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Indian Financial System

Notes (d) Premises, furniture and fixtures 100%
(e) Bills purchased and discounted and other credit facilities 100%

Norms for Capital Adequacy

Banks are required to maintain unimpaired minimum capital funds equivalent to the prescribed
level of the aggregate of the risk-weighted assets and other exposures on an ongoing basis. All
banks with international presence had to achieve the norm of 8% as early as possible, and in any
case, by March 31, 1994. Foreign banks operating in India had to achieve this norm by March 31,
1993. Other banks had to achieve a capital adequacy norm of 4% by March 31, 1993 (Tier I or Core
capital having been set at not less than 50% of total capital) and the 8% norm by March 31, 1996.
The total of Tier II elements will be limited to a maximum 100% of total Tier I elements for the
purpose of compliance with the norms. Banks were advised to review the existing level and plan
to increase the capital funds vis-à-vis the prescribed level and plan to increase the capital funds
in a phased manner to achieve the prescribed ratio by the end of the period stipulated.

In conformity with the recommendations of the Committee on Banking Sector Reforms 1998
(CBSR), RBI announced a package of reform measures in October, 1998 in the areas relating to
the prudential norms. These measures aim at increasing the minimum capital adequacy ratio
from 8% to 9% by March 31, 2000; recognizing the market risks and prescribing a risk-weight of
2.5% in Government approved securities by March 31, 1999; providing 100% risk weight for
foreign exchange and gold open posting limits from the year ended March 31, 1999; moving
towards tighter asset classification, income recognition and provisioning norms; putting in
place a formal asset liability management system with effect from April 1, 1999; and further
enhancing the transparency in accounting and disclosure practices.
In February, 1999 banks were given autonomy to raise rupee denominated subordinated debt as
Tier II capital. To restrict cross-holdings, an individual bank's investment is restricted at 10%.
CBSR would also be eligible for SLR investment by banks and approved instruments for LIC,
GIC and provident funds.

In USA, the capital of banks includes long-term debt of seven years. In the context of regulatory
capital, long-term debt only serves to absorb operating losses in the event of bank failure.

New Capital Adequacy Framework, 1999

The Basic Committee on Banking Supervision (BCBS) has issued in June, 1999 a new capital
adequacy framework to replace the Capital Accord of 1988. The New Capital Adequacy
Framework consists of minimum capital adequacy requirement, supervisory review of an
institution's capital adequacy and internal assessment process; and effective use of market
discipline as a lever to strengthen disclosure and encourage safe and sound banking.
While the Capital Accord of 1988 has helped strengthen the soundness and stability of the
international banking system and enhance competitive equality among internationally active
banks, it has become a less accurate indicator of a bank's financial condition, in view of the
developments in the financial market place. The new framework is designed to better align
regulatory capital requirements with underlying risks and to recognize the improvements in
risk measurement and control.

Minimum Regulatory Capital Requirements

The objective of minimum regulatory capital requirement is to provide a comprehensive and
risk sensitive treatment of credit risk. The coverage of the Accord is expanded to incorporate

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