CAIIB BFM Unit 21 - Numerical-Case Studies - RWA, CRAR, Tier - 1 & 2

CREDIT RISK

How to find Risk Weighted Assets?

Fixed Assets : 500 Crore
Govt. Securities : 5000 crore

Standard Assets
Retail ---3000 crore
HL -------2000 crore
Other loans—10000 cr

Sub-Standard Assets
Secured ----500 crore
Unsecured -----150 crore

Doubtful (DAI) -----800 crore

Solution:
Retail----------------3000*75/100 = 2250 crore
HL---------------------2000*50/100=1000 crore
Other loans---------10000*100/100 = 10000 crore
Gsec------------------5000*0/100=0
SS Secured----------500*150/100=750 crore
SS Unsecured ------150*100/100=150 crore
Doubtful D1 --------800*100/100=800 crore
Total RWAs = 2250+1000+750+150+800 = 4950 crore

 

OPERATIONAL RISK
How to find Risk Weighted Assets?

Ist year            2nd year
Net Profit        120 crore        150 crore
Provisions        240 crore        290 crore
Staff Expenses 280 crore        320 crore
Other Oper.
Expenses         160 crore        240 crore
Gross Income 800 crore        1000 crore

Average Income 1800/2=900 crore
Capital Charge 900*15/100=135 crore

RWAs (assuming BASEL rate of 8%)
Capital Charge/8% = 135*100/8 = 1687.50 crore

 

Tier-I and Tier II Capital
CRAR
RWAs --- Credit and Operational Risks = 10000 crore
RWAs ----Market Risk =4000 crore
Tier –I Capital
Paid up Capital--------------------------------------------- 100 crore
Free Reserves --------------------------------------------- 300 crore
Perpetual non-Cumulative Preference Shares -----400 crore
Tier-II Capital
Provisions for contingencies ---------------------------200 crore
Revaluation Reserve--------------------------------------300 crore
Subordinate Debts----------------------------------------300 crore

Solution
Tier –I Capital = 100+300+400 = 800 crore
Tier-II Capital = ( 300*45/100) + 300 + 1.25 % of RWAs (or Rs. 200 crore)
=135 + 300 + 175 = 610 crore
Total Capital = 800 + 610 = 1410 crore

 

Minimum Capital Required and Capital to Support Market Risks
In the above example:
CAR = 1410/14000*100 = 10.07%
Minimum Capital Required to support Credit and Operational Risks = 10000*9/100 = 900 crore
Minimum Tier –I Capital Required to support Credit and Operational Risks = 900*50=450 crore
Minimum Tier –I I Capital Required to support Credit and Operational Risks =900-450=450 crore
Amount of Tier –I Capital to support Market Risks = 800-450 = 350 crore
Amount of Tier –II Capital to support Market Risks = 610-450 = 160 crore