__BANK FINANCIAL MANAGEMENT (BFM) __

Unit - 10: Calculate RWAs and Capital charge in respect of Credit Risk

Unit - 10: Calculate RWAs and Capital charge in respect of Credit Risk

Ist Step : Calculate Fund Based and Non Fund Based Exposure

2nd Step: Allowable Reduction

3rd Step : Apply Risk Weights as per Ratings

4th Step: Calculate Risk Weighted Assets

5th Step : Calculate Capital Charge

Nature of loan Limit Outstanding Undrawn portion

CC 200 100 100

Bills Purchased 60 30 30

Packing Credit 40 30 10

Term Loan 200 40 160

Out of Undrawn portion of TL, 60 is to drawn in a year and balance beyond 1 year.

100% Outstanding(Unrated) = 200

20% of Undrawn CC, BP & PC (140*20/100) = 28

20% of Undrawn TL (1 yr) (60*20/100) = 12

50% of Undrawn TL (>1Yr) (100*50/100) = 50

Financial Guarantees 90 100% 90

Acceptances 80 100% 80

Standby LC 50 100% 50

Clean LC 50 100% 50

Unconditional Take out finance 100 100% 100

Performance Guarantee 80 50% 40

Bid Bonds 20 50% 10

Conditional Take out finance 50 50% 25

Documentary LC 40 20% 8

Total Adjusted Exposure = 290000+453000 = 7,43,000

• Deposits being maintained by a borrower under lien.

• Cash (including CDs or FDs), Gold, Govt Securities, KVP, NSC, LIC Policy, Debt Securities, Mutual Funds’

(C=Amount of Deposit; Hfx =0 (if same currency), Hfx = 0.08 (if diff currency) Mf = Maturity factor).

Formula for Approved Financial collaterals: C*(1-Hc-Hfx) *Mf ) - E*He

E* - exposure value alter risk mitigation

E – Current value of exposure for which coll. Qualifies

C = current value of collateral received

Hfx = Haircut appropriate for currency mismatch between collateral and exposure.

E* will be multiplied by the risk weight of the counter party to obtain RWA amount.

1. Exposure----------------------------------------- 100 lac with tenure 3 years

2. Eligible Collateral in A+ Debt Security -----30 lac with Residual maturity 2 years

3. Hair cut on Collateral is 6%

4. Table of Maturity factor shows hair cut as 25% for remaining maturity of 2 years/

Calculate Value of Exposure after Risk Mitigation:

Value of Exposure after Risk Mitigation =

Current Value of Exposure – Value of adjusted collateral for Hair cut and maturity mismatch

Value of Adjusted Collateral for Hair cut = C*(1-Hc) = 30(1-6%) = 30*94% = 28.20

Value of Adjusted Collateral for Hair cut and Maturity Mismatch = C*(t-0.25) / (T-0.25)

= 28.20*(2-.25)/(3-.25) = 17.95

(Where t = Remaining maturity of Collateral T= Tenure of loan )

Value of Exposure after Risk Mitigation = 100-17.95= 82.05 lac.

An exposure of Rs. 100 lac is backed by lien on FD of 30 lac. There is no mismatch of maturity.

Hair Cut for CRM i.e. FDR is zero.

Hence Value of Exposure after Risk Mitigation is 100 lac – 30 lac = 70 lac

In a bank ; Tier 1 Capital = 1000 crore

Tier II Capital = 1200 crore

RWAs for Credit Risk = 10000 crore

Capital Charge for Market Risk = 500 crore

Capital Charge for Op Risk = 300 crore

Find Tier I CRAR and Total CRAR.

RWAs for Credit Risk = 10000 crore

RWAs for Market Risk = 500/.09 = 5556 crore

RWAs for Op Risk = 300/.09 = 3333 crore

Total RWS = 10000+5556+3333 = 18889 crore

Tier I Capital = 1000 crore

Tier II Capital can be up to maximum 1000 crore

Total Capital = 2000 crore

Tier I CRAR = Eligible Tier I Capital /Total RWAs = 1000/18889=5.29%

Total CRAR = Eligible Total Capital /Total RWAs = 2000/18889 = 10.59%

We may conclude that Tier I Capital is less than the required level.

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