What are Risk Weighted Assets?

The Risk Weighted Assets (RWA) refer to the fund based assets such as Cash, Loans, Investments and other assets.  They are the total assets owned by the Banks, however, the value of each asset is assigned a risk weight (for example 100% for corporate loans and 50% for mortgage loans) and the credit equivalent amount of all off-balance sheet activities. Each credit equivalent amount is also assigned a risk weight.

Degree of risk expressed % weights assigned by the Reserve Bank of India

The degree of risk expressed % weights assigned by the Reserve Bank of India. The following table shows the Risk weights for some important assets assigned by RBI in an increasing order.

Asset  Weighted Risk  
 Cash  0% 
Balance with Reserve Bank of India0% 
Central/ state Government Guaranteed advances0%
 SSI advances up to CGF guarantee0%
Loans against FD (Fixed Deposits), LIC Policy0%
 Government approved Securities2.50%
Balance with Banks other than RBI which maintain the 9% CRAR 20%
Secured Loan to the Staff Members20%
Housing Loans 50% 
Housing Loans >Rs. 30 Lakhs75% 
Loans against Gold and Jewellery 50% 
Retail Lending up to Rs. 5 crore75% 
Loans Guaranteed by DGCGC / ECGC  50% 
Loans to Public Sector Undertakings  100% 
Foreign Exchange and Gold in Open Position100% 
Claims on unrated corporates  100% 
Commercial Real estate100%
Consumer Credit  125% 
Credit Cards  125% 
Exposure to Capital Markets  125% 
Venture Capital Investment as a part of Capital Market exposure 150% 

In the above table we can have a broad idea that the assets which are in the form of Cash, Government Guaranteed securities, against the LIC policies etc. are safest assets with 0% Risk weighted assigned to them. On the other hand, the venture Capital Investment as a part of Capital Market exposure has the maximum risk weight assigned to them.

How does this work?

Let’s take this example, For a AAA client, the risk weight is 20%, which means banks have to set aside its own capital of ` 1.80 for every Rs 100 loan (this means 20% of 9% of ` 100). Similarly, in case of 100% risk weight (such as capital markets exposures) , banks have to keep aside its own capital of Rs 9 on the loan.

Calculation of the Ratio

Under Basel-III, banks are to compute ratio as follows:

  • Common Equity Tier-I Capital Ratio = Common Equity Tier-I Capital / RWA for (Credit risk + Market risk + Operational risk)
  • Tier-I capital ratio = Tier-I Capital / RWA for (Credit risk + Market risk + Operational risk)
  • Total capital ratio (CRAR) = Eligible Total Capital / RWA for (Credit risk + Market risk + Operational risk)

Tags: , , ,

Comments

  • Ashok Kumar
    Reply

    Really good….

  • manju
    Reply

    lot of thanks.

  • priya
    Reply

    Very nice…Thanks a lot…

  • swagata
    Reply

    Itz really great…i like it a lot….thank you..it is the best gk site i have ever visited..i can easily understand its language..

  • Pranab
    Reply

    Hello Everyone..

    I just want to thank to all the team members and admin for their valuable notes. I have cleared IBPS PO/MT 3 and now got appointment in Canara Bank.

    Long live GKtoday.in

  • siri
    Reply

    wonderful website,lot of thanks to writer

  • parag saurav mishra
    Reply

    I would be very honest to tell , that Risk weighted asset was always very confusing to me and i was not able to understand its trades, but after going through the above notes, my picture is quite clear . Though i need to read more on that but for a beginner this is the best notes to grasp. Thank you, please accept my gratitude….

  • N Lalitha Vibhooshan
    Reply

    Hai,
    Can anybody tell me for of he asset types how and why risk weight is assigned is more than 100%. can you please explain….

    • k.vinayak05

      becuase sometimes you take money on credit without paying collateral.. and when you happened to be a default bank loses both money and interest.. may be thats why Risk is more that 100%

  • Jainesh
    Reply

    Perfect..!!
    Thank you..!!