What changed
This master circular updates the previous July 2007 version by incorporating all instructions issued up to June 30, 2008. It consolidates guidelines on capital components, risk weights, and capital charges for credit and market risks under the Basel I framework. For banks that have already migrated to Basel II norms from March 31, 2008, the separate Basel II master circular applies.
What it means for you
Banks still on Basel I must continue to maintain capital as per these norms until they migrate. The circular provides explicit capital charges for credit risk, market risk (including interest rate, equity, and forex risks), and defines trading book components. It ensures a standardized approach for capital adequacy computation across commercial banks excluding RRBs.
What you must do
- Review and ensure compliance with the updated capital adequacy norms for credit and market risks as per this master circular.
- For banks not yet on Basel II, continue using this circular for CRAR computation and capital charge calculations.
- Check that all off-balance sheet exposures and trading book items are correctly risk-weighted as per Annex 10 and Annex 7.
- Prepare to transition to Basel II norms if migration is planned by March 31, 2009, as this circular will cease to apply post-migration.
Who it affects
All commercial banks excluding Regional Rural Banks, Banks that have not yet migrated to Basel II norms as of March 31, 2008, Banks planning to migrate to Basel II by March 31, 2009
Does this circular apply to banks that have already adopted Basel II?
No. Banks that migrated to Basel II norms with effect from March 31, 2008 must follow the separate Basel II master circular. This circular applies only to banks still on Basel I or those migrating by March 31, 2009.
What risks are covered under the capital charge requirements in this circular?
The circular covers explicit capital charges for credit risk and market risk. Market risk includes interest rate risk in the trading book, equity position risk, and foreign exchange risk (including gold and other precious metals) in both trading and banking books.
What is the trading book definition for these guidelines?
The trading book includes securities under Held for Trading and Available For Sale categories, open gold and foreign exchange position limits, trading positions in derivatives, and derivatives used for hedging trading book exposures.