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Pls explain how to calculate crar, minimum 15%, with example

SANKET KALYANI (n/a) (40 Points)

13 April 2012

HELLO DEAR ONES!!! MYSELF SANKET KALYANI!! I AM 90% PHYSICALLY CHALLENGED AND I NEED YOUR HELP TO SOLVE ONE PROBLEM:

PLS EXPLAIN HOW TO CALCULATE CRAR, MINIMUM 15%, WITH EXAMPLE!!!

AS FAR AS I KNOW ITS (TIER 1 CAPITAL + TIER 2 CAPITA)/ RISK WEIGTED ASSETS AND OFF BALANCE SHEET ITEMS.

RIGHT? BUT I EXECTLY DONT KNOW WHAT TO TAKE IN EACH INDIVIDUAL ITEM I.E. NUMERATOR AND DENOMINATOR. SO PLEASE EXPLAIN IT WITH 1 EXAMPLE......

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ABHISHEK JINDAL (ARTICLE) (92 Points)
Replied 14 April 2012

FIRST WE SHOULD CALCULATE NET OWN FUNDS OF THE COMPANY FOR THE NUMERATOR FIGURE.

TIER 1 CAPITAL = (paid up capital + statutory reserves + disclosed free reserves) - (equity investments in subsidiary + intangible assets + current & b/f losses)

TIER 2 CAPITAL -A)Undisclosed Reserves, B)General Loss reserves, C) hybrid debt capital instruments and subordinated debts.

RISK WEIGHTED ASSETS: Since different types of assets have different risk profiles, CAR primarily adjusts for assets that are less risky by allowing banks to "discount" lower-risk assets. The specifics of CAR calculation vary from country to country, but general approaches tend to be similar for countries that apply the Basel Accords.

In the most basic application, government debt is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of calculating the CAR.

Risk weighting example Risk weighted assets = Fund Based : Risk weighted assets mean fund based assets such as cash, loans, investments and other assets. Degrees of credit risk expressed as percentage weights have been assigned by RBI to each such assets. Non-funded (Off-Balance sheet) Items : The credit risk exposure attached to off-balance sheet items has to be first calculated by multiplying the face amount of each of the off-balance sheet items by the credit conversion factor. This will then have to be again multiplied by the relevant weightage.

Local regulations establish that cash and government bonds have a 0% risk weighting, and residential mortgage loans have a 50% risk weighting. All other types of assets (loans to customers) have a 100% risk weighting.

Bank "A" has assets totaling 100 units, consisting of: Cash: 10 units Government bonds: 15 units Mortgage loans: 20 units Other loans: 50 units Other assets: 5 units Bank "A" has debt of 95 units, all of which are deposits.

By definition, equity is equal to assets minus debt, or 5 units. Bank A's risk-weighted assets are calculated as follows

Cash 10 * 0% = 0

Government securities 15 * 0% = 0

Mortgage loans 20 * 50% = 10

Other loans 50 * 100% = 50

Other assets 5 * 100% = 5

Total risk Weighted assets 65

Equity 5 CAR (Equity/RWA) 7.69%

Even though Bank "A" would appear to have a debt-to-equity ratio of 95:5, or equity-to-assets of only 5%, its CAR is substantially higher. It is considered less risky because some of its assets are less risky than others.

Types of capital The Basel rules recognize that different types of equity are more important than others. To recognize this, different adjustments are made: Tier I Capital: Actual contributed equity plus retained earnings. Tier II Capital: Preferred shares plus 50% of subordinated debt. Different minimum CAR ratios are applied: minimum Tier I equity to risk-weighted assets may be 4%, while minimum CAR including Tier II capital may be 8%. There is usually a maximum of Tier II capital that may be "counted" towards CAR, depending on the jurisdiction.

4 Like

Niraj (Senior Analyst) (23 Points)
Replied 02 July 2012

Boss you could have given him the link for wikipedia instead of copying pasting the entire stuff .........Dont promote plagirism...........

Nirmala sundararaman (1 Points)
Replied 05 October 2016

Mr. Niraj has never claimed it as his own. Any body who knew the link could have done that. Mr. Niraj has taken pains to do that. It has helped the quesionnaire. Period.

Sundararaman

Yasaswi Gomes new (Finance ) (4479 Points)
Replied 14 June 2023

I don't know what discounting is for subordinate debt and I've searched all net for examples plus cfa institutes. Basel frameworks are not published properly otherwise no questions would arise here

Yasaswi Gomes new (Finance ) (4479 Points)
Replied 14 June 2023

If anyone knows amortised cost model which ofcourse used by nbfc, discounting is used to find the closing balance. The adjustments are between interest rate of debentures and market rates.