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Question

Which of the following statement with respect to Risk weight for banks is correct?

                      I.        The risk weight is a function of the risk perception the RBI has on loans for different sectors.

                    II.        Risk weight is capital required to be set aside, stipulated by the Reserve Bank of India for banks

                   III.        Risk Weighted Assets (RWA) comes from the Basel Norms for regulating Bank's capital requirement for managing credit risk.

                  IV.        A corporate bond with medium/long term duration of a company presenting negative losses during the last few years, and a BBB rating will provide lower RWA than company having AAA rating

A All except I Correct Answer Incorrect Answer
B All except II Correct Answer Incorrect Answer
C All except III Correct Answer Incorrect Answer
D All except IV Correct Answer Incorrect Answer
E All of the above Correct Answer Incorrect Answer

Solution

Risk weight is capital required to be set aside, stipulated by the Reserve Bank of India for banks. The risk weight is a function of the risk perception the apex bank has on loans for different sectors. It is applicable to all categories of retail (personal, home, car and education loans) as well as corporate lending.  A corporate bond with medium/long term duration of a company presenting negative losses during the last few years, and a BBB rating will provide higher RWA than company having AAA rating.

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