Regulatory Retail Portfolio Criteria

Questions and Answers

What is the maximum aggregated retail exposure to one counterpart for a regulatory retail portfolio?

Rs.15 crore

Rs.10 crore

Rs.7.50 crore (correct)

Rs.5 crore

Which of the following is NOT a criterion for classifying an exposure as a regulatory retail portfolio?

No aggregate exposure to one counterpart should exceed 0.2 per cent

Maximum aggregated retail exposure not exceeding Rs.7.50 crore

Exposure to a small business with turnover less than Rs.50 crores

Aggregate exposure to one counterpart exceeding 0.5 per cent (correct)

What risk weight is applied to unsecured portions of NPA when specific provisions are less than 20%?

150% (correct)

100%

50%

200%

For claims secured by residential property classified as NPA, what is their risk weight net of specific provisions?

100% Signup and view all the answers

What is the maximum turnover for a small business to qualify for regulatory retail portfolio classification based on the last three years?

Rs.50 crores Signup and view all the answers

When is a risk weight of 100% applied to the outstanding amount for NPA?

When there are specific provisions of at least 20% Signup and view all the answers

What is the maximum segregated exposure to one counterpart allowed in a regulatory retail portfolio expressed in percentage?

0.2% Signup and view all the answers

What is the risk weight applied when the provision for a NPA is at least 50%?

50% Signup and view all the answers

What is the maximum limit for a bank's equity investment in non-financial services companies based on the company's paid-up share capital?

10% of the investee company's paid up share capital Signup and view all the answers

What is the aggregate limit for equity investments held by banks and their subsidiaries in non-financial services companies?

20% of the investee company's paid up share capital Signup and view all the answers

What is the total cap on a bank's investments in subsidiaries and other entities engaged in financial services along with non-financial services activities?

20% of the bank's paid-up share capital Signup and view all the answers

Under what condition does the 20% cap on investments not apply for banks?

If investments are classified under 'Held for Trading' and held for less than 90 days Signup and view all the answers

What primarily supports the measure of credit risk under the Standardized Approach for capital charge?

The rating assigned by eligible external credit rating agencies Signup and view all the answers

What is the risk weight assigned to consumer credit from commercial banks?

125% Signup and view all the answers

Which type of receivables has the highest risk weight according to the provided data?

Credit card receivables from commercial banks Signup and view all the answers

What is the risk weight for commercial real estate?

100% Signup and view all the answers

Which financial institution type applies a risk weight of 125% to credit card receivables?

Non-Banking Financial Companies (NBFCs) Signup and view all the answers

What is the risk weight for regulatory retail loans other than housing?

75% Signup and view all the answers

What percentage risk weight is assigned to claims on Credit Information Companies?

100% Signup and view all the answers

Which of the following correctly states the risk weight for consumer credit from NBFCs?

125% Signup and view all the answers

What is the risk weight for commercial real estate-residential housing?

75% Signup and view all the answers

What limits must be adhered to when substituting Tier II elements for Tier III?

Tier II capital must not exceed the total Tier I capital. Signup and view all the answers

Which of the following is NOT a key element introduced by Basel III?

Elimination of the capital conservation buffer. Signup and view all the answers

What is the minimum original maturity required for short-term subordinated debt to be eligible as Tier III capital?

At least two years. Signup and view all the answers

What is the primary purpose of Pillar II in the supervisory review process?

To evaluate bank management's internal capital adequacy assessment. Signup and view all the answers

When were the new capital and liquidity standards of Basel III endorsed?

At the G20 Leaders' Summit in Seoul. Signup and view all the answers

Which element of Basel III supports market discipline?

The requirement for additional disclosure by banks. Signup and view all the answers

What is the purpose of the capital conservation buffer introduced in Basel III?

To restrict pay-outs and strengthen capital requirements. Signup and view all the answers

How does the Basel Committee aim to respond to the challenges observed during the 2007-09 financial crisis?

By issuing principles for sound liquidity risk management. Signup and view all the answers

What is the minimum Capital to Risk-weighted Assets Ratio (CRAR) required from banks on an ongoing basis?

9% Signup and view all the answers

Which component of regulatory capital consists of Common Equity Tier-1 and Additional Tier-1?

Tier 1 Capital Signup and view all the answers

As prescribed by the RBI, what is the minimum Tier-1 capital percentage?

7.00% Signup and view all the answers

What is the prescribed capital conservation buffer (CCB) as a percentage of Risk Weighted Assets (RWA)?

2.50% Signup and view all the answers

What is the total minimum capital requirement, including the Capital Conservation Buffer (CCB), as adopted by RBI for India?

11.50% Signup and view all the answers

Which process involves the Internal Capital Adequacy Assessment Process (ICAAP)?

Pillar II Signup and view all the answers

What is the minimum common equity Tier-1 capital percentage as adopted by the RBI for commercial banks?

5.50% Signup and view all the answers

What percentage of the total capital is Tier 2 capital limited to under the Basel III guidelines?

2.00% Signup and view all the answers

Which of the following is a component of regulatory capital that allows banks to absorb losses during financial stress?

Capital Conservation Buffer Signup and view all the answers

What is the total minimum capital requirement (including CCB) for Tier-1 capital as mandated by the RBI?

9.50% Signup and view all the answers

What is the minimum required ratio of capital to risk-weighted assets established by the Basel Capital Accord?

8% Signup and view all the answers

In which year was the Basel Committee established?

1974 Signup and view all the answers

What key aspect did the Amendment to the Capital Accord issued in 1996 incorporate?

Market risk Signup and view all the answers

Where is the Basel Committee headquartered?

Basel, Switzerland Signup and view all the answers

What was the first direction paper issued by the Basel Committee called?

Concordat Signup and view all the answers

Which types of risks were primarily addressed in the original Basel I framework?

Credit risk Signup and view all the answers

What year did the Basel Committee release the capital measurement system known as the Basel Capital Accord?

1988 Signup and view all the answers

How many institutions were initially part of the Basel Committee when it was established?

10 Signup and view all the answers

What is the maximum percentage for a bank's investment in capital instruments issued by banking, financial and insurance entities?

10% Signup and view all the answers

What does the standalone ('Solo') capital adequacy ratio measure?

The capital adequacy of a bank based on its own capital strength. Signup and view all the answers

Which of the following statements regarding equity investment in subsidiaries is correct?

Equity investment in a subsidiary should not exceed 10% of the bank's paid-up share capital. Signup and view all the answers

What is meant by ‘consolidated capital adequacy ratio requirements’?

It measures the capital adequacy by consolidating the assets and liabilities of subsidiaries. Signup and view all the answers

Under the provisions of the Banking Regulation Act, what is the maximum stake a bank can hold in any non-financial company?

30% of the paid-up share capital or 30% of its own capital, whichever is less. Signup and view all the answers

In what scenario are overseas operations of a bank assessed for capital adequacy?

They are included in both consolidated and standalone capital adequacy assessments. Signup and view all the answers

What must occur before a bank can adopt any advanced approaches for capital adequacy?

Prior approval from the Reserve Bank of India (RBI). Signup and view all the answers

Which of the following correctly describes the application of capital adequacy norms to a Non-Operative Financial Holding Company (NOFHC)?

Consolidated capital adequacy norms apply after consolidating relevant entities held by the NOFHC. Signup and view all the answers

What is the minimum Capital to Risk-Weighted Assets Ratio (CRAR) required from banks on an ongoing basis as prescribed by the RBI?

9% Signup and view all the answers

Which capital type is classified as gone-concern capital under Basel III?

Tier 2 Capital Signup and view all the answers

What is the capital conservation buffer (CCB) percentage of Risk Weighted Assets that banks are required to hold?

2.50% Signup and view all the answers

According to the Basel III guidelines adopted by the RBI, what is the minimum Common Equity Tier-1 capital percentage?

5.50% Signup and view all the answers

Which process evaluates a bank's internal capital adequacy assessment in the Supervisory Review Process?

Internal Capital Adequacy Assessment Process (ICAAP) Signup and view all the answers

What is the minimum total capital requirement (including CCB) for commercial banks as prescribed by the RBI?

11.50% Signup and view all the answers

Which of the following statements regarding Tier 1 capital is correct?

It consists of Common Equity Tier-1 and Additional Tier-1. Signup and view all the answers

RBI may consider prescribing a higher level of minimum capital ratio under which pillar?

Pillar II Signup and view all the answers

Under the Basel III framework for India, what is the maximum percentage of Tier 2 capital allowed?

2.00% Signup and view all the answers

What does the Capital to Risk Weighted Asset Ratio (CRAR) measure?

Banks' overall stability and risk exposure Signup and view all the answers

What is the maximum equity investment limit for a bank in a non-financial services company based on the lesser of the company's paid-up share capital or the bank's paid-up share capital and reserves?

10% Signup and view all the answers

What cumulative percentage of equity investments can banks, together with their subsidiaries, associates, or joint ventures, hold in a non-financial services company?

20% Signup and view all the answers

When does the 20% cap on a bank's investments in subsidiaries and entities engaged in financial services not apply?

When the investment is classified as 'Held for Trading' and not held beyond 90 days. Signup and view all the answers

Under the Standardized Approach, what primarily aids in measuring credit risk?

The rating assigned by eligible external credit rating agencies. Signup and view all the answers

What is the limit on a bank's equity investments in subsidiaries engaged in financial services along with non-financial services?

20% of the bank’s paid-up capital. Signup and view all the answers

What is the applicable risk weight for loans when specific provisions are less than 20%?

75% Signup and view all the answers

For staff loans secured by mortgage or charge on superannuation benefits, what is the risk weight applied?

20% Signup and view all the answers

What risk weight is assigned to claims on foreign banks rated A?

50% Signup and view all the answers

What is the risk weight applied to Corporates rated AAA?

20% Signup and view all the answers

What is the risk weight for exposures to NBFCs rated BB and below?

150% Signup and view all the answers

For domestic public sector entities, what risk weight is implemented?

50% Signup and view all the answers

What risk weight applies to claims on foreign sovereigns rated BBB?

100% Signup and view all the answers

For claims on venture capital funds, what risk weight is assigned?

150% Signup and view all the answers

What is the risk weight applied to foreign public sector enterprises rated A?

20% Signup and view all the answers

If specific provisions are between 20% and 50%, what risk weight is applicable to the loan net of specific provisions?

75% Signup and view all the answers

Study Notes

Regulatory Retail Portfolio Classification

Small business exposures classified if average turnover over the last three years is less than Rs. 50 crores.
No single counterparty exposure should exceed 0.2% of the overall regulatory retail portfolio.
Maximum aggregated retail exposure to one counterparty must not exceed Rs. 7.50 crores.

Non-Performing Assets (NPA)

Unsecured portion of NPA net of specific provisions is risk-weighted at 150% when provisions are below 20%.
Risk weight is 100% for provisions of at least 20%, and 50% for at least 50% provisioning.

Claims Secured by Residential Property

Risk-weighted at 100% net of specific provisions when classified as NPA.

Basel III Overview

Implemented in response to the 2007-09 financial crisis to enhance liquidity risk management.
Introduced higher global minimum capital standards for banks at the GHOS meeting in September 2010.
Basel III focuses on stricter capital requirements, liquidity measures, and an overall framework enhancing banks’ resilience.

Key Features of Basel III

Minimum Capital to Risk-weighted Assets Ratio (CRAR) set at 9% for ongoing compliance.
Total regulatory capital includes Tier 1 (Common and Additional Tier-1) and Tier 2 capital.
Capital Conservation Buffer (CCB) of 2.50% required in addition to the minimum capital.

Capital Structure Requirements

Minimum Total Capital Requirement is 9% compared to the global standard of 8%.
Minimum Tier-I capital required is 7% in India, exceeding the global requirement of 6%.
Common Equity Tier-1 capital must be at least 5.50% in India, versus 4.50% globally.

Capital Conservation Buffer

Aimed at absorbing losses during financial stress periods, required to be 2.50% of Risk Weighted Assets (RWA).

Equity Investment Limits

Limits set for banking equity investments in non-financial services to 10% of either the investee’s paid-up share capital or the bank's paid-up share capital and reserves.
Aggregate equity investments in non-financial services entities by banks should not exceed 20% of the investee company’s paid-up equity.

Capital Charge for Credit Risk

Under the Standardized Approach, credit ratings by eligible external credit rating agencies guide credit risk measurement.
Specific capital risk weights set for various loan categories including consumer credit and commercial real estate.

Specific Risk Weights

Consumer credit (personal loans) for Commercial Banks is risk-weighted at 125% and 150% for credit card receivables.
Non-Banking Financial Companies (NBFCs) face similar risk weights for consumer credit and credit card receivables.
Commercial real estate exposures are risk-weighted at 100%. Regulatory retail loans are 75%.

Evolution of the Basel Committee

Established in 1974 by G10 central bank Governors to address international banking disturbances.
Initially named the Committee on Banking Regulations and Supervisory Practices.
Headquartered at the Bank for International Settlements in Basel, Switzerland.
Expanded from G10 to 45 institutions over time.
First directive, the "Concordat," issued in 1975, addressed supervisory responsibilities over banks' foreign operations.

Basel I: The Basel Capital Accord

Basel Capital Accord approved in July 1988, establishing standards for banks.
Set a minimum capital ratio of 8% of risk-weighted assets, to be implemented by end of 1992.
Framework adopted globally, refining to include risks beyond credit risk.
Market Risk Amendment introduced in January 1996, allowing internal models for market risk measurement.
Under Basel I, only credit risk was considered for capital requirements.

Pillar Structure

Pillar I: Minimum capital requirements.
Pillar II: Supervisory review of capital adequacy.
Pillar III: Market discipline.
Supervisory review includes ICAAP and SREP processes.

Composition of Regulatory Capital

Minimum Capital to Risk-weighted Assets Ratio (CRAR) set at 9%.
Comprises Tier 1 Capital (Common Equity Tier-1 & Additional Tier-1) and Tier 2 Capital.
Formula for CRAR: Eligible Total Capital / (RWA for Credit Risk + Market Risk + Operational Risk).

Minimum Capital Requirements in Basel III

Minimum Total Capital:
Globally: 8%
India (RBI): 9%
Minimum Tier-1 Capital:
Globally: 6%
India (RBI): 7% (with 4.50% as Common Equity Tier-1)
Capital Conservation Buffer (CCB): 2.50%, additional to minimum capital.

Capital Conservation Buffer (CCB)

Designed to absorb losses during economic stress.
Must be composed of Common Equity Tier-1 capital.

Scope of Capital Adequacy Framework

Compliance required at two levels:
- Consolidated ("Group") level: Includes all banking subsidiaries and joint ventures.
- Standalone ("Solo") level: Based on individual bank's capital strength.

Limits on Bank Investments

Investments in capital instruments of banking and financial entities limited to 10% of capital funds.
No fresh stake acquisition if resulting holding exceeds 10% of the investee bank’s equity.
Limits on equity investment in subsidiaries and non-financial services activities, generally capped at 10%.

Capital Charge for Credit Risk

Uses the Standardized Approach whereby credit risk is assessed based on external ratings.
Risk weights vary by asset type and rating, with specific provisions affecting applicable weights.

Risk Weights for Sovereigns and Corporates

Sovereigns rated AAA to AA: 0% risk weight; rated unrated: 100%.
Corporates risk weights range from 20% for AAA to 150% for BB & below.

Key Takeaways

Basel norms enhance global banking stability through rigorous capital requirements.
The framework continues to evolve, addressing additional risks and refining supervisory practices.
Adherence to Basel standards, particularly Basel III, is critical for operational banks to manage risks effectively.

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Description

This quiz focuses on the criteria for classifying exposures as a regulatory retail portfolio, specifically addressing small businesses with defined turnover limits. Test your understanding of the classifications and requirements involved in this domain.