Master Circular - Prudential Guidelines on Capital Adequacy and Market Discipline – New Capital Adequacy Framework (NCAF)

Master Circular - Prudential Guidelines on Capital Adequacy and Market Discipline – New Capital Adequacy Framework (NCAF)

RBI/2009-10/308
DBOD.No.BP.BC. 73 /21.06.001/2009-10

February 8, 2010

All Scheduled Commercial Banks
(Excluding Local Area Banks and Regional Rural Banks)

Dear Sir,

Master Circular - Prudential Guidelines on Capital Adequacy 
and Market Discipline – New Capital Adequacy Framework (NCAF)

Please refer to paragraphs 153 and 154 of Second Quarter Review of Monetary Policy 2009-10 announced on October 27, 2009 on Enhancement to Basel II Framework (extract annexed). Accordingly, ‘Prudential Guidelines on Capital Adequacy and Market Discipline – New Capital Adequacy Framework (NCAF), issued vide Master Circular DBOD No. BP.BC.21//21.06.001/2009-10 dated July 1, 2009 has been updated in line with the changes made by the Basel Committee on Banking Supervision (BCBS) to the Basel II Framework. The additions have been indicated in bold italics and deletions in bold strikethrough.

2. The changes in Pillar 1 are mainly aimed at increasing the capital requirements for specific risk and  liquidity facility for securitisation exposures. The revised  guidance  on Pillar 2 is intended to assist banks in better identifying and appropriately capturing risks in their internal assessments of capital adequacy and managing risks. The Pillar 3 revisions include more granular disclosure requirements for credit risk mitigations and securitised exposures. The guidance also includes references, as examples, to activities/products not used by our banks.

3. The Enhancement to Basel II Framework will be effective from March 31, 2010.

4. This Master Circular also integrates other changes in the NCAF effected after the date of the last Master Circular i.e. July 1, 2009, which are listed in Annex 17.

Yours faithfully,

(B.Mahapatra)
Chief General Manager

Encls: as above

Annex

Extract from Second Quarter Review of Monetary Policy 2009-10

Enhancements to the Basel II Framework

153. In July 2009, the Basel Committee on Banking Supervision (BCBS) had finalised enhancements and revisions in certain areas of the Basel II framework. The enhanced/ revised guidance of BCBS is contained in their three documents, viz., Enhancements to the Basel II Framework; Revisions to the Basel II Market Risk Framework; and Guidelines for Computing Capital Charge for Incremental Risk in the Trading Book. These enhancements and revisions are intended to strengthen the framework and respond to lessons learnt from the financial crisis.

154. The enhancements and revisions now stipulated by BCBS are, however, mostly applicable to advanced approaches of the Basel II framework. Banks in India have implemented standardised/basic approaches contained in the framework. However, wherever those enhancements and revisions are applicable to standardised/basic approaches, it is proposed:

• to issue detailed guidelines as appropriate for implementation by banks operating in India by end-November 2009.