Unit - 10: Calculate RWAs and Capital charge in respect of Credit Risk
CAIIB-ABM-MOD-B-Calculate RWAs and Capital Charge in respect of Credit risk How to 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 Ist Step: Calculate Fund Based and Non Fund Based Exposure: Example: Fund Based Exposure (Amount in ‘000) 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
Total Outstanding 200 Out of Undrawn portion of TL, 60 is to drawn in a year and balance beyond 1 year. Adjusted Exposure: 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
Total Adjusted Exposure FB limits 290 Non Fund Based Exposure (Amount in ‘000) Type of NBF Exposure CCF Adjusted Exposure 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 FB limits = 453 Total Adjusted Exposure = 290000+453000 = 7,43,000
2nd Step: Allowable Reduction after adjusting CRMs (Credit Risk Mitigates) Reduction from adjusted exposure is made on account of following eligible financial collaterals: Eligible Financial Collaterals . • Deposits being maintained by a borrower under lien. • Cash (including CDs or FDs), Gold, Govt Securities, KVP, NSC, LIC Policy, Debt Securities, Mutual Funds’ • Equity and convertible bonds are no more eligible CRMs. Formula for Deposits under lien: C*(1-Hfx) X Mf (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 Haircuts(He–Haircut for Exposure & Hc-Haircut for Collateral) Haircut refers to the adjustments made to the amount of exposures to the counter party and also the value of collateral received to take account of possible future fluctuations in the value of either, on account of market movements. Standardized Supervisory Haircuts for collateral /Exposure have been prescribed by RBI and given in the said circular. Capital Requirement for collateralized transaction E* = max { 0, [E X (1+He) – C X (1-Hc- Hfx) } ] 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.
Illustrations clarifying CRM In the case of exposure of Rs 100 (denominated in USD) having a maturity of 6 years to a BBB rated (rating by external credit rating agency) corporate borrower secured by collateral of Rs 100 by way of A+ rated corporate bond with a maturity of 6 years, the exposure amount after the applicable haircut @ 12%, will be Rs 112 and the volatility adjusted collateral value would be Rs 80, (after applying haircut @ 12% as per issue rating and 8% for currency mismatch) for the purpose of arriving at the value of risk weighted asset & calculating charge on capital. There is an exposure of Rs 100 to an unrated Corporate (having no rating from any external agency) having a maturity of 3 years, which is secured by Equity shares outside the main index having a market value of Rs 100. The haircut for exposure as well as collateral will be 25%. There is no currency mismatch in this case. The volatility adjusted exposure and collateral after application of haircuts works out to Rs 125 and Rs 75 respectively. Therefore, the net exposure for calculating RWA works out to Rs 50. There is a demand loan of Rs 100 secured by bank’s own deposit of Rs 125. The haircuts for exposure and collateral would be zero. There is no maturity mismatch. Adjusted exposure and collateral after application of haircuts would be Rs 100 and Rs 125 respectively. Net exposure for the purpose of RWA would be zero Other ExamplesNo. 1: 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: Solution: 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. No. 2 An exposure of Rs. 100 lac is backed by lien on FD of 30 lac. There is no mismatch of maturity. Solution: Hair Cut for CRM i.e. FDR is zero. Hence Value of Exposure after Risk Mitigation is 100 lac – 30 lac = 70 lac Computation of CRAR 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. Solution: 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.