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What are Risk Weighted Assets?
2011-04-21 10:04:32 GKToday

The Risk weighted assets refer to the fund based assets such as Cash, Loans, Investments and other assets. This means that they are the total assets owned by the Banks, however, the value of each asset is assigned a risk weight (for example 100% for corporate loans and 50% for mortgage loans) and the credit equivalent amount of all off-balance sheet activities. Each credit equivalent amount is also assigned a risk weight. Here an important question arises:
Investment in which among the following is the Most Risk Free asset of a Bank as per the RBI guidelines?

1. 2. 3. 4.

Housing Loans Government Approved Securities Venture Capital Investments Loans against Jewellery

Answer of the above question is B, please read below.

The degree of risk expressed % weights assigned by the Reserve Bank of India. The following table shows the Risk weights for some important assets assigned by RBI in an increasing order.
Asset Cas h Balance with Res erve Bank of India Central/ s tate Government Guaranteed advances SSI advances up to CGF guarantee Loans agains t FD (Fixed Depos its ), LIC Policy Government approved Securities Balance with Banks other than RBI which maintain the 9% CRAR Secured Loan to the Staff Members Hous ing Loans <Rs. 30 Lakh Hous ing Loans >Rs. 30 Lakhs Loans agains t Gold and Jewellery <Rs. 1 Lakh Retail Lending up to Rs. 5 crore Loans Guaranteed by DGCGC / ECGC Loans to Public Sector Undertakings Foreign Exchange and Gold in Open Pos ition Claims on unrated corporates Commercial Real es tate Cons umer Credit Credit Cards Expos ure to Capital Markets Venture Capital Inves tment as a part of Capital Market expos ure Weighted Risk 0% 0% 0% 0% 0% 2.5% 20% 20% 50% 75% 50% 75% 50% 100% 100% 100% 100% 125% 125% 125% 150%

In the above table we can have a broad idea that the assets which are in the form of Cash, Government Guaranteed securities, against the LIC policies etc. are safest assets with 0% Risk weighted assigned to them. On the other hand, the venture Capital Investment as a part of Capital Market exposure has the maximum risk weight assigned to them. How does this work? Lets take this example, For a AAA client, the risk weight is 20%, which means banks

have to set aside its own capital of ` 1.80 for every Rs 100 loan (this means 20% of 9% of ` 100). Similarly, in case of 100% risk weight (such as capital markets exposures) , banks have to keep aside its own capital of Rs 9 on the loan. Calculation of the Capital: The following formulas are used for calculating the Tier I and total Capital fund as per the Basel II guidelines. Tier I CRAR: =(Eligible Tier I Capital Funds Total Risk Weighted Assets )X 100 Total CRAR =(Eligible Total Capital Funds )(Total Risk Weighted Assets ) X 100