Qualitative Disclosures:
A. A summary discussion of the Bank's approach to assessing the adequacy of its capital to support current and future activities.
In order to strengthen the capital base of banks in India, the Reserve Bank of India in April 1992 introduced capital adequacy measures in banks, based on the capital adequacy framework (Basel I) issued by Basel Committee on Banking Supervision (BCBS). Initially, the framework addressed capital for credit risk, which was subsequently amended to include capital for market risk as well and the Bank was compliant with regard to maintenance of minimum capital for credit and market risks.
Subsequently, the BCBS released the "International Convergence of Capital Measurement and Capital Standards: A Revised Framework" (popularly known as Basel II document) on 26.06.2004. Reserve Bank of India issued final guidelines on 27.04.2007 for implementation of the New Capital Adequacy (Basel II) Framework, which includes capital for Operational Risk. In line with the RBI guidelines, the Bank successfully migrated to the revised framework (Basel-II) from 31.03.2009.
Reserve Bank of India issued guidelines based on the Basel III reforms on capital regulation during May 2012, to the extent applicable to banks operating in India. The Basel III capital regulation has been implemented from 01.04.2013 in India in phases and it was decided originally to implement 'Capital Conservation Buffer Framework' fully from 31.03.2018. RBI issued detailed Guidelines on Composition of Capital Disclosure Requirements on 28.05.2013.
RBI had issued circulars on various dates extending the transitional period for full implementation of Basel III Capital Regulations due to the unfavorable economic situation and also due to the continuing stress on account of COVID-19 crisis. Now the minimum regulatory requirement under Basel III with Capital Conservation Buffer (CCB) is 11.50% (9.00% 2.50%) with effect from 01.10.2021.
RBI has issued circular on "Prudential Guidelines on Capital Adequacy and Liquidity Standards -Amendments" on 31.03.2015. The Basel III Capital Regulations have been consolidated in Master Circular -Basel III Capital Regulations vide circular No. DOR.CAP.REC 3/21.06.201/2022-23 dated April 01, 2022, which includes the introduction of capital buffers.
Under the Basel II framework, the total regulatory capital comprises Tier I (core capital) and Tier 2 capital (supplementary capital). In order to improve the quality of regulatory capital, the capital will predominantly consist of Common Equity Tier1 (CET1) under Basel III. Non-equity Tier 1 and Tier 2 capital would continue to form part of regulatory capital subject to eligibility criteria as laid down in Basel III. The Basel III capital regulations continue to be based on three-mutually reinforcing Pillars, viz. Minimum Capital Requirements (Pillar 1), Supervisory Review of Capital Adequacy (Pillar 2) and Market Discipline (Pillar 3) of the Basel II Capital Adequacy framework.
The Basel-III norms mainly seek to:
• Raise the quality of capital to ensure that the banks are capable of absorbing losses, both as going concern and as gone concern basis.
• Increase the risk coverage of the capital framework.
• Introduce leverage ratio to serve as a backstop to the risk-based capital measure.
• Raise the standards for the supervisory review process and public disclosures.
The macro prudential aspects of Basel III are largely enshrined in the capital buffers. Both the buffers i.e. the Capital Conservation Buffer and the Counter Cyclical Capital Buffer are intended to protect the banking sector from stressed situations and business cycles.
Minimum capital requirements under Basel-III:
Under the Basel III Capital Regulations, banks are required to maintain a minimum Pillar 1 Capital (Tier-I Tier-II) to Risk-weighted Assets Ratio (CRAR) of 9% on an
on-going basis. Besides these minimum capital requirements, Basel III also provides for creation of Capital Conservation Buffer (CCB) and Counter Cyclical Capital Buffer (CCCB).
B. The Bank's approach in assessment of Capital Adequacy
The Bank is following Standardised Approach, Standardised Duration Approach and Basic Indicator Approach for measurement of capital charge in respect of credit risk, market risk and operational risk respectively. Besides computing CRAR under the Pillar I requirement, the Bank also undertakes stress testing periodically in various risk
areas to assess the impact of stressed scenario or plausible events on asset quality, liquidity, profitability and capital adequacy. The Bank conducts Internal Capital Adequacy Assessment Process (ICAAP) on an annual basis to assess the sufficiency of its capital funds to cover the risks specified under Pillar-I and Pillar-II of Basel guidelines. The adequacy of Bank's capital funds to meet the future business growth is being assessed in the ICAAP document.
D. RiskExposureandAssessment
Risk is an integral part of banking business in an ever dynamic environment, which is undergoing radical changes both on the technology front and product offerings. The main risks faced by the bank are credit risk, market risk and operational risk. The bank aims to achieve an optimum balance between risk and return to maximize shareholder value. The relevant information on the various categories of risks faced by the bank is given in the ensuing sections. This information is intended to give market participants a better idea on the risk profile and risk management practices of the bank.
The Bank has a comprehensive risk management system to address various risks and has set up an Integrated Risk Management Department (RMD), which is an independent operational department. Bank has a Risk Management Committee of Board
functioning at apex level for formulating, implementing and reviewing bank's risk management measures pertaining to credit, market and operational risks. Apart from the Risk Management Committee of the Board at apex level, the Bank has a strong bankwide risk management structure comprising of Risk Management Committee of Executives (RMCE) assisted by Asset Liability Management Committee (ALCO), Credit Risk Management Committee (CRMC) and Operational Risk Management Committee (ORMC) at senior management level. Credit Risk Management Committee deals with credit policies and procedures, Asset Liability Management Committee deals with Asset Liability Management (ALM) and Integrated Treasury Policy of the Bank and Operational Risk Management Committee formulates policies and procedures for managing operational risks.
Credit Risk
Credit Risk is a possibility of losses associated with diminution in the credit quality of borrowers or counterparties. In a bank's portfolio, Credit Risk arises mostly from lending activities of the bank, when a borrower is unable to meet its financial obligations emanating from potential changes in the credit quality / worthiness of the borrowers or counterparties.
Credit Risk Management encompasses a host of management techniques, which help the banks in mitigating the adverse impacts of credit risk. The objective of the Credit Risk Management is to identify measure, monitor and control credit risk by adopting suitable methodology.
The Bank has formulated Loan Policy which stipulates various prudential norms, benchmarks, guidelines for sanctioning of credits and recovery of the same. The Bank has also formulated a separate Credit Risk Management Policy, besides a Policy on Credit Risk Mitigation and Collateral Management.
Credit Risk is assessed by a robust internal credit risk rating system. Credit Risk Rating is the process wherein the merits and demerits of a borrower are captured and scorings assigned, which enables the Bank to take a view on the acceptability or otherwise of any credit proposal.
Credit Risk Management Policy
The Bank has put in place a well-structured Credit Risk Management Policy duly approved by the Board. The Policy document defines organization structure, roles & responsibilities and the processes whereby the Credit Risk can be identified, quantified and managed. Credit Risk is monitored on a bank wide basis and the compliance with regard to the risk limits approved by the Credit Risk Management Committee (CRMC)/ Board is ensured.
The Bank adopts the definition of 'past due' and 'impaired credits' (for reporting purposes) as defined by Reserve Bank of India under Income Recognition, Asset Classification and provisioning (IRAC) norms (vide RBI Master Circular dated October 01, 2021).
The Bank is accepting the ratings of the External Credit Rating Agencies approved by Reserve Bank of India, namely a) CRISIL, b) ICRA, c) CARE, d) India ratings & research Pvt Ltd, e) Acuite ratings & research Ltd and f) Infomerics Valuation and Rating Pvt. Ltd. to facilitate the corporate borrowers who enjoy credit facilities to get themselves rated. The corporates which are yet to get the approved ratings from these rating agencies are treated as 'unrated'.
The Bank computes risk weight on the basis of external rating assigned, both long-term and short-term, for the facilities availed by the borrowers. The external ratings assigned are generally facility specific. The Bank follows
the below mentioned procedures as laid down in the Basel III guidelines for usage of external ratings:
Rating assigned by one rating agency is used for all the
types of claims on the borrowing entity.
Long-term ratings are used for facilities with
contractual maturity of one year & above.
Short-term ratings are generally applied for facilities with contractual maturity of less than one year.
The Bank has put in place Credit Risk Mitigation and Collateral Management Policy with the primary objective of
Mitigation of Credit Risks and enhancing awareness on identification of appropriate collateral taking into account the spirit of Basel III / RBI guidelines
Optimizing the benefit of Credit Risk Mitigation in
computation of capital charge as per the approaches laid down in Basel III / RBI guidelines.
Valuation and methodologies are detailed in Credit Risk Management Policy, Valuation Policy and Loan Policy of the Bank.
The Bank recognizes the following Financial Collateral (FC) for Credit Risk Mitigation.
a) Cash or Cash equivalent (Bank Deposits/Certificate of Deposits issued by the Bank, etc.)
b) Gold Jewels
c) Indira Vikas Patras
d) Kisan Vikas Patras
e) National Savings Certificates
f) Life Insurance Policies with a declared surrender value
g) Securities issued by the Central and State Governments
h) Debt securities rated by a recognized Credit Rating Agency where these are either:
at least BBB(-] when issued by public sector entities; or
• at least A when issued by other entities
(including banks and Primary Dealers); or
at least PR3/P3/F3/A3 for short term debt
instruments
i) Debt securities not rated by Credit Rating Agency but
issued by a bank and
listed on a recognized stock exchange; and Classified as senior debt.
The Bank accepts guarantees from individuals with considerable net worth and the Corporates, besides guarantee issued by Government, other Commercial banks, ECGC and CGTSI.
Concentration Risk in Credit Risk Mitigation: All types of securities eligible for mitigation are easily realizable financial securities. As such, presently no limit/ceiling has been prescribed to address the concentration risk in credit risk mitigants recognized by the Bank. The portion of advances subjected to CRM including non-funded advances amounted to 27.59% of outstanding total of funded and non-funded credit. The Bank has ensured legal certainty in the matter of credit risk mitigation as per RBI guidelines.
Market Risk in trading book is assessed as per the Standardised Duration Approach. The capital charge for both investments and foreign exchange exposure is computed as per Reserve Bank of India prudential guidelines.
a. Definition of market risk:
Market risk refers to the potential losses arising from volatility in interest rates, foreign exchange rates, equity prices and commodity prices. Market risk arises with respect to all market risk sensitive financial instruments, including securities, foreign exchange contracts, equity and derivative instruments as well as from balance sheet or structural positions.
b. Portfolios covered under Standardised approach:
The Bank's portfolio comprises of Government securities, equity shares and forex portfolio.
c. Strategies and processes :
1. The Bank has put in place a comprehensive Market risk management Framework to address the Market risks (bank wide) including that of the Trading Book.
2. Within the above framework, various policies of the Bank prescribes Limits like Value at Risk
(VaR), Duration, Minimum holding level for liquid assets, Exposure limits, Forex open position limits (day light/overnight), Stop-loss limits etc .
3. Risk profiles are analyzed and the effectiveness of risk mitigants is regularly monitored through Mid Office.
4. Adherence to limits are being monitored by dedicated mid office, reporting exceptions to the head of Risk Management Department, independent of Treasury /IBD operational units.
d. Risk Measurement :
1. Value at Risk (VaR) numbers is arrived for Equity Portfolio and Foreign Exchange Position.
2. The positions are marked to market at stipulated intervals. The Duration/Modified Duration for trading book is computed and its adherence to the prescribed duration limits is ensured.
3. The Bank is computing capital charge for both investments and foreign exchange exposure categories using Standardised Duration Approach as required under RBI guidelines.
4. Stress testing analysis is done by applying rate shocks on investment portfolio and also on foreign exchange open position.
Operational Risk is the risk of loss resulting from inadequate or failed processes, people and systems or from external events. Operational risk includes legal risk but excludes strategic and reputation risks.
The Bank has put in place Operational Risk Management Policy duly approved by the Board. This policy outlines the Organisation Structure and covers the process of identification, assessment/measurement and control of various operational risks.
The other policies adopted by the Bank which deal with the management of operational risks are Inspection Policy, Information Security Audit Policy and Policy on Modified code of conduct for Know Your Customer & AntiMoney Laundering Standards.
Operational Risks in the Bank are managed through comprehensive and well-articulated internal control framework. Operational risk is mitigated by effecting suitable insurance coverage wherever necessary. The Bank has also put in place a compliance cell to supervise KYC & AML guidelines and off site monitoring of high value transactions. For accounting operations in the computerized environment, suitable internal control system is maintained and a separate policy on I.T. Security is in place specifying the internal guidelines on access, control, communications, operations, personal security, business continuity management etc.
Quantitative Disclosures:
Capital charge for Operational Risk is computed as per the Basic Indicator Approach based on 15% of the average of the gross income for the previous three years i.e. 2019-20, 2020-21 & 2021-22 as defined in the Master Circular on Basel III Capital Regulations of RBI dated 01.04.2022. The capital charge for operational risk is arrived at '358.27 crore.
Qualitative Disclosures:
Interest rate risk is the risk where changes in the market interest rates might affect a bank's financial condition. Changes in interest rates affect both the current earnings (earnings perspective) as also the net-worth of the Bank (economic value perspective). The risk from earnings perspective can be measured as impact in the Net Interest Income (NII) or Net Interest Margin (NIM). Similarly, the risk from economic value perspective can be measured as drop in the Economic value of Equity (EVE).
The impact on income (earning perspective) is measured through use of Gap Analysis by applying notional rate shock up to 200 bps as prescribed.
For the calculation of impact on earnings, the Traditional Gap is taken from the Rate Sensitivity statement and based on the remaining period from the mid-point of a particular bucket, the impact for change in interest rates up to 200 bps is arrived at for one year time horizon.
The Bank has adopted Duration Gap Analysis for assessing the impact (as a percentage) on the Economic
Value of Equity (Economic Value Perspective) by applying a notional interest rate shock of 200 bps. RBI has issued draft guidelines vide DBOD.No. BP. 7/21.04.098/ 2005-06 dated April 17, 2006 on improvements to banks' Asset Liability Management framework, covering interest rate risk and liquidity risk measurement / reporting frameworks and prudential limits. Subsequently, on November 04, 2010, RBI issued a circular on Interest Rate Risk using Duration Gap Analysis and these guidelines have been taken into account while calculating IRRBB As per the RBI guideline circular DOR.MRG.REC.102/00-00-009/2022-23 dated 17.02.2023 on "Governance, Measurement and Management of Interest Rate Risk in Banking Book (IRRBB)", the bank is taking steps in measuring, monitoring & disclosing the exposure to Interest Rate Risk in Banking Book (IRRBB). The revised
measurement and implementation of IRRBB will be calculated from August 2023 (using the position as of 30.06.2023) and would be submitted to RBI as per extant guidelines. The Bank calculates Modified Duration Gap on Assets & Liabilities and arrives at the impact on Economic Value of Equity. The Bank is calculating IRRBB on a monthly basis.
Quantitative Disclosures:
a. The impact of change in Interest Rate i.e. Earnings at Risk for 200 bps interest rate shock as on 31st March, 2023 is ' 162.67 crore.
b. The impact of change in market value of Equity for an interest rate shock of 200 bps as on 31st March, 2023 is 5.17%.
Counterparty Credit Risk (CCR) is the risk that a counter party to a transaction could default before the final settlement of the transaction cash flows. Unlike a firm's exposure to credit risk through a loan, where the exposure to credit risk is unilateral and only the lending bank faces the risk of loss, CCR creates a bilateral risk of loss to either party.
Counterparty credit risk in case of derivative contracts arises from the forward contracts. The subsequent credit risk exposures depend on the value of underlying market factors (e.g., interest rates and foreign exchange rates),
which can be volatile and uncertain in nature. The Bank does not enter into derivative transactions other than forward contracts.
Credit exposures on forward contracts
The Bank enters into the forward contracts in the normal course of business for proprietary trading and arbitrage purposes, as well as for our own risk management needs, including mitigation of interest rate and foreign currency risk. Derivative exposures are calculated according to the current exposures method.
The capital requirement for Bank's exposure to Qualified Central Counter Party (QCCP) has been computed for the exposure to Clearing Corporation of India (CCIL) as on 31st March, 2023 amounting to '3674.73 crore with risk weighted assets of '734.95 crore, which is forming part of credit risk total. In terms of RBI circular dated 28th March, 2013, the Credit Valuation Adjustment (CVA) risk capital charge has been computed, which amounted to '2.35 crore (the corresponding risk weighted value of '29.32 crore has also been added to credit risk weighted assets).
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