CARE’s rating approach for BASEL III
instruments
Regulatory Minimum Capital Adequacy Ratio
Regulatory Capital
(As % of RWA)
(i)
(ii)
Minimum Common Equity Tier I
Ratio
Capital Conservation Buffer (CCB)
Minimum Common Equity Tier I
Ratio + CCB (i) + (ii)
(iv) Additional
Tier
I
Capital
(IPDI+PNCPS)
(v)
Minimum Tier I Capital (i) + (iv)
(vi) Tier II Capital
(vii) Minimum Total Capital [MTC] (v)
+ (vi)
(viii) MTC + CCB (ii) + (vii)
Basel April Mar
II
1
31
2013 2014
Basel III
Mar
Mar
31
31
2016 2017
Mar
31
2015
Mar
31
2018
Mar
31
2019
3.6
4.5
5
5.5
5.5
5.5
5.5
5.5
NA
-
-
-
0.625
1.25
1.875
2.5
3.6
4.5
5
5.5
6.125
6.75
7.375
8.0
2.4
6
3
1.5
6
3
1.5
6.5
2.5
1.5
7.0
2.0
1.5
7.0
2.0
1.5
7.0
2.0
1.5
7.0
2.0
1.5
7.0
2.0
9
9.0
9.0
9.0
9.0
9.0
9.0
9.0
9
9
9
9
9.625 10.25 10.875
11.5
(iii)
Key Comparison - Tier II Bonds under Basel II and Basel III
Clause
Under Basel II
Under Basel III
Lower Tier II Bonds
Tier II Bonds

No Lock-in Clause applicable

Not applicable

No Lock-in Clause applicable
Lock-in Clause on payment
of coupon/principal in
going concern scenario
Loss Absorption Features
Call / Put / Coupon Option
 Such instruments can be
written off or converted into
common equity upon declaration of
point of non viability (PONV) by
RBI.
 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
Clause
Under Basel II
Under Basel III
Innovative Perpetual Debt
Instruments (IPDI)
Perpetual Debt
Instruments (PDI)
Non-payment of coupon if CAR
is below 9% or goes below 9%
on payment of coupon
Lock-in Clause
on payment of
coupon
Prior RBI approval if coupon
results in net loss or increases
net loss provided CAR > 9%
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
on Perpetual bond.
Impact on Credit Risk
Under Basel II, the trigger is
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
Clause
Loss absorption
features
Under Basel II
Under Basel III
Innovative
Perpetual Debt
Instruments (IPDI)
Perpetual Debt
Instruments (PDI)
Impact on Credit Risk
Can be permanently
written-off
or
converted
into
common equity in
case of two events:
The credit loss is higher under
Basel III as compared to Basel II as
breach of capital based trigger
under Basel III in a going concern
scenario resulting in conversion or
write-off.
No such clause
• For
instruments
issued prior to March
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
Clause
Loss absorption
features
Under Basel II
Under Basel III
Innovative
Perpetual Debt
Instruments (IPDI)
Perpetual Debt
Instruments (PDI)
Impact on Credit Risk
•Instruments issued
on or after March
31, 2019 - Breach of
CE Tier I capital
ratio of 6.125% in a
going
concern
scenario
The credit loss is higher under
Basel III as compared to Basel
II as breach of capital based
trigger under Basel III in a
going
concern
scenario
resulting in conversion or
write-off.
No such clause
•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
Clause
Coupon
Discretion
Under Basel II
Under Basel III
Innovative
Perpetual Debt
Instruments (IPDI)
Perpetual Debt
Instruments (PDI)
Impact on Credit Risk
The bank must have
full discretion at all
times to cancel
distributions
/payments.
The
interest shall not be
cumulative.
Makes the credit quality of the
Perpetual bonds under Basel III
framework weaker in relation
to the Perpetual bonds under
the Basel II framework
No such clause
Key Differences between Tier I instruments under Basel II and
Basel III
Clause
Coupon payment
Under Basel II
Under Basel III
Innovative
Perpetual Debt
Instruments (IPDI)
Perpetual Debt
Instruments (PDI)
Impact on Credit Risk
If the payment of
coupons is likely to
result in losses in the
current year, their
declaration should be
precluded to that
extent.
Coupons
should not be paid out
of retained earnings /
reserves
Makes the credit quality of the
Perpetual bonds under Basel III
framework weaker in relation to the
Perpetual bonds under the Basel II
framework
Payment of coupon
with the prior approval
of RBI allowed even
when the impact of
such payment may
result in net loss or
increase the net loss,
provided the CRAR
remains above the
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