CARE’s rating approach for BASEL III

instruments
 Regulatory Minimum Capital Adequacy Ratio

Basel III
Regulatory Capital Basel April Mar Mar Mar Mar Mar Mar
(As % of RWA) II 1 31 31 31 31 31 31
2013 2014 2015 2016 2017 2018 2019
(i) Minimum Common Equity Tier I
Ratio 3.6 4.5 5 5.5 5.5 5.5 5.5 5.5
(ii) Capital Conservation Buffer (CCB) NA - - - 0.625 1.25 1.875 2.5
(iii) Minimum Common Equity Tier I
Ratio + CCB (i) + (ii) 3.6 4.5 5 5.5 6.125 6.75 7.375 8.0
(iv) Additional Tier I Capital
(IPDI+PNCPS) 2.4 1.5 1.5 1.5 1.5 1.5 1.5 1.5
(v) Minimum Tier I Capital (i) + (iv) 6 6 6.5 7.0 7.0 7.0 7.0 7.0
(vi) Tier II Capital 3 3 2.5 2.0 2.0 2.0 2.0 2.0
(vii) Minimum Total Capital [MTC] (v)
+ (vi) 9 9.0 9.0 9.0 9.0 9.0 9.0 9.0
(viii) MTC + CCB (ii) + (vii)
9 9 9 9 9.625 10.25 10.875 11.5
Key Comparison - Tier II Bonds under Basel II and Basel III

Under Basel II Under Basel III

Clause Lower Tier II Bonds Tier II Bonds

 No Lock-in Clause applicable  No Lock-in Clause applicable

Lock-in Clause on payment
of coupon/principal in
going concern scenario

Loss Absorption Features  Not applicable  Such instruments can be

written off or converted into
common equity upon declaration of
point of non viability (PONV) by
RBI.
Call / Put / Coupon Option  No step-up option  No step-up option
 No Put Option  No Put Option
 Call option subject to conditions  Call option subject to
only after the instrument has run for conditions only after the
at least 5 years and with approval of instrument has run for at least 5
RBI years and with approval of RBI.
 Criteria to determine Point of Non Viability (PONV)

As per the RBI guidelines a Non-Viable Bank is:

1. A bank which, owing to its financial and other difficulties, may no longer remain a going
concern on its own in the opinion of the Reserve Bank unless appropriate measures are
taken to revive its operations and thus, enable it to continue as a going concern.

2. The difficulties faced by a bank should be such that these are likely to result in financial
losses and raising the Common Equity Tier 1 capital of the bank should be considered as
the most appropriate way to prevent the bank from turning non-viable. Such measures
would include write-off / conversion of non-equity regulatory capital into common shares
in combination with or without other measures as considered appropriate by the
Reserve Bank
 CARE’s Rating Approach for Tier II Bonds under Basel III

 The parameters considered to assess whether a bank

will reach the PONV are similar to the parameters
considered to assess rating of Tier II instruments even
under Basel II

 Therefore the rating of Tier II instruments under Basel

III will be similar to the rating of Lower Tier II
instruments under Basel II
 Key Differences between Tier I instruments under Basel II and
Basel III
Under Basel II
Clause Innovative Perpetual Debt
Instruments (IPDI)
Non-payment of coupon if CAR
is below 9% or goes below 9%
on payment of coupon
Prior RBI approval if coupon
results in net loss or increases
net loss provided CAR > 9%
Lock-in Clause
on payment of
coupon
Under Basel III
Perpetual Debt Impact on Credit Risk
Instruments (PDI)
If a bank does not have
positive earnings and has
a Common Equity Tier 1
ratio less than 8%, the
bank will not be able
make coupon payment Under Basel II, the trigger is
on Perpetual bond. based on overall CAR and under
Basel III, the trigger is based on
Common equity
 Key Differences between Tier I instruments under Basel II and
Basel III
Under Basel II Under Basel III
Clause Innovative Perpetual Debt Impact on Credit Risk
Perpetual Debt Instruments (PDI)
Instruments (IPDI)
Can be permanently The credit loss is higher under
written-off or Basel III as compared to Basel II as
converted into breach of capital based trigger
common equity in under Basel III in a going concern
case of two events: scenario resulting in conversion or
write-off.
• For instruments
Loss absorption issued prior to March
No such clause
features 31, 2019 - Breach of
CE Tier I capital ratio
of 5.5% till March 31,
2019 and 6.125% post
Mar 31, 2019 in a
going concern
scenario
 Key Differences between Tier I instruments under Basel II and
Basel III
Under Basel II Under Basel III
Clause Innovative Perpetual Debt Impact on Credit Risk
Perpetual Debt Instruments (PDI)
Instruments (IPDI)
•Instruments issued The credit loss is higher under
on or after March Basel III as compared to Basel
31, 2019 - Breach of II as breach of capital based
CE Tier I capital trigger under Basel III in a
ratio of 6.125% in a going concern scenario
going concern resulting in conversion or
Loss absorption scenario write-off.
No such clause
features

•Upon declaration
of non viability by
RBI on reaching the
trigger of PONV
 Key Differences between Tier I instruments under Basel II and
Basel III

Under Basel II Under Basel III

Clause Innovative Perpetual Debt Impact on Credit Risk

Perpetual Debt Instruments (PDI)
Instruments (IPDI)

The bank must have Makes the credit quality of the

full discretion at all Perpetual bonds under Basel III
times to cancel framework weaker in relation
distributions to the Perpetual bonds under
Coupon /payments. The the Basel II framework
No such clause
Discretion interest shall not be
cumulative.
 Key Differences between Tier I instruments under Basel II and
Basel III

Under Basel II Under Basel III

Clause Innovative Perpetual Debt Impact on Credit Risk

Perpetual Debt Instruments (PDI)
Instruments (IPDI)

If the payment of Makes the credit quality of the

Payment of coupon coupons is likely to Perpetual bonds under Basel III
with the prior approval result in losses in the framework weaker in relation to the
of RBI allowed even current year, their Perpetual bonds under the Basel II
when the impact of declaration should be framework
such payment may precluded to that
Coupon payment
result in net loss or extent. Coupons
increase the net loss, should not be paid out
provided the CRAR of retained earnings /
remains above the reserves
regulatory norm
 Rating Approach for Tier I instruments under Basel III

• IPDI under Basel II was rated 0 – 1 notch lower than

Lower Tier II bonds depending upon the rating of the
bank (Ratings of some of the AAA rated banks were not
notched down)
• Tier I instruments under Basel III have higher loss
absorption characteristics as compared to IPDI under
Basel II thereby increasing the riskiness of these
instruments
• Tier I instruments under Basel III may be rated more
notches down as compared to Tier I instruments under
Basel II based upon the credit profile of the bank