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Prudential norms on capital adequacy – Risk weights on banks’ exposures on commercial real estate and capital market

It has been decided to increase the risk weights for all outstanding commercial real estate exposures of banks from 100 per cent to 125 per cent with immediate effect. Commercial real estate exposure is defined as under:

a) Fund based and non-fund based exposures secured by mortgages on commercial real estates (office buildings, retail space, multi-purpose commercial premises, multi-family residential buildings, multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction, etc.).

b) Investments in Mortgage Backed Securities (MBS) and other securitised exposures backed by exposures as at (a) above.

It will be recalled that in terms of paragraph 123 of the Mid-Term review of the Annual Policy Statement for the year 2004-05 the risk weights for banks on (i) housing loans, which are fully secured by mortgage of residential properties, extended to individuals by banks and (ii) investments in Mortgage Backed Securities (MBS) of Housing Finance Companies (HFCs), recognised and supervised by NHB were increased from 50 per cent to 75 per cent for capital adequacy purposes.

It has also been decided to increase with immediate effect the risk weight for credit risk on capital market exposures from 100 per cent to 125 per cent. Capital market exposures covers the following:-

a. direct investment by a bank in equity shares, convertible bonds and debentures and units of equity oriented mutual funds

b. advances against shares to individuals for investment in equity shares (including IPOs /ESOPs), bonds and debentures, units of equity oriented mutual funds, etc

c. secured and unsecured advances to stock brokers and guarantees issued on behalf of stock brokers and market makers

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