CRAR Disclosure Mandated for Co-operative Banks from March 2008

RBI/2007-2008/203 RPCD.CO.RF.BC.40/07.38.03/2007-08 December 4, 2007 13 Agrahayana, Saka 1929 The Chairman / Managing Director All State and Central Co-operative Banks Dear Sir, Mid-Term Review of Annual Policy Statement for the year 2007-08 -Application of Capital Adequacy Norms to State and Central Co-operative Banks Please refer to  Paragraph 149 of the Mid-Term Review of Annual Policy Statement for the year 2007-08  (copy of the extract enclosed). At present, State and Central Co-operative Banks are outside the Capital to Risk weighted Assets Ratio (CRAR) framework. In order to assess the capital structure of the State and Central Co-operative Banks, in the context of financial stability of the whole system, it is proposed that they should disclose the level of CRAR as on March 31, 2008 in their Balance Sheets. 2. Accordingly, all State and Central Co-operative Banks are advised to disclose their CRAR as on March 31, 2008 and thereafter every year as 'Notes on Accounts' to their Balance Sheets. The roadmap for achieving the desired level of CRAR norms would be communicated in due course. 3. Under the proposed CRAR framework, the Balance Sheet assets and non-funded / off-balance sheet items will be assigned weights and banks have to compute the ratio of their capital funds to the aggregate of risk weighted assets and other off-balance sheet exposures. The details of the framework and other procedural guidelines are indicated in the enclosed ' Memorandum of Instructions ', which may please be studied carefully for the purpose of such computation. 4. Additionally, banks should furnish an annual return to our Regional Office / NABARD Regional office, indicating capital funds and risk assets ratio, in the format given in  Annex 2 . The return should be signed by two officials who are authorised to sign the statutory returns submitted to the Reserve Bank. The statement as per the format ( Annex 2 ) indicating the position as on March 31, 2008 may please be furnished to the Regional Office of RPCD / NABARD under whose jurisdiction the bank is located, as soon as the annual accounts are finalised. 5. Please bring the contents of this letter to the notice of the Board of Directors of your bank. 6. Please acknowledge receipt to our Regional Office concerned. Yours faithfully (C.S.Murthy) Chief General Manager in-Charge Memorandum of Instructions Capital Adequacy Standards 1.  General The fundamental objective behind introducing Capital to Risk Weighted Asset Ratio (CRAR) framework is to strengthen the soundness and stability of the rural co-operative banks. 2. Definition of Capital Funds etc. The Capital Funds can be segregated into two broad groups/tiers - Tier I and Tier II. While Tier I Capital, otherwise known as core capital, provides the most permanent and readily available support to a bank against unexpected losses, the Tier ll capital consists elements that are less readily available. 2.1. Tier I Capital/Core Capital Tier I Capital would include the following items: (a) Paid up share capital collected from regular members of a bank having voting powers. (b)  Free Reserves (c) Capital Reserve representing surplus arising out of sale proceeds of assets. (d)  Any surplus (net) in profit and loss account i.e. balance after appropriation towards dividend payable, education fund, other funds whose utilisation is defined and asset loss, if any, etc. Note:  Amount of intangible assets, losses in current year and those brought forward from previous periods, deficit in NPA provisions, income wrongly recognized on non performing assets, provision required for liability devolved on bank etc., will be deducted form Tier I Capital. 2.2. Tier II Capital 2.2.1 Undisclosed Reserves These often have characteristics similar to equity and disclosed reserves. They have the capacity to absorb unexpected losses and can be included in capital, if they represent accumulation of profits and not encumbered by any known liability and should not be routinely used for absorbing normal loss or operating losses. 2.2.2.  Revaluation Reserves These reserves often serve as a cushion against unexpected losses, but they are less permanent in nature and cannot be considered as 'Core Capital'. Revaluation reserves arise from revaluation of assets that are undervalued on the bank's books. The typical examples in this regard are bank premises and marketable securities. The extent to which the revaluation reserves can be relied upon as a cushion for unexpected losses depends mainly upon the level of certainty that can be placed on estimates of the market values of the relevant assets, the subsequent deterioration in values under difficult market conditions or in a forced sale, potential for actual liquidation of those values, tax consequences of revaluation, etc. Therefore, it would be prudent to consider revaluation reserves at a discount of 55 percent when determining their value for inclusion in Tier II capital i.e. only 45% of revaluation reserve is available for inclusion in Tier II capital. Such reserves will have to be reflected on the face of the Balance Sheet as revaluation reserves. 2.2.3. General Provisions and Loss Reserves These will include such provisions of general nature appearing in the books of the bank which are not attributed to any identified potential loss or a diminution in value of an asset or a known liability. Adequate care must be taken to ensure that sufficient provisions have been made to meet all known losses and foreseeable potential losses before considering any amount of general provision as part of Tier II capital as indicated above. To illustrate, excess provision in respect of Bad and Doubtful Debt, general provision for Standard Assets etc. could be considered for inclusion under this category. Such provisions which are considered for inclusion in Tier II capital will be admitted up to 1.25% of total weighted risk assets. 2.2.4 Investment Fluctuation Reserve Balance, if any, in Investment Fluctuation Reserve of bank. Note:  It may be noted that the total of Tier II elements will be limited to a maximum of 100 percent of total Tier I elements for the purpose of compliance with the norms. 3.  Risk Adjusted Assets and Off-Balance Sheet Items Risk adjusted assets would mean weighted aggregate of funded and non-funded items. Degrees of credit risk expressed as percentage weightings have been assigned to Balance Sheet assets and conversion factors to off-Balance Sheet items. The value of each asset/item shall be multiplied by the relevant weights to produce risk-adjusted values of assets and of off-Balance Sheet items. The aggregate will be taken into account for reckoning the minimum capital ratio. The weights allotted to each of the items of assets and off-Balance Sheet items are furnished in the  Annex 1 . Annex 1 PRUDENTIAL NORMS Risk Weights for Calculation of CRAR   I.  Domestic Operations A. Funded Risk Assets Sr. No.

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2007-2008/203 · issued 04 Dec 2007. The plain-English explanation above is BankPulse’s own independent summary.

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