i) Undisclosed reserves and cumulative perpetual preference shares

These often have characteristics similar to equity and disclosed reserves. These elements have the capacity to absorb unexpected losses and can be included in capital, if they represent accumulations of post-tax profits and not encumbered by any known liability and should not be routinely used for absorbing normal loss or operating losses. Cumulative perpetual preference shares should be fully paid-up and should not contain clauses which permit redemption by the holder.

ii) Revaluation reserves

These reserves often serve as a cushion against unexpected losses, but they are less permanent in nature and cannot be considered as ‘Core Capital’. Revaluation reserves arise from revaluation of assets that are undervalued on the bank’s books, typically bank premises and marketable securities. The extent to which the revaluation reserves can be relied upon as a cushion for unexpected losses depends mainly upon the level of certainty that can be placed on estimates of the market values of the relevant assets, the subsequent deterioration in values under difficult market conditions or in a forced sale, potential for actual liquidation at those values, tax consequences of revaluation, etc. Therefore, it would be prudent to consider revaluation reserves at a discount of 55 percent while determining their value for inclusion in Tier II capital. Such reserves will have to be reflected on the face of the Balance Sheet as revaluation reserves.

iii) General provisions and loss reserves

Such reserves, if they are not attributable to the actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, can be included in Tier II capital. Adequate care must be taken to see that sufficient provisions have been made to meet all known losses and foreseeable potential losses before considering general provisions and loss reserves to be part of Tier II capital. General provisions/loss reserves will be admitted up to a maximum of 1.25 percent of total risk weighted assets.

iv) Hybrid debt capital instruments

In this category, fall a number of capital instruments which combine certain characteristics of equity and certain characteristics of debt. Each has a particular feature which can be considered to affect its quality as capital. Where these instruments have close similarities to equity, in particular when they are able to support losses on an ongoing basis without triggering liquidation, they may be included in Tier II capital.

v) Subordinated debt

vi) The Investment Fluctuation Reserve (IFR) would continue to be treated as Tier II capital but it would not be subject to the ceiling of 1.25 per cent of the total risk weighted assets. The above treatment would be effective from March 31, 2003 onwards.

vii) Banks are allowed to include the ‘General Provisions on Standard Assets’ and ‘provisions held for country exposures’ in Tier II capital. However, the provisions on ‘standard assets together with other ‘general provisions/ loss reserves’ and ‘provisions held for country exposures’ will be admitted as Tier II capital up to a maximum of 1.25 per cent of the total risk-weighted assets.

(i) Banks are required to maintain a minimum capital to risk weighted assets ratio of 9%. Non-bank subsidiaries are required to maintain the capital adequacy ratio prescribed by their respective regulators. In case of any shortfall in the capital adequacy ratio of any of the subsidiaries, the parent should maintain capital in addition to its own regulatory requirements to cover the shortfall.

(ii) Risks inherent in deconsolidated entities (i.e., entities which are not consolidated in the Consolidated Prudential Reports) in the group need to be assessed and any shortfall in the regulatory capital in the deconsolidated entities should be deducted (in equal proportion from Tier 1 and Tier 2 capital) from the consolidated bank's capital in the proportion of its equity stake in the entity.

Issue of unsecured bonds as
Subordinated Debt by banks for raising Tier II capital
(Vide paragraph 2.4.1)

1. The instruments should be fully paid-up, unsecured, subordinated to the claims of other creditors, free of restrictive clauses and should not be redeemable at the initiative of the holder or without the consent of the Reserve Bank of India.

2. Necessary permission from Exchange Control Department should be obtained for issuing the instruments to NRIs/OCBs/FIIs.

3. Banks should comply with the terms and conditions, if any, set by SEBI/other regulatory authorities in regard to issue of the instruments.

4. Nationalised banks should obtain permission from the Government for issuing the instruments.

5. In the case of foreign banks rupee subordinated debt should be issued by the Head Office of the bank, through the Indian branch after obtaining specific approval from Exchange Control Department.

Subordinated debt instruments will be limited to 50 per cent of Tier-I Capital of the bank. These instruments, together with other components of Tier II capital, should not exceed 100% of Tier I capital.

Banks should not grant advances against the security of their own bonds.

The total amount of Subordinated Debt raised by the bank has to be reckoned as liability for the calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will attract CRR/SLR requirements.

Investments by banks in subordinated debt of other banks will be assigned 100% risk weight for capital adequacy purpose. Also, the bank's aggregate investment in Tier II bonds issued by other banks and financial institutions shall be permitted upto 10 percent of the investing bank's total capital. The capital for this purpose will be the same as that reckoned for the purpose of capital adequacy.

Banks may take approval of RBI on a case-by-case basis.

III. Reporting Requirements

The banks should submit a report to Reserve Bank of India giving details of the capital raised, such as, amount raised, maturity of the instrument, rate of interest together with a copy of the offer document, soon after the issue is completed.

Tier II capital - Subordinated debt - Head Office borrowings
in foreign currency raised by foreign banks operating
in India for inclusion in Tier II capital
(Vide paragraph 2.4.2)

Detailed guidelines on the standard requirements and conditions for Head Office borrowings in foreign currency raised by foreign banks operating in India for Inclusion , as subordinated debt in Tier II capital are as indicated below:-

2. The total amount of HO borrowing in foreign currency will be at the discretion of the foreign bank. However, the amount eligible for inclusion in Tier II capital as subordinated debt will be subject to a maximum ceiling of 50% of the Tier I capital maintained in India, and the applicable discount rate mentioned in para 5 below. Further as per extant instructions, the total of Tier II capital should not exceed 100% of Tier I capital.

3. Head Office borrowings should have a minimum initial maturity of 5 years. If the borrowing is in tranches, each tranche will have to be retained in India for a minimum period of five years. HO borrowings in the nature of perpetual subordinated debt, where there may be no final maturity date, will not be permitted.

4. The HO borrowings should be fully paid up, i.e. the entire borrowing or each tranche of the borrowing should be available in full to the branch in India. It should be unsecured, subordinated to the claims of other creditors of the foreign bank in India, free of restrictive clauses and should not be redeemable at the instance of the HO.

5. The HO borrowings will be subjected to progressive discount as they approach maturity at the rates indicated below:

6. The rate of interest on HO borrowings should not exceed the on-going market rate. Interest should be paid at half yearly rests.

7. The interest payments to the HO will be subject to applicable withholding tax.

8. All repayments of the principal amount will be subject to prior approval of Reserve Bank of India, Department of Banking Operations and Development.

9. The bank should obtain a letter from its HO agreeing to give the loan for supplementing the capital base for the Indian operations of the foreign bank. The loan documentation should confirm that the loan given by Head Office would be subordinated to the claims of all other creditors of the foreign bank in India. The loan agreement will be governed by, and construed in accordance with the Indian law. Prior approval of the RBI should be obtained in case of any material changes in the original terms of issue.

10. The total amount of HO borrowings may be disclosed in the balance sheet under the head `Subordinated loan in the nature of long term borrowings in foreign currency from Head Office’.

11. The total amount of HO borrowings is to be reckoned as liability for the calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will attract CRR/SLR requirements.

12. The entire amount of HO borrowing should remain fully swapped with banks at all times. The swap should be in Indian rupees.

Risk Weights for Calculation of CRAR
(Vide paragraph 3.4)

The credit risk exposure attached to off-Balance Sheet items has to be first calculated by multiplying the face value of each of the off-Balance Sheet items by ‘credit conversion factor’ as indicated in the table below. This will then have to be again multiplied by the weights attributable to the relevant counter-party as specified above.

NOTE: In regard to off-balance sheet items, the following transactions with non-bank counterparties will be treated as claims on banks and carry a risk-weight of 20%

1. Guarantees issued by banks against the counter guarantees of other banks.

2. Rediscounting of documentary bills accepted by banks. Bills discounted by banks which have been accepted by another bank will be treated as a funded claim on a bank.

In all the above cases banks should be fully satisfied that the risk exposure is in fact on the other bank.

For reckoning the minimum capital ratio, the computation of risk weighted assets on account of FRAs / IRS should be done as per the two steps procedure set out below:

The adjusted value thus obtained shall be multiplied by the risk weightage allotted to the relevant counter-party as specified below:

1. While calculating the aggregate of funded and non-funded exposure of a borrower for the purpose of assignment of risk weight, banks may ‘net-off’ against the total outstanding exposure of the borrower -

1. advances collateralised by cash margins or deposits,

2. credit balances in current or other accounts which are not earmarked for specific purposes and free from any lien,

3. in respect of any assets where provisions for depreciation or for bad debts have been made

4. claims received from DICGC/ ECGC and kept in a separate account pending adjustment, and

5. subsidies received against IRDP advances and kept in a separate account.

2. After applying the conversion factor as indicated above, the adjusted off Balance Sheet value shall again be multiplied by the weight attributable to the relevant counter-party as specified.

3. Foreign exchange contracts with an original maturity of 14 calendar days or less, irrespective of the counterparty, may be assigned 'zero' risk weight as per international practice.

4. Foreign Exchange and Interest Rate related Contracts

(i) Foreign exchange contracts include the following:

1. Cross currency interest rate swaps

2. Forward foreign exchange contracts

3. Currency futures

4. Currency options purchased

5. Other contracts of a similar nature

(ii) As in the case of other off-Balance Sheet items, a two stage calculation prescribed below shall be applied:

(iii) Interest rate contracts include the following:

1. Single currency interest rate swaps

2. Basis swaps

3. Forward rate agreements

4. Interest rate futures

5. Interest rate options purchased

6. Other contracts of a similar nature

(ii) As in the case of other off-Balance Sheet items, a two stage calculation prescribed below shall be applied:

List of All-India Financial Institutions whose
bonds/debentures would qualify for 20% Risk Weight for
Capital Adequacy Ratio
(Vide items II(A)- 7, 8 & 9 of Annexure 2)

1. Industrial Credit and Investment Corporation of India Ltd.



2. Industrial Finance Corporation of India Ltd.


3. Industrial Development Bank of India


4. Industrial Investment Bank of India Ltd.


5. Tourism Finance Corporation of India Ltd.


6. Risk Capital and Technology Finance Corporation Ltd.


7. Technology Development and Information Company of India Ltd.


8. Power Finance Corporation Ltd.


9. National Housing Bank


10. Small Industries Development Bank of India


11. Rural Electrification Corporation Ltd.


12. Indian Railways Finance Corporation Ltd.


13. National Bank for Agriculture and Rural Development


14. Export Import Bank of India


15. Infrastructure Development Finance Co. Ltd.


16. Housing and Urban Development Corporation Ltd. (HUDCO)


17. Indian Renewable Energy Development Agency Ltd. (IREDA)

SSI Advances Guaranteed by Credit Guarantee Fund Trust for Small Industries (CGTSI) – Risk weights and Provisioning norms (paragraph I (A)(III)(9) of Annexure 2)

Example I

CGTSI Cover : 75% of the amount outstanding or 75% of the unsecured amount or Rs.18.75 lakh , whichever is the least.

CGTSI cover : 75% of the amount outstanding or 75% of the unsecured amount or Rs.18.75 lakh whichever is the least.

Terms and conditions for the purpose of liberal Risk Weight for Capital Adequacy for
investments in Mortgage Backed Securities (MBS) of residential assets of Housing
Finance Companies (HFC).
(Vide item (I)(A)(II)(12)of Annexure 2)

1(a) The right, title and interest of a HFC in securitised housing loans and receivables thereunder should irrevocably be assigned in favour of a Special Purpose Vehicle (SPV) / Trust.

1(b) Mortgaged securities underlying the securitised housing loans should be held exclusively on behalf of and for the benefit of the investors by the SPV/Trust.

1(c) The SPV or Trust should be entitled to the receivables under the securitised loans with an arrangement for distribution of the same to the investors as per the terms of issue of MBS. Such an arrangement may provide for appointment of the originating HFC as the servicing and paying agent. However, the originating HFC participating in a securitisation transaction as a seller, manager, servicer or provider of credit enhancement or liquidity facilities :

1. shall not own any share capital in the SPV or be the beneficiary of the trust used as a vehicle for the purchase and securitisation of assets. Share capital for this purpose shall include all classes of common and preferred share capital;

2. shall not name the SPV in such manner as to imply any connection with the bank;

3. shall not have any directors, officers or employees on the board of the SPV unless the board is made up of at least three members and where there is a majority of independent directors. In addition, the official(s) representing the bank will not have veto powers;

4. shall not directly or indirectly control the SPV; or

5. shall not support any losses arising from the securitisation transaction or by investors involved in it or bear any of the recurring expenses of the transaction.

1(d) The loans to be securitised should be loans advanced to individuals for acquiring/constructing residential houses which should have been mortgaged to the HFC by way of exclusive first charge.

1(e) The loans to be securitised should be accorded an investment grade credit rating by any of the credit rating agencies at the time of assignment to the SPV.

1(f) The investors should be entitled to call upon the issuer - SPV - to take steps for recovery in the event of default and distribute the net proceeds to the investors as per the terms of issue of MBS.

1(g) The SPV undertaking the issue of MBS should not be engaged in any business other than the business of issue and administration of MBS of individual housing loans.

1(h) The SPV or Trustees appointed to manage the issue of MBS should have to be governed by the provisions of Indian Trusts Act, 1882.

2. If the issue of MBS is in accordance with the terms and conditions stated in paragraph 1 above and includes irrevocable transfer of risk and reward of the housing loan assets to the Special Purpose Vehicle (SPV)/Trust, investment in such MBS by any bank would not be reckoned as an exposure on the HFC originating the securitised housing loan. However, it would be treated as an exposure on the underlying assets of the SPV / Trust.

Conditions for availing concessional risk weight on investment in securitised paper
pertaining to an infrastructure facility
(Vide item (I)(A)(II)(13)of Annexure 2)

1. The infrastructure facility should satisfy the conditions stipulated in our circular DBOD. No. BP. BC. 67 /21.04.048/ 2002- 2003 dated February 4, 2003.

2. The infrastructure facility should be generating income/ cash flows which would ensure servicing/ repayment of the securitised paper.

3. The securitised paper should be rated at least 'AAA' by the rating agencies and the rating should be current and valid. The rating relied upon will be deemed to be current and valid if :

1. The rating is not more than one month old on the date of opening of the issue, and the rating rationale from the rating agency is not more than one year old on the date of opening of the issue, and the rating letter and the rating rationale is a part of the offer document.

2. In the case of secondary market acquisition, the 'AAA' rating of the issue should be in force and confirmed from the monthly bulletin published by the respective rating agency.

4. The securitised paper should be a performing asset on the books of the investing/ lending institution.

Conditions for availing concessional risk weight for Advances covered by Insurance
cover under Business Credit Shield the product of New India Assurance Company Ltd.
(Vide item (I)(A)(III)(10)of Annexure 2)

New India Assurance Company Limited (NIA) should comply with the provisions of the Insurance Act, 1938, the Regulations made thereunder - especially those relating to Reserves for unexpired risks and the Insurance Regulatory and Development Authority (Assets, Liabilities and Solvency Margin of Insurers) Regulations, 2000 and any other conditions/regulations that may be prescribed by IRDA in future, if their insurance product - Business Credit Shield (BCS) - is to quality for the above treatment.

2. To be eligible for the above regulatory treatment in respect of export credit covered by BCS policy of NIA, banks should ensure that:

1. The BCS policy is assigned in its favour, and

2. NIA abides by the provisions of the Insurance Act, 1938 and the regulations made thereunder, especially those relating to Reserves for unexpired risks and the Insurance Regulatory and Development Authority (Assets, Liabilities and Solvency Margin of Insurers) Regulations, 2000, and any other conditions/regulations that may be prescribed by IRDA in future.

3. . Banks should maintain separate account(s) for the advances to exporters, which are covered by the insurance under the 'Business Credit Shield' to enable easy administration/verification of risk weights/provisions.