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  • 8/6/2019 NPA Assignment



    Non Performing AssetsManagement

    TOPIC:-CDR (Corporate Debt Restructuring)Mechanism and NPA (Non-Performing


    Submitted To: Prof. B. B. Senapati

    Submitted By:

    (1) Govind Ballav Sahoo---------------16

    (2) Nidhi Kumari------------------------26

    (3) Niraj Deoria--------------------------28

    (4) Rupam Kumari----------------------36

    (5) Santosh Behera----------------------42

    (6) Sudipta Kumar Rout---------------54


    e of Submission: 16/01/10

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    (7) Sunil Singh Laguri-------------------56


    What Does Corporate Debt RestructuringMean?

    A method used by companies with outstanding debt obligations to alter the terms of debt

    agreement or to take advantages of lower interest rate.

    The reorganization of a company's outstanding obligations, often achieved by reducing the

    burden of the debts on the company by decreasing the rates paid and increasing the time the

    company has to pay the obligation back. This allows a company to increase its ability to meet

    the obligations. Also, some of the debt may be forgiven by creditors in exchange for an

    equity position in the company.

    The need for a corporate debt restructuring often arises when a company is going through

    financial hardship and is having difficulty in meeting its obligations. If the troubles are

    enough to pose a high risk of the company going bankrupt, it can negotiate with its creditors

    to reduce these burdens and increase its chances of avoiding bankruptcy.

    Method of CDR

    The existing debt is called and then replaced with new debt at a lower interest rate.

    Companies can also restructure their debt by altering the terms and provisions of the

    existing debt issue.

    Corporate Debt Restructuring (CDR) System


    Inspite of their best efforts and intentions, sometimes corporate find themselves in financial

    difficulty because of factors beyond their control and also due to certain internal reasons. For

    the revival of the corporate as well as for the safety of the money lent by the banks and FIs,

    timely support through restructuring in genuine cases is called for. However, delay in

    agreement amongst different lending institutions often comes in the way of such endeavors.

    Based on the experience in other countries like the U.K., Thailand, Korea, etc. of putting in

    place institutional mechanism for restructuring of corporate debt and need for a similar

    mechanism in India, a Corporate Debt Restructuring System has been evolved.


    To support continuing economic recovery.

    Enabling viable debtors to continue business operations.

    Promoting fair and equitable debt repayment to creditors.

    Revival of viable Corporate (genuine cases).

    Ensuring safety of money lent by Banks & FIs.

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    The basic objective of corporate debt restructuring should be revival of units by increasing their

    production within a time-frame and, if necessary, by changing the management with

    government support. The CDR mechanism has not proved effective in redressing loan

    delinquency by big borrowers; it has, in fact, enhanced the losses.

    The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely andtransparent mechanism for restructuring of the corporate debts ofviable entities facing

    problems, outside the purview of BIFR, DRT and other legal proceedings, for the

    benefit of all concerned. In particular, the framework will aim at preserving viable

    corporates that are affected by certain internal and external factors and minimize the losses to

    the creditors and other stakeholders through an orderly and coordinated restructuring


    Proposals under CDR entail mainly the following:

    Extending the repayment period of loans;

    Converting the un-serviced portion of interest into term loans; and

    Reducing the rate of interest on outstanding advances.

    3. Structure

    CDR system in the country will have a three tier structure :

    CDR Standing Forum CDR Empowered Group

    CDR Cell

    3.1 CDR Standing Forum :

    3.1.1 The CDR Standing Forum would be the representative general body of all financial

    institutions and banks participating in CDR system. All financial institutions and banks

    should participate in the system in their own interest. CDR Standing Forum will be a self

    empowered body, which will lay down policies and guidelines, guide and monitor the

    progress of corporate debt restructuring.

    3.1.2 The Forum will also provide an official platform for both the creditors and borrowers

    (by consultation) to amicably and collectively evolve policies and guidelines for working out

    debt restructuring plans in the interests of all concerned.

    3.1.3 The CDR Standing Forum shall comprise Chairman& Managing Director, Industrial

    Development Bank of India; Managing Director, Industrial Credit & Investment Corporation

    of India Limited; Chairman, State Bank of India; Chairman, Indian Banks Association and

    Executive Director, Reserve Bank of India as well as Chairmen and Managing Directors of

    all banks and financial institutions participating as permanent members in the system. The

    Forum will elect its Chairman for a period of one year and the principle of rotation will befollowed in the subsequent years. However, the Forum may decide to have a Working

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    Chairman as a whole-time officer to guide and carry out the decisions of the CDR Standing


    3.1.4 A CDR Core Group will be carved out of the CDR Standing Forum to assist the

    Standing Forum in convening the meetings and taking decisions relating to policy, on behalf

    of the Standing Forum. The Core Group will consist of Chief Executives of IDBI, ICICI,SBI, Bank of Baroda, Bank of India, Punjab National Bank, Indian Banks Association and a

    representative of Reserve Bank of India.

    3.1.5 The CDR Standing Forum shall meet at least once every six months and would review

    and monitor the progress of corporate debt restructuring system. The Forum would also lay

    down the policies and guidelines to be followed by the CDR Empowered Group and CDR

    Cell for debt restructuring and would ensure their smooth functioning and adherence to the

    prescribed time schedules for debt restructuring. It can also review any individual decisions

    of the CDR Empowered Group and CDR Cell.

    3.1.6 The CDR Standing Forum, the CDR Empowered Group and CDR Cell (described infollowing paragraphs) shall be housed in IDBI. The administrative and other costs shall be

    shared by all financial institutions and banks. The sharing pattern shall be as determined by

    the Standing Forum.

    3.2 CDR Empowered Group and CDR Cell

    The individual cases of corporate debt restructuring shall be decided by the CDR Empowered

    Group, consisting of ED level representatives of IDBI, ICICI Limited and SBI as standing

    members, in addition to ED level representatives of financial institutions and banks who have

    an exposure to the concerned company. In order to make the CDR Empowered Groupeffective and broad based and operate efficiently and smoothly, it would have to be ensured

    that each financial institution and bank, as participants of the CDR system, nominates a panel

    of two or three EDs, one of whom will participate in a specific meeting of the Empowered

    Group dealing with individual restructuring cases. Where, however, a bank / financial

    institution has only one Executive Director, the panel may consist of senior officials, duly

    authorized by its Board. The level of representation of banks/ financial institutions on the

    CDR Empowered Group should be at a sufficiently senior level to ensure that concerned

    bank / FI abides by the necessary commitments including sacrifices, made towards debt


    3.2.2 The Empowered Group will consider the preliminary report of all cases of requests ofrestructuring, submitted to it by the CDR Cell. After the Empowered Group decides that

    restructuring of the company is prima-facie feasible and the enterprise is potentially viable in

    terms of the policies and guidelines evolved by Standing Forum, the detailed restructuring

    package will be worked out by the CDR Cell in conjunction with the Lead Institution.

    3.2.3 The CDR Empowered Group would be mandated to look into each case of debt

    restructuring, examine the viability and rehabilitation potential of the Company and

    approve the restructuring package within a specified time frame of 90 days, or at best 180

    days of reference to the Empowered Group.

    3.2.4 There should be a general authorisation by the respective Boards of the participatinginstitutions / banks in favour of their representatives on the CDR Empowered Group,

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    authorising them to take decisions on behalf of their organization, regarding restructuring of

    debts of individual corporates.

    3.2.5 The decisions of the CDR Empowered Group shall be final and action-reference point.

    If restructuring of debt is found viable and feasible and accepted by the Empowered Group,

    the company would be put on the restructuring mode. If, however, restructuring is not foundviable, the creditors would then be free to take necessary steps for immediate recovery of

    dues and / or liquidation or winding up of the company, collectively or individually.

    3.3 CDR Cell

    3.3.1 The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR

    Cell in all their functions. The CDR Cell will make the initial scrutiny of the proposals

    received from borrowers / lenders, by calling for proposed rehabilitation plan and other

    information and put up the matter before the CDR Empowered Group, within one month to

    decide whether rehabilitation is prima facie feasible, if so, the CDR Cell will proceed to

    prepare detailed Rehabilitation Plan with the help of lenders and if necessary, experts to beengaged from outside. If not found prima facie feasible, the lenders may start action for

    recovery of their dues.

    3.3.2 To begin with, CDR Cell will be constituted in IDBI, Mumbai and adequate members

    of staff for the Cell will be deputed from banks and financial institutions. The CDR Cell may

    also take outside professional help. The initial cost in operating the CDR mechanism

    including CDR Cell will be met by IDBI initially for one year and then from contribution

    from the financial institutions and banks in the Core Group at the rate of Rs.50 lakh each and

    contribution from other institutions and banks at the rate of Rs.5 lakh each.

    3.3.3 All references for corporate debt restructuring by lenders or borrowers will be

    made to the CDR Cell. It shall be the responsibility of the lead institution / major

    stakeholder to the corporate, to work out a preliminary restructuring plan in consultation

    with other stakeholders and submit to the CDR Cell within one month. The CDR Cell will

    prepare the restructuring plan in terms of the general policies and guidelines approved by the

    CDR Standing Forum and place for the consideration of the Empowered Group within 30

    days for decision. The Empowered Group can approve or suggest modifications, so,

    however, that a final decision must be taken within a total period of 90 days. However, for

    sufficient reasons the period can be extended maximum upto 180 days from the date of

    reference to the CDR Cell.

    4. Other features:

    4.1CDR will be a Non-statutory mechanism

    4.1.1 CDR mechanism will be a voluntary system based on debtor-creditor agreement and

    inter-creditor agreement.

    4.1.2 The scheme will not apply to accounts involving only one financial institution or one

    bank. The CDR mechanism will cover only multiple banking accounts / syndication /

    consortium accounts with outstanding exposure of Rs.20 crore and above by banks and


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    4.1.3 The CDR system will be applicable only to standard and sub-standard accounts. There

    would be no requirement of the account / company being sick, NPA or being in default

    for a specified period before reference to the CDR Group. However, potentially viable

    cases of NPAs will get priority. This approach would provide the necessary flexibility and

    facilitate timely intervention for debt restructuring. Prescribing any milestone(s) may not be

    necessary, since the debt restructuring exercise is being triggered by banks and financialinstitutions or with their consent. In no case, the requests of any corporate indulging in wilful

    default or misfeasance will be considered for restructuring under CDR.

    4.1.4 Reference to Corporate Debt Restructuring System could be triggered by (i) any or

    more of the secured creditor who have minimum 20% share in either working capital or term

    finance, or (ii) by the concerned corporate, if supported by a bank or financial institution

    having stake as in (i) above.

    4.2 Legal Basis

    The legal basis to the CDR mechanism shall be provided by the Debtor-Creditor

    Agreement (DCA) and the Inter-Creditor Agreement. The debtors shall have to accede to

    the DCA, either at the time of original loan documentation (for future cases) or at the time of

    reference to Corporate Debt Restructuring Cell. Similarly, all participants in the CDR

    mechanism through their membership of the Standing Forum shall have to enter into a legally

    binding agreement, with necessary enforcement and penal clauses, to operate the System

    through laid-down policies and guidelines.

    4.3 Stand-Still Clause

    4.3.1 One of the most important elements of Debtor-Creditor Agreement would be 'standstill' agreement binding for 90 days, or 180 days by both sides. Under this clause, both the

    debtor and creditor(s) shall agree to a legally binding 'stand-still' whereby both the

    parties commit themselves not to taking recourse to any other legal action during the

    'stand-still' period, this would be necessary for enabling the CDR System to undertake the

    necessary debt restructuring exercise without any outside intervention judicial or otherwise.

    4.3.2 The Inter-Creditors Agreement would be a legally binding agreement amongst the

    secured creditors, with necessary enforcement and penal clauses, wherein the creditors would

    commit themselves to abide by the various elements of CDR system. Further , the creditors

    shall agree that if75% of secured creditors by value, agree to a debt restructuring package,

    the same would be binding on the remaining secured creditors.

    5. Accounting treatment for restructured accounts

    The accounting treatment of accounts restructured under CDR would be governed by the

    prudential norms indicated in circular DBOD. BP. BC. 98 / 21.04.048 / 2000-01 dated March

    30, 2001. Restructuring of corporate debts under CDR could take place in the following


    a. before commencement of commercial production;

    b. after commencement of commercial production but before the asset has been

    classified as sub-standard;

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    c. after commencement of commercial production and the asset has been classified as


    6. The prudential treatment of the accounts, subjected to restructuring under CDR, would be

    governed by the following norms:

    6.1 Treatment of standard accounts restructured under CDR:

    a. A rescheduling of the instalments of principal alone, at any of the aforesaid first two

    stages [paragraph 5(a) and (b) above] would not cause a standard asset to be classified

    in the sub-standard category, provided the loan / credit facility is fully secured.

    b. A rescheduling of interest element at any of the foregoing first two stages would not

    cause an asset to be downgraded to sub-standard category subject to the condition that

    the amount of sacrifice, if any, in the element of interest, measured in present value

    terms, is either written off or provision is made to the extent of the sacrifice involved.

    For the purpose, the future interest due as per the original loan agreement in respect

    of an account should be discounted to the present value at a rate appropriate to therisk category of the borrower (i.e. current PLR + the appropriate credit risk premium

    for the borrower-category) and compared with the present value of the dues expected

    to be received under the restructuring package, discounted on the same basis.

    c. In case there is a sacrifice involved in the amount of interest in present value terms, as

    at (b) above, the amount of sacrifice should either be written off or provision made to

    the extent of the sacrifice involved.

    6.2 Treatment of sub-standard accounts restructured under CDR:

    a. A rescheduling of the instalments of principal alone, would render a sub-standardasset eligible to be continued in the sub-standard category for the specified period,

    provided the loan / credit facility is fully secured.

    b. A rescheduling of interest element would render a sub-standard asset eligible to be

    continued to be classified in sub-standard category for the specified period subject to

    the condition that the amount of sacrifice, if any, in the element of interest, measured

    in present value terms, is either written off or provision is made to the extent of the

    sacrifice involved. For the purpose, the future interest due as per the original loan

    agreement in respect of an account should be discounted to the present value at a rate

    appropriate to the risk category of the borrower (i.e., current PLR + the appropriate

    credit risk premium for the borrower-category) and compared with the present value

    of the dues expected to be received under the restructuring package, discounted on thesame basis.

    c. In case there is a sacrifice involved in the amount of interest in present value terms, as

    at (b) above, the amount of sacrifice should either be written off or provision made to

    the extent of the sacrifice involved. Even in cases where the sacrifice is by way of

    write off of the past interest dues, the asset should continue to be treated as sub-


    The sub-standard accounts at 6.2 (a), (b) and (c) above, which have been subjected to

    restructuring, etc. whether in respect of principal instalment or interest amount, by whatever

    modality, would be eligible to be upgraded to the standard category only after the specified

    period, i.e., a period of one year after the date when first payment of interest or of principal,whichever is earlier, falls due, subject to satisfactory performance during the period. The

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    amount of provision made earlier, net of the amount provided for the sacrifice in the interest

    amount in present value terms as aforesaid, could also be reversed after the one-year period.

    6.3 During this one-year period, the sub-standard asset will not deteriorate in its classification

    if satisfactory performance of the account is demonstrated during the period. In case,

    however, the satisfactory performance during the one year period is not evidenced, the assetclassification of the restructured account would be governed as per the applicable prudential

    norms with reference to the pre-restructuring payment schedule.

    6.4 The asset classification under CDR would continue to be bank-specific based on record

    of recovery of each bank, as per the existing prudential norms applicable to banks.

    7. Disclosure

    Banks should also disclose in their published Annual Accounts, under the "Notes on

    Accounts", the following information in respect of CDR undertaken during the year :

    Total amount of loan assets subjected to restructuring under CDR.

    The amount of standard assets subjected to CDR.

    The amount of sub-standard assets subjected to CDR.

    Process of CDR

    A number of companies are now taking a good look atbusiness debt restructuring to resolve

    their unmet financial obligations. This is often a preferable solution to bankruptcy probably

    because it is less expensive and more discreet. But just like bankruptcy, company debt

    restructuring involves a systematic process.

    The consultation process Because business debt restructuring is nothing but an

    aggregate loan agreement, the lender seeks a series of consultation sessions with

    the borrower. During these meetings, the lender assesses the company's overall

    financial situation. It is at this point that all the company's financial obligations

    are evaluated against the expected regular cash flow. Primarily because of this,

    small business debt restructuring works differently than that of a big corporate


    The negotiation process. Once the assessment procedure is finished, the lender

    then settles an agreement with all the borrower's creditors and vendors. The mainidea is to arrive at a solution that is acceptable to all the parties involved. When

    that is achieved, the lender can proceed to implement the solution agreed upon.

    The liquidation of assets. The liquidation of the business's assets, if found to be

    necessary by all parties concerned, is the next step in the process. In some cases,

    restructuring your existing debt may require you to pay a large amount of money

    up front. If your lender can't cover that, you have no other choice but to liquidate

    some assets. But most of the time, the liquidation strategy is only used to get the

    profitability of the business back.

    The restructuring process starts. This is the step where the contract is signed

    and the agreement is enforced. The borrower, and in this case the business, agreeto the aggregate loan amount and to other details including the monthly payment
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    obligation, the interest rate, and the term of payment. After everything is

    accounted for, the business is now officially under a debt-restructuring program is

    expected to make payments as stipulated. This is the last level of debt help

    available to the business before a filing for bankruptcy.

    These are the steps involved in a business debt restructuring procedure. Simple as it mayseem, businesses should not leap into the plan immediately without careful consideration.

    Company debt restructuring is a process that has to be critically evaluation to ensure the

    ultimate fate of the business involved


    The primary advantages of debt restructuring involve matters of control and overall


    Allows a business to gain control of its finances. With business debt restructuring,

    debts carrying a high interest rate can be transferred to another lender with a lower

    rate and potentially a prolonged payment term so that the monthly obligation isreduced.

    Improves credit score. Businesses have credit scores too. If restructuring is performed

    properly, it can actually improve those scores after a period of time. Restructuring

    your existing debt ensures easier debt payments. When debts are paid regularly and

    on time, good credit scores result.

    Engages the help of third party. With intervention of third party financial institutions,

    thereby processing large enterprise or small business debt restructuring, everything

    flows more smoothly and the business owner is relieved of much of the stress of debt



    The primary drawbacks to debt restructuring involve the availability of new lines of credit

    and overall business image.

    Places a hold on new credit applications. While business debt restructuring is

    underway, the first reaction of the creditors is to hold all applications for new credit to

    ensure that the borrower pays the existing obligations regularly after the whole

    restructuring process is enforced.

    It won't look good to the public. If the corporate house chooses to restructure its debts

    and the information leaks out to customers, they may assume that the corporate

    houses are having problems with their finances or that they are close to bankruptcy.The customers could start looking for a more stable company to deal with.

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    Now-a-days banks are not only for profit but also for social responsibility with

    little commerciality.

    In liberalizing economy banking and financial sector get high priority. Indian

    banking sector of having a serious problem due non performing. The financial

    reforms have helped largely to clean NPA was around Rs. 52,000 crores in the

    year 2004. The earning capacity and profitability of the bank are highly affected

    due to this

    An asset becomes NPA when it ceases to generate income for the bank. This wouldmean that interest, which is debited to borrowers account, has to be realised by thebank. An account has to be classified as NPA on the basis of record of recoveryrather than security charged in favour of the bank in respect of such account. Thus,an account of a borrower may become NPA if interest charged to that particularborrower is not realised despite the account being fully secured.Identification Of Account As NPAA non-performing asset (NPA) is a loan or an advance where;

    interest and/ or installment of principal remain overdue for a period of morethan 90 days in respect of a term loan

    the account remains out of order in respect of an Overdraft/Cash Credit(OD/CC)

    the bill remains overdue for a period of more than 90 days in the case of billspurchased and discounted

    a loan granted for short duration crops will be treated as NPA, if theinstallment of principal or interest thereon remains overdue for two cropseasons.

    a loan granted for long duration crops will be treated as NPA, if theinstallment of principal or interest thereon remains overdue for one cropseason.

    In case of any other credit facility, if the amount to be received remainsoverdue for more than 90 days, then the account will be classified as NPA.

    Out of order

    the outstanding balance remains continuously in excess of the sanctionedlimit/drawing power.

    In cases where the outstanding balance in the principal operating account isless than the sanctioned limit/drawing power,but there are no creditscontinuously for 90 days as on the date of Balance Sheet or credits are notenough to cover the interest debited during the same period.

    Over dueAny amount due to the bank under any credit facility is overdue if it is not paid onthe due date fixed by the bank.


    Banks own TDRs (Term Deposit Receipts)

    Loan against NSC (National Saving Certificate)

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    LIC policies & Surrender Value: if before the maturity of LI policy thesurrender value is less than actual amount.

    Indira vikas patras, kisan vikas patras provided adequate margin available.

    In respect of agricultural advances as well as advances for other purposesgranted by banks to ceded PACS (Primary agricultural credit society)/ FSS

    (Farmers Service Society) under the on-lending system, only that particularcredit facility granted to PACS/FSS which is in default will be classified as NPAand not all the credit facilities sanctioned to a PACS/FSS. The other directloans & advances, if any, granted by the bank to the member borrower of aPACS/ FSS outside the on-lending arrangement will become NPA even if one ofthe credit facilities granted to the same borrower becomes NPA.

    The credit facilities backed by guarantee of the Central Government thoughoverdue may be treated as NPA only when the Government repudiates itsguarantee when invoked.

    Prudential normsIncome recognition

    Income from non-performing assets (NPA) is not recognised on accrual basisbut is booked as income only when it is actually received.

    Interest on advances against term deposits, NSCs, IVPs, KVPs and Life policiesmay be taken to income account on the due date, provided adequate marginis available in the accounts

    Fees and commissions earned by the banks as a result of re-negotiations orrescheduling of outstanding debts should be recognised on an accrual basisover the period of time covered by the re-negotiated or rescheduledextension of credit.

    Any subsequent recovery in NPA a/c should first be appropriate towardsinterest arrears & balance, if any, to principal.

    Asset classification

    Standard AssetThe account is not non-performing.

    Sub-Standard AssetA sub standard Asset is one which has remained NPA for a periodless than or equal 12 months.

    Doubtful AssetNPA period exceeding 12 months but after doubtful of 1 year.

    Three Categories

    Category PeriodDoubtful - I up to One Year (NPA is

    2 year) Doubtful - II 1 3 Years (NPA is 2 4 year)

    Doubtful - III above 3 Years (NPA isabove 4 years)

    Loss Assets

    These are accounts, identified by the bank or internal or externalauditors or by RBI Inspectors as wholly irrecoverable but the amount for

    which has not been written off.

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    When value of security is below 10% of the loan outstanding, it istreated as loss assets.

    The classification of assets of scheduled commercial bank.

    (Amount Rs. crores)

    Asset 2001 2002 2003 2004



    494716 609972 709260 837130

    Sub standard


    18206 21382 20078 21026



    37756 41201 39731 36247

    Loss assets 8001 8370 8971 7625

    ProvisioningStandard asset

    The banks should make a general provision of a minimum of 0.25

    percent on standard assets on global loan portfolio basis

    All scheduled commercial banks are required to increase the generalprovision on standard advances from 0.25 percent to 0.40 percent except fordirect advances to agricultural and SME sectors (as per circular issued by RBIon 8th of Nov 2005)

    Sub-standard asset

    20% of outstanding balance after deducting interest debited and not collectedduring the year for secured as well as unsecured advances.

    Doubtful assets

    Period value of tangible security + unsecured portion of advance afterDICGC/ECGC coverUpto 1 year 20% + 100%1to 3 years 30% + 100%More than 3 years 100% + 100%

    Loss Assets

    Loss assets should be written off. If loss assets are permitted to remain in thebooks for any reason, 100 percent of the outstanding should be provided forprovision.

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    Capital Adequacy Ratio (CAR)

    Capital adequacy ratio is the ratio which determines the capacity of a bank in

    terms of meeting the time liabilities and other risk such as credit risk, marketrisk, operational risk, and others. It is a measure of how much capital is used to

    support the banks' risk assets.

    All bank must kept the minimum standard set by the Bank for International

    Settlements (BIS) is 8% (comprising 4% each of Tier 1 and Tier 2 capital).

    Tier one capital is the capital in the bank's balance sheet that can

    absorb losses without a bank being required to cease trading.

    Tier two capital can absorb losses in the event of a winding-up and so

    provides a lesser degree of protection to depositors.

    Exposure Norms

    An exposure norm indicates the financing limit of the banks, which is depending

    upon capital having by banks.

    As per Exposure Norms, banks mustnt give more than:

    15% of paid-up capital to individual,

    50% to group and

    60% for infrastructure.