Capital Management & Profit Planning

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Presentation transcript:

Capital Management & Profit Planning

Basel II Paid up capital ,Free Reserves and unallocated surpluses 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

Total Risk weighted Assets Risk weighted assets of credit risk plus 12.5* Capital requirement for market risk 12.5* capital requirement for for operational risk

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

Capital Charge for Credit Risk Standardized Approach Internal rating based approach [1]Foundation Approach [2]Advanced IRB Approach

Credit rating of sovereign Risk weight for Risk weight for banks in that country AAA TO AA 0% 20% A+ TO A 50% BBB+ TO BBB- 100% BB+ TO BB- BELOW B- 150%

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%

Capital Charge for Operational Risk The Basic Indicator Approach The Standardized Approach Advanced Management Approach

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

Asset Classification Standard Assets Sub Standard Assets Doubtful Assts Loss Assets

Provisioning Standard Assts 0.40% Substandard- Secured -provision 10% Unsecured[realisable value is not more than 10% of o/s] –provision 20%

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%

Thank you ravindran@iibf.org.in