**RBI guidelines on CCF (Credit Conversion Factor)**

General Guarantees (including Standby LCs), Acceptances - 100%

Transaction related contingent items (Performance bonds, Bid bonds, - 50%

Warranties, Indemnities, Standby LC relating to particular transaction

Short Term LC (Documentary) for Issuing bank as well as confirming bank - 20%

**Capital Charge on Un-availed limit**

Capital Charge on Undrawn limits is calculated as under:

• 20% on Undrawn CC limit

• 20% on Undrawn TL limit (which is to be drawn in a year)

• 50% on Undrawn TL limit (which is to be drawn beyond a year)

**Example**

In the case of a cash credit facility for Rs.100 lakh (which is not unconditionally cancelable) where the

availed portion is Rs. 60 lakh, the un-availed portion of Rs.40 lakh will attract a Credit Conversion Factor (CCF) of 20% (since the cash credit facility is subject to review / renewal normally once a year). The credit equivalent amount of Rs.8 lakh (20% of Rs.40 lakh) will be assigned the appropriate risk weight as applicable to the counterparty / rating to arrive at the risk weighted asset for the unavailed portion. The availed portion (Rs.60 lakh) will attract a risk weight as applicable to the counterparty / rating.

In compliance of the new guidelines banks have advised all the branches for:

i) Insertion of Limit Cancellation Clause in loan documents

ii) Levying of Commitment Charges

**Time frame for application of different approaches****Application to RBI by Approval by RBI by**

IRB approach for Credit Risk 01.04.2012 31.3.2014

AMA approach for Operational Risk 01.04.2012 31.3.2014

Internal Model approach for

Market Risk 01.04.2010 31.3.2011

**BASEL -III **Basel III covers Liquidity Risk in addition to Basel II.

It is planned to implement BASEL-III w.e.f. 1.1.2013. The propose reforms are as under:

**Capital Common Equity Tier –I Total Capital**

Minimum 4.5% 6% 8%

+ Conservative Buffer 2.5% 2.5% 2.5%

**Transition Arrangement**

As on 1.1.2013, the banks will meet new minimum requirement in relation to Risk Weighted Assets as under:

3.5% of Common Equity + 4.5% of Tier –I Capital = .8% of Total Capital /Risk Weighted Assets.

**VaR (Value at Risk)**

Value at Risk is how much can we expect to lose? What is potential loss?

We can lose maximum up to VaR (value at Risk) over a given time at a given confidence level.

Calculation of VaR

Market Factor Sensitivity X Daily Volatility X Probability at given confidence level

Suppose impact of 1% change of interest rate (Price) = 6000/-

Daily Volatility = 3% : Confidence level is 99%

Probability of occurrence at 99% confidence level is 2.326

Defeasance period = 1 day

VaR = 6000x3x2.326 = 41874/-

**Duration and Modified Duration**

Duration is the time that Bondholder must wait for a number of years (duration) to receive Present Value of Cash Inflows i.e. PV of Cash Inflows equals Actual Cash Inflows.

Formula of calculating Duration (Macaulay’s Duration)

Σ ( PV*T) / ΣPV

For example:

5 years bond of Rs. 100 @ 6% gives Duration of 3.7 years. It means Total Cash flow of Rs. 130/- would be equivalent to receiving Rs. 130/- at the end of 3.7 years.**Modified Duration = Duration / 1 + Yield**

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