(This post provides the risk weight table for on balance sheet and off-balance sheet category of assets)
Updated on November 17:
RBI increases risk weights on consumer credit exposure of banks, NBFCs to 125% from 100%. Measures announced to contain the risk emanating from a sharp rise in unsecured loans – mostly personal loans and credit cards. It has been also decided to increase the risk weights on Credit Card exposures by 25 percentage points to 150% for SCBs and 125% for NBFCs. Learn more…
The Risk Weighted Asset (RWA) is a measurement designed to evaluate the element of risk involved in each asset held by the bank. Risk-weighted assets are used to determine the minimum amount of capital that must be held by banks and other financial institutions in order to reduce the risk of insolvency. The capital requirement is based on a risk assessment for each type of bank asset. For example, Cash held by the bank is an asset with zero risks, whereas other assets of the bank such as loans and advances, guarantees, etc., are vulnerable to the risk of default. Thus, such assets are called risk-weighted assets. Banks make provisions on those risk-weighted assets to meet future unforeseen losses.
Risk weight slabs for different category of assets:
The degree of risk expressed % weights assigned to various assets by the Reserve Bank of India is as under.
Cash 0%, Balance with Reserve Bank of India 0%, Central/ State Government Guaranteed advances 0%, SME advances up to CGF guarantee 0%, Loans against FD (Fixed Deposits), LIC Policy 0%, Government approved Securities 2.50%, Balance with Banks other than RBI which maintain the 9% CRAR (inter-bank assets) were assigned 20% risk weight; secured Loan to the Staff Members 20%, Housing Loans 50%, Housing Loans above Rs. 30 Lakhs 75%, Loans against Gold and Jewellery 50%, Retail Lending up to Rs. 5 crore 75%, Loans Guaranteed by DICGC / ECGC 50%, Loans to Public Sector Undertakings 100%,Foreign Exchange and Gold in Open Position 100%, Claims on unrated corporates 100%, Commercial Real estate 100%, Consumer Credit 125%, Credit Cards 125%, Exposure to Capital Markets 125%, Venture Capital Investment as a part of Capital Market exposure 150%,
RBI on September 12, 2019, announced on a review decided to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100%.
Off-balance sheet items under the standardized approach will be converted into credit exposure equivalents through the use of credit conversion factors. Commitments with original maturity up to one year and commitments with an original maturity over one year will receive a credit conversion factor of 20 % and 50 % respectively. Any commitments that are unconditionally cancelable, or that effectively provide for automatic cancellation, due to deterioration in a borrower’s creditworthiness, at any time by the bank without prior notice will receive a 0 % credit conversion factor. A 20% credit conversion factor to trade finance letters of credit will have to be applied.
The Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted) Assets Ratio (CRAR), is the ratio of a bank’s capital to its risk. The Capital to risk-weighted assets ratio is arrived at by dividing the capital of the bank with aggregated risk-weighted assets for credit risk, market risk, and operational risk. The higher the CRAR of a bank the better capitalized it is.
Total CRAR= (Eligible Total capital funds)÷ (Credit Risk RWA + Market Risk RWA + Operational Risk RWA)
In other words, the capital to risk-weighted assets ratio is calculated by adding a bank’s tier 1 capital and tier 2 capital and dividing the total by its total risk-weighted assets
Related article:
What is CRAR: Capital to Risk Weighted Assets Ratio?
