1.1 Basel III reforms are the response of Basel Committee on Banking Supervision (BCBS) to improve the banking sector's ability to absorb sh

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1. Introduction 1.1 Basel III reforms are the response of Basel Committee on Banking Supervision (BCBS) to improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spill over from the financial sector to the real economy. During Pittsburgh summit in September 2009, the G20 leaders committed to strengthen the regulatory system for banks and other financial firms and also act together to raise capital standards, to implement strong international compensation standards aimed at ending practices that lead to excessive risk -taking, to improve the over-the-counter derivatives market and to create more powerful tools to hold large global firms to account for the risks they take. For all these reforms, the leaders set for themselves strict and precise timetables. Consequently, the Basel Committee on Banking Supervision (BCBS) released comprehensive reform package entitled "Basel III: A global regulatory framework for more resilient banks and banking systems" (known as Basel III capital regulations) in December 2010. 1.2 Basel III reforms strengthen the bank-level i.e. , micro prudential regulation, with the intention to raise the resilience of individual banking institutions in periods of stress. Besides, the reforms have a macro prudential focus also, addressing system wide risks, which can build up across the banking sector, as well as the procyclical amplification of these risks over time. These new global regulatory and supervisory standards mainly seek to raise the quality and level of capital to ensure banks are better able to absorb losses on both a going concern and a gone concern basis, increase the risk coverage of the capital framework, introduce leverage ratio to serve as a back

Rule TOC

1 · Introduction

1 · 1 Basel III reforms are the response of Basel Committee on Banking Supervision (BCBS) to improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spill over from the financial sector to the real economy. During Pittsburgh summit in September 2009, the G20 leaders committed to strengthen the regulatory system for banks and other financial firms and also act together to raise capital standards, to implement strong international compensation standards aimed at ending practices that lead to excessive risk -taking, to improve the over-the-counter derivatives market and to create more powerful tools to hold large global firms to account for the risks they take. For all these reforms, the leaders set for themselves strict and precise timetables. Consequently, the Basel Committee on Banking Supervision (BCBS) released comprehensive reform package entitled "Basel III: A global regulatory framework for more resilient banks and banking systems" (known as Basel III capital regulations) in December 2010.

1 · 2 Basel III reforms strengthen the bank-level i.e. , micro prudential regulation, with the intention to raise the resilience of individual banking institutions in periods of stress. Besides, the reforms have a macro prudential focus also, addressing system wide risks, which can build up across the banking sector, as well as the procyclical amplification of these risks over time. These new global regulatory and supervisory standards mainly seek to raise the quality and level of capital to ensure banks are better able to absorb losses on both a going concern and a gone concern basis, increase the risk coverage of the capital framework, introduce leverage ratio to serve as a backstop to the risk-based capital measure, raise the standards for the supervisory review process (Pillar 2) and public disclosures (Pillar 3) etc. The macro prudential aspects of Basel III are largely enshrined in the capital buffers. Both the buffers i.e. , the capital conservation buffer and the countercyclical buffer are intended to protect the banking sector from periods of excess credit growth.

2 · Approach to Implementation and Effective Date

2 · 1 The Basel III capital regulations continue to be based on three-mutually reinforcing Pillars, viz. minimum capital requirements, supervisory review of capital adequacy, and market discipline of the Basel II capital adequacy framework 1 . Under Pillar 1, the Basel III framework will continue to offer the three distinct options for computing capital requirement for credit risk and three other options for computing capital requirement for operational risk, albeit with certain modifications / enhancements. These options for credit and operational risks are based on increasing risk

1 · For reference, please refer to the Master Circular on Prudential Guidelines on Capital Adequacy and Market Discipline New Capital Adequacy Framework (NCAF) issued vide circular DBOD.No.BP.BC.4/21.06.001/2015-16 dated July 1, 2015 .

2 · 2 Keeping in view the Reserve Bank's goal to have consistency and harmony with international standards, it was decided in 2007 that all commercial banks in India (excluding Local Area Banks and Regional Rural Banks) should adopt Standardised Approach for credit risk, Basic Indicator Approach for operational risk by March 2009 and banks should continue to apply the Standardised Duration Approach (SDA) for computing capital requirement for market risks.

2 · 3 Banks were advised to undertake an internal assessment of their preparedness for migration to advanced approaches and take a decision with the approval of their Boards, whether they would like to migrate to any of the advanced approaches. Based on bank's internal assessment and its preparation, a bank may choose a suitable date to apply for implementation of advanced approach. Besides, 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, and it would not be necessary to adopt the advanced approaches for all the risk categories simultaneously. However, banks should invariably obtain prior approval of the RBI for adopting any of the advanced approaches.

2 · 4 Effective Date: The Basel III capital regulations were implemented in India with effect from April 1, 2013 and have been fully implemented as on October 1, 2021. Banks have to comply with the regulatory limits and minima as prescribed under Basel III capital regulations, on an ongoing basis.

3 · Scope of Application of Capital Adequacy Framework

3 · 1 A bank shall comply with the capital adequacy ratio requirements at two levels:

2 · In terms of guidelines on preparation of consolidated prudential reports issued vide circular DBOD. No.BP.BC.72/21.04.018/ 2001 -02 dated February 25, 2003, a consolidated bank may exclude group companies which are engaged in insurance business and businesses not pertaining to financial services. A consolidated bank should maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) as applicable to a bank on an ongoing basis. Please also refer to circular DBOD.No.FSD.BC.46/24.01.028/2006 -07 dated December 12, 2006 .

3 · 2 For the purpose of these guidelines, the subsidiary is an enterprise that is controlled by another enterprise (known as the parent). Banks will follow the definition of 'control' as given in the applicable accounting standards.

3 · 3 The components, elements and eligibility criteria of the regulatory capital instruments for foreign banks operating in India under the Wholly Owned Subsidiary (WOS) model would be as applicable to the other domestic banks as stipulated in this Master Circular. The WOS shall meet the Basel III requirements on a continuous basis from the time of its entry / conversion. WOS shall, however, maintain a minimum capital adequacy ratio, on a continuous basis for an initial period of three years from the commencement of its operations, at 10 per cent. In addition, the WOS shall maintain the Capital Conservation Buffer and other buffers as applicable 3 .

3 · 4 Capital Adequacy at Group / Consolidated Level

3 · 4.1 All banking and other financial subsidiaries except subsidiaries engaged in insurance and any non -financial activities (both regulated and unregulated) should be fully consolidated for the purpose of capital adequacy. This would ensure assessment of capital adequacy at the group level, taking into account the risk profile of assets and liabilities of the consolidated subsidiaries.

3 · 4.2 The insurance and non -financial subsidiaries / joint ventures / associates etc. of a bank should not be consolidated for the purpose of capital adequacy. The equity and other regulatory capital investments in the insurance and non-financial subsidiaries will be deducted from consolidated regulatory capital of the group. Equity and other regulatory capital investments in the unconsolidated insurance and non -financial entities of banks (which also include joint ventures / associates of the parent bank) will be treated in terms of paragraphs 4.4.9 and 5.13.6 respectively.

3 · 4.3 All regulatory adjustments indicated in paragraph 4.4 are required to be made to the consolidated capital of the banking group as indicated therein.

3 · . 4.4 Minority interest (i.e. , non-controlling interest) and other capital issued out of consolidated subsidiaries as per paragraph 3.4.1 that is held by third parties will be recognized in the consolidated regulatory capital of the group subject to certain conditions as stipulated in paragraph 4.3.

3 · Please refer to the Framework for setting up of Wholly Owned Subsidiaries by Foreign Banks in India dated November 6, 2013 .

3 · 4.5 Banks should ensure that majority owned financial entities that are not consolidated for capital purposes and for which the investment in equity and other instruments eligible for regulatory capital status is deducted, meet their respective regulatory capital requirements. In case of any shortfall in the regulatory capital requirements in the unconsolidated entity, the shortfall shall be fully deducted from the Common Equity Tier 1 capital.

3 · 4.6 It is clarified that group/ consolidated level capital adequacy would also mean application of consolidated capital adequacy norms to the Non -Operative Financial Holding Company (NOFHC) after consolidating the relevant entities held by it in terms of paragraph 3.1(a) above, in conjunction with the Guidelines for consolidated accounting and other quantitative methods to facilitate consolidated supervision issued vide circular dated DBOD.No.BP.BC.72 /21.04.018/2001 -02 dated February 25, 2003 4 .

3 · 4.7 Banks may refer to Annex 19 for guidelines on general permission for infusion of capital in overseas banking centres and retention/ repatriation/ transfer of profits in these centres.

3 · 5 Capital Adequacy at Solo Level

3 · 5.1 While assessing the capital adequacy of a bank at solo level, all regulatory adjustments indicated in paragraph 4.4 are required to be made. In addition, investments in the capital instruments of the subsidiaries, which are consolidated in the consolidated financial statements of the group, shall be deducted from the corresponding capital instruments issued by the bank.

3 · 5.2 In case of any shortfall in the regulatory capital requirements in the unconsolidated entity (e.g. , insurance subsidiary), the shortfall shall be fully deducted from the Common Equity Tier 1 capital.

4 · Composition of Regulatory Capital

4 · 1 General

4 · Please refer circular no. DBR.No.BP.BC.57/21.06.201/2015 -16 dated November 19, 2015 on Non-Operative Financial Holding Company (NOFHC) – Application of Capital Adequacy Norms.

4 · 2 Elements of Regulatory Capital and the Criteria for their Inclusion in the Definition of Regulatory Capital

4 · 2.1 Components of Capital

4 · 2.2 Limits and Minima

5 · From regulatory capital perspective, going-concern capital is the capital which can absorb losses without triggering bankruptcy of the bank. Gone-concern capital is the capital which will absorb losses only in a situation of liquidation of the bank.

4 · 2.3 Common Equity Tier 1 Capital

4 · 2.3.1 Common Equity – Indian Banks

6 · The CCB of 2.5% of RWAs has been fully phased in from October 1, 2021.

7 · Please refer to Master Direction -Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 dated September 12, 2023. It is also clarified that any negative balance in the AFS reserve shall be deducted from CET1 capital.

4 · 2.3.2 Common Equity Tier 1 Capital – Foreign Banks’ Branches

8 · Please refer to Master Direction -Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 dated September 12, 2023. It is also clarified that any negative balance in the AFS reserve shall be deducted from CET1 capital.

9 · Revaluation reserves which do not qualify as CET1 capital shall also not qualify as Tier 2 capital. The bank may choose to reckon revaluation reserves in CET1 capital or Tier 2 capital at its discretion, subject to fulfilment of all the conditions specified in paragraph 4.2.3.1.A (vi).

4 · 2.4 Additional Tier 1 Capital

4 · 2.4.1 Additional Tier 1 Capital – Indian Banks

10 · Please refer to the circular DBOD.No.BP.BC.28/21.06.001/2012 -13 dated July 9, 2012 on 'Treatment of Head Office Debit Balance -Foreign Banks'.

4 · 2.4.2 Elements and Criteria for Additional Tier 1 Capital – Foreign Banks’ Branches

4 · 2.5 Elements of Tier 2 Capital

4 · 2.5.1 Tier 2 Capital - Indian Banks

11 · Banks will continue to have the option to net off such provisions from Gross NPAs to arrive at Net NPA or reckoning it as part of their Tier 2 capital as per circular DBOD.NO.BP.BC 33/21.04.048/2009-10 dated August 27, 2009 .

12 · Please refer to Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022 issued vide DOR.MRG.REC.76/00 -00 -007/2022 -23 dated October 11, 2022 .

13 · Please refer to circular DBOD.No.BP.BC.87/21.04.048/2010 -11 dated April 21, 2011 on provisioning coverage ratio (PCR) for advances.

14 · Please refer to clause 37 of the Master Direction DOR.MRG.36/21.04.141/2023 -24 dated September 12, 2023 titled 'Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023'.

4 · 2.5.2 Tier 2 Capital – Foreign Banks’ Branches

4 · 3 Recognition of Minority Interest (i.e. , Non -Controlling Interest) and Other Capital Issued out of Consolidated Subsidiaries that is Held by Third Parties

4 · 3.1 Under Basel III, the minority interest is recognised only in cases where there is considerable explicit or implicit assurance that the minority interest which is supporting the risks of the subsidiary would be available to absorb the losses at the consolidated level. Accordingly,

4 · 3.2 Treatment of Minority Interest Corresponding to Common Shares Issued by Consolidated Subsidiaries

4 · 3.3 Treatment of Minority Interest Corresponding to Tier 1 Qualifying Capital Issued by Consolidated Subsidiaries

15 · For the purposes of this paragraph, All India Financial Institutions, Non-banking Financial Companies regulated by RBI and Primary Dealers will be considered to be a bank

4 · 3.4 Treatment of Minority Interest Corresponding to Tier 1 Capital and Tier 2 Capital Qualifying Capital Issued by Consolidated Subsidiaries

4 · 3.5 An illustration of calculation of minority interest and other capital issued out of consolidated subsidiaries that is held by third parties is furnished in Annex 16 .

4 · 4 Regulatory Adjustments / Deductions

4 · 4.1 Goodwill and all Other Intangible Assets

4 · 4.2 Deferred Tax Assets (DTAs) 16

16 · Please refer to paragraph 2.3 of circular no. DBR.No.BP.BC.83/21.06.201/2015-16 dated March 1, 2016 on Master Circular – – Basel III Capital Regulations – Revision.

4 · 4.3 Cash Flow Hedge Reserve

4 · 4.4 Shortfall of the Stock of Provisions to Expected Losses

4 · 4.5 Gain -on-Sale Related to Securitisation Transactions , Unrealised Profits Arising because of Transfer of Loans, and Security Receipts (SRs) guaranteed by the Government of India

4 · 4.6 Cumulative Gains and Losses due to Changes in Own Credit Risk on Fair Valued Financial Liabilities

4 · 4.7 Defined Benefit Pension Fund 17 Assets and Liabilities

17 · It includes other defined employees' funds also.

4 · 4.8 Investments in Own Shares (Treasury Stock)

4 · 4.9 Investments in the Capital of Banking, Financial and Insurance Entities 19

4 · 4.9.1 Limits on a Bank's Investments in the Capital of Banking, Financial and Insurance Entities

18 · In terms of Securities and Exchange Board of India (Mutual Funds) Regulations 1996, no mutual fund under all its schemes should own more than ten per cent of any company's paid up capital carrying voting rights.

19 · These rules will be applicable to a bank's equity investments in other banks and financial entities, even if such investments are exempted from 'capital market exposure' limit.

4 · 4.9.2 Treatment of a Bank's Investments in the Capital Instruments Issued by Banking, Financial and Insurance Entities within Limits

20 · For this purpose, investments may be reckoned at values according to their classification in terms of Master Direction -Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 dated September 12, 2023 .

21 · Indirect holdings are exposures or part of exposures that, if a direct holding loses its value, will result in a loss to the bank substantially equivalent to the loss in the value of direct holding.

22 · If the investment is issued out of a regulated financial entity and not included in regulatory capital in the relevant sector of the financial entity, it is not required to be deducted.

23 · Investments in entities that are outside of the scope of regulatory consolidation refers to investments in entities that have not been consolidated at all or have not been consolidated in such a way as to result in their assets being included in the calculation of consolidated risk -weighted assets of the group.

24 · An affiliate of a bank is defined as a company that controls, or is controlled by, or is under common control with, the bank. Control of a company is defined as (1) ownership, control, or holding with power to vote 20% or more of a class of voting securities of the company; or (2) consolidation of the company for financial reporting purposes.

25 · Indirect holdings are exposures or part of exposures that, if a direct holding loses its value, will result in a loss to the bank substantially equivalent to the loss in the value of direct holding.

26 · If the investment is issued out of a regulated financial entity and not included in regulatory capital in the relevant sector of the financial entity, it is not required to be deducted.

4 · 4.9.3 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 as mentioned in paragraphs 4.4.9.2(B) and 4.4.9.2(C) above, the following rules may be observed:

4 · 4.9.4 Application of these rules at consolidated level would mean:

4 · 4.9.5 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 shall not be considered as regulatory capital for the purpose of capital adequacy.

4 · 4.10 As indicated in paragraphs 3.4.2 and 3.5.1, equity investments in non-financial subsidiaries should be fully deducted from the consolidated and solo CET1 capital of the bank respectively, after making all the regulatory adjustments as indicated in above paragraphs.

4 · 4.11 Intra Group Transactions and Exposures

4 · 4.12 The net unrealised gains arising on fair valuation of Level 3 financial instruments recognised in the Profit and Loss Account or in the AFS-Reserve shall be deducted from CET 1 capital 27 .

4 · 5 Transitional Arrangements

4 · 5.1 Capital instruments , which no longer qualified as non-common equity Tier 1 capital or Tier 2 capital , were phased out beginning January 1, 2013 , and completely derecognised from regulatory capital by March 31, 2022 .

4 · 5.2 Non -common equity regulatory capital instruments, issued on or after January 1, 2013 , must comply with all the eligibility criteria , including the non-viability criteria , in order to be an eligible regulatory capital instrument (Additional Tier 1 or Tier 2 capital). Otherwise, such instrument will be fully derecognised as eligible capital instrument.

4 · 5.3 Capital instruments , which do not meet the criteria for inclusion in Common Equity Tier 1 , were excluded from Common Equity Tier 1 as on April 1, 2013.

27 · Please refer to clause 28 and 41 of Master Direction -Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 dated September 12, 2023 .

5 · Capital Charge for Credit Risk

5 · 1 General

5 · 2 Claims on Domestic Sovereigns

5 · 2.1 Both fund based and non -fund based claims on the central government will attract a zero risk weight. Central Government guaranteed claims will attract a zero risk weight.

5 · 2.2 The Direct loan / credit / overdraft exposure, if any, of banks to the State Governments and the investment in State Government securities will attract zero risk weight. State Government guaranteed claims will attract 20 per cent risk weight.

5 · 2.3 The risk weight applicable to claims on central government exposures will also apply to the claims on the Reserve Bank of India, DICGC, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) and individual schemes under National Credit Guarantee Trustee Company Ltd. (NCGTC) which are backed by explicit Central Government Guarantee. The claims on ECGC will attract a risk weight of 20 per cent.

5 · 2.4 The risk weight of zero percent as mentioned in para 5.2.3 above shall be applicable in respect of exposures guaranteed under any existing or future schemes launched by CGTMSE, CRGFTLIH and NCGTC satisfying the following conditions 28 :

28 · Please refer to the circular DOR.STR.REC.67/21.06.201/2022 -23 dated September 7, 2022 on Review of Prudential Norms – – Risk Weights for Exposures guaranteed by Credit Guarantee Schemes (CGS) .

5 · 2.5 The above risk weights for both direct claims and guarantee claims will be applicable as long as they are classified as 'standard' / performing assets. Where these sovereign exposures are classified as non -performing, they would attract risk weights as applicable to NPAs, which are detailed in paragraph 5.12.

5 · 2.6 The above risk weights will be applied if such exposures are denominated in Indian Rupees and also funded in Indian Rupees.

5 · 3 Claims on Foreign Sovereigns and Foreign Central Banks 29

5 · 3.1 Subject to paragraph 5.3.2 below, claims on foreign sovereigns and their central banks will attract risk weights as per the rating assigned 30 to those sovereigns and central banks/ sovereign and central bank claims, by international rating agencies as follows:

5 · 3.2 Claims on the foreign sovereign or foreign central bank in their jurisdiction, denominated in the domestic currency of that jurisdiction, met out of resources of the same currency 31 will

29 · Please refer to the circular DBR.BP.BC.No.43/21.06.001/2015 -16 dated October 8, 2015 on Risk Weights for Claims on Foreign Central Banks

30 · For example: The risk weight assigned to an investment in US Treasury Bills by any overseas branch of an Indian Bank in Paris, irrespective of the currency of funding, will be determined by the rating assigned to the Treasury Bills, as indicated in Table 1 .

31 · For example: The risk weight assigned to an investment in US Treasury Bills by overseas branch of any Indian bank in New York will attract a zero per cent risk weight, irrespective of the rating of the claim, if the investment is funded from out of the USD denominated resources of that overseas branch of the Indian bank in New York. In case the

5 · 4 Claims on Public Sector Entities (PSEs)

5 · 4.1 Claims on domestic public sector entities will be risk weighted in a manner similar to claims on Corporates.

5 · 4.2 Claims on foreign PSEs will be risk weighted as per the rating assigned by the international rating agencies as under:

5 · 5 Claims on MDBs, BIS and IMF

5 · 6 Claims on Banks (Exposure to capital instruments)

5 · 6.1 In case of a banks' investment in capital instruments of other banks, the following such investments would not be deducted, but would attract appropriate risk weights (refer to the paragraph 4.4.9 above):

32 · For claims held in trading book, please see the paragraphs 8.3.4 and 8.4.4 under 'capital charge for market risk'

5 · 6.2 The claims on foreign banks will be risk weighted as under as per the ratings assigned by international rating agencies.

33 · For example, as on March 31, 2022, minimum Common Equity Tier 1 of 5.5% and CCB between equal to 75% of 2.50% and less than 2.50%.

5 · 6.3 However, the claims on a bank which are denominated in 'domestic 35 ' foreign currency met out of the resources in the same currency raised in that jurisdiction will be risk weighted at 20 per cent provided the bank complies with the minimum CRAR prescribed by the concerned bank regulator(s).

5 · 6.4 However, in case a Host Supervisor requires a more conservative treatment for such claims in the books of the foreign branches of the Indian banks, they should adopt the requirements prescribed by the Host supervisor for computing capital adequacy.

5 · 7 Claims on Primary Dealers

5 · 8 Claims on Corporates and NBFCs

5 · 8.1 Claims on corporates 36 , and exposures to all NBFCs 37 , excluding Core Investment Companies (CICs), will be risk weighted as per the ratings assigned by the rating agencies registered with SEBI and accredited by the Reserve Bank of India . Exposures to CICs, rated as

34 · Please refer to Circular DOR.No.BP.BC.43 /21.01.003/2019 -20 dated March 23, 2020 on "Large Exposures Framework"

35 · For example: A Euro denominated claim of SBI branch in Paris on BNP Paribas, Paris which is funded from out of the Euro denominated deposits of SBI, Paris will attract a 20 per cent risk weight irrespective of the rating of the claim, provided BNP Paribas complies with the minimum CRAR stipulated by its regulator/supervisor in France. If BNP Paribas were breaching the minimum CRAR, the risk weight will be as indicated in Table 3 above.

36 · Claims on corporates will include all fund based and non-fund based exposures other than those which qualify for inclusion under 'sovereign', 'bank', 'regulatory retail', 'residential mortgage', 'non performing assets', specified category addressed separately in these guidelines.

37 · Please refer to circulars DBR.BP.BC.No.25/21.06.001/2018 -19 dated February 22, 2019 on Risk Weights for exposures to NBFCs and DOR.STR.REC.61/21.06.001/2024-25 dated February 25, 2025 on Exposures of Scheduled Commercial Banks (SCBs) to Non-Banking Financial Companies (NBFCs) – Review of Risk Weights .

5 · 8.2 The Reserve Bank may increase the standard risk weight for unrated claims where a higher risk weight is warranted by the overall default experience. As part of the supervisory review

38 · Please refer to circular DOR.STR.REC.26/21.06.008/2024 -25 dated July 10, 2024 .

39 · Please refer to circular DBOD.BP.BC.No.59/21.06.007/2013 -14 dated October 17, 2013 .

5 · 8.3 The claims on non -resident corporates will be risk weighted as under as per the ratings assigned by international rating agencies.

5 · 9 Claims included in the Regulatory Retail Portfolios

5 · 9.1 Claims (including both fund-based and non-fund based) that meet all the four criteria listed below in paragraph 5.9.3 may be considered as retail claims for regulatory capital purposes and included in a regulatory retail portfolio. Claims included in this portfolio shall be assigned a riskweight of 75 per cent, except as provided in paragraph 5.12 below for non-performing assets.

5 · 9.2 The following claims, both fund based and non-fund based, shall be excluded from the regulatory retail portfolio:

5 · 9.3 Qualifying Criteria

40 · Mortgage loans qualifying for treatment as 'claims secured by residential property' are defined in paragraph 5.10.

41 · As defined in paragraph 5.11.1.

5 · 9.4 For the purpose of ascertaining compliance with the absolute threshold, exposure would mean sanctioned limit or the actual outstanding, whichever is higher, for all fund based and nonfund based facilities, including all forms of off-balance sheet exposures. In the case of term loans and EMI based facilities, where there is no scope for redrawing any portion of the sanctioned amounts, exposure shall mean the actual outstanding.

5 · 9.5 The RBI would evaluate at periodic intervals the risk weight assigned to the retail portfolio with reference to the default experience for these exposures. As part of the supervisory review process, the RBI would also consider whether the credit quality of regulatory retail claims held by individual banks should warrant a standard risk weight higher than 75 per cent.

5 · 10 Claims secured by Residential Property

5 · 10.1 Lending to individuals meant for acquiring residential property which are fully secured by mortgages on the residential property that is or will be occupied by the borrower, or that is rented, shall be risk weighted as indicated as per Table 7 below, based on Board approved valuation policy. LTV ratio should be computed as a percentage with total outstanding in the account (viz. "principal + accrued interest + other charges pertaining to the loan" without any netting) in the numerator and the realisable value of the residential property mortgaged to the bank in the denominator.

42 · Please refer to the circular no. circular no. DBR.BP.BC.No.72/08.12.015/2016 -17 dated June 7, 2017 on Individual Housing Loans: Rationalisation of Risk-Weights and Loan to Value (LTV) Ratios

43 · Please also refer to para 2 of the circular DBOD.No.BP.BC.78/08.12.001/2011-12 dated February 3, 2012 on Housing Loans by Commercial Banks – Loan to Value (LTV) Ratio and para 2 of the DBR.BP.BC.No.74/08.12.015/201415 dated March 5, 2015

1 · -The LTV ratios and Risk Weights set out in the circular DBR.BP.BC.No.44/08.12.015/2015 -16 dated October 8, 2015, shall continue to apply to loans sanctioned up to June 6, 2017 .

2 · -The LTV ratio should not exceed the prescribed ceiling in all fresh cases of sanction. In case the LTV ratio is currently above the ceiling prescribed for any reasons, efforts shall be made to bring it within limits.

3 · -Banks' exposures to third dwelling unit onwards to an individual will also be treated as CRE exposures, as indicated in paragraph 2 in Appendix 2 of Circular DBOD.BP.BC.No.42/08.12.015/2009 -10 dated September 9, 2009 on 'Guidelines on Classification of Exposures as Commercial Real Estate (CRE) Exposures'.

5 · 10.2 All other claims secured by residential property would attract the higher of the risk weight applicable to the counterparty or to the purpose for which the bank has extended finance.

5 · 10.3 Loans / exposures to intermediaries for on-lending will not be eligible for inclusion under claims secured by residential property but will be treated as claims on corporates or claims included in the regulatory retail portfolio as the case may be.

5 · 10.4 Investments in mortgage backed securities (MBS) backed by exposures as at paragraph 5.10.1 above will be governed by the guidelines pertaining to securitisation exposures 45 .

5 · 11 Claims Classified as Commercial Real Estate Exposure

5 · 11.1 Commercial Real Estate exposure is defined as per the guidelines issued vide circular DBOD.No.BP.BC.42/08.12.015/2009 -10 dated September 9, 2009 .

5 · 11.2 Claims mentioned above will attract a risk weight of 100 per cent.

44 · Please refer to circulars no. DOR.No.BP.BC.24/08.12.015/2020 -21 dated October 16, 2020 and DOR.CRE.REC.13/08.12.015/2022 -23 dated April 8, 2022 on Individual Housing Loans – Rationalisation of Risk

45 · Please refer to Master Direction – – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 dated September 24, 2021 .

5 · 11.3 Investments in mortgage backed securities (MBS) backed by exposures as at paragraph 5.11.1 above will be governed by the guidelines pertaining to securitisation exposures 46 .

5 · 12 Non -Performing Assets (NPAs)

5 · 12.1 The unsecured portion of NPA (other than a qualifying residential mortgage loan which is addressed in paragraph 5.12.6), net of specific provisions (including partial write-offs), will be riskweighted as follows:

5 · 12.2 For the purpose of computing the level of specific provisions in NPAs for deciding the riskweighting, all funded NPA exposures of a single counterparty (without netting the value of the eligible collateral) should be reckoned in the denominator.

5 · 12.3 For the purpose of defining the secured portion of the NPA, eligible collateral will be the same as recognised for credit risk mitigation purposes (paragraph 7.3.5). Hence, other forms of collateral like land, buildings, plant, machinery, current assets, etc. will not be reckoned while computing the secured portion of NPAs for capital adequacy purposes.

5 · 12.4 In addition to the above, where a NPA is fully secured by the following forms of collateral that are not recognised for credit risk mitigation purposes, either independently or along with other eligible collateral a 100 per cent risk weight may apply, net of specific provisions, when provisions reach 15 per cent of the outstanding amount:

5 · 12.5 The above collaterals (mentioned in paragraph 5.12.4) will be recognized only where the bank is having clear title to realize the sale proceeds thereof and can appropriate the same

46 · Please refer to Master Direction – – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 dated September 24, 2021 .

5 · 12.6 Claims secured by residential property, as defined in paragraph 5.10.1, which are NPA will be risk weighted at 100 per cent net of specific provisions. If the specific provisions in such loans are at least 20 per cent but less than 50 per cent of the outstanding amount, the risk weight applicable to the loan net of specific provisions will be 75 per cent. If the specific provisions are 50 per cent or more the applicable risk weight will be 50 per cent.

5 · 13 Specified Categories

5 · 13.1 Fund based and non -fund based claims on Venture Capital Funds, which are considered as high risk exposures, will attract a higher risk weight of 150 per cent.

5 · 13.2 Reserve Bank may, in due course, decide to apply a 150 per cent or higher risk weight reflecting the higher risks associated with any other claim that may be identified as a high risk exposure.

5 · 13.3 Consumer credit exposure (outstanding as well as new), including personal loans, but excluding housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery , will attract a risk weight of 125 per cent 47 . Microfinance loans that are in the nature of consumer credit and are not eligible for classification under regulatory retail under paragraph 5.9 shall be risk weighted at 100 per cent. 48 Credit card receivables will attract a higher risk weight of 150 per cent or higher, if warranted by the external rating (or, the lack of it) of the counterparty. As gold and gold jewellery are eligible financial collateral, the counterparty exposure in respect of personal loans secured by gold and gold jewellery will be worked out under the comprehensive approach as per paragraph 7.3.4. The 'exposure value after risk mitigation' shall attract the risk weight of 125 per cent. All other consumer credit exposures shall attract a risk weight of 100%, unless specified otherwise.

5 · 13.4 Advances classified as 'Capital market exposures' will attract a 125 per cent risk weight or risk weight warranted by external rating (or lack of it) of the counterparty, whichever is higher. These risk weights will also be applicable to all banking book exposures, which are exempted from capital market exposure ceilings for direct investments / total capital market exposures 49 .

5 · 13.5 The exposure to capital instruments issued by NBFCs which are not deducted and are required to be risk weighted in terms of paragraph 4.4.9.2(B) would be risk weighted at 125% or

47 · Please refer to circular -DOR.STR.REC.57/21.06.001/2023 -24 dated November 16, 2023 on Regulatory measures towards consumer credit and bank credit to NBFCs .

48 · Please refer to circular -DOR.CRE.REC.63/21.06.001/2024 -25 dated February 25, 2025 on Review of Risk Weights on Microfinance Loans .

49 · The applicable risk weight for banking book exposure / capital charge for market risk exposure for a bank's equity investments in other banks/financial institutions etc. are covered under paragraphs 5 and 8 respectively. These risk weights / capital charge will also apply to exposures which are exempt from 'capital market exposure' limit.

5 · 13.6 All investments in the paid-up equity of non-financial entities (other than subsidiaries) which exceed 10% of the issued common share capital of the issuing entity or where the entity is an unconsolidated affiliate as defined in paragraph 4.4.9.2(C)(i) will receive a risk weight of 1250%50. Equity investments equal to or below 10% paid-up equity of such investee companies shall be assigned a 125% risk weight or the risk weight as warranted by rating or lack of it, whichever higher.

5 · 13.7 The exposure to capital instruments issued by financial entities (other than banks and NBFCs) which are not deducted and are required to be risk weighted in terms of paragraph 4.4.9.2(B) would be risk weighted at 125% or as per the external ratings whichever is higher. The exposure to equity instruments issued by financial entities (other than banks and NBFCs) which are not deducted and are required to be risk weighted in terms of paragraph 4.4.9.2(C) would be risk weighted at 250%.

5 · 13.8 Bank's investments in the non -equity capital eligible instruments of other banks should be risk weighted as prescribed in paragraph 5.6.1.

5 · 13.9 Unhedged Foreign Currency Exposure 51

50 · Equity investments in non-financial subsidiaries will be deducted from the consolidated / solo bank capital as indicated in paragraphs 3.4.2 / 3.5.1.

51 · Please refer to Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022 issued vide DOR.MRG.REC.76/00 -00 -007/2022 -23 dated October 11, 2022 .

52 · In this context, 'entities' means those entities which have borrowed from banks including borrowing in INR and other currencies.

53 · For example: for an entity which otherwise attracts a risk weight of 50 per cent, the applicable risk weight would become 75 per cent.

5 · 13.10 Guidelines on Enhancing Credit Supply for Large Borrowers through Market Mechanism

5 · 14 Other Assets

5 · 14.1 Loans and advances to bank's own staff which are fully covered by superannuation benefits and/or mortgage of flat/ house will attract a 20 per cent risk weight. Since flat / house is not an eligible collateral and since banks normally recover the dues by adjusting the superannuation benefits only at the time of cessation from service, the concessional risk weight shall be applied without any adjustment of the outstanding amount. In case a bank is holding eligible collateral in respect of amounts due from a staff member, the outstanding amount in respect of that staff member shall be adjusted to the extent permissible, as indicated in paragraph 7 below.

5 · 14.2 Other loans and advances to bank's own staff will be eligible for inclusion under regulatory retail portfolio and will therefore attract a 75 per cent risk weight.

5 · 14.3 All other assets will attract a uniform risk weight of 100 per cent.

5 · 15 Off -Balance Sheet Items

5 · 15.1 General

54 · 'Specified borrower', means a borrower having an Aggregate Sanctioned Credit Limit (ASCL) of more than Rs.10,000 crore at any time from April 1, 2019 onwards.

55 · Normally permitted lending limit (NPLL), means 50 percent of the incremental funds raised by the specified borrower over and above its Aggregate Sanctioned Credit Limit as on the reference date, in the financial years (FYs) succeeding the FY in which the reference date falls. For this purpose, any funds raised by way of equity shall be deemed to be part of incremental funds raised by the specified borrower (from outside the banking system) in the given year; Provided that where a specified borrower has already raised funds by way of market instruments and the amount outstanding in respect of such instruments as on the reference date is 15 per cent or more of ASCL on that date, the NPLL will mean 60 percent of the incremental funds raised by the specified borrower over and above its ASCL as on the reference date, in the financial years (FYs) succeeding the FY in which the reference date falls.

5 · 15.2 Non -market -related Off Balance Sheet Items 56

56 · The aggregate capital required to be maintained by the banks providing Partial Credit Enhancement will be computed as provided in circular DBR.BP.BC.No.40/21.04.142/2015-16 dated September 24, 2015, as amended from time to time.

57 · For example: (a) In the case of a cash credit facility for Rs.100 lakh (which is not unconditionally cancellable) where the drawn portion is Rs. 60 lakh, the undrawn portion of Rs. 40 lakh will attract a CCF of 20 per cent (since the CC facility is subject to review / renewal normally once a year). The credit equivalent amount of Rs. 8 lakh (20% of Rs.40 lakh) will be assigned the appropriate risk weight as applicable to the counterparty / rating to arrive at the risk weighted asset for the undrawn portion. The drawn portion (Rs. 60 lakh) will attract a risk weight as applicable to the counterparty / rating.

58 · However, this will be subject to banks demonstrating that they are actually able to cancel any undrawn commitments in case of deterioration in a borrower's credit worthiness failing which the credit conversion factor applicable to such facilities which are not cancellable will apply. Banks' compliance to these guidelines will be assessed under Supervisory Review and Evaluation Process under Pillar 2 of RBI.

59 · Please refer to the circular DBR.BP.BC.No.12/21.04.048/2018 -19 dated December 5, 2018 on 'Guidelines on Loan System for Delivery of Bank Credit'.

60 · Please refer to the circular DBOD.No.BP.BC.89 /21.04.009 /2012 -13 dated April 02, 2013 on 'New Capital Adequacy Framework -Non -market related Off Balance Sheet Items -Bank Guarantees'.

5 · 15.3 Treatment of Total Counterparty Credit Risk

5 · 15.3.1 The total capital charge for counterparty credit risk will cover the default risk as well as credit migration risk of the counterparty reflected in mark-to-market losses on the expected counterparty risk (such losses being known as credit value adjustments, CVA). Counterparty risk may arise in the context of OTC derivatives and Securities Financing Transactions. Such instruments generally exhibit the following abstract characteristics:

5 · 15.3.2 Definitions and general terminology

61 · Please refer to circular DBOD.No.BP.BC.28/21.06.201/2013 -14 dated July 2, 2013 .

62 · For the purpose of these guidelines, where a CCP has a link to a second CCP, that second CCP is to be treated as a clearing member of the first CCP. Whether the second CCP's collateral contribution to the first CCP is treated as initial margin or a default fund contribution will depend upon the legal arrangement between the CCPs. In such cases, if any, RBI should be consulted for determining the treatment of this initial margin and default fund contributions.

63 · For the purpose of this definition, the current exposure of a clearing member includes the variation margin due to the clearing member but not yet received.

5 · 15.3.3 When entering into bilateral OTC derivative transactions, banks are required to hold capital to protect against the risk that the counterparty defaults and for credit valuation adjustment (CVA) risk. The CVA charge is introduced as part of the Basel III framework as explained in paragraphs 5.15.3.4 and 5.15.3.5 below.

5 · 15.3.4 Default Risk Capital Charge for CCR

64 · For 'sold options' (outside netting and margin agreements) where the premium / fee or any other form of income is not fully received / realised, the add-on will be capped to the amount of unpaid premia.

65 · Please refer to paragraph 8.6.3 for credit default swaps

5 · 15.3.5 Capitalisation of mark-to-market counterparty risk losses (CVA capital charge)

66 · Banks must calculate NGR on a counterparty by counterparty basis for all transactions that are subject to legally enforceable netting agreements.

5 · 15.3.6 Calculation of the Aggregate CCR and CVA Risk Capital Charges

67 · Please refer to the revised version of Basel III capital rules (bcbs189.doc) issued by the BCBS vide press release on June 1, 2011.

5 · 15.3.7 Capital requirement for exposures to Central Counterparties (CCPs)

68 · Please refer to the circular DBOD.No.BP.BC.88/21.06.201/2012 -13 dated March 28, 2013 on 'Implementation of Basel III Capital Regulations in India – Clarifications', read with circular DBOD.No.BP.BC.81/21.06.201/2013-14 dated December 31, 2013 in terms of which the requirements for CVA risk capital charges would become effective as on April 1, 2014.

5 · 15.3.8 Exposures to Qualifying CCPs (QCCPs)

69 · Please refer to paragraph 7.3.8 of this Master Circular.

70 · It is clarified that the trade exposure (i.e., both replacement cost and potential future exposure) can be computed on net basis, provided other conditions stated in paragraph 5.15.3.8 are met.

71 · Please refer to Guidelines on Implementation of Basel III Capital Regulations in India - Clarifications (Circular DBOD.No.BP.BC.88/21.06.201/2012 -13 dated March 28, 2013 read with circular DBOD.No.BP.BC.81/21.06.201/2013 -14 dated December 31, 2013) in terms of which CVA risk capital charges would

72 · Where the entity holding such assets or collateral is the QCCP, a risk-weight of 2% applies to collateral included in the definition of trade exposures. The relevant risk-weight of the QCCP will apply to assets or collateral posted for other purposes

73 · In this paragraph, the word "custodian" may include a trustee, agent, pledgee, secured creditor or any other person that holds property in a way that does not give such person a beneficial interest in such property and will not result in such property being subject to legally-enforceable claims by such persons, creditors, or to a court-ordered stay of the return of such property, should such person become insolvent or bankrupt.

5 · 15.3.9 Exposures to Non-qualifying CCPs

74 · The 2% risk weight on trade exposures does not apply additionally, as it is included in the equation.

75 · In cases where a CCP is to be considered as non -QCCP and the exposure is to be reckoned on CCP, the applicable risk weight will be according to the ratings assigned to the CCPs.

5 · 15.4 Failed Transactions

5 · 16 Securitisation Exposures

5 · 16.1 The treatment of securitisation exposures for capital adequacy has been specified in the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 76 . As specified under clause 4 of Master Direction ibid, these directions, including those under chapter VI ibid, will be applicable to securitisation transactions undertaken subsequent to the issue of these directions.

5 · 16.2 For transactions undertaken before issuance of the afore mentioned directions, i.e., prior to September 24, 2021 , the treatment of securitisation exposures for capital adequacy would be as per the guidelines issued vide circular no. DBOD.NO.BP.BC.60 / 21.04.048/2005-06 dated February 1, 2006 , as amended from time to time , and as consolidated in para 5.16 of Master Circular no. DBR.No.BP.BC.1/21.06.201/2015 -16 on Basel III Capital Regulations dated July 1, 2015 .

5 · 17 Capital Adequacy Requirement for Credit Default Swap (CDS) Positions in the Banking Book

5 · 17.1 Recognition of External / Third-party CDS Hedges

5 · 17.1.1 In case of Banking Book positions hedged by bought CDS positions, no exposure will be reckoned against the reference entity / underlying asset in respect of the hedged exposure, and exposure will be deemed to have been substituted by the protection seller, if the following conditions are satisfied:

76 · Master Direction no. DOR.STR.REC.53/21.04.177/2021 -22 dated September 24, 2021 .

5 · 17.1.2 If the conditions 5.17.1.1 (a) and (b) above are not satisfied or the bank breaches any of these conditions subsequently, the bank shall reckon the exposure on the underlying asset; and the CDS position will be transferred to Trading Book where it will be subject to specific risk, counterparty credit risk and general market risk (wherever applicable) capital requirements as applicable to Trading Book.

5 · 17.1.3 The unprotected portion of the underlying exposure should be risk-weighted as applicable under the Standardised Approach for credit risk. The amount of credit protection shall be adjusted if there are any mismatches between the underlying asset/ obligation and the reference / deliverable asset / obligation with regard to asset or maturity. These are dealt with in detail in the following paragraphs.

5 · 17.2 Internal Hedges

6 · External Credit Assessments

6 · 1 Eligible Credit Rating Agencies

6 · 1.1 Reserve Bank has undertaken the detailed process of identifying the eligible credit rating agencies, whose ratings may be used by banks for assigning risk weights for credit risk. In line with the provisions of the Revised Framework 77 , where the facility provided by the bank possesses

77 · Please refer to the Document 'International Convergence of Capital Measurement and Capital Standards' (June 2006) released by the Basel Committee on Banking Supervision.

6 · 1.2 Banks may use the ratings of the following domestic credit rating agencies (arranged in alphabetical order) for the purposes of risk weighting their claims for capital adequacy purposes:

6 · 1.3 The Reserve Bank of India has decided that banks may use the ratings of the following international credit rating agencies (arranged in alphabetical order) for the purposes of risk weighting their claims for capital adequacy purposes where specified:

6 · 2 Scope of Application of External Ratings

6 · 2.1 Banks should use the chosen credit rating agencies and their ratings consistently for each type of claim, for both risk weighting and risk management purposes. Banks will not be allowed to "cherry pick" the assessments provided by different credit rating agencies and to arbitrarily change the use of credit rating agencies. If a bank has decided to use the ratings of some of the chosen credit rating agencies for a given type of claim, it can use only the ratings of those credit rating agencies, despite the fact that some of these claims may be rated by other chosen credit rating agencies whose ratings the bank has decided not to use. Banks shall not use one agency's rating for one corporate bond, while using another agency's rating for another exposure to the same counterparty, unless the respective exposures are rated by only one of the chosen credit rating agencies, whose ratings the bank has decided to use. External assessments for one entity within a corporate group cannot be used to risk weight other entities within the same group .

6 · 2.2 Banks must disclose the names of the credit rating agencies that they use for the risk weighting of their assets, the risk weights associated with the particular rating grades as

78 · Please refer to circular DBOD.BP.BC.No.59/21.06.007/2013 -14 dated October 17, 2013 .

79 · Please refer to circular DOR.STR.REC.26/21.06.008/2024 -25 dated July 10, 2024 .

80 · Please refer to circular DOR.No.CRE.BC.33/21.06.007/2020 -21 dated January 27, 2021 .

81 · Please refer to circular DBR.No.BP.BC.74/21.06.009/2016 -17 dated June 13, 2017. The rating-risk weight mapping for the long term and short term ratings assigned by INFOMERICS will be the same as in case of other rating agencies.

6 · 2.3 To be eligible for risk-weighting purposes, the external credit assessment must take into account and reflect the entire amount of credit risk exposure the bank has with regard to all payments owed to it. For example, if a bank is owed both principal and interest, the assessment must fully take into account and reflect the credit risk associated with timely repayment of both principal and interest.

6 · 2.4 To be eligible for risk weighting purposes, the rating should be in force and confirmed from the monthly bulletin of the concerned rating agency. The rating agency should have reviewed the rating at least once during the previous 15 months.

6 · 2.5 An eligible credit assessment must be publicly available. In other words, a rating must be published in an accessible form and included in the external credit rating agency's transition matrix. Consequently, ratings that are made available only to the parties to a transaction do not satisfy this requirement.

6 · 2.6 For assets in the bank's portfolio that have contractual maturity less than or equal to one year, short term ratings accorded by the chosen credit rating agencies would be relevant. For other assets which have a contractual maturity of more than one year, long term ratings accorded by the chosen credit rating agencies would be relevant.

6 · 2.7 Cash credit exposures tend to be generally rolled over and also tend to be drawn on an average for a major portion of the sanctioned limits. Hence, even though a cash credit exposure may be sanctioned for period of one year or less, these exposures should be reckoned as long term exposures and accordingly the long term ratings accorded by the chosen credit rating agencies will be relevant. Similarly, banks may use long-term ratings of a counterparty as a proxy for an unrated short -term exposure on the same counterparty subject to strict compliance with the requirements for use of multiple rating assessments and applicability of issue rating to issuer / other claims as indicated in paragraphs 6.4, 6.5, 6.7 and 6.8 below.

6 · 3 Mapping Process

6 · 4 Long Term Ratings

6 · 4.1 On the basis of the above factors as well as the data made available by the rating agencies, the ratings issued by the chosen domestic credit rating agencies have been mapped to the appropriate risk weights applicable as per the Standardised approach under the Revised Framework. The rating-risk weight mapping furnished in the Table 10 below shall be adopted by all banks in India:

6 · 4.2 Where "+" or " -" notation is attached to the rating, the corresponding main rating category risk weight should be used. For example, A+ or A- would be considered to be in the A rating category and assigned 50 per cent risk weight.

6 · 4.3 If an issuer has a long-term exposure with an external long term rating that warrants a risk weight of 150 per cent, all unrated claims on the same counter-party, whether short-term or longterm, should also receive a 150 per cent risk weight, unless the bank uses recognised credit risk mitigation techniques for such claims.

6 · 5 Short Term Ratings

6 · 5.1 For risk -weighting purposes, short-term ratings are deemed to be issue-specific. They can only be used to derive risk weights for claims arising from the rated facility. They cannot be generalised to other short-term claims. In no event can a short-term rating be used to support a

82 · Please refer to circular DOR.STR.REC.26/21.06.008/2024 -25 dated July 10, 2024 .

6 · 5.2 Notwithstanding the above restriction on using an issue specific short term rating for other short term exposures, the following broad principles will apply. The unrated short term claim on counterparty will attract a risk weight of at least one level higher than the risk weight applicable to the rated short term claim on that counter -party. If a short-term rated facility to counterparty attracts a 20 per cent or a 50 per cent risk-weight, unrated short-term claims to the same counterparty cannot attract a risk weight lower than 30 per cent or 100 per cent respectively.

6 · 5.3 Similarly, if an issuer has a short-term exposure with an external short term rating that warrants a risk weight of 150 per cent, all unrated claims on the same counter-party, whether long-term or short-term, should also receive a 150 per cent risk weight, unless the bank uses recognised credit risk mitigation techniques for such claims.

6 · 5.4 In respect of the issue specific short term ratings the following risk weight mapping shall be adopted by banks:

6 · 5.5 Where "+" or " -" notation is attached to the rating, the corresponding main rating category risk weight should be used for A2 and below, unless specified otherwise. For example, A2+ or A2 -would be considered to be in the A2 rating category and assigned 50 per cent risk weight.

83 · Please refer to circular DOR.STR.REC.26/21.06.008/2024 -25 dated July 10, 2024 .

6 · 5.6 The above risk weight mapping of both long term and short term ratings of the chosen domestic rating agencies would be reviewed annually by the Reserve Bank.

6 · 6 Use of Unsolicited Ratings

6 · 7 Use of Multiple Rating Assessments

6 · 8 Applicability of ‘Issue Rating’ to issuer/ other claims

6 · 8.1 Where a bank invests in a particular issue that has an issue specific rating by a chosen credit rating agency the risk weight of the claim will be based on this assessment. Where the bank's claim is not an investment in a specific assessed issue, the following general principles will apply:

84 · In a case where a short term claim on a counterparty is rated as A1+ and a long term claim on the same counterparty is rated as AAA, then a bank may assign a 30 per cent risk weight to an unrated short term claim and 20 per cent risk weight to an unrated long term claim on that counterparty where the seniority of the claim ranks

85 · Please refer circular no. DOR.STR.REC.71/21.06.201/2022 -23 dated October 10, 2022 on Review of Prudential Norms – – Risk Weights for Exposures to Corporates and NBFCs .

6 · 8.2 If the conditions indicated in paragraph 6.8.1 above are not satisfied, the rating applicable to the specific debt cannot be used and the claims on NABARD/SIDBI/NHB 86 on account of deposits placed in lieu of shortfall in achievement of priority sector lending targets/sub-targets shall be risk weighted as applicable for unrated claims, i.e. , 100%.

7 · Credit Risk Mitigation

7 · 1 General Principles

7 · 1.1 Banks use a number of techniques to mitigate the credit risks to which they are exposed. For example, exposures may be collateralised in whole or in part by cash or securities, deposits from the same counterparty, guarantee of a third party, etc. Credit risk mitigation approach as detailed in this section is applicable to the banking book exposures. This will also be applicable for calculation of the counterparty risk charges for OTC derivatives and repo-style transactions booked in the trading book.

7 · 1.2 The general principles applicable to use of credit risk mitigation techniques are as under:

86 · Please refer to the circular DBOD.BP.BC.No.103/21.06.001/2012 -13 dated June 20, 2013 on 'Risk Weights on Deposits Placed with NABARD / SIDBI / NHB in lieu of Shortfall in Achievement of Priority Sector Lending Targets / Sub -targets'.

7 · 2 Legal Certainty

7 · 3 Credit Risk Mitigation Techniques - Collateralised Transactions

7 · 3.1 A Collateralised Transaction is one in which:

7 · 3.2 Overall framework and minimum conditions

7 · 3.3 A capital requirement will be applied to a bank on either side of the collateralised transaction: for example, both repos and reverse repos will be subject to capital requirements. Likewise, both sides of securities lending and borrowing transactions will be subject to explicit capital charges, as will the posting of securities in connection with a derivative exposure or other borrowing.

7 · 3.4 The Comprehensive Approach

7 · 3.5 Eligible Financial Collateral

87 · A debenture would meet the test of liquidity if it is traded on a recognised stock exchange(s) on at least 90 per cent of the trading days during the preceding 365 days. Further, liquidity can be evidenced in the trading during the previous one month in the recognised stock exchange if there are a minimum of 25 trades of marketable lots in securities of each issuer.

7 · 3.6 Calculation of capital requirement

88 · As mentioned in the referenced circular, the amount so held shall not be included in regulatory capital. (i.e., no double counting of the fund placed under Section 11(2) as both capital and CRM). Accordingly, while assessing the capital adequacy of a bank, the amount will form part of regulatory adjustments made to Common Equity Tier 1 Capital.

7 · 3.7 Haircuts

89 · Holding period will be the time normally required by the bank to realise the value of the collateral.

90 · Including those backed by securities issued by foreign sovereigns and foreign corporates.

91 · In terms of Reserve Bank of India (Government Securities Lending) Directions, 2023 dated December 27, 2023 .

7 · 3.8 Capital Adequacy Framework for Repo-/Reverse Repo-style transactions.

7 · 3.8.1 The repo-style transactions also attract capital charge for Counterparty credit risk (CCR), in addition to the credit risk and market risk. The CCR is defined as the risk of default by the counterparty in a repo-style transaction, resulting in non-delivery of the security lent/pledged/sold or non-repayment of the cash.

7 · 3.8.2 The formula in paragraph 7.3.6 will be adapted as follows to calculate the capital requirements for transactions with bilateral netting agreements. The bilateral netting agreements must meet the requirements set out in Annex 18 (part A) of these guidelines.

7 · 3.9 Collateralised OTC derivatives transactions

7 · 4 Credit Risk Mitigation Techniques – On-Balance Sheet Netting

7 · 5 Credit Risk Mitigation Techniques - Guarantees

7 · 5.1 Where guarantees are direct, explicit, irrevocable and unconditional banks may take account of such credit protection in calculating capital requirements.

7 · 5.2 A range of guarantors are recognised and a substitution approach will be applied. Thus , only guarantees issued by entities with a lower risk weight than the counterparty will lead to reduced capital charges since the protected portion of the counterparty exposure is assigned the risk weight of the guarantor, whereas the uncovered portion retains the risk weight of the underlying counterparty.

7 · 5.3 Detailed operational requirements for guarantees eligible for being treated as a CRM are as under:

7 · 5.4 Operational requirements for guarantees

7 · 5.5 Additional operational requirements for guarantees

7 · 5.6 Range of Eligible Guarantors (Counter-Guarantors)

7 · 5.7 Risk Weights

7 · 5.7.1 The protected portion is assigned the risk weight of the protection provider. Exposures covered by State Government guarantees will attract a risk weight of 20 per cent. The uncovered portion of the exposure is assigned the risk weight of the underlying counterparty subject to conditions stipulated in paragraph 7.5.7.2 .

7 · 5.7.2 As per para 7.13 of Circular No.DBR.No.BP.BC.43/21.01.003/2018-19 dated June 03, 2019 on Large Exposures Framework, any CRM instrument from which CRM benefits like shifting of exposure/ risk weights etc. are not derived may not be counted as an exposure on the CRM provider. In case of non-fund based credit facilities provided to a person resident outside India where CRM benefits are not derived and the exposure is shifted to the non-resident person, such exposures to the non-resident person shall attract a minimum risk weight of 150%.

7 · 5.8 Proportional Cover

7 · 5.9 Currency Mismatches

7 · 5.10 Sovereign Guarantees and Counter-Guarantees

7 · 5.11 ECGC Guaranteed Exposures:

92 · DBOD Mailbox Clarification dated October 18, 2013.

7 · 6 Maturity Mismatch

7 · 6.1 For the purpose of calculating risk-weighted assets, a maturity mismatch occurs when the residual maturity of collateral is less than that of the underlying exposure. Where there is a maturity mismatch and the CRM has an original maturity of less than one year, the CRM is not recognised for capital purposes. In other cases where there is a maturity mismatch, partial recognition is given to the CRM for regulatory capital purposes as detailed below in paragraphs 7.6.2 to 7.6.4. In case of loans collateralised by the bank's own deposits, even if the tenor of such deposits is less than three months or deposits have maturity mismatch vis-à-vis the tenor of the loan, the provisions of paragraph 7.6.1 regarding derecognition of collateral would not be attracted provided an explicit consent of the depositor has been obtained from the depositor (i.e. borrower) for adjusting the maturity proceeds of such deposits against the outstanding loan or for renewal of such deposits till the full repayment of the underlying loan .

1 · 1.1.

7 · 6.2 Definition of Maturity

7 · 6.3 Risk Weights for Maturity Mismatches

7 · 6.4 When there is a maturity mismatch with recognised credit risk mitigants (collateral, onbalance sheet netting and guarantees) the following adjustment will be applied:

7 · 7 Treatment of pools of CRM Techniques

8 · Capital Charge for Market Risk

8 · 1 Introduction

8 · 2 Scope and Coverage of Capital Charge for Market Risks

8 · 2.1 These guidelines seek to address the issues involved in computing capital charges for interest rate related instruments in the trading book, equities in the trading book and foreign exchange risk (including gold and other precious metals) in both trading and banking books. Trading book for the purpose of capital adequacy will include all instruments that are classified as " Held for Trading" as per Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 dated September 12, 2023 . All other instruments93 will be included in the banking book and attract corresponding capital charge for credit risk (or counterparty credit risk, where applicable) .

8 · 2.2 Banks are required to manage the market risks in their books on an ongoing basis and ensure that the capital requirements for market risks are being maintained on a continuous basis,

93 · Accordingly, instruments classified under HTM, AFS, FVTPL (non-HFT) and investments in own subsidiaries, joint ventures and associates will also be part of banking book and will not attract market risk capital charge.

8 · 2.3 Capital for market risk would not be relevant for securities, which have already matured and remain unpaid. These securities will attract capital only for credit risk. On completion of 90 days delinquency, these will be treated on par with NPAs for deciding the appropriate risk weights for credit risk.

8 · 2.4 The risk -weighted assets for market risk should be determined by multiplying the market risk capital charge by a factor of 12.5, as provided in paragraph 8.7 . The market risk capital charge is the simple sum of the capital requirements arising from each of the three risk classes – namely interest rate risk, equity risk and foreign exchange risk as detailed in the formula below:

8 · 3 Measurement of Capital Charge for Interest Rate Risk

8 · 3.1 This section describes the framework for measuring the risk of holding or taking positions in debt securities and other interest rate related instruments in the trading book .

8 · 3.2 The capital charge for interest rate related instruments would apply to fair value of these items in bank's trading book. Since banks are required to maintain capital for market risks on an ongoing basis, they are required to mark to market their trading positions on a daily basis. The fair value will be determined as per extant RBI guidelines on valuation of investments .

8 · 3.3 The minimum capital requirement is expressed in terms of two separately calculated charges, (i) "specific risk" charge for each security, which is designed to protect against an adverse movement in the price of an individual security owing to factors related to the individual issuer, both for short (short position is not allowed in India except in derivatives and Central Government Securities) and long positions, and (ii) "general market risk" charge towards interest rate risk in the portfolio, where long and short positions (which is not allowed in India except in derivatives and Central Government Securities) in different securities or instruments can be offset.

8 · 3.4 The capital charge for specific risk is designed to protect against an adverse movement in the price of an individual security owing to factors related to the individual issuer. The specific risk charges for various kinds of exposures would be applied as detailed below:

94 · Master Circular DBOD.No.BP.BC.73/21.06.001/2009 -10 dated Feb 8, 2010 .

95 · Re -securitisation Exposures are not allowed in terms of circular DBOD.No.BP.BC-103/21.04.177/2011-12 dated May 07, 2012 (instructions since consolidated in Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 dated September 24, 2021).

8 · 3.5 Banks shall, in addition to computing the counterparty credit risk (CCR) charge for OTC derivatives, as part of capital for credit risk as per the Standardised Approach covered in paragraph 5 above, also compute the specific risk charge for OTC derivatives in the trading book as required in terms of Annex 9 .

8 · 3.6 The capital requirements for general market risk are designed to capture the risk of loss arising from changes in market interest rates. The capital charge is the sum of four components:

8 · 3.7 Separate maturity ladders should be used for each currency and capital charges should be calculated for each currency separately and then summed with no offsetting between positions of opposite sign. In the case of those currencies in which business is insignificant (where the turnover in the respective currency is less than 5 per cent of overall foreign exchange turnover), separate calculations for each currency are not required. The bank may, instead, slot within each appropriate time-band, the net long or short position for each currency. However, these individual net positions are to be summed within each time-band, irrespective of whether they are long or

8 · 3.8 The Basel Committee has suggested two broad methodologies for computation of capital charge for market risks. One is the standardised method and the other is the banks' internal risk management models method. As banks in India are still in a nascent stage of developing internal risk management models, it has been decided that, to start with, banks may adopt the standardised method. Under the standardised method there are two principal methods of measuring market risk, a "maturity" method and a "duration" method. As "duration" method is a more accurate method of measuring interest rate risk, it has been decided to adopt standardised duration method to arrive at the capital charge. Accordingly, banks are required to measure the general market risk charge by calculating the price sensitivity (modified duration) of each position separately. Under this method, the mechanics are as follows:

8 · 3.9 The measurement system should include all interest rate derivatives and off balance-sheet instruments in the trading book which react to changes in interest rates, (e.g. forward rate agreements (FRAs), other forward contracts, bond futures, interest rate and cross-currency swaps and forward foreign exchange positions). Options can be treated in a variety of ways as described in Annex 9 .

8 · 4 Measurement of Capital Charge for Equity Risk

8 · 4.1 The capital charge for equities would apply on their fair value in bank's trading book. Minimum capital requirement to cover the risk of holding or taking positions in equities in the trading book is set out below. This is applied to all instruments that exhibit market behaviour similar to equities but not to non-convertible preference shares (which are covered by the interest rate risk requirements described earlier). The instruments covered include equity shares 96 , whether voting or non-voting, convertible securities that behave like equities, for example: units of funds97 (other than debt mutual funds/ETFs mentioned in para 8.3.4), and commitments to buy or sell equity .

96 · Please refer to Master Direction -Classification, Valuation and Operation of Investment Portfolio of Commercial

97 · Please also refer to paragraph 7(d) and 8(b) of Annex I of Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 dated September 12, 2023 .

8 · 4.2 Capital charge for specific risk (akin to credit risk) will be 11.25 per cent or capital charge in accordance with the risk warranted by external rating (or lack of it) of the counterparty, whichever is higher and specific risk is computed on banks' gross equity positions (i.e. , the sum of all long equity positions and of all short equity positions - short equity position is, however, not allowed for banks in India). In addition, the general market risk charge will also be 9 per cent on the gross equity positions. These capital charges will also be applicable to all trading book exposures, which are exempted from capital market exposure ceilings for direct investments .

8 · 4.3 Specific Risk Capital Charge for banks' investment in Security Receipts 98 will be 13.5 per cent (equivalent to 150 per cent risk weight).

8 · 4.4 The specific risk charge for bank's investments in the equity of other banks / other financial entities / non -financial entities will be as under:

98 · Please refer to Master Direction -Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 dated September 12, 2023. Accordingly, Security Receipts can be part of banking book [classified under FVTPL (non-HFT)] or trading book (classified under HFT).

8 · 5 Measurement of Capital Charge for Foreign Exchange Risk

8 · 6 Measurement of Capital Charge for Credit Default Swap (CDS) in the Trading Book

8 · 6.1 General Market Risk

8 · 6.2 Specific Risk for Exposure to Reference Entity

8 · 6.2.1 Specific Risk Capital Charges for Positions Hedged by CDS 99

99 · Please refer to paragraph 6.2 of Annex 7 of this Master Circular for details.

8 · 6.2.2 Specific Risk Charge in CDS Positions which are not meant for Hedging

8 · 6.3 Capital Charge for Counterparty Credit Risk

8 · 6.3.1 Protection Seller

8 · 6.3.2 Protection Buyer

100 · A CDS contract, which is required to be marked-to-market, creates bilateral exposure for the parties to the contract. The mark -to -market value of a CDS contract is the difference between the default -adjusted present value of protection payment (called "protection leg" / "credit leg") and the present value of premium payable called ("premium leg"). If the value of credit leg is less than the value of the premium leg, then the marked-to-market value for the protection seller in positive. Therefore, the protection seller will have exposure to the counterparty (protection buyer) if the value of premium leg is more than the value of credit leg. In case, no premium is outstanding, the value of premium leg will be zero and the mark-to-market value of the CDS contract will always be negative for the protection seller and therefore, protection seller will not have any exposure to the protection buyer. In no case, the protection seller's exposure on protection buyer can exceed the amount of the premium unpaid. For the purpose of capital adequacy as well as exposure norms, the measure of counterparty exposures in case of CDS transaction held in Trading Book is the Potential Future Exposure (PFE) which is measured and recognised as per Current Exposure Method.

8 · 6.3.3 Capital Charge for Counterparty Risk for Collateralised Transactions in CDS

8 · 6.4 Treatment of Exposures below Materiality Thresholds of CDS

8 · 7 Aggregation of the capital charge for Market Risks

8 · 8 Treatment for Illiquid Positions

8 · 8.1 Prudent Valuation Guidance

8 · 8.1.1 Systems and Controls:

8 · 8.1.2 Valuation Methodologies:

101 · Provisions against incurred CVA losses are akin to specific provisions required on impaired assets and depreciation in case of investments held in the trading book. These provisions will be in addition to the general provisions @ 0.4% required on the positive MTM values. The provisions against incurred CVA losses may be netted off from the exposure value while calculating capital charge for default risk under the Current Exposure Method as required in terms of paragraph 5.15.3.4 (ii).

8 · 8.2 Adjustment to the current valuation of less liquid positions for regulatory capital purposes:

8 · 8.2.1 Banks must establish and maintain procedures for judging the necessity of and calculating an adjustment to the current valuation of less liquid positions for regulatory capital purposes. This adjustment may be in addition to any changes to the value of the position required for financial reporting purposes and should be designed to reflect the illiquidity of the position. An adjustment to a position's valuation to reflect current illiquidity should be considered whether the position is marked to market using market prices or observable inputs, third-party valuations or marked to model.

8 · 8.2.2 Bearing in mind that the assumptions made about liquidity in the market risk capital charge may not be consistent with the bank's ability to sell or hedge out less liquid positions where appropriate, banks must take an adjustment to the current valuation of these positions, and review their continued appropriateness on an on-going basis. Reduced liquidity may have arisen from market events. Additionally, close-out prices for concentrated positions and/or stale positions should be considered in establishing the adjustment. RBI has not prescribed any particularly methodology for calculating the amount of valuation adjustment on account of illiquid positions. Banks must consider all relevant factors when determining the appropriateness of the adjustment for less liquid positions. These factors may include, but are not limited to, the amount of time it would take to hedge out the position/risks within the position, the average volatility of bid/offer spreads, the availability of independent market quotes (number and identity of market makers), the average and volatility of trading volumes (including trading volumes during periods of market stress), market concentrations, the aging of positions, the extent to which valuation relies on marking-to-model, and the impact of other model risks not included in paragraph 8.8.2.2. The valuation adjustment on account of illiquidity should be considered irrespective of whether the guidelines issued by FIMMDA have taken into account the illiquidity premium or not, while fixing YTM/spreads for the purpose of valuation .

8 · 8.2.3 For complex products including, but not limited to, securitisation exposures, banks must explicitly assess the need for valuation adjustments to reflect two forms of model risk:

8 · 8.2.4 The adjustment to the current valuation of less liquid positions made under paragraph 8.8.2.2 will not be debited to P&L Account, but will be deducted from Common Equity Tier 1 capital while computing CRAR of the bank. The adjustment may exceed those valuation adjustments made under financial reporting/accounting standards and paragraphs 8.8.1.2 (vi) and (vii).

8 · 8.2.5 In calculating the eligible capital for market risk, it will be necessary first to calculate the banks' minimum capital requirement for credit and operational risk and only afterwards its market risk requirement to establish how much components of capital are available to support market risk .

9 · Capital Charge for Operational Risk

9 · 1 Definition of Operational Risk

9 · 2 The Measurement Methodologies

9 · 2.1 The New Capital Adequacy Framework outlines three methods for calculating operational risk capital charges in a continuum of increasing sophistication and risk sensitivity: (i) the Basic Indicator Approach (BIA); (ii) the Standardised Approach (TSA); and (iii) Advanced Measurement Approaches (AMA).

9 · 2.2 Banks in India shall compute the capital requirements for operational risk under the Basic Indicator Approach. Reserve Bank will review the capital requirement produced by the Basic Indicator Approach for general credibility, especially in relation to a bank's peers and in the event that credibility is lacking, appropriate supervisory action under Pillar 2 will be considered.

9 · 3 The Basic Indicator Approach

9 · 3.1 Under the Basic Indicator Approach, banks shall hold capital for operational risk equal to the average over the previous three years of a fixed percentage (denoted as alpha) of positive annual gross income. Figures for any year in which annual gross income is negative or zero should be excluded from both the numerator and denominator when calculating the average. If negative gross income distorts a bank's Pillar 1 capital charge, Reserve Bank will consider appropriate supervisory action under Pillar 2. The charge may be expressed as follows:

9 · 3.2. Gross income is defined as "Net interest income" plus "net non-interest income". It is intended that this measure should:

9 · 3.3 Banks are advised to compute capital charge for operational risk under the Basic Indicator Approach as follows:

9 · 3.4 As a point of entry for capital calculation, no specific criteria for use of the Basic Indicator Approach are set out in these guidelines. Nevertheless, banks using this approach are encouraged to comply with the 'Guidance Note on Operational Risk Management and Operational Resilience' issued by the Reserve Bank of India on April 30, 2024, and ' Revisions to the Principles for the Sound Management of Operational Risk' and 'Principles for Operational Resilience' issued by the Basel Committee on Banking Supervision in March 2021 . Further, banks are also

9 · 3.5 Once the bank has calculated the capital charge for operational risk under the Basic Indicator Approach, it has to multiply this with 12.5 and arrive at the notional risk weighted asset (RWA) for operational risk .

10 · Introduction to the SREP under Pillar 2

10 · 1 The New Capital Adequacy Framework (NCAF), based on the Basel II Framework evolved by the Basel Committee on Banking Supervision, was adapted for India vide Circular DBOD.No.BP.BC.90/20.06.001/ 2006 -07 dated April 27, 2007. In terms of paragraph 2.4 (iii)(c) of the Annex to the aforesaid circular banks were required to have a Board-approved policy on Internal Capital Adequacy Assessment Process (ICAAP) and to assess the capital requirement as per ICAAP. It is presumed that banks would have formulated the policy and also undertaken the capital adequacy assessment accordingly.

10 · 2 The Capital Adequacy Framework rests on three components or three Pillars. Pillar 1 is the Minimum Capital Ratio while Pillar 2 and Pillar 3 are the Supervisory Review Process (SRP) and Market Discipline, respectively. The guidelines in regard to the SRP and the ICAAP are furnished in this Section. An illustrative outline of the format of the ICAAP document, to be submitted to the RBI, by banks, is furnished at Annex 14 .

10 · 3 The objective of the SRP is to ensure that 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. This in turn would require a well-defined internal assessment process within banks through which they assure the RBI that adequate capital is indeed held towards the various risks to which they are exposed. The process of assurance could also involve an active dialogue between the bank and the RBI so that, when warranted, appropriate intervention could be made to either reduce the risk exposure of the bank or augment / restore its capital. Thus, ICAAP is an important component of the SRP.

10 · 4 The main aspects to be addressed under the SRP, and therefore, under the ICAAP, would include:

10 · 5 It is recognised that there is no one single approach for conducting the ICAAP and the market consensus in regard to the best practice for undertaking ICAAP is yet to emerge. The methodologies and techniques are still evolving particularly in regard to measurement of nonquantifiable risks, such as reputational and strategic risks. These guidelines, therefore, seek to provide only broad principles to be followed by banks in developing their ICAAP .

102 · Please refer to circular DBOD.No.BP.BC.85/21.06.200/2013 -14 and DBOD.No.BP.BC.116/21.06.200/2013 -14 dated January 15, 2014 and June 3, 2014, respectively.

10 · 6 Banks were advised to develop and put in place, with the approval of their Boards, an ICAAP commensurate with their size, level of complexity, risk profile and scope of operations. The ICAAP would be in addition to a bank's calculation of regulatory capital requirements under Pillar 1.

10 · 7 The ICAAP document should, inter alia, include the capital adequacy assessment and projections of capital requirement for the ensuing year, along with the plans and strategies for meeting the capital requirement. An illustrative outline of a format of the ICAAP document is furnished at Annex 14, for guidance of the banks though the ICAAP documents of the banks could vary in length and format, in tune with their size, level of complexity, risk profile and scope of operations.

11 · Need for Improved Risk Management 103

11 · 1 While financial institutions have faced difficulties over the years for a multitude of reasons, the major causes of serious banking problems continue to be lax credit standards for borrowers and counterparties, poor portfolio risk management, and a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties. This experience is common in both advanced and developing countries.

11 · 2 The financial market crisis of 2007 -08 has underscored the critical importance of effective credit risk management to the long-term success of any banking organisation and as a key component to financial stability. It has provided a stark reminder of the need for banks to effectively identify, measure, monitor and control credit risk, as well as to understand how credit risk interacts with other types of risk (including market, liquidity and reputational risk). The essential elements of a comprehensive credit risk management programme include (i) establishing an appropriate credit risk environment; (ii) operating under a sound credit granting process; (iii) maintaining an appropriate credit administration, measurement and monitoring process; and (iv) ensuring adequate controls over credit risk as elaborated in our Guidance note on Credit Risk issued on October 12, 2002 104 .

11 · 3 The financial crisis has emphasised the importance of effective capital planning and longterm capital maintenance. A bank's ability to withstand uncertain market conditions is bolstered by maintaining a strong capital position that accounts for potential changes in the bank's strategy and volatility in market conditions over time. Banks should focus on effective and efficient capital planning, as well as long-term capital maintenance. An effective capital planning process requires a bank to assess both the risks to which it is exposed and the risk management processes in place to manage and mitigate those risks; evaluate its capital adequacy relative to its risks; and consider the potential impact on earnings and capital from economic downturns. A bank's capital

103 · Master Circular DBOD.No.BP.BC.73/21.06.001/2009 -10 dated Feb 8, 2010 .

104 · Guidance Notes on Management of Credit Risk and Market Risk issued vide circular DBOD.No.BP.520/21.04.103/2002 -03 dated October 12, 2002 .

11 · 4 Rapid growth in any business activity can present banks with significant risk management challenges. This was the case with the expanded use of the "originate-to-distribute" business model, off-balance sheet vehicles, liquidity facilities and credit derivatives. The originate-todistribute model and securitisation can enhance credit intermediation and bank profitability, as well as more widely diversify risk. Managing the associated risks, however, poses significant challenges. Indeed, these activities create exposures within business lines, across the firm and across risk factors that can be difficult to identify, measure, manage, mitigate and control. This is especially true in an environment of declining market liquidity, asset prices and risk appetite. The inability to properly identify and measure such risks may lead to unintended risk exposures and concentrations, which in turn can lead to concurrent losses arising in several businesses and risk dimensions due to a common set of factors. Strong demand for structured products created incentives for banks using the originate-to-distribute model to originate loans, such as subprime mortgages, using unsound and unsafe underwriting standards. At the same time, many investors relied solely on the ratings of the credit rating agencies (CRAs) when determining whether to invest in structured credit products. Many investors conducted little or no independent due diligence on the structured products they purchased. Furthermore, many banks had insufficient risk management processes in place to address the risks associated with exposures held on their balance sheet, as well as those associated with off-balance sheet entities, such as asset backed commercial paper (ABCP) conduits and structured investment vehicles (SIVs).

11 · 5 Innovation has increased the complexity and potential illiquidity of structured credit products. This, in turn, can make such products more difficult to value and hedge, and may lead to inadvertent increases in overall risk. Further, the increased growth of complex investor-specific products may result in thin markets that are illiquid, which can expose a bank to large losses in times of stress if the associated risks are not well understood and managed in a timely and effective manner.

12 · Guidelines for the SREP of the RBI and the ICAAP of Banks

12 · 1 Background

12 · 1.1 The Basel capital adequacy framework rests on the following three mutually-reinforcing pillars:

12 · 1.2 The Basel Committee also lays down the following four key principles in regard to the SRP envisaged under Pillar 2:

12 · 1.3 It would be seen that the principles 1 and 3 relate to the supervisory expectations from banks while the principles 2 and 4 deal with the role of the supervisors under Pillar 2. Pillar 2 (Supervisory Review Process - SRP) requires banks to implement an internal process, called the Internal Capital Adequacy Assessment Process (ICAAP), for assessing their capital adequacy in relation to their risk profiles as well as a strategy for maintaining their capital levels. Pillar 2 also requires the supervisory authorities to subject all banks to an evaluation process, hereafter called Supervisory Review and Evaluation Process (SREP), and to initiate such supervisory measures on that basis, as might be considered necessary. An analysis of the foregoing principles indicates that the following broad responsibilities have been cast on banks and the supervisors:

12 · 1.4 Thus, the ICAAP and SREP are the two important components of Pillar 2 and could be broadly defined as follows:

12 · 1.5 These guidelines seek to provide broad guidance to banks by outlining the manner in which the SREP would be carried out by the RBI, the expected scope and design of their ICAAP, and the expectations of the RBI from banks in regard to implementation of the ICAAP.

12 · 2 Conduct of the SREP by the RBI

12 · 2.1 Capital helps protect individual banks from insolvency, thereby promoting safety and soundness in the overall banking system. Minimum regulatory capital requirements under Pillar 1 establish a threshold below which a sound bank's regulatory capital must not fall. Regulatory capital ratios permit some comparative analysis of capital adequacy across regulated banking entities because they are based on certain common methodology / assumptions. However, supervisors need to perform a more comprehensive assessment of capital adequacy that considers risks specific to a bank, conducting analyses that go beyond minimum regulatory capital requirements.

12 · 2.2 The RBI generally expects banks to hold capital above their minimum regulatory capital levels, commensurate with their individual risk profiles, to account for all material risks. Under the

12 · 2.3 The SREP of banks would, thus, be conducted as part of the RBI's Risk Based Supervision (RBS) of banks and in the light of the data in the off-site returns received from banks in the RBI, in conjunction with the ICAAP document, which is required to be submitted every year by banks to the RBI (refer to paragraph 12.3.3.6 below). Through the SREP, the RBI would evaluate the adequacy and efficacy of the ICAAP of banks and the capital requirements derived by them therefrom. While in the course of evaluation, there would be no attempt to reconcile the difference between the regulatory minimum CRAR and the outcome of the ICAAP of a bank (as the risks covered under the two processes are different), banks would be expected to demonstrate to the RBI that the ICAAP adopted by them is fully responsive to their size, level of complexity, scope and scale of operations and the resultant risk profile / exposures, and adequately captures their capital requirements. Such an evaluation of the effectiveness of the ICAAP would help the RBI in understanding the capital management processes and strategies adopted by banks. If considered necessary, the SREP could also involve a dialogue between the bank's top management and the RBI from time to time. In addition to the periodic reviews, independent external experts may also be commissioned by the RBI, if deemed necessary, to perform ad hoc reviews and comment on specific aspects of the ICAAP process of a bank; the nature and extent of such a review shall be determined by the RBI .

12 · 2.4 Pillar 1 capital requirements will include a buffer for uncertainties surrounding the Pillar 1 regime that affect the banking population as a whole. Bank-specific uncertainties will be treated under Pillar 2105. It is anticipated that such buffers under Pillar 1 will be set to provide reasonable assurance that a bank with good internal systems and controls, a well-diversified risk profile and a business profile well covered by the Pillar 1 regime, and which operates with capital equal to Pillar 1 requirements, will meet the minimum goals for soundness embodied in Pillar 1. However, RBI may require particular banks to operate with a buffer, over and above the Pillar 1 standard. Banks should maintain this buffer for a combination of the following:

105 · Annex 3 of the Guidelines on Implementation of Basel III Capital Regulations in India issued vide circular DBOD.No.BP.BC.98/21.06.201/2011 -2012 dated May 2, 2012 .

106 · If a bank has identified some capital add-on to take care of an identified Pillar 2 risk or inadequately capitalised Pillar 1 risk, that add-on can be translated into risk weighted assets as indicated in this paragraph below, which should be added to the total risk weighted assets of the bank. No additional Pillar 2 buffer need be maintained for such identified risks.

107 · Please refer to circular DBOD.No.BP.BC.85/21.06.200/2013 -14 and DBOD.No.BP.BC.116/21.06.200/2013 -14 dated January 15, 2014 and June 3, 2014, respectively.

12 · 2.5 As and when the advanced approaches envisaged in the Basel capital adequacy framework are permitted to be adopted in India, the SREP would also assess the ongoing compliance by banks with the eligibility criteria for adopting the advanced approaches.

12 · 3 The Structural Aspects of the ICAAP

12 · 3.1 This section outlines the broad parameters of the ICAAP that banks shall comply with in designing and implementing their ICAAP.

12 · 3.2 Every bank shall have an ICAAP

12 · 3.3 ICAAP to encompass firm-wide risk profile 108

12 · 3.3.1 General firm -wide risk management principles:

12 · 3.3.2 Board and Senior Management Oversight:

108 · Master Circular DBOD.No.BP.BC.73/21.06.001/2009 -10 dated Feb 8, 2010 .

12 · 3.3.3 Policies, procedures, limits and controls:

12 · 3.3.4 Identifying, measuring, monitoring and reporting of risk:

12 · 3.3.5 Internal controls:

12 · 3.3.6 Submission of the outcome of the ICAAP to the Board and the RBI

12 · 4 Review of the ICAAP Outcomes

12 · 5 ICAAP to be an Integral part of the Management and Decision-making Culture

12 · 6 The Principle of Proportionality

12 · 7 Regular Independent Review and Validation

12 · 8 ICAAP to be a Forward -looking Process

12 · 9 ICAAP to be a Risk -based Process

12 · 10 ICAAP to Include Stress Tests and Scenario Analyses

12 · 11 Use of Capital Models for ICAAP

109 · In terms of paragraph 17 of our Circular DBOD.No.BP(SC).BC. 98 / 21.04.103 / 99 dated October 7, 1999

13 · Select Operational Aspects of the ICAAP

13 · 1 Identifying and Measuring Material Risks in ICAAP

13 · 2 Credit Risk110

13 · 2.1 Banks should have methodologies that enable them to assess the credit risk involved in exposures to individual borrowers or counterparties as well as at the portfolio level. Banks should be particularly attentive to identifying credit risk concentrations and ensuring that their effects are adequately assessed. This should include consideration of various types of dependence among

110 · Annex 3 of the Guidelines on Implementation of Basel III Capital Regulations in India issued vide circular DBOD.No.BP.BC.98/21.06.201/2011 -2012 dated May 2, 2012 .

13 · 2.2 Banks should assess exposures, regardless of whether they are rated or unrated 111 , and determine whether the risk weights applied to such exposures, under the Standardised Approach, are appropriate for their inherent risk. In those instances where a bank determines that the inherent risk of such an exposure, particularly if it is unrated, is significantly higher than that implied by the risk weight to which it is assigned, the bank should consider the higher degree of credit risk in the evaluation of its overall capital adequacy. For more sophisticated banks, the credit review assessment of capital adequacy, at a minimum, should cover four areas: risk rating systems, portfolio analysis/aggregation, securitisation/complex credit derivatives, and large exposures and risk concentrations .

13 · 2.3 Counterparty credit risk (CCR)

111 · In such cases it would be in order for banks to derive notional external ratings of the unrated exposure by mapping their internal credit risk ratings / grades of the exposure used for pricing purposes with the external ratings scale.

13 · 3 Market Risk: A bank should be able to identify risks in trading activities resulting from a movement in market prices. This determination should consider factors such as illiquidity of instruments, concentrated positions, one-way markets, non-linear/deep out-of-the money positions, and the potential for significant shifts in correlations. Exercises that incorporate extreme events and shocks should also be tailored to capture key portfolio vulnerabilities to the relevant market developments .

13 · 4 Operational Risk: A bank should be able to assess the potential risks resulting from inadequate or failed internal processes, people, and systems, as well as from events external to the bank. This assessment should include the effects of extreme events and shocks relating to operational risk. Events could include a sudden increase in failed processes across business units or a significant incidence of failed internal controls .

13 · 5 Interest Rate Risk in the Banking Book (IRRBB): A bank should identify the risks associated with the changing interest rates on its on-balance sheet and off-balance sheet exposures in the banking book from both, a short-term and long-term perspective. This might include the impact of changes due to parallel shocks, yield curve twists, yield curve inversions, changes in the relationships of rates (basis risk), and other relevant scenarios. The bank should be able to support its assumptions about the behavioural characteristics of its non-maturity deposits and other assets and liabilities, especially those exposures characterised by embedded optionality. Given the uncertainty in such assumptions, stress testing and scenario analysis should be used in the analysis of interest rate risks. While there could be several approaches to measurement of IRRBB, an illustrative approach for measurement of IRRBB is furnished at Annex 10. The banks would, however, be free to adopt any other variant of these approaches or

13 · 6 Credit Concentration Risk: A risk concentration is any single exposure or a group of exposures with the potential to produce losses large enough (relative to a bank's capital, total assets, or overall risk level) to threaten a bank's health or ability to maintain its core operations. Risk concentrations have arguably been the single most important cause of major problems in banks. Concentration risk resulting from concentrated portfolios could be significant for most of the banks .

112 · Banks may refer to circular no. DBR.No.BP.BC.43/21.01.003/2016-17 dated December 1, 2016 on Large Exposures Framework, as amended from time to time, for guidelines on, inter alia, large exposure limits on single counterparty and group of connected counterparties.

113 · Master Circular DBOD.No.BP.BC.73/21.06.001/2009 -10 dated Feb 8, 2010 .

13 · 7 Liquidity Risk: A bank should understand the risks resulting from its inability to meet its obligations as they come due, because of difficulty in liquidating assets (market liquidity risk) or in obtaining adequate funding (funding liquidity risk). This assessment should include analysis of sources and uses of funds, an understanding of the funding markets in which the bank operates, and an assessment of the efficacy of a contingency funding plan for events that could arise.

114 · Master Circular DBOD.No.BP.BC.73/21.06.001/2009 -10 dated Feb 8, 2010 .

13 · 8 Off -Balance Sheet Exposures and Securitisation Risk

13 · 9 Reputational Risk and Implicit Support 115

13 · 9.1 Provision of Implicit Support for Securitisation Transactions

115 · Annex 3 of the Guidelines on Implementation of Basel III Capital Regulations in India issued vide circular DBOD.No.BP.BC.98/21.06.201/2011 -2012 dated May 2, 2012 .

13 · 9.2 Reputational Risk on Account of Implicit Support

13 · 10 Risk Evaluation and Management

13 · 11 Valuation Practices

13 · 12 Sound Stress Testing Practices

13 · 13 Sound Compensation Practices

13 · 14 The risk factors discussed above should not be considered an exhaustive list of those affecting any given bank. All relevant factors that present a material source of risk to capital should be incorporated in a well-developed ICAAP. Furthermore, banks should be mindful of the capital adequacy effects of concentrations that may arise within each risk type .

13 · 15 Quantitative and Qualitative Approaches in ICAAP

13 · 16 Risk Aggregation and Diversification Effects

14 · Guidelines for Market Discipline

14 · 1 General

14 · 1.1 The purpose of Market discipline is to complement the minimum capital requirements (detailed under Pillar 1) and the supervisory review process (detailed under Pillar 2). The aim is to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on the scope of application, capital, risk exposures, risk assessment processes and hence, the capital adequacy of the institution .

14 · 1.2 In principle, banks' disclosures should be consistent with how senior management and the Board of Directors assess and manage the risks of the bank. Under Pillar 1, banks use specified approaches / methodologies for measuring the various risks they face and the resulting capital

14 · 2 Achieving Appropriate Disclosure

14 · 2.1 Market discipline can contribute to a safe and sound banking environment. Hence, noncompliance with the prescribed disclosure requirements would attract a penalty, including financial penalty. However, it is not intended that direct additional capital requirements would be a response to non-disclosure, except as indicated below.

14 · 2.2 In addition to the general intervention measures, the Basel Capital Adequacy Framework also anticipates a role for specific measures. Where disclosure is a qualifying criterion under Pillar 1 to obtain lower risk weightings and/or to apply specific methodologies, there would be a direct sanction (not being allowed to apply the lower risk weighting or the specific methodology).

14 · 3 Interaction with Accounting Disclosures

14 · 4 Validation

14 · 5 Materiality

14 · 6 Proprietary and Confidential Information

14 · 7 General Disclosure Principle

14 · 8 Implementation Date

14 · 9 Scope and Frequency of Disclosures

14 · 9.1 Pillar 3 applies at the top consolidated level of the banking group to which the Capital Adequacy Framework applies. Disclosures related to individual banks within the groups would not generally be required to be made by the parent bank. An exception to this arises in the disclosure of capital ratios by the top consolidated entity where an analysis of significant bank subsidiaries within the group is appropriate, in order to recognise the need for these subsidiaries to comply

14 · 9.2 Banks are required to make Pillar 3 disclosures 116 at least on a half yearly basis, irrespective of whether financial statements are audited, with the exception of following disclosures:

14 · 9.3 All disclosures must either be included in a bank's published financial results / statements or, at a minimum, must be disclosed on bank's website. If a bank finds it operationally inconvenient to make these disclosures along with published financial results / statements, the bank must provide in these financial results / statements, a direct link to where the Pillar 3 disclosures can be found on the bank's website. The Pillar 3 disclosures should be made concurrent with publication of financial results / statements 117 .

14 · 9.4 However, banks may note that in the case of main features template (as indicated in paragraph 14.13.7) and provision of the full terms and conditions of capital instruments (as indicated in paragraph 14.13.8), banks are required to update these disclosures concurrently whenever a new capital instrument is issued and included in capital or whenever there is a redemption, conversion / write-down or other material change in the nature of an existing capital instrument.

14 · 10 Regulatory Disclosure Section

14 · 10.1 Banks are required to make disclosures in the format as specified in Annex 17 of this Master Circular. Banks have to maintain a 'Regulatory Disclosures Section' on their websites, where all the information relating to disclosures will be made available to the market participants. The direct link to this page should be prominently provided on the home page of a bank's website and it should be easily accessible. This requirement is essentially to ensure that the relevance /

116 · Please refer to Annex 17 for detailed Pillar 3 disclosure templates.

117 · It may be noted that Pillar 3 disclosures are required to be made by all banks including those which are not listed on stock exchanges and / or not required to publish financial results / statement. Therefore, such banks are also required to make Pillar 3 disclosures at least on their websites within reasonable period.

14 · 10.2 An archive for at least three years of all templates relating to prior reporting periods should be made available by banks on their websites.

14 · 11 Pillar 3 under Basel III Framework 118

14 · 11.1 The Pillar 3 disclosure requirements as introduced under Basel III along with previous disclosure requirements with suitable modifications / enhancements are detailed in the subsequent paragraphs .

14 · 11.2 In order to ensure comparability of the capital adequacy of banks across jurisdictions, it is important to disclose details of items of regulatory capital and various regulatory adjustments to it. Further, to improve consistency and ease of use of disclosures relating to the composition of capital and to mitigate the risk of inconsistent reporting format undermining the objective of enhanced disclosures, banks across Basel member jurisdictions are required to publish their capital positions according to common templates. The disclosure requirements are set out in the form of following templates:

118 · Pillar 3 requirements as introduced vide circular DBOD.No.BP.BC.98/21.06.201/2012-13 dated May 28, 2013 on Guidelines on Composition of Capital Disclosure Requirements. These guidelines became effective from July 1, 2013.

14 · 12 Disclosure Template

14 · 12.1 The common template which banks should use is set out in Table DF-11 of Annex 17 , along with explanations.

14 · 12.2 It may be noted that banks should not add or delete any rows / columns from the common reporting template. This is essential to ensure that there is no divergence in reporting templates across banks and across jurisdictions which could undermine the objectives of consistency and comparability of a bank's regulatory capital. The template will retain the same row numbering used in its first column such that market participants can easily map the Indian version of templates to the common version designed by the Basel Committee.

14 · 12.3 The Basel Committee has suggested that in cases where the national implementation of Basel III rules120 applies a more conservative definition of an element (e.g. , components and criteria of regulatory capital, regulatory adjustments etc.), national authorities may choose between one of two approaches listed below for the purpose of disclosure:

119 · Master Circular DBOD.No.BP.BC.73/21.06.001/2009 -10 dated Feb 8, 2010 .

120 · As defined in the DBOD.No.BP.BC.98/21.06.201/2011 -12 dated May 2, 2012 on Guidelines on Implementation of Basel III Capital Regulations in India.

121 · Basel III: A global regulatory framework for more resilient banks and banking systems, December 2010 (rev June 2011).

14 · 12.4 The aim of both the approaches is to provide all the information necessary to enable market participants to calculate the capital of banks on a common basis. In the Indian context, Approach 2 appears to be more practical and less burdensome for banks than the Approach 1. Under the Approach 2, banks have to furnish data based on the definition of capital / regulatory adjustments as implemented in India. The difference with the Basel III minimum can be separately disclosed and explained in notes to the templates. This way of disclosure will be more relevant and comprehensible to a larger number of users of disclosures more specifically, the domestic users. At the same time, information provided in the notes to the templates to indicate differences from Basel III minimum will help facilitate cross-jurisdictional comparison of banks' capital, should users desire. Accordingly, the disclosure templates have been customised, keeping in view the consistency and comparability of disclosures .

14 · 13 Reconciliation Requirements

14 · 13.1 Banks will be required to disclose a full reconciliation of all regulatory capital elements back to the balance sheet in the audited (or unaudited) financial statements. This requirement aims to address disconnect, if any, present in a bank's disclosure between the numbers used for the calculation of regulatory capital and the numbers used in the balance sheet.

14 · 13.2 Banks will have to follow a three step approach to show the link between their balance sheet and the numbers which are used in the composition of capital disclosure template set out in Annex 17 (Table DF-11 whichever applicable). The three steps are explained below and also illustrated in Table DF -12 of Annex 17:

122 · As defined in the DBOD.No.BP.BC.98/21.06.201/2011 -12 dated May 2, 2012 on Guidelines on Implementation of Basel III Capital Regulations in India.

123 · Basel III: A global regulatory framework for more resilient banks and banking systems, December 2010 (rev June 2011).

124 · Regulatory scope of consolidation is explained in paragraph 3 of this Master Circular.

14 · 13.3 Step 1: Disclose the reported balance sheet under the regulatory scope of consolidation

14 · 13.4 Step 2: Expand the lines of the regulatory balance sheet to display all of the components used in the definition of capital disclosure template (Table DF-11 of Annex 17)

14 · 13.5 Step 3: Map each of the components that are disclosed in Step 2 to the composition of capital disclosure templates

14 · 13.6 The three step approach is flexible and offers the following benefits:

14 · 13.7 Main Features Template

14 · 13.7.1 Banks are required to complete a 'main features template' to ensure consistency and comparability of disclosures of the main features of capital instruments. Banks are required to disclose a description of the main features of capital instruments issued by them. Besides, banks will also be required to make available the full terms and conditions of their capital instruments (paragraph 14.13.8 below). The requirement of separately disclosing main features of capital instruments is intended to provide an overview of the capital structure of a bank. Many times, it may not be possible for the users to extract key features of capital instruments with ease from the full disclosure of terms and conditions of capital instruments made by banks .

14 · 13.7.2 This template represents the minimum level of summary disclosure which banks are required to report in respect of each regulatory capital instrument issued. The main feature disclosure template is set out in Table DF-13 of Annex 17 along with a description of each of the items to be reported. Some of the key aspects of the 'Main Features Template' are as under:

14 · 13.7.3 Banks are required to keep the completed main features report up-to-date. Banks should ensure that the report is updated and made publicly available, whenever a bank issues or repays a capital instrument and whenever there is redemption, conversion / write-down or other material change in the nature of an existing capital instrument.

14 · 13.8 Other Disclosure Requirements

14 · 14 Format of Disclosure Template

15 · Capital Conservation Buffer

15 · 1 Objective

15 · 1.1 The capital conservation buffer (CCB) is designed to ensure that banks build up capital buffers during normal times (i.e. , outside periods of stress) which can be drawn down as losses are incurred during a stressed period. The requirement is based on simple capital conservation rules designed to avoid breaches of minimum capital requirements.

15 · 1.2 Outside the period of stress, banks should hold buffers of capital above the regulatory minimum. When buffers have been drawn down, one way banks should look to rebuild them is through reducing discretionary distributions of earnings. This could include reducing dividend payments, share buybacks and staff bonus payments. Banks may also choose to raise new

125 · Please refer to paragraph 14.10 of this Master Circular.

126 · Annex 4 of Guidelines on Implementation of Basel III Capital Regulations in India issued vide circular DBOD.No.BP.BC.98/21.06.201/2011 -12 dated May 2, 2012 .

15 · 1.3 In the absence of raising capital from the market, the share of earnings retained by banks for the purpose of rebuilding their capital buffers should increase the nearer their actual capital levels are to the minimum capital requirement. It will not be appropriate for banks which have depleted their capital buffers to use future predictions of recovery as justification for maintaining generous distributions to shareholders, other capital providers and employees. It is also not acceptable for banks which have depleted their capital buffers to try and use the distribution of capital as a way to signal their financial strength. Not only is this irresponsible from the perspective of an individual bank, putting shareholders' interests above depositors, it may also encourage other banks to follow suit. As a consequence, banks in aggregate can end up increasing distributions at the exact point in time when they should be conserving earnings.

15 · 1.4 The capital conservation buffer can be drawn down only when a bank faces a systemic or idiosyncratic stress. A bank should not choose in normal times to operate in the buffer range simply to compete with other banks and win market share. This aspect would be specifically looked into by Reserve Bank of India during the Supervisory Review and Evaluation Process. If, at any time, a bank is found to have allowed its capital conservation buffer to fall in normal times, particularly by increasing its risk weighted assets without a commensurate increase in the Common Equity Tier 1 Ratio (although adhering to the restrictions on distributions), this would be viewed seriously. In addition, such a bank will be required to bring the buffer to the desired level within a time limit prescribed by Reserve Bank of India. The banks which draw down their capital conservation buffer during a stressed period should also have a definite plan to replenish the buffer as part of its Internal Capital Adequacy Assessment Process and strive to bring the buffer to the desired level within a time limit agreed to with Reserve Bank of India during the Supervisory Review and Evaluation Process .

15 · 1.5 The framework of capital conservation buffer will strengthen the ability of banks to withstand adverse economic environment conditions, will help increase banking sector resilience both going into a downturn, and provide the mechanism for rebuilding capital during the early stages of economic recovery. Thus, by retaining a greater proportion of earnings during a downturn, banks will be able to help ensure that capital remains available to support the ongoing business operations / lending activities during the period of stress. Therefore, this framework is expected to help reduce pro-cyclicality.

15 · 2 The Framework

15 · 2.1 Banks are required to maintain a capital conservation buffer of 2.5%, comprised of Common Equity Tier 1 capital, above the regulatory minimum capital requirement 127 of 9%. Capital distribution constraints will be imposed on a bank when capital level falls within this range. However, they will be able to conduct business as normal when their capital levels fall into the conservation range as they experience losses. Therefore, the constraints imposed are related to the distributions only and are not related to the operations of banks. The distribution constraints imposed on banks when their capital levels fall into the range increase as the banks' capital levels approach the minimum requirements. The Table 22 below shows the minimum capital conservation ratios a bank must meet at various levels of the Common Equity Tier 1 capital ratios.

15 · 2.2 The Common Equity Tier 1 ratio includes amounts used to meet the minimum Common Equity Tier 1 capital requirement of 5.5%, but excludes any additional Common Equity Tier 1 needed to meet the 7% Tier 1 and 9% Total Capital requirements. For example, a bank maintains Common Equity Tier 1 capital of 9% and has no Additional Tier 1 or Tier 2 capital. Therefore, the bank would meet all minimum capital requirements, but would have a zero conservation buffer and therefore, the bank would be subjected to 100% constraint on distributions of capital by way of dividends, share-buybacks and discretionary bonuses .

15 · 2.3 The following represents other key aspects of the capital conservation buffer requirements:

127 · Common Equity Tier 1 must first be used to meet the minimum capital requirements (including the 7% Tier 1 and 9% Total capital requirements, if necessary), before the remainder can contribute to the capital conservation buffer requirement.

16 · Leverage Ratio

16 · 1 Rationale and Objective

128 · A scrip dividend is a scrip issue made in lieu of a cash dividend. The term 'scrip dividends' also includes bonus shares.

129 · If a subsidiary is a bank, it will naturally be subject to the provisions of capita conservation buffer. If it is not a bank, even then the parent bank should not allow the subsidiary to distribute dividend which are inconsistent with the position of CCB at the consolidated level.

130 · Please refer to Annex 5 of Guidelines on Implementation of Basel III Capital Regulations in India issued vide circular DBOD.No.BP.BC.98/21.06.201/2011 -12 dated May 2, 2012 .

16 · 2 Definition, Minimum Requirement and Scope of Application of the Leverage Ratio

16 · 2.1 The Basel III leverage ratio is defined as the capital measure (the numerator) divided by the exposure measure (the denominator), with this ratio expressed as a percentage .

16 · 2.2 The minimum Leverage Ratio shall be 4% for Domestic Systemically Important Banks (DSIBs) and 3.5% for other banks 131 . Both the capital measure and the exposure measure along with Leverage Ratio are to be disclosed on a quarter-end basis. However, banks must meet the minimum Leverage Ratio requirement at all times.

16 · 2.3 The Basel III leverage ratio framework follows the same scope of regulatory consolidation as is used for the risk -based capital framework 132 .

16 · 2.4 Treatment of investments in the capital of banking, financial, insurance and commercial entities that are outside the regulatory scope of consolidation: in cases where a banking, financial, insurance or commercial entity is outside the scope of regulatory consolidation, only the investment in the capital of such entities (i.e. only the carrying value of the investment, as opposed to the underlying assets and other exposures of the investee) is to be included in the leverage ratio exposure measure. However, investments in the capital of such entities that are deducted from Tier 1 capital (i.e. , either deduction from Common Equity Tier 1 capital or deduction from Additional Tier 1 capital following corresponding deduction approach) as set out in paragraph 4.4

131 · Please refer to circular no. DBR.BP.BC.No.49/21.06.201/2018 -19 dated June 28, 2019 on Basel III Capital Regulations- Implementation of Leverage Ratio.

132 · Please refer to paragraph 3: Scope of Application of Capital Adequacy Framework. Please also refer to circulars DBOD.No.BP.BC.72/21.04.018/2001 -02 dated February 25, 2003 and DBOD.No.FSD.BC.46/24.01.028/2006-07 dated December 12, 2006 .

16 · 3 Capital Measure

16 · 4 Exposure Measure

16 · 4.1 General Measurement Principles

16 · 4.2 On -balance sheet exposures

133 · Regulatory adjustments / deductions as indicated in paragraph 4.4.

134 · Tier 1 capital as defined in paragraph 4: Composition of regulatory capital.

16 · 4.2.1 Banks must include all balance sheet assets in their exposure measure, including onbalance sheet derivatives collateral and collateral for SFTs, with the exception of on-balance sheet derivative and SFT assets that are covered in paragraph 16.4.3 and 16.4.4 below 135 .

16 · 4.2.2 However, to ensure consistency, balance sheet assets deducted from Tier 1 capital as set out in paragraph 4.4 Regulatory Adjustments / Deductions may be deducted from the exposure measure. Following are the two examples:

16 · 4.2.3 Liability items must not be deducted from the exposure measure. For example, gains/losses on fair valued liabilities or accounting value adjustments on derivative liabilities due to changes in the bank's own credit risk as described in paragraph 4.4.6 must not be deducted from the exposure measure.

16 · 4.3 Derivative exposures

16 · 4.3.1 Treatment of derivatives: Derivatives create two types of exposure:

135 · Where a bank according to its operative accounting framework recognises fiduciary assets on the balance sheet, these assets can be excluded from the leverage ratio exposure measure provided that the assets meet the IAS 39 criteria for derecognition and, where applicable, IFRS 10 for deconsolidation. When disclosing the leverage ratio, banks must also disclose the extent of such de -recognised fiduciary items as set out in paragraph 16.7.4.

16 · 4.3.2 Banks must calculate their derivative exposures 136 , including where a bank sells protection using a credit derivative, as the replacement cost (RC) 137 for the current exposure plus an add -on for potential future exposure (PFE), as described in paragraph 16.4.3.3 below. If the derivative exposure is covered by an eligible bilateral netting contract as specified in the Annex 18 (part B), an alternative treatment as indicated in paragraph 16.4.3.4 below may be applied 138 . Written credit derivatives are subject to an additional treatment, as set out in paragraphs 16.4.3.11 to 16.4.3.14 below.

16 · 4.3.3 For a single derivative contract, not covered by an eligible bilateral netting contract as specified in Annex 18 (part B), the amount to be included in the exposure measure is determined as follows:

16 · 4.3.4 Bilateral netting: when an eligible bilateral netting contract is in place as specified in Annex 18 (part B), the RC for the set of derivative exposures covered by the contract will be the sum of net replacement cost and the add-on factors as described in paragraph 16.4.3.3 above will be ANet as calculated below:

136 · This approach makes reference to the Current Exposure Method (CEM) to calculate CCR exposure amounts associated with derivative exposures. The Basel Committee will consider whether the recently released Standardised Approach for measuring exposure at default (EAD) for CCR known as SA-CCR is appropriate in the context of the need to capture both types of exposures created by derivatives as described in paragraph 16.4.3.1. Banks operating in India may continue to use CEM until advised otherwise by the Reserve Bank

137 · If, under the relevant accounting standards, there is no accounting measure of exposure for certain derivative instruments because they are held (completely) off-balance sheet, the bank must use the sum of positive fair values of these derivatives as the replacement cost.

138 · These netting rules are with the exception of cross-product netting i.e. cross-product netting is not permitted in determining the leverage ratio exposure measure. However, where a bank has a cross-product netting agreement in place that meets the eligibility criteria of Annex 20 (part B) it may choose to perform netting separately in each product category provided that all other conditions for netting in this product category that are applicable to the Basel III leverage ratio are met.

16 · 4.3.5 Treatment of related collateral: collateral received in connection with derivative contracts has two countervailing effects on leverage:

16 · 4.3.6 Collateral received in connection with derivative contracts does not necessarily reduce the leverage inherent in a bank's derivatives position, which is generally the case if the settlement exposure arising from the underlying derivative contract is not reduced. As a general rule, collateral received may not be netted against derivative exposures whether or not netting is permitted under the bank's operative accounting or risk-based framework. Therefore, it is advised that when calculating the exposure amount by applying paragraphs 16.4.3.2 to 16.4.3.4 above, a bank must not reduce the exposure amount by any collateral received from the counterparty.

16 · 4.3.7 Similarly, with regard to collateral provided, banks must gross up their exposure measure by the amount of any derivatives collateral provided where the effect of providing collateral has reduced the value of their balance sheet assets under their operative accounting framework .

139 · Banks must calculate NGR on a counterparty by counterparty basis for all transactions that are subject to legally enforceable netting agreements.

16 · 4.3.8 Treatment of cash variation margin: in the treatment of derivative exposures for the purpose of the leverage ratio, the cash portion of variation margin exchanged between counterparties may be viewed as a form of pre-settlement payment, if the following conditions are met:

140 · A QCCP is as defined in the paragraph 5.15.3.2 .

141 · Cash variation margin would satisfy the non-segregation criterion if the recipient counterparty has no restrictions on the ability to use the cash received (i.e., the cash variation margin received is used as its own cash). Further, this criterion would be met if the cash received by the recipient counterparty is not required to be segregated by law, regulation, or any agreement with the counterparty.

142 · To meet this criterion, derivative positions must be valued daily and cash variation margin must be transferred daily to the counterparty or to the counterparty's account, as appropriate.

143 · For this paragraph, currency of settlement means any currency of settlement specified in the derivative contract, governing qualifying master netting agreement (MNA), or the credit support annex (CSA) to the qualifying MNA. The Basel Committee will review the issue further for an appropriate treatment in this regard.

144 · Cash variation margin exchanged on the morning of the subsequent trading day based on the previous, end-ofday market values would meet this criterion, provided that the variation margin exchanged is the full amount that would be necessary to fully extinguish the mark-to-market exposure of the derivative subject to applicable threshold and minimum transfer amounts.

145 · A Master MNA may be deemed to be a single MNA for this purpose.

146 · To the extent that the criteria in this paragraph include the term "master netting agreement", this term should be read as including any "netting agreement" that provides legally enforceable rights of offsets. This is to take account of the fact that no standardisation has currently emerged for netting agreements employed by CCPs

147 · A master netting agreement (MNA) is deemed to meet this criterion if it satisfies the conditions as specified in Annex 20 (part B).

16 · 4.3.9 If the conditions in paragraph 16.4.3.8 are met, the cash portion of variation margin received may be used to reduce the replacement cost portion of the leverage ratio exposure measure, and the receivables assets from cash variation margin provided may be deducted from the leverage ratio exposure measure as follows:

16 · 4.3.10 Treatment of clearing services: where a bank acting as clearing member (CM) 148 offers clearing services to clients, the clearing member's trade exposures 149 to the central counterparty (CCP) that arise when the clearing member is obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that the CCP defaults, must be captured by applying the same treatment that applies to any other type of derivatives transactions. However, if the clearing member, based on the contractual arrangements with the client, is not obligated to reimburse the client for any losses suffered due to changes in the value of its transactions in the event that a QCCP defaults, the clearing member need not recognise the resulting trade exposures to the QCCP in the leverage ratio exposure measure 150 .

16 · 4.3.11 Where a client enters directly into a derivatives transaction with the CCP and the CM guarantees the performance of its clients' derivative trade exposures to the CCP, the bank acting as the clearing member for the client to the CCP must calculate its related leverage ratio exposure resulting from the guarantee as a derivative exposure as set out in paragraphs 16.4.3.2 to

148 · A Clearing Member (CM) is as defined in the paragraph 5.15.3.2 .

149 · For the purposes of paragraphs 16.4.3.9 and 16.4.3.10, "trade exposures" includes initial margin irrespective of whether or not it is posted in a manner that makes it remote from the insolvency of the CCP.

150 · An affiliated entity to the bank acting as a clearing member (CM) may be considered a client for the purpose of this paragraph of the Basel III leverage ratio framework if it is outside the relevant scope of regulatory consolidation at the level at which the Basel III leverage ratio is applied. In contrast, if an affiliate entity falls within the regulatory scope of consolidation, the trade between the affiliate entity and the CM is eliminated in the course of consolidation, but the CM still has a trade exposure to the qualifying central counterparty (QCCP), which will be considered proprietary and the exemption in this paragraph no longer applies.

16 · 4.3.9, as if it had entered directly into the transaction with the client, including with regard to the receipt or provision of cash variation margin.

16 · 4.3.12 Additional treatment for written credit derivatives: in addition to the CCR exposure arising from the fair value of the contracts, written credit derivatives create a notional credit exposure arising from the creditworthiness of the reference entity. It is therefore appropriate to treat written credit derivatives consistently with cash instruments (e.g. , loans, bonds) for the purposes of the exposure measure.

16 · 4.3.13 In order to capture the credit exposure to the underlying reference entity, in addition to the above CCR treatment for derivatives and related collateral, the effective notional amount 151 referenced by a written credit derivative is to be included in the exposure measure. The effective notional amount of a written credit derivative may be reduced by any negative change in fair value amount that has been incorporated into the calculation of Tier 1 capital with respect to the written credit derivative152. The resulting amount may be further reduced by the effective notional amount of a purchased credit derivative on the same reference name provided 153154 :

16 · 4.3.14 Since written credit derivatives are included in the exposure measure at their effective notional amounts, and are also subject to add-on amounts for PFE, the exposure measure for

151 · The effective notional amount is obtained by adjusting the notional amount to reflect the true exposure of contracts that are leveraged or otherwise enhanced by the structure of the transaction.

152 · A negative change in fair value is meant to refer to a negative fair value of a credit derivative that is recognised in Tier 1 capital. This treatment is consistent with the rationale that the effective notional amounts included in the exposure measure may be capped at the level of the maximum potential loss, which means the maximum potential loss at the reporting date is the notional amount of the credit derivative minus any negative fair value that has already reduced Tier 1 capital. For example, if a written credit derivative had a positive fair value of 20 on one date and has a negative fair value of 10 on a subsequent reporting date, the effective notional amount of the credit derivative may be reduced by 10. The effective notional amount cannot be reduced by 30. However, if at the subsequent reporting date the credit derivative has a positive fair value of 5, the effective notional amount cannot be reduced at all.

153 · Two reference names are considered identical only if they refer to the same legal entity. For single-name credit derivatives, protection purchased that references a subordinated position may offset protection sold on a more senior position of the same reference entity as long as a credit event on the senior reference asset would result in a credit event on the subordinated reference asset.

154 · The effective notional amount of a written credit derivative may be reduced by any negative change in fair value reflected in the bank's Tier 1 capital provided the effective notional amount of the offsetting purchased credit protection is also reduced by any resulting positive change in fair value reflected in Tier 1 capital.

155 · For tranched products if applicable, the purchased protection must be on a reference obligation with the same level of seniority.

16 · 4.4 Securities financing transaction exposures

16 · 4.4.1 SFTs157 are included in the exposure measure according to the treatment described in the following paragraphs. The treatment recognises that secured lending and borrowing in the form of SFTs is an important source of leverage and ensures consistent international implementation by providing a common measure for dealing with the main differences in the operative accounting frameworks.

16 · 4.4.2 General treatment (bank acting as principal): the sum of the amounts in subparagraphs (A) and (B) below are to be included in the leverage ratio exposure measure:

156 · In these cases, where effective bilateral netting contracts are in place, and when calculating ANet = 0.4·AGross+ 0.6·NGR·A Gross as per paragraphs 16.4.3.2 to 16.4.3.4, AGross may be reduced by the individual add-on amounts (i.e., notionals multiplied by the appropriate add-on factors) which relate to written credit derivatives whose notional amounts are included in the leverage ratio exposure measure. However, no adjustments must be made to NGR. Where effective bilateral netting contracts are not in place, the PFE add-on may be set to zero in order to avoid the double -counting described in this paragraph.

157 · SFTs are transactions such as repurchase agreements, reverse repurchase agreements, security lending and borrowing, and margin lending transactions, where the value of the transactions depends on market valuations and the transactions are often subject to margin agreements.

158 · For SFT assets subject to novation and cleared through QCCPs, "gross SFT assets recognised for accounting purposes" are replaced by the final contractual exposure, given that pre-existing contracts have been replaced by new legal obligations through the novation process.

159 · Gross SFT assets recognised for accounting purposes must not recognise any accounting netting of cash payables against cash receivables (e.g., as currently permitted under the IFRS and US GAAP accounting frameworks). This regulatory treatment has the benefit of avoiding inconsistencies from netting which may arise across different accounting regimes.

160 · This may apply, for example, under US GAAP where securities received under an SFT may be recognised as assets if the recipient has the right to rehypothecate but has not done so.

161 · This latter condition ensures that any issues arising from the securities leg of the SFTs do not interfere with the completion of the net settlement of the cash receivables and payables.

162 · To achieve functional equivalence, all transactions must be settled through the same settlement mechanism. The failure of any single securities transaction in the settlement mechanism should delay settlement of only the matching cash leg or create an obligation to the settlement mechanism, supported by an associated credit facility. Further, if there is a failure of the securities leg of a transaction in such a mechanism at the end of the window for settlement in the settlement mechanism, then this transaction and its matching cash leg must be split out from the netting set and treated gross for the purposes of the Basel III leverage ratio exposure measure. Specifically, the criteria in this paragraph are not intended to preclude a Delivery-versus-Payment (DVP) settlement mechanism or other type of settlement mechanism, provided that the settlement mechanism meets the functional requirements set out in this paragraph. For example, a settlement mechanism may meet these functional requirements if any failed transaction (that is, the securities that failed to transfer and the related cash receivable or payable) can be re-entered in the settlement mechanism until they are settled.

163 · A "qualifying" MNA is one that meets the requirements under Annex 20 - Part A.

16 · 4.4.3 Sale accounting transactions: leverage may remain with the lender of the security in an SFT whether or not sale accounting is achieved under the operative accounting framework. As such, where sale accounting is achieved for an SFT under the bank's operative accounting framework, the bank must reverse all sales-related accounting entries, and then calculate its exposure as if the SFT had been treated as a financing transaction under the operative accounting framework (i.e. , the bank must include the sum of amounts in sub -paragraphs (A) and (B) of paragraph 16.4.4.2 for such an SFT) for the purposes of determining its exposure measure.

16 · 4.4.4 Bank acting as agent: a bank acting as agent in an SFT generally provides an indemnity or guarantee to only one of the two parties involved, and only for the difference between the value of the security or cash its customer has lent and the value of collateral the borrower has provided. In this situation, the bank is exposed to the counterparty of its customer for the difference in values rather than to the full exposure to the underlying security or cash of the transaction (as is the case where the bank is one of the principals in the transaction). Where the bank does not own/control the underlying cash or security resource, that resource cannot be leveraged by the bank.

16 · 4.4.5 Where a bank acting as agent in an SFT provides an indemnity or guarantee to a customer or counterparty for any difference between the value of the security or cash the customer has lent and the value of collateral the borrower has provided, then the bank will be required to calculate its exposure measure by applying only subparagraph (B) of paragraph 16.4.4.2164 .

16 · 4.4.6 A bank acting as agent in an SFT and providing an indemnity or guarantee to a customer or counterparty will be considered eligible for the exceptional treatment set out in paragraph 16.4.4.5 only if the bank's exposure to the transaction is limited to the guaranteed difference between the value of the security or cash its customer has lent and the value of the collateral the borrower has provided. In situations where the bank is further economically exposed (i.e. , beyond the guarantee for the difference) to the underlying security or cash in the transaction 165 , a further exposure equal to the full amount of the security or cash must be included in the exposure measure.

16 · 4.4.7 An illustrative example of exposure measure for SFT transactions are furnished in Annex 13 .

16 · 4.5 Off -balance sheet items

164 · Where, in addition to the conditions in paragraphs 16.4.4.4 to 16.4.4.6, a bank acting as an agent in an SFT does not provide an indemnity or guarantee to any of the involved parties, the bank is not exposed to the SFT and therefore need not recognise those SFTs in its exposure measure.

165 · For example, due to the bank managing collateral received in the bank's name or on its own account rather than on the customer's or borrower's account (e.g., by on-lending or managing unsegregated collateral, cash or securities).

16 · 4.5.1 This paragraph explains the treatment of off-balance sheet (OBS) items into the leverage ratio exposure measure. OBS items include commitments (including liquidity facilities), whether or not unconditionally cancellable, direct credit substitutes, acceptances, standby letters of credit, trade letters of credit, etc.

16 · 4.5.2 In the risk -based capital framework, OBS items are converted under the standardised approach into credit exposure equivalents through the use of credit conversion factors (CCFs) 166 . For the purpose of determining the exposure amount of OBS items for the leverage ratio, the CCFs set out in the following paragraphs must be applied to the notional amount 167 .

166 · Please refer to paragraph 5.15.1.

167 · These correspond to the CCFs of the standardised approach for credit risk under paragraph 5.15.2 (including Table 8), subject to a floor of 10%. The floor of 10% will affect commitments that are unconditionally cancellable at any time by the bank without prior notice, or that effectively provide for automatic cancellation due to deterioration in a borrower's creditworthiness. These may receive a 0% CCF under the risk-based capital framework. For any OBS item not specifically mentioned under paragraph 16.4.5.2, the applicable CCF for that item will be as indicated in the paragraph 5.15.2 above.

16 · 5 Disclosure and Reporting requirements

16 · 5.1 Banks are required to publicly disclose their Basel III leverage ratio on a consolidated basis.

16 · 5.2 To enable market participants to reconcile leverage ratio disclosures with banks' published financial statements from period to period, and to compare the capital adequacy of banks, it is important that banks adopt a consistent and common disclosure of the main components of the leverage ratio, while also reconciling these disclosures with their published financial statements.

16 · 5.3 To facilitate consistency and ease of use of disclosures relating to the composition of the leverage ratio, and to mitigate the risk of inconsistent formats undermining the objective of enhanced disclosure, banks shall publish their leverage ratio according to a common set of templates.

16 · 5.4 The public disclosure requirements include:

16 · 5.5 Banks should also report their leverage ratio to the RBI (Department of Banking Supervision) along with detailed calculations of capital and exposure measures on a quarterly basis .

16 · 5 . 6 Implementation date, frequency and location of disclosure

16 · 5 . 6.1 Banks operating in India are required to make disclosure of the leverage ratio and its components from the date of publication of their first set of financial statements / results on or after April 1, 2015. Accordingly, the first such disclosure was to be made for the quarter ending June 30, 2015.

16 · 5 . 6.2 With the exception of the mandatory quarterly frequency requirement in paragraph 16.5 . 6.3 below, detailed disclosures required according to paragraphs 16.6 must be made by banks, irrespective of whether financial statements are audited, at least on a half yearly basis (i.e. as on September 30 and March 31 of a financial year), along with other Pillar 3 disclosures as required in terms of paragraph 14.9.

16 · 5 . 6 . 3 As the leverage ratio is an important supplementary measure to the risk-based capital requirements, the same Pillar 3 disclosure requirement also applies to the leverage ratio. Therefore, banks, at a minimum, must disclose the following three items on a quarterly basis, irrespective of whether financial statements are audited:

16 · 5 . 6.4 The location of leverage ratio disclosures should be as stipulated for Pillar 3 disclosures in terms of paragraphs 14.9.3 and 14.10. However, specific to leverage ratio disclosures, banks have to make available on their websites, an ongoing archive of all reconciliation templates, disclosure templates and explanatory tables relating to prior reporting periods, instead of an archive for at least three years as required in case of Pillar 3 disclosures.

16 · 6 Disclosure templates

16 · 6.1 The summary comparison table (Table: DF-17), common disclosure template (Table: DF18) and explanatory table, qualitative reconciliation and other requirements are set out in the Annex 17: Pillar 3 disclosure requirements. Together, these ensure transparency between the values used for the calculation of the Basel III leverage ratio and the values used in banks' published financial statements.

17 · Countercyclical Capital Buffer

17 · 1 Objective

17 · 2 The Framework

17 · 2.1 The CCCB may be maintained in the form of Common Equity Tier 1 (CET 1) capital only, and the amount of the CCCB may vary from 0 to 2.5% of total risk weighted assets (RWA) of the banks. If, as per the Reserve Bank of India directives, banks are required to hold CCCB at a given

17 · 2.2 The CCCB decision would normally be pre-announced with a lead time of 4 quarters. However, depending on the CCCB indicators, the banks may be advised to build up requisite buffer in a shorter span of time.

17 · 2.3 The credit -to -GDP gap 168 shall be the main indicator in the CCCB framework in India. However, it shall not be the only reference point and shall be used in conjunction with GNPA growth. The Reserve Bank of India shall also look at other supplementary indicators for CCCB decision such as incremental C -D ratio for a moving period of three years (along with its correlation with credit -to -GDP gap and GNPA growth), Industry Outlook (IO) assessment index (along with its correlation with GNPA growth) and interest coverage ratio (along with its correlation with credit -to -GDP gap). While taking the final decision on CCCB, the Reserve Bank of India may use its discretion to use all or some of the indicators along with the credit-to-GDP gap.

17 · 2.4 The CCCB framework shall have two thresholds, viz., lower threshold and upper threshold, with respect to credit-to-GDP gap.

17 · 2.5 The same set of indicators that are used for activating CCCB (as mentioned in paragraph 4) may be used to arrive at the decision for the release phase of the CCCB. However, discretion

168 · Credit -to -GDP gap is the difference between credit-to-GDP ratio and the long term trend value of credit-to-GDP ratio at any point in time.

169 · The CCCB requirement shall increase linearly from 0 to 20 basis points when credit-to-GDP gap moves from 3 to 7 percentage points. Similarly, for above 7 and up to 11 percentage points range of credit-to-GDP gap, CCCB requirement shall increase linearly from above 20 to 90 basis points. Finally, for above 11 and up to 15 percentage points range of credit-to-GDP gap, the CCCB requirement shall increase linearly from above 90 to 250 basis points. However, if the credit-to-GDP gap exceeds 15 percentage points, the buffer shall remain at 2.5 per cent of the RWA.

17 · 2.6 For all banks operating in India, CCCB shall be maintained on a solo basis as well as on consolidated basis.

17 · 2.7 All banks operating in India (both foreign and domestic banks) should maintain capital for Indian operations under CCCB framework based on their exposures in India.

17 · 2.8 Banks incorporated in India having international presence shall maintain adequate capital under CCCB as prescribed by the host supervisors in respective jurisdictions. The banks, based on the geographic location of their private sector credit exposures (including non-bank financial sector exposures), shall calculate their bank specific CCCB requirement as a weighted 170 average of the requirements that are being applied in respective jurisdictions. The Reserve Bank of India may also ask Indian banks to keep excess capital under CCCB framework for exposures in any of the host countries they are operating if it feels the CCCB requirement in host country is not adequate.

17 · 2.9 Banks will be subject to restrictions on discretionary distributions (may include dividend payments, share buybacks and staff bonus payments) if they do not meet the requirement on countercyclical capital buffer which is an extension of the requirement for capital conservation buffer (CCB). Assuming a concurrent requirement of CCB of 2.5% and CCCB of 2.5% of total RWAs, the required conservation ratio (restriction on discretionary distribution) of a bank, at various levels of CET1 capital held is illustrated in Table-23 .

170 · Weight = (bank's total credit risk charge that relates to private sector credit exposures in that jurisdiction/ bank's total credit risk charge that relates to private sector credit exposures across all jurisdictions), where credit includes all private sector credit exposures that attract a credit risk capital charge, or the risk weighted equivalent trading book capital charges for specific risk, IRC and securitisation.

17 · 2.10 Banks must ensure that their CCCB requirements are calculated and publicly disclosed with at least the same frequency as their minimum capital requirements as applicable in various jurisdictions. The buffer should be based on the latest relevant jurisdictional CCCB requirements that are applicable on the date that they calculate their minimum capital requirement. In addition, when disclosing their buffer requirement, banks must also disclose the geographic breakdown of their private sector credit exposures used in the calculation of the buffer requirement .

17 · 3 The CCCB decisions may form a part of the first bi-monthly monetary policy statement of the Reserve Bank of India for the year. However, more frequent communications in this regard may be made by the Reserve Bank of India, if warranted by changes in economic conditions .

17 · 4 The indicators and thresholds for CCCB decisions mentioned above shall be subject to continuous review and empirical testing for their usefulness and other indicators may also be used by the Reserve Bank of India to support CCCB decisions .

171 · First CET 1 ratio band = Minimum CET 1 ratio + 25% of CCB + 25% of applicable CCCB. For subsequent bands, starting point will be the upper limit of previous band. However, it may be mentioned that CET 1 ratio band may change depending on various capital/buffer requirements (e.g., D-SIB buffer) as prescribed by the Reserve Bank of India from time to time. Accordingly, lower and upper values of the bands as given in Table-25 will undergo changes.

2 · Represents the most subordinated claim in liquidation of the bank.

8 · Distributions are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions, including in respect of other elements classified as the highest quality issued capital.

9 · It is the paid-up capital that takes the first and proportionately greatest share of any losses as they occur 172 . Within the highest quality capital, each instrument absorbs losses on a going concern basis proportionately and pari passu with all the others.

10 · The paid up amount is classified as equity capital (i.e. not recognised as a liability) for determining balance sheet insolvency.

11 · The paid up amount is classified as equity under the relevant accounting standards.

12 · It is directly issued and paid up and the bank cannot directly or indirectly have funded the purchase of the instrument 173 . Banks should also not extend loans against their own shares.

13 · The paid up amount is neither secured nor covered by a guarantee of the issuer or related entity 174 nor subject to any other arrangement that legally or economically enhances the seniority of the claim.

14 · Paid up capital is only issued with the approval of the owners of the issuing bank, either given directly by the owners or, if permitted by applicable law, given by the Board of Directors or by other persons duly authorised by the owners.

15 · Paid up capital is clearly and separately disclosed in the bank's balance sheet.

172 · In cases where capital instruments have a permanent write-down feature, this criterion is still deemed to be met by common shares.

173 · Banks should not grant advances against its own shares as this would be construed as indirect funding of its own capital.

174 · A related entity can include a parent company, a sister company, a subsidiary or any other affiliate. A holding company is a related entity irrespective of whether it forms part of the consolidated banking group.

1 · Represents the most subordinated claim in liquidation of the Indian operations of the bank.

2 · Entitled to a claim on the residual assets which is proportional to its share of paid up capital, after all senior claims have been repaid in liquidation (i.e. has an unlimited and variable claim, not a fixed or capped claim).

3 · Principal is perpetual and never repaid outside of liquidation (except with the approval of RBI).

4 · Distributions to the Head Office of the bank are paid out of distributable items. The level of distributions is not in any way tied or linked to the amount paid up at issuance and is not subject to a contractual cap (except to the extent that a bank is unable to pay distributions that exceed the level of distributable items). As regards 'distributable items', it is clarified that: the dividend on common shares/ equity will be paid out of current year's profit only.

5 · Distributions to the Head Office of the bank are paid only after all legal and contractual obligations have been met and payments on more senior capital instruments have been made. This means that there are no preferential distributions, including in respect of other elements classified as the highest quality issued capital.

6 · This capital takes the first and proportionately greatest share of any losses as they occur 175 .

7 · It is clearly and separately disclosed in the bank's balance sheet.

175 · In cases where capital instruments have a permanent write-down feature, this criterion is still deemed to be met by common shares

1 · Terms of Issue of Instruments

1 · 1 Paid up Status

1 · 2 Amount

1 · 3 Limits

1 · 4 Maturity Period

1 · 5 Rate of Dividend

1 · 6 Optionality

1 · 7 Repurchase / Buy-back / Redemption

176 · If a bank were to call a capital instrument and replace it with an instrument that is more costly (e.g. has a higher credit spread) this might create an expectation that the bank will exercise calls on its other capital instruments.

177 · Replacement issues can be concurrent with but not after the instrument is called.

178 · Here, minimum refers to Common Equity Tier 1 of 8% of RWAs (including capital conservation buffer of 2.5% of RWAs) and Total Capital of 11.5% of RWAs including any additional capital requirement identified under Pillar 2.

1 · 8 Dividend Discretion

179 · Consequence of full discretion at all times to cancel distributions / payments is that "dividend pushers" are prohibited. An instrument with a dividend pusher obliges the issuing bank to make a dividend/coupon payment on the instrument if it has made a payment on another (typically more junior) capital instrument or share. This obligation is inconsistent with the requirement for full discretion at all times. Furthermore, the term "cancel distributions/payments" means extinguish these payments. It does not permit features that require the bank to make distributions/payments in kind.

1 · 9 Treatment in Insolvency

1 · 10 Loss Absorption Features

1 · 11 Prohibition on Purchase / Funding of PNCPS

1 · 12 Re -capitalisation

1 · 13 Reporting of Non-payment of Dividends and Non-exercise of Call Option

1 · 14 Seniority of Claim

1 · 15 Investment in Instruments Raised in Indian Rupees by Foreign Entities/NRIs

1 · 16 Compliance with Reserve Requirements

1 · 17 Reporting of Issuances

1 · 18 Investment in Additional Tier 1 Capital Instruments (PNCPS) Issued by Other Banks/ FIs

1 · 19 Classification in the Balance Sheet

1 · 20 PNCPS to Retail Investors 180

180 · Please refer to circular DBOD.BP.BC.38/21.06.201/2014 -15 dated September 1, 2014 on Implementation of Basel

1 · Terms of Issue of Instruments Denominated in Indian Rupees

1 · 1 Paid -in Status

1 · 2 Amount

1 · 3 Limits

1 · 4 Maturity Period

1 · 5 Rate of Interest

1 · 6 Optionality

1 · 7 Repurchase / Buy-back / Redemption

181 · Replacement issues can be concurrent with but not after the instrument is called.

182 · Minimum refers to Common Equity Tier 1 of 8% of RWAs (including capital conservation buffer of 2.5% of RWAs) and Total capital of 11.5% of RWAs including additional capital requirements identified under Pillar 2.

1 · 8 Coupon Discretion

183 · Consequence of full discretion at all times to cancel distributions/payments is that "dividend pushers" are prohibited. An instrument with a dividend pusher obliges the issuing bank to make a dividend/coupon payment on the instrument if it has made a payment on another (typically more junior) capital instrument or share. This obligation is inconsistent with the requirement for full discretion at all times. Furthermore, the term "cancel distributions/payments" means extinguish these payments. It does not permit features that require the bank to make distributions/payments in kind.

184 · Please refer circular no. DBR.BP.BC.No.50/21.06.201/2016 -17 dated February 02, 2017 on 'Basel III Capital Regulations- Additional Tier 1 Capital'.

185 · Please refer to clause 13(d) of Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 dated September 12, 2023 .

1 · 9 Treatment in Insolvency

1 · 10 Loss Absorption Features

1 · 11 Prohibition on Purchase / Funding of Instruments

1 · 12 Re -capitalisation

1 · 13 Reporting of Non-payment of Coupons and Non-exercise of Call Option

1 · 14 Seniority of Claim

1 · 15 Investment in Instruments Raised in Indian Rupees by Foreign Entities/NRIs

1 · 16 Terms of Issue of Instruments Denominated in Foreign Currency/ Rupee Denominated Bonds Overseas

1 · 17 Compliance with Reserve Requirements

1 · 18 Reporting of Issuances

1 · 19 Investment in Additional Tier 1 Debt Capital Instruments (PDIs) Issued by Other Banks/ FIs

186 · Not applicable to foreign banks' branches. The limit for PDIs eligible for inclusion in AT1 capital, denominated in foreign currency/rupee denominated bonds, as prescribed in para 1.16(ii) above, is also applicable to foreign banks operating under the Wholly Owned Subsidiary (WOS) model

187 · Please refer to circular no. DOR.CAP.REC.No.56/21.06.201/2021 -22 dated October 4, 2021 on Basel III Capital Regulations Perpetual Debt Instruments (PDI) in Additional Tier 1 Capital – Eligible Limit for Instruments Denominated in Foreign Currency/Rupee Denominated Bonds Overseas.

1 · 20 Classification in the Balance Sheet

1 · 21 Raising of Instruments for Inclusion as Additional Tier 1 Capital by Foreign Banks in India

188 · Please refer to circular DBOD.No.BP.BC.81/21.01.002/2009 -10 dated March 30, 2010 .

1 · 22 Perpetual Debt Instruments to Retail Investors 189

189 · Please refer to circular DBOD.BP.BC.38/21.06.201/2014 -15 dated September 1, 2014 on Implementation of Basel

1 · Terms of Issue of Instruments Denominated in Indian Rupees

1 · 1 Paid -in Status

1 · 2 Amount

1 · 3 Maturity Period

1 · 4 Discount

1 · 5 Rate of Interest

190 · The criteria relating to loss absorbency through conversion / write-down / write-off at the point of non-viability are furnished in Annex 16.

1 · 6 Optionality

1 · 7 Treatment in Bankruptcy / Liquidation

1 · 8 Prohibition on Purchase / Funding of Instruments

191 · Replacement issues can be concurrent with but not after the instrument is called.

192 · Minimum refers to Common Equity ratio of 8% of RWAs (including capital conservation buffer of 2.5% of RWAs)

1 · 9 Reporting of Non-payment of Coupons and Non-exercise of Call Option

1 · 10 Seniority of Claim

1 · 11 Investment in Instruments Raised in Indian Rupees by Foreign Entities/NRIs

1 · 11A Issuance of rupee denominated bonds overseas by Indian banks

1 · 12 Terms of Issue of Tier 2 Debt Capital Instruments in Foreign Currency

193 · Not applicable to foreign banks' branches.

1 · 13 Compliance with Reserve Requirements

1 · 14 Reporting of Issuances

1 · 15 Investment in Tier 2 Debt Capital Instruments Issued by Other Banks/ FIs

1 · 16 Classification in the Balance Sheet

194 · Includes both foreign currency and rupee denominated bonds raised overseas.

1 · 17 Debt Capital Instruments to Retail Investors 195 , 196

1 · 18 Raising of Instruments for Inclusion as Tier 2 Capital by Foreign Banks in India

195 · Please refer to circular DBOD.BP.BC.No.69 / 21.01.002/ 2009 -10 dated January 13, 2010 .

196 · Please also refer to the circular DBOD.BP.BC.No.72/21.01.002/2012 -13 dated January 24, 2013 on 'Retail Issue of Subordinated Debt for Raising Tier 2 Capital', in terms of which banks were advised that with a view to deepening the corporate bond market in India through enhanced retail participation, banks, while issuing subordinated debt for raising Tier 2 capital, are encouraged to consider the option of raising such funds through public issue to retail investors. However, while doing so banks are advised to adhere to the conditions prescribed in circular dated January 13, 2010 so as to ensure that the investor is aware of the risk characteristics of regulatory capital instruments.

1 · . 19 Requirements

1 · 20 Hedging

1 · 21 Reporting and Certification

1 · Terms of Issue of Instruments197

1 · 1 Paid -in Status

1 · 2 Amount

1 · 3 Maturity Period

1 · 4 Amortisation

1 · 5 Coupon

197 · The criteria relating to loss absorbency through conversion / write-down / write-off at the point of non-viability are furnished in Annex 16.

1 · 6 Optionality

1 · 7 Treatment in Bankruptcy / Liquidation

1 · 8 Prohibition on Purchase / Funding

198 · Replacement issues can be concurrent with but not after the instrument is called.

199 · Minimum refers to Common Equity Tier 1 of 8% of RWAs (including capital conservation buffer of 2.5% of RWAs) and Total Capital of 11.5% of RWAs including and additional capital identifies under Pillar 2.

1 · 9 Reporting of Non-payment of Coupon and Non-exercise of Call Option

1 · 10 Seniority of Claim

1 · 11 Investment in Instruments Raised in Indian Rupees by Foreign Entities/NRIs

1 · 12 Compliance with Reserve Requirements

1 · 13 Reporting of Issuances

1 · 14 Investment in these Instruments Issued by other Banks/ FIs

1 · 15 Classification in the Balance Sheet

1 · 16 PCPS/RNCPS/RCPS to Retail Investors 200

200 · Please refer to circular DBOD.BP.BC.38/21.06.201/2014 -15 dated September 1, 2014 on Implementation of Basel III Capital Regulations in India – Amendments.

1 · Introduction

2 · Definitions

3 · . Classification of CDS into Trading Book and Banking Book Positions

4 · Operational requirements for CDS to be recognised as eligible External / Third-party hedges for Trading Book and Banking Book

201 · The maturity of the underlying exposure and the maturity of the hedge should be defined conservatively. The effective maturity of the underlying should be gauged as the longest possible remaining time before the counterparty is scheduled to fulfill its obligation, taking into account any applicable grace period.

5 · Capital Adequacy Requirement for CDS Positions in the Banking Book

5 · 1 Recognition of External/Third-party CDS Hedges

5 · 1.1 In case of Banking Book positions hedged by bought CDS positions, no exposure will be reckoned against the reference entity / underlying asset in respect of the hedged exposure, and exposure will be deemed to have been substituted by the protection seller, if the following conditions are satisfied:

5 · 1.2 If the conditions (a) and (b) above are not satisfied or the bank breaches any of these conditions subsequently, the bank shall reckon the exposure on the underlying asset; and the CDS position will be transferred to Trading Book where it will be subject to specific risk, counterparty credit risk and general market risk (wherever applicable) capital requirements as applicable to Trading Book.

202 · Basel II Framework has been modified and enhanced by Basel III capital regulations. Therefore, a reference to Basel II Framework in this Annex should now be construed as reference to Basel III guidelines as contained in this Master Circular

5 · 1.3 The unprotected portion of the underlying exposure should be risk-weighted as applicable under Basel II framework. The amount of credit protection shall be adjusted if there are any mismatches between the underlying asset/ obligation and the reference / deliverable asset / obligation with regard to asset or maturity. These are dealt with in detail in the following paragraphs.

5 · 2 Internal Hedges

6 · Capital Adequacy for CDS in the Trading Book

6 · 1 General Market Risk

6 · 2 Specific Risk for Exposure to Reference Entity

203 · Under Basel II, the specific risk capital charge for risk exposures to corporate bonds, CDS contracts, etc., held in Trading Book have been calibrated, keeping in view the generally short time horizon of the Trading Book. In case such positions remain in the Trading Book for longer time horizons, these are exposed to higher credit risk. In such

6 · 2.1 Specific Risk Capital Charges for Positions Hedged by CDS 204

204 · This paragraph will be applicable only in those cases where a CDS position is explicitly meant for hedging a Trading Book exposure. In other words, a bank cannot treat a CDS position as a hedge against any other Trading Book exposure if it was not intended to be as such ab initio .

6 · 2.2 Specific Risk Charge in CDS Positions which are not meant for Hedging

205 · A cash position in corporate bond in Trading Book hedged by a CDS position, even where the reference obligation and the underlying bonds are the same, will not qualify for 100% offset because a CDS cannot guarantee a 100% match between the market value of CDS and the appreciation / depreciation in the underlying bond at all times. This paragraph will apply only when two legs consist of completely identical CDS instruments.

206 · For example, if specific risk charge on long position (corporate bond) comes to Rs.1000 and that on the short position (credit protection bought through CDS) comes to Rs.700, there will be no capital change on the short position and the long position will attract specific risk capital charge of Rs.200 (1000-80% of 1000). Banks will not be allowed to offset specific risk charges between two opposite CDS positions which are not completely identical.

7 · Capital Charge for Counterparty Credit Risk

7 · 1 Protection Seller

7 · 2 Protection Buyer

207 · A CDS contract, which is required to be marked-to-market, creates bilateral exposure for the parties to the contract. The mark -to -market value of a CDS contract is the difference between the default -adjusted present value of protection payment (called "protection leg" / "credit leg") and the present value of premium payable called ("premium leg"). If the value of credit leg is less than the value of the premium leg, then the marked-to-market value for the protection seller in positive. Therefore, the protection seller will have exposure to the counterparty (protection buyer) if the value of premium leg is more than the value of credit leg. In case, no premium is outstanding, the value of premium leg will be zero and the mark-to-market value of the CDS contract will always be negative for the protection seller and therefore, protection seller will not have any exposure to the protection buyer. In no case, the protection seller's exposure on protection buyer can exceed the amount of the premium unpaid. For the purpose of capital adequacy as well as exposure norms, the measure of counterparty exposures in case of CDS transaction held in Trading Book is the Potential Future Exposure (PFE) which is measured and recognised as per Current Exposure Method.

208 · The add -on factors will be the same regardless of maturity of the reference obligations or CDS contract.

7 · 3 Capital Charge for Counterparty risk for Collateralised Transactions in CDS

8 · Treatment of Exposures Below Materiality Thresholds

9 · General Provisions Requirements

10 · Prudential Treatment Post -Credit Event

209 · The add -on factors will be the same regardless of maturity of the reference obligations or CDS contract.

10 · 1 Protection Buyer

10 · 2 Protection Seller

10 · 2.1 From the date of credit event and until the credit event payment in accordance with the CDS contract, the protection seller shall debit the Profit and Loss account and recognise a liability to pay to the protection buyer, for an amount equal to fair value of the contract (notional of credit protection less expected recovery value). In case, the fair value of the deliverable obligation (in case of physical settlement) / reference obligation (in case of cash settlement) is not available after the date of the credit event, then until the time that value is available, the protection seller should debit the Profit and Loss account for the full amount of the protection sold and recognise a liability to pay to the protection buyer equal to that amount.

10 · 2.2 In case of physical settlement, after the credit event payment, the protection seller shall recognise the assets received, if any, from the protection buyer at the fair value. These investments will be classified as non -performing investments and valued in terms of paragraph 19 of the Master Direction – Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2021 . Thereafter, the protection seller shall subject these assets to the appropriate prudential treatment as applicable to corporate bonds.

11 · Exposure Norms

11 · 1 For the present, the CDS is primarily intended to provide an avenue to investors for hedging credit risk in the corporate bonds, after they have invested in the bonds. It should, therefore, not be used as a substitute for a bank guarantee. Accordingly, a bank should not sell credit protection by writing a CDS on a corporate bond on the date of its issuance in the primary market or undertake, before or at the time of issuance of the bonds, to write such protection in future210 .

210 · As per extant instructions issued by RBI, banks are not permitted to guarantee the repayment of principal and/or interest due on corporate bonds. Considering this restriction, writing credit protection through CDS on a corporate bond on the date of its issuance or undertaking, before or at the time of issuance, to write such protection in future, will be deemed to be a violation of the said instructions.

11 · 2 Exposure on account of all CDS contracts will be aggregated and combined with other onbalance sheet and offfbalance sheet exposures against the reference entity for the purpose of complying with the exposure norms.

11 · 3 Protection Seller

11 · 4 Protection Buyer

12 · . Reporting Requirements

211 · In a CDS transaction, the protection buyer does not suffer a loss when reference entity defaults; it rather gains in such a situation.

1 · Calculation of positions

2 · Calculation of capital charges for derivatives under the Standardised Methodology

2 · In the simplified approach , the positions for the options and the associated underlying, cash or forward, are not subject to the standardised methodology but rather are "carved-out" and subject to separately calculated capital charges that incorporate both general market risk and specific risk. The risk numbers thus generated are then added to the capital charges for the relevant category, i.e. , interest rate related instruments, equities, and foreign exchange as described in paragraph 8.3 to 8.5 of this Master Circular. The delta-plus method uses the sensitivity parameters or "Greek letters" associated with options to measure their market risk and capital requirements. Under this method, the delta-equivalent position of each option becomes part of the standardised methodology set out in paragraph 8.3 to 8.5 of this Master Circular with the delta -equivalent amount subject to the applicable general market risk charges. Separate capital charges are then applied to the gamma and Vega risks of the option positions. The scenario approach uses simulation techniques to calculate changes in the value of an options portfolio for changes in the level and volatility of its associated underlyings. Under this approach, the general market risk charge is determined by the scenario "grid" (i.e. , the specified combination of underlying and volatility changes) that produces the largest loss. For the delta-plus method and the scenario approach the specific risk capital charges are determined separately by multiplying the delta -equivalent of each option by the specific risk weights set out in paragraph 8.3 to 8.4 of this Master Circular .

3 · Banks which handle a limited range of purchased options only will be free to use the simplified approach set out in Table B below, for particular trades. As an example of how the calculation would work, if a holder of 100 shares currently valued at Rs.10 each holds an equivalent put option with a strike price of Rs.11, the capital charge would be: Rs.1,000 x 18 per cent (i.e. , 9 per cent specific plus 9 per cent general market risk) = Rs.180, less the amount the option is in the money (Rs.11 – Rs.10) x 100 = Rs.100, i.e. , the capital charge would be Rs.80. A similar methodology applies for options whose underlying is a foreign currency or an interest rate related instrument.

212 · Unless all their written option positions are hedged by perfectly matched long positions in exactly the same options, in which case no capital charge for market risk is required.

4 · Banks which write options will be allowed to include delta-weighted options positions within the standardised methodology set out in paragraph 8.3 to 8.5 of this Master Circular. Such options should be reported as a position equal to the market value of the underlying multiplied by the delta.

213 · In some cases, such as foreign exchange, it may be unclear which side is the "underlying security"; this should be taken to be the asset which would be received if the option were exercised. In addition, the nominal value should be used for items where the market value of the underlying instrument could be zero, e.g., caps and floors, swaptions etc.

214 · Some options (e.g., where the underlying is an interest rate or a currency) bear no specific risk, but specific risk shall be present in the case of options on certain interest rate-related instruments (e.g., options on a corporate debt security or corporate bond index; see Section B for the relevant capital charges) and for options on equities and stock indices (see Section C). The charge under this measure for currency options will be 9 per cent.

215 · For options with a residual maturity of more than six months, the strike price should be compared with the forward, not current, price. A bank unable to do this must take the "in-the-money" amount to be zero.

216 · Where the position does not fall within the trading book (i.e., options on certain foreign exchange or commodities positions not belonging to the trading book), it may be acceptable to use the book value instead.

217 · Reserve Bank of India may wish to require banks doing business in certain classes of exotic options (e.g., barriers, digitals) or in options "at-the-money" that are close to expiry to use either the scenario approach or the internal models' alternative, both of which can accommodate more detailed revaluation approaches.

5 · Delta -weighted positions with debt securities or interest rates as the underlying will be slotted into the interest rate time -bands, as set out in Table 15 of paragraph 8.3 of this Master Circular, under the following procedure. A two-legged approach should be used as for other derivatives, requiring one entry at the time the underlying contract takes effect and a second at the time the underlying contract matures. For instance, a bought call option on a June three-month interest -rate future will in April be considered, on the basis of its delta-equivalent value, to be a long position with a maturity of five months and a short position with a maturity of two months 218 . The written option will be similarly slotted as a long position with a maturity of two months and a short position with a maturity of five months. Floating rate instruments with caps or floors will be treated as a combination of floating rate securities and a series of European-style options. For example, the holder of a three-year floating rate bond indexed to six month LIBOR with a cap of 15 per cent will treat it as:

6 · The capital charge for options with equities as the underlying will also be based on the delta -weighted positions which will be incorporated in the measure of market risk described in paragraph 8.4 of this Master Circular. For purposes of this calculation each national market is to be treated as a separate underlying. The capital charge for options on foreign exchange and gold positions will be based on the method set out in paragraph 8.5 of this Master Circular. For delta risk, the net delta-based equivalent of the foreign currency and gold options will be incorporated into the measurement of the exposure for the respective currency (or gold) position .

7 · In addition to the above capital charges arising from delta risk, there will be further capital charges for gamma and for Vega risk. Banks using the delta-plus method will be required to calculate the gamma and Vega for each option position (including hedge positions) separately. The capital charges should be calculated in the following way:

218 · Two -months call option on a bond future, where delivery of the bond takes place in September, would be considered in April as being long the bond and short a five-month deposit, both positions being delta-weighted.

219 · The rules applying to closely-matched positions set out in paragraph 2 (a) of this Annex shall also apply in this respect.

8 · More sophisticated banks will also have the right to base the market risk capital charge for options portfolios and associated hedging positions on scenario matrix analysis. This will be accomplished by specifying a fixed range of changes in the option portfolio's risk factors and calculating changes in the value of the option portfolio at various points along this "grid". For the purpose of calculating the capital charge, the bank will revalue the option portfolio using matrices for simultaneous changes in the option's underlying rate or price and in the volatility of that rate

220 · The basic rules set out here for interest rate and equity options do not attempt to capture specific risk when calculating gamma capital charges. However, Reserve Bank may require specific banks to do so.

221 · Positions have to be slotted into separate maturity ladders by currency.

222 · Banks using the duration method should use the time-bands as set out in Table 16 of this Master Circular.

9 · The options and related hedging positions will be evaluated over a specified range above and below the current value of the underlying. The range for interest rates is consistent with the assumed changes in yield in Table-15 of paragraph 8.3 of this Master Circular. Those banks using the alternative method for interest rate options set out in paragraph 8 above should use, for each set of time -bands, the highest of the assumed changes in yield applicable to the group to which the time -bands belong 223 . T The other ranges are ±9 per cent for equities and ±9 per cent for foreign exchange and gold. For all risk categories, at least seven observations (including the current observation) should be used to divide the range into equally spaced intervals.

10 · The second dimension of the matrix entails a change in the volatility of the underlying rate or price. A single change in the volatility of the underlying rate or price equal to a shift in volatility of + 25 per cent and - 25 per cent is expected to be sufficient in most cases. As circumstances warrant, however, the Reserve Bank may choose to require that a different change in volatility be used and / or that intermediate points on the grid be calculated .

11 · After calculating the matrix, each cell contains the net profit or loss of the option and the underlying hedge instrument. The capital charge for each underlying will then be calculated as the largest loss contained in the matrix.

12 · In drawing up these intermediate approaches it has been sought to cover the major risks associated with options. In doing so, it is conscious that so far as specific risk is concerned, only the delta -related elements are captured; to capture other risks would necessitate a much more complex regime. On the other hand, in other areas the simplifying assumptions used have resulted in a relatively conservative treatment of certain options positions.

13 · Besides the options risks mentioned above, the RBI is conscious of the other risks also associated with options, e.g. , rho (rate of change of the value of the option with respect to the interest rate) and theta (rate of change of the value of the option with respect to time). While not proposing a measurement system for those risks at present, it expects banks undertaking significant options business at the very least to monitor such risks closely. Additionally, banks will be permitted to incorporate rho into their capital calculations for interest rate risk, if they wish to do so.

223 · If, for example, the time-bands 3 to 4 years, 4 to 5 years and 5 to 7 years are combined, the highest assumed change in yield of these three bands would be 0.75.

2 · The approach prescribed in the BCBS Paper on "Principles for the Management and Supervision of Interest Rate Risk"

3 · Methods for measurement of the IRRBB

3 · 1 Impact on Earnings

224 · International Convergence of Capital Measurement and Capital Standards (June 2006) released by the Basel Committee on Banking Supervision.

3 · 2 Impact of IRRBB on the Market Value of Equity (MVE)

3 · 2.1 Method indicated in the BCBS Paper on "Principles for the Management and Supervision of Interest Rate Risk"

3 · 2.2 Other techniques for Interest rate risk measurement

225 · Principles for the Management and Supervision of Interest Rate Risk (July 2004).

4 · Suggested approach for measuring the impact of IRRBB on capital

4 · 1 As per Basel II Framework, if the supervisor feels that the bank is not holding capital commensurate with the level of IRRBB, it may either require the bank to reduce the risk or allocate additional capital or a combination of the two.

4 · 2 The banks can decide, with the approval of the Board, on the appropriate level of interest rate risk in the banking book which they would like to carry keeping in view their capital level, interest rate management skills and the ability to re-balance the banking book portfolios quickly in case of adverse movement in the interest rates. In any case, a level of interest rate risk which generates a drop in the MVE of more than 20 per cent with an interest rate shock of 200 basis points, will be treated as excessive and such banks would normally be required by the RBI to hold additional capital against IRRBB as determined during the SREP. The banks which have IRRBB exposure equivalent to less than 20 per cent drop in the MVE may also be required to hold additional capital if the level of interest rate risk is considered, by the RBI, to be high in relation to their capital level or the quality of interest rate risk management framework obtaining in the bank. While the banks may on their own decide to hold additional capital towards IRRBB keeping in view the potential drop in their MVE, the IRR management skills and the ability to re-balance the portfolios quickly in case of adverse movement in the interest rates, the amount of exact capital add -on, if considered necessary, will be decided by the RBI as part of the SREP, in consultation with the bank.

5 · Limit setting

1 · What is an ICAAP document?

2 · Contents

226 · Master Circular DBOD.No.BP.BC.73/21.06.001/2009 -10 dated Feb 8, 2010 .

1 · INTRODUCTION

1 · 1 As indicated in paragraph 4.2.4 of this Master Circular, under Basel III non-common equity elements to be included in Tier 1 capital should absorb losses while the bank remains a going concern. Towards this end, one of the important criteria for Additional Tier 1 instruments is that these instruments should have principal loss absorption through either (i) conversion into common shares or (ii) a write-down mechanism, which allocates losses to the instrument at an objective pre -specified trigger point .

1 · 2 During the financial crisis a number of distressed banks were rescued by the public sector injecting funds in the form of common equity and other forms of Tier 1 capital. While this had the effect of supporting depositors it also meant that Tier 2 capital instruments (mainly subordinated debt), and in some cases Tier 1 instruments, did not absorb losses incurred by certain large internationally-active banks that would have failed had the public sector not provided support. Therefore, Basel III requires that the terms and conditions of all non-common Tier 1 and Tier 2 capital instruments issued by a bank must have a provision that requires such instruments, at the option of the relevant authority, to either be written off or converted into common equity upon the occurrence of the trigger event.

1 · 3 Therefore, in order for an instrument issued by a bank to be included in Additional (i.e. non-common) Tier 1 or in Tier 2 capital, in addition to criteria for individual types of non-equity regulatory capital instruments mentioned in Annex 3 , 4 , 5 and 6, it must also meet or exceed minimum requirements set out in the following paragraphs.

2 · LOSS ABSORPTION OF ADDITIONAL TIER 1 (AT1) INSTRUMENTS AT THE PRESPECIFIED TRIGGER

2 · 1 One of the criteria for AT1 capital instruments 228 requires that these instruments should have principal loss absorption at an objective pre-specified trigger point through either:

227 · Please refer to paragraph 2 of the circular DBOD.No.BP.BC.38/21.06.201/2014-15 dated September 1, 2014 on Implementation of Basel III Capital Regulations in India-Amendments.

228 · Please refer to the Appendices 4 & 5 of the circular DBOD.No.BP.BC.98 /21.06.201/2011-12 dated May 2, 2012 on 'Guidelines on Implementation of Basel III Capital Regulations in India'.

2 · 2 Accordingly, banks may issue AT1 instruments with either conversion 229 or write -down (temporary or permanent) 230 mechanism.

2 · 3 The pre-specified trigger for loss absorption through conversion / write-down of Additional Tier 1 instruments (PNCPS and PDI) must be at least Common Equity Tier 1 capital of 6.125% of RWAs. The Write -down of any Common Equity Tier 1 capital shall not be required before a writedown of any Additional Tier 1 capital instrument.

2 · 4 The conversion / write -down mechanism (temporary or permanent) which allocates losses to the Additional Tier 1 instruments (AT1) instruments must generate Common Equity Tier 1 (CET1) under applicable Indian Accounting Standards. The instrument will receive recognition in AT1 capital only upto the extent of minimum level of CET1 generated (i.e. , net of contingent liability recognised under the Indian Accounting Standards, potential tax liabilities, etc., if any) by a full write -down / conversion of the instrument .

2 · 5 Banks must obtain and keep on their records a certificate from the statutory auditors clearly stating that the conversion / write-down mechanism chosen by the bank for a particular AT1 issuance is able to generate CET1 under the prevailing accounting standards 231 . Further, banks must also obtain and keep on their records an external legal opinion confirming that the conversion or write -down of Additional Tier 1 capital instrument at the pre -specified trigger by the issuing bank is legally enforceable.

229 · Conversion means conversion to common shares.

230 · When a paid-up instrument is fully and permanently written-down, it ceases to exist resulting in extinguishment of a liability of a bank (a non-common equity instrument) and creates CET1. A temporary write-down is different from a conversion and a permanent write-down i.e., the original instrument may not be fully extinguished. Generally, the par value of the instrument is written-down (decrease) on the occurrence of the trigger event and which may be written -up (increase) back to its original value in future depending upon the conditions prescribed in the terms and conditions of the instrument. The amount shown on the balance sheet subsequent to temporary write-down may depend on the precise features of the instrument and the prevailing accounting standards.

231 · Auditors certificate would be required not only at the time of issuance of the instruments, but also whenever there is a change in accounting norms / standards which may affect the ability of the loss absorbency mechanism of the instrument to create CET1

2 · 6 The aggregate amount to be written-down / converted for all AT1 instruments on breaching the trigger level must be at least the amount needed to immediately return the bank's CET1 ratio to the trigger level or, if this is not possible, the full principal value of the instruments. Further, the issuer should have full discretion to determine the amount of AT1 instruments to be converted / written -down subject to the amount of conversion/write-down not exceeding the amount which would be required to bring the CET1 ratio to 8% of RWAs (minimum CET1 of 5.5% + capital conservation buffer of 2.5%).

2 · 7 When a bank breaches the pre-specified trigger of loss absorbency of AT1 and the equity is replenished either through conversion or write-down, such replenished amount of equity will be excluded from the total equity of the bank for the purpose of determining the proportion of earnings to be paid out as dividend in terms of rules laid down for maintaining capital conservation buffer. However, once the bank has attained total Common Equity ratio of 8% without counting the replenished equity capital, that point onwards, the bank may include the replenished equity capital for all purposes 232 .

2 · 8 The conversion / write -down may be allowed more than once in case a bank hits the prespecified trigger level subsequent to the first conversion / write-down which was partial.

2 · 9 The conversion / write -down of AT1 instruments are primarily intended to replenish the equity in the event it is depleted by losses. Therefore, banks should not use conversion / writedown of AT1 instruments to support expansion of balance sheet by incurring further obligations / booking assets. Accordingly, a bank whose Common Equity ratio slips below 8% due to losses and is still above 6.125% i.e. , trigger point, should seek to expand its balance sheet further only by raising fresh equity from its existing shareholders or market and the internal accruals. However, fresh exposures can be taken to the extent of amortization of the existing ones. If any expansion in exposures, such as due to draw down of sanctioned borrowing limits, is inevitable, this should be compensated within the shortest possible time by reducing other exposures 233 . The bank should maintain proper records to facilitate verification of these transactions by its internal auditors, statutory auditors and Inspecting Officers of RBI .

2 · 10 If a bank goes into liquidation before the AT1 instruments have been written-down/ converted, these instruments will absorb losses in accordance with the order of seniority indicated in the offer document and as per usual legal provisions governing priority of charges.

232 · If the total CET1 ratio of the bank falls again below the 8%, it would include the replenished capital for the purpose of applying the capital conservation buffer framework.

233 · For the purpose of determination of breach of trigger, the fresh equity, if any, raised after slippage of CET1 below 8% will not be subtracted. In other words, if CET1 of the bank now is above the trigger level though it would have been below the trigger had it not raised the fresh equity which it did, the trigger will not be treated as breached.

2 · 11 If a bank goes into liquidation after the AT1 instruments have been written-down, the holders of these instruments will have no claim on the proceeds of liquidation.

2 · 12 If a bank is amalgamated with any other bank before the AT1 instruments have been written -down/converted, these instruments will become part of the corresponding categories of regulatory capital of the new bank emerging after the merger.

2 · 13 If a bank is amalgamated with any other bank after the AT1 instruments have been writtendown temporarily, the amalgamated entity can write-up these instruments as per its discretion .

2 · 14 If a bank is amalgamated with any other bank after the non-equity regulatory capital instruments have been written -down permanently, these cannot be written-up by the amalgamated entity .

2 · 15 If the relevant authorities decide to reconstitute a bank or amalgamate a bank with any other bank under the Section 45 of BR Act, 1949, such a bank will be deemed as non-viable or approaching non-viability and both the pre-specified trigger and the trigger at the point of nonviability 234 for conversion / write -down of AT1 instruments will be activated. Accordingly, the AT1 instruments will be fully converted / written-down permanently before amalgamation / reconstitution in accordance with these rules.

2 · 16 Banks may issue AT1 instruments with conversion features either based on price fixed at the time of issuance or based on the market price prevailing at the time of conversion 235 .

2 · 17 There will be possibility of the debt holders receiving a large number of shares in the event the share price is very low at the time of conversion. Thus, debt holders will end up holding the number of shares and attached voting rights exceeding the legally permissible limits. Banks should therefore, always keep sufficient headroom to accommodate the additional equity due to conversion without breaching any of the statutory / regulatory ceilings especially that for maximum private shareholdings and maximum voting rights per investors / group of related investors. In order to achieve this, banks should cap the number of shares and / or voting rights in accordance with relevant laws and regulations on Ownership and Governance of banks. Banks should adequately incorporate these features in the terms and conditions of the instruments in the offer document. In exceptional circumstances, if the breach is inevitable, the bank should immediately

234 · As described in subsequent paragraph 3 of this Annex.

235 · Market price here does not mean the price prevailing on the date of conversion; banks can use any pricing formula such as weighted average price of shares during a particular period before conversion.

2 · 18 In the case of unlisted banks, the conversion price should be determined based on the fair value of the bank's common shares to be estimated according to a mutually acceptable methodology which should be in conformity with the standard market practice for valuation of shares of unlisted companies .

2 · 19 In order to ensure the criteria that the issuing bank must maintain at all times all prior authorisation necessary to immediately issue the relevant number of shares specified in the instrument's terms and conditions should the trigger event occur, the capital clause of each bank will have to be suitably modified to take care of conversion aspects .

2 · 20 Banks should clearly indicate in the offer document, the order of conversion / write-down of the instrument in question vis-à-vis other capital instruments which the bank has already issued or may issue in future, based on the advice of its legal counsels.

3 · Minimum Requirements to Ensure Loss Absorbency of Non-equity Regulatory Capital Instruments at the Point of Non-Viability

3 · 1 The terms and conditions of all non -common equity Tier 1 and Tier 2 capital instruments issued by banks in India must have a provision that requires such instruments, at the option of the Reserve Bank of India, to either be written off or converted into common equity upon the occurrence of the trigger event, called the 'Point of Non-Viability (PONV) Trigger' stipulated below:

236 · Conversion means full conversion to common shares.

237 · Write -off means fully and permanently write-off.

3 · 2 For the purpose of these guidelines, a non-viable bank will be:

238 · Compensation in the form of common shares may be viewed as the simultaneous occurrence of (a) permanent write -off of the original instrument; and (b) creation of new common shares issued in lieu of non-equity capital instrument which is written -off, as compensation for its extinguishment. The precise mechanism may vary under the accounting standards. No compensation (i.e., zero common shares) is paid in case of full and permanent write-off.

239 · In rare situations, a bank may also become non-viable due to non-financial problems, such as conduct of affairs of the bank in a manner which is detrimental to the interest of depositors, serious corporate governance issues, etc. In such situations raising capital is not considered a part of the solution and therefore, may not attract provisions of this framework.

3 · 3 A bank facing financial difficulties and approaching a PONV will be deemed to achieve viability if within a reasonable time in the opinion of Reserve Bank, it will be able to come out of the present difficulties if appropriate measures are taken to revive it. The measures including augmentation of equity capital through write-off/conversion/public sector injection of funds are likely to:

3 · 4 Instruments may be issued with either of the following feature:

3 · 5 The amount of non -equity capital to be converted / written-off will be determined by RBI.

3 · 6 When a bank breaches the PONV trigger and the equity is replenished either through conversion or write -off, such replenished amount of equity will be excluded from the total equity of the bank for the purpose of determining the proportion of earnings to be paid out as dividend in terms of rules laid down for maintaining capital conservation buffer. However, once the bank has attained total Common Equity ratio of 8% without counting the replenished equity capital, that point onwards, the bank may include the replenished equity capital for all purposes 240 .

3 · 7 The provisions regarding treatment of AT1 instruments in the event of winding-up, amalgamation, acquisition, re-constitution etc. of the bank as given in paragraphs 2.10 to 2.15 will also be applicable to all non-common equity capital instruments (AT1 and Tier 2 capital instruments) when these events take place after conversion/write-off at the PONV.

3 · 8 The provisions regarding fixation of conversion price, capping of number of shares/voting rights applicable to AT1 instruments in terms of paragraphs 2.16 to 2.19 above will also be applicable for conversion of all non-common equity capital instruments (AT1 and Tier 2 capital instruments) at the PONV .

240 · If the total CET1 ratio of the bank falls again below the total Common Equity ratio of 8%, it would include the replenished capital for the purpose of applying the capital conservation buffer framework.

3 · 9 The provisions regarding order of conversion/write-down of AT1 instruments as given in paragraph 2.20 above will also be applicable for conversion/ write-off of all non-common equity capital instruments (AT1 and Tier 2 capital instruments) at the PONV .

3 · 10 The above framework will be invoked when a bank is adjudged by Reserve Bank of India to be approaching the point of non-viability, or has already reached the point of non-viability, but in the views of RBI:

3 · 11 The purpose of write-off and / or conversion of non-equity regulatory capital elements will be to shore up the capital level of the bank. RBI would follow a two- stage approach to determine the non -viability of a bank. The Stage 1 assessment would consist of purely objective and quantifiable criteria to indicate that there is a prima facie case of a bank approaching non-viability and, therefore, a closer examination of the bank's financial situation is warranted. The Stage 2 assessment would consist of supplementary subjective criteria which, in conjunction with the Stage 1 information, would help in determining whether the bank is about to become non-viable. These criteria would be evaluated together and not in isolation .

3 · 12 Once the PONV is confirmed, the next step would be to decide whether rescue of the bank would be through write-off/conversion alone or write-off/conversion in conjunction with a public sector injection of funds .

3 · 13 The trigger at PONV will be evaluated both at consolidated and solo level and breach at either level will trigger conversion / write-off .

3 · 14 As the capital adequacy is applicable both at solo and consolidated levels, the minority interests in respect of capital instruments issued by subsidiaries of banks including overseas subsidiaries can be included in the consolidated capital of the banking group only if these instruments have pre-specified triggers (in case of AT1 capital instruments) / loss absorbency at the PONV241 (for all non-common equity capital instruments). In addition, where a bank wishes the instrument issued by its subsidiary to be included in the consolidated group's capital in addition

241 · The cost to the parent of its investment in each subsidiary and the parent's portion of equity of each subsidiary, at the date on which investment in each subsidiary is made, is eliminated as per AS-21. So, in case of wholly-owned subsidiaries, it would not matter whether or not it has same characteristics as the bank's capital. However, in the case of less than wholly owned subsidiaries (or in the case of non-equity regulatory capital of the wholly owned subsidiaries, if issued to the third parties), minority interests constitute additional capital for the banking group over and above what is counted at solo level; therefore, it should be admitted only when it (and consequently the entire capital in that category) has the same characteristics as the bank's capital.

3 · 15 In such cases, the subsidiary should obtain its regulator's approval/no-objection for allowing the capital instrument to be converted/written-off at the additional trigger point referred to in paragraph 3.14 above.

3 · 16 Any common shares paid as compensation to the holders of the instrument must be common shares of either the issuing subsidiary or the parent bank (including any successor in resolution).

242 · Illustration is based on Basel III minima as indicated in the BCBS document 'Basel III: A global regulatory framework for more resilient banks and banking systems issued in December 2010 (rev June 2011)' The Common Equity Tier 1 in the example should be read to include issued common shares plus retained earnings and reserves in Bank S.

1 · Scope of Application and Capital Adequacy

243 · If the entity is not consolidated in such a way as to result in its assets being included in the calculation of consolidated risk -weighted assets of the group, then such an entity is considered as outside the regulatory scope of consolidation

244 · Also explain the treatment given i.e., deduction or risk weighting of investments under regulatory scope of consolidation.

245 · A capital deficiency is the amount by which actual capital is less than the regulatory capital requirement. Any deficiencies which have been deducted on a group level in addition to the investment in such subsidiaries are not to be included in the aggregate capital deficiency.

2 · Risk exposure and assessment

2 · 1 General qualitative disclosure requirement

246 · That is after accounting offsets in accordance with the applicable accounting regime and without taking into account the effects of credit risk mitigation techniques, e.g., collateral and netting.

247 · That is, on the same basis as adopted for Segment Reporting adopted for compliance with AS 17.

248 · The industries break -up may be provided on the same lines as prescribed for DSB returns. If the exposure to any particular industry is more than 5 per cent of the gross credit exposure as computed under (b) above it should be disclosed separately.

249 · Banks shall use the same maturity bands as used for reporting positions in the ALM returns.

100 · % risk weight

250 · As defined for disclosures in Table DF -3.

251 · At a minimum, banks must give the disclosures in this Table in relation to credit risk mitigation that has been recognised for the purposes of reducing capital requirements under this Framework. Where relevant, banks are encouraged to give further information about mitigants that have not been recognised for that purpose.

252 · Net credit exposure is the credit exposure on derivatives transactions after considering both the benefits from legally enforceable netting agreements and collateral arrangements. The notional amount of credit derivative hedges alerts market participants to an additional source of credit risk mitigation.

3 · Composition of Capital Disclosure Templates

3 · 1 Disclosure Template

253 · For example, interest rate contracts, FX contracts, credit derivatives, and other contracts.

254 · For example, credit default swaps.

255 · Not Applicable to commercial banks in India.

256 · In terms of Basel III rules text issued by the Basel Committee (December 2010), DTAs that rely on future profitability of the bank to be realized are to be deducted. DTAs which relate to temporary differences are to be treated under the "threshold deductions" as set out in paragraph 87.

257 · Only significant investments other than in the insurance and non-financial subsidiaries should be reported here. The insurance and non -financial subsidiaries are not consolidated for the purpose of capital adequacy. The equity and other regulatory capital investments in insurance subsidiaries are fully deducted from consolidated regulatory

258 · Not applicable in Indian context.

259 · Please refer to Footnote 246 above.

260 · Adjustments which are not specific to the Basel III regulatory adjustments (as prescribed by the Basel Committee) will be reported under this row. However, regulatory adjustments which are linked to Basel III i.e., where there is a change in the definition of the Basel III regulatory adjustments, the impact of these changes will be explained in the Notes of this disclosure template.

261 · Non -financial subsidiaries are not consolidated for the purpose of capital adequacy. The equity and other regulatory capital investments in the non-financial subsidiaries are deducted from consolidated regulatory capital of the group. These investments are not required to be deducted fully from capital under Basel III rules text of the Basel Committee.

262 · Please refer to paragraph 3.4.5 of this Master Circular. Please also refer to the Paragraph 34 of the Basel II Framework issued by the Basel Committee (June 2006). Though this is not national specific adjustment, it is reported here.

263 · Please refer to Footnote 247 above.

264 · Eligible Provisions and revaluation Reserves in terms of paragraph 4.2.5.1 of this Master Circular, both to be reported and break-up of these two items to be furnished in Notes.

265 · Please refer to Footnote 247 above.

3 · 2 Three Step Approach to Reconciliation Requirements

3 · 3 Main Features Template

3 · 5 Full Terms and Conditions of Regulatory Capital Instruments

3 · 6 Disclosure Requirements for Remuneration

4 · Leverage Ratio Disclosures

266 · Unrealised gains (losses) recognised in the balance sheet but not through the profit and loss account.

267 · Unrealised gains (losses) not recognised either in the balance sheet or through the profit and loss account.

4 · 1 Summary comparison table

4 · 1.1 Applying values at the end of period (e.g. , quarter-end), banks must report a reconciliation of their balance sheet assets from their published financial statements with the leverage ratio exposure measure as shown in Table DF-17 below. Specifically:

268 · Specifically, a common template is set out. However, with respect to reconciliation, banks are to qualitatively reconcile any material difference between total balance sheet assets in their reported financial statements and onbalance sheet exposures as prescribed in the leverage ratio.

4 · 2 Common disclosure template and explanatory table, reconciliation and other requirements

4 · 2.1 Banks must report, in accordance with Table DF-18 below, and applying values at the end of period (e.g. , quarter-end), a breakdown of the following exposures under the leverage ratio framework: (i) on-balance sheet exposures; (ii) derivative exposures; (iii) SFT exposures; and (iv) OBS items. Banks must also report their Tier 1 capital, total exposures and the leverage ratio.

4 · 2.2 The Basel III leverage ratio for the quarter, expressed as a percentage and calculated according to paragraph 16.2, is to be reported in line 22.

4 · 2.3 Reconciliation with public financial statements: banks are required to disclose and detail the source of material differences between their total balance sheet assets (net of on-balance sheet derivative and SFT assets) as reported in their financial statements and their on-balance sheet exposures in line 1 of the common disclosure template.

4 · 2.4 Material periodic changes in the leverage ratio: banks are required to explain the key drivers of material changes in their Basel III leverage ratio observed from the end of the previous reporting period to the end of the current reporting period (whether these changes stem from changes in the numerator and/or from changes in the denominator).

4 · 2.5 The following table sets out explanations for each row of the disclosure template referencing the relevant paragraphs of the Basel III leverage ratio framework detailed in this document.

4 · 2.6 To ensure that the summary comparison table, common disclosure template and explanatory table remain comparable across jurisdictions, there should be no adjustments made by banks to disclose their leverage ratio. Banks are not permitted to add, delete or change the definitions of any rows from the summary comparison table and common disclosure template implemented in their jurisdiction. This will prevent a divergence of tables and templates that could undermine the objectives of consistency and comparability.

269 · The holding period for the haircuts will depend as in other repo-style transactions on the frequency of margining.

270 · It is clarified that the membership agreement together with relevant netting provisions contained in QCCP's bye laws, rules and regulations are a type of netting agreement.

2 · . Banks shall, while considering such proposals, analyse all relevant aspects including inter alia the business plans, home and host country regulatory requirements and performance parameters of their overseas centres. Banks shall also ensure compliance with all applicable home and host country laws and regulations.

3 · Banks which do not meet the minimum regulatory capital requirements as laid down in para 1 above, shall be required to seek prior approval of RBI.

4 · Banks shall report all such instances of infusion of capital and/ or retention 273 /transfer/ repatriation of profits in overseas branches and banking subsidiaries within 30 days of such action, to the Chief General Manager-in-Charge, Department of Regulation, Central Office, Mumbai with a copy to Chief General Manager-in-Charge, Department of Supervision, Central Office, Mumbai.

5 · The guidelines in this Annex are not applicable to foreign banks, Small Finance Banks, Payments Banks and Regional Rural Banks.

271 · Overseas banking centres, in the context of this Annex, include Branches, Banking Subsidiaries, Joint Ventures and Associates. Banks shall continue to take the applicable RBI approvals necessary for opening and for change in the nature of these centres .

272 · Capital Conservation Buffer (CCB), including Domestic – Systemically Important Bank (D-SIB) capital requirements where applicable, and Counter-Cyclical Capital Buffer as may be mandated.

273 · In case of retention of profits in overseas branch/ subsidiary, the reporting shall be done within 30 days of the finalisation of the annual financial statements of the overseas branch/ subsidiary.

1 · Banks must follow the 15% limit on significant investments in the common shares of unconsolidated financial institutions (banks, insurance and other financial entities) and deferred tax assets arising from timing differences (collectively referred to as specified items) as stipulated in paragraph 3 of this circular.

2 · The recognition of these specified items will be limited to 15% of Common Equity Tier 1 (CET1) capital, after the application of all deductions. To determine the maximum amount of the specified items that can be recognised*, banks should multiply the amount of CET1** (after all deductions, including after the deduction of the specified items in full i.e. , specified items should be fully deducted from CET1 along with other deductions first for arriving at CET1**) by 17.65%. This number i.e. , 17.65% is derived from the proportion of 15% to 85% (15%/85% = 17.65%).

3 · As an example, take a bank with Rs.85 of common equity (calculated net of all deductions, including after the deduction of the specified items in full).

4 · The maximum amount of specified items that can be recognised by this bank in its calculation of CET1 capital is Rs.85 x 17.65% = Rs.15. Any excess above Rs.15 must be deducted from CET1. If the bank has specified items (excluding amounts deducted after applying the individual 10% limits) that in aggregate sum up to the 15% limit, CET1 after inclusion of the specified items, will amount to Rs.85 + Rs.15 = Rs.100. The percentage of specified items to total CET1 would equal 15%.