the login password of users, set risk
limits & take action on client bids etc. Only one user is possible in every
PM environment. |
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These are GAH employees (GAH Users) who are authorized by PM to place, modify, cancel
their bids, view status of their bids and view the limits set by the PM & along
with the current utilization. |
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These are GAH employees (GAH Users) who have been provided with ‘View only’
rights by the PM. These employees have an aggregated view of all the activities
and risk limits of all transactional users under the respective GAH. It also includes
view of issuance details and aggregate view of bidding and allocation details of
all transactional users. |
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SOL shall mean the maximum order quantity (in terms of face value) that can be placed
by the concerned user through a single order. |
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NDS-OM Web shall validate that the price/yield of every order placed by a GAH user
is within the range specified by the Primary Member vis-à-vis the last traded
price/yield for the concerned security in the specific market. |
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Primary Members shall update the Security Stock Balances for each of their GAH.
Once input, NDS-OM shall automatically update the security balances based on activity
undertaken on NDS-OM Web on the same lines as that of NDS-OM. Adequacy of available
free balances for each security shall be validated before accepting a sale order(s)
for any security. If the balance is not adequate, the respective sale order shall
be rejected. |
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Primary Members shall assign Buy and / or Sell privileges to each of the Transactional
Users of their GAH through activity control settings. |
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Funding limits for trades represent the net aggregate settlement consideration amount
up to which the concerned GAH can accumulate net long fund positions arising out
of trades concluded on NDS-OM Web. This control shall be set for every GAH at the
GAH user level. This limit constitutes a trading limit which shall get reinstated
at the beginning of every trading session for every GAH. |
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Turnover limits represent the gross amount in face value terms computed by aggregating
individual "buys" + "sells" orders inputted on behalf of a GAH
across all its users. This value is expressed in consideration terms of the underlying
security instrument and shall reflect the total aggregate value that can be undertaken
by the GAH for that trading session. This control shall be set for every GAH
at the user level. This limit constitutes a trading limit which shall get reinstated
at the beginning of every trading session for every GAH; |