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.
[table id=86 /]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)