Page 168 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 8: Financial Institutions

4. FIs are required to assign a risk weight of 2.5% for market risk in respect of investments in Notes
all securities from March 31,2001. This risk weight would be in addition to 20%/100% risk
weight already assigned for credit risk in non-government/non-approved securities.
5. In order to bring about uniformity in the disclosure practices adopted by the FIs and with
a view to improving the transparency in their affairs, FIs were advised to disclose certain
important financial ratios/data with effect from the financial year 2000-01. These
disclosures pertain to capital-to- risk weighted assets ratio (CRAR), Core CRAR,
supplementary CRAR, amount of subordinated debt raised/outstanding as tier II capital,
risk weighted assets, shareholding pattern, asset quality and credit concentration, maturity
pattern of rupee and foreign currency assets and liabilities, and details on operating
results. Besides, separate details on loan assets arid substandard assets which have been
subject to restructuring, and so on, would also need to be disclosed.
6. Capital to risk-weighted Asset Ratio (CRAR) should be 9% of risk weighted assets (RWA)
on an ongoing basis. CRAR represents the amount of capital maintained in consonance
with the risk-adjusted aggregate of funded and non-funded assets of an FI. The risk-
adjusted asset is arrived at by multiplying each asset with its corresponding risk weight in
the case of funded assets. Conversion factors are assigned in case of non-funded assets
apart from weights. CRAR includes core capital (tier I) and supplementary capital (tier II).
Tier I capital includes paid up capital, statutory reserves, and other disclosed free reserves,
if any. Certain Government of India grants and reserves held under section 36(1)(viii) of
the Income Tax Act, 1961 are treated as capital. Besides capital reserves, equity investment
in subsidiaries, intangible assets, gaps in provisioning, and losses in the current period
and those brought forward from the previous period will be deducted from tier I capital.
The core CRAR should not be less than 50% of CRAR at any point of time. Supplementary
CRAR, or tier II capital, includes undisclosed reserves and cumulative preference shares,
revaluation reserves, general provisions and reserves, hybrid debt capital instruments,
and subordinated debt. The supplementary capital is limited to a maximum of 100% of tier
I capital.
7. Since June 2000, FIs need not seek the Reserve Bank's issue wise prior approval/registration
for raising resources through either public issue or private placement if (a) the minimum
maturity period is 3 years, (b) where bonds have call/put or both options, the same is not
exercisable before expiry of one year from date of issue, (c) yield to maturity (YTM)
offered at the time of issue of bonds, including instruments having call/put options, does
not exceed 200 basis points over that on government securities of equal residual maturities,
and (d) 'exit' option is not offered prior to expiry of one year, from date of issue. The
outstanding total resources mobilised at any point of time by an individual FI including
funds mobilised under the 'umbrella limit' as prescribed by the Reserve Bank should not
exceed 10 times its net owned funds as per the latest audited balance sheet.

8. The rating for the term deposits accepted by FIs was made mandatory effective November
1, 2000.
9. FIs are required to classify entire investment portfolio from March 31, 2001, under three
categories, viz., (a) held to maturity, (b) available for sale, and (c) held for trading.
Investments under (b) and (c) are to be marked-to-market as prescribed or at more frequent
intervals, while those under (a) need not be marked-to-market and should not exceed 25%
of total investments.

10. Looking to the deteriorating financial position of FIs, it was decided that the inspection of
all the FII would be undertaken by the Reserve Bank on an annual basis.
11. The Reserve Bank introduced a CAMELS based supervisory rating model for the FIs
effective March 31, 2002.

LOVELY PROFESSIONAL UNIVERSITY 163