Capital adequacy PDF
Preview Capital adequacy
Capital Adequacy Compliance Objectives of Capital Adequacy Requirement • Fundamental objective for holding adequate capital by banks – Strengthen the soundness of banks – Stability of the banking system – Provide a stable resource to absorb losses – Loss absorption capacity based on the business risk Capital Fund • Division of capital fund – Characteristics of instruments – Quality of instruments – Supervisory requirements Elements of Tier I Capital • Paid-up capital (ordinary shares) • Statutory reserves • Other disclosed free reserves • Perpetual non-cumulative preference shares (PNCPS) eligible for inclusion as Tier I capital – Subject to laws in force from time to time • Innovative perpetual debt instruments (IPDI) eligible for inclusion as Tier I capital • Capital reserves representing surplus arising out of sale proceeds of assets Elements of Tier II Capital • Undisclosed reserves • Revaluation reserves • General provisions • Loss reserves • Hybrid capital instruments • Subordinated debt • Investment reserve account Undisclosed Reserves • Represent accumulations of post-tax profits • Not encumbered by any known liability • Not routinely used for absorbing normal loss • Not routinely used for absorbing operating losses Revaluation Reserve • Revaluation reserves at a discount of 55 per cent for Tier II capital. • Disclosed in the balance sheet as revaluation reserves. General Provisions and Loss Reserves • Identifiable potential loss in any specific asset. • Available to meet unexpected losses. • 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 and loss reserves considered up to a maximum of 1.25 percent of total risk weighted assets. Floating Reserves • General in nature • Not made against any identified assets • Excess provisions which arise on sale of non performing assets eligible for Tier II capital • Applicable ceiling 1.25% of total risk weighted assets Hybrid Debt Capital Instruments • Instruments that have close similarities to equity instruments • Instruments that support losses on an ongoing basis without triggering liquidation • Debt capital instruments eligible for inclusion as upper Tier II capital • Perpetual Cumulative Preference Shares (PCPS) • Redeemable Non Cumulative Preference Shares (RNCPS) • Redeemable Cumulative Preference Shares (RCPS)
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