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Question

Based on the following case study, answer the following 4 questions.  Over the years, the role of the AIFIs (EXIM Bank, NABARD, NHB & SIDBI) in the Indian financial system has undergone significant change reflecting the changes in their business models. As the Indian economy grows further, the AIFIs are increasingly being seen as key institutions to promote the flow of direct or indirect credit to the economic sectors they cater to. It has been decided, therefore, to extend Basel III Capital framework to the AIFIs as detailed in the following paragraphs.

Which among the following will not be considered a constituent of Tier 2 capital of AIFI according to BASEL III capital framework?

A.    Revaluation Reserves

B.    General Loan-loss Reserves

C.   Capital Reserve

D.   Statutory Reserves

A A and B Correct Answer Incorrect Answer
B B and C Correct Answer Incorrect Answer
C C and D Correct Answer Incorrect Answer
D A and D Correct Answer Incorrect Answer
E All of the above Correct Answer Incorrect Answer

Solution

Tier 2 capital must be at least 2% of RWAs on an ongoing basis. Tier 2 Capital : represents “supplementary capital”. The Tier 2 capital for AIFI would include general loan-loss reserves, debt capital instruments issued by AIFI, preference share capital instruments issued by AIFI, stock surplus (share premium) from issue of instruments included in Tier 2 capital, revaluation reserves (at 55% discount), and any other instrument notified by RBI for inclusion as Tier II capital. Tier 2 Capital is generally less reliable or secure than Tier 1 capital, and therefore must be considered separately when evaluating the riskiness of a bank/AIFI. Capital reserve and statutory reserve form a part of the Tier I capital of the AIFI.

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