What are Risk Weighted Assets?

What are Risk Weighted Assets?

The Risk weighted assets refer to the fund based assets such as Cash, Loans, Investments and other assets. This means that 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 sheetAn accounting statement of a company’s assets and liabilities, provided for the benefit of shareholders and regulators. It gives a snapshot, at a specific point ..... activities. Each credit equivalent amount is also assigned a risk weight.

Here an important question arises:

Investment in which among the following is the Most Risk Free asset of a Bank as per the RBI guidelines?

1. Housing Loans
   
2. Government Approved Securities
   
3. Venture CapitalProfessional moneys co-invested with the entrepreneur usually to fund an early stage, more risky venture. Offsetting the high risk is the promise of higher return ..... Investments
   
4. Loans against Jewellery
   

Answer of the above question is B, please read below.

The degree of risk expressed % weights assigned by the Reserve Bank of IndiaThe Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934 with ...... 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 India In 1926, the Royal Commission on Indian Currency and Finance which is also known as the Hilton-Young Commission recommended the creation of a central bank. .....	0%
Central/ state Government Guaranteed advances	0%
SSI advances up to CGF guarantee	0%
Loans against FD (Fixed Deposits), LIC Policy	0%
Government approved Securities	2.5%
Balance with Banks other than RBI which maintain the 9% CRAR	20%
Secured Loan to the Staff Members	20%
Housing Loans <Rs. 30 Lakh	50%
Housing Loans >Rs. 30 Lakhs	75%
Loans against Gold and Jewellery <Rs. 1 Lakh	50%
Retail Lending up to Rs. 5 crore	75%
Loans Guaranteed by DGCGC / ECGC	50%
Loans to Public Sector Undertakings	100%
Foreign ExchangeRegulated market place where capital market products are bought and sold through intermediaries. and Gold in Open Position	100%
Claims on unrated corporates	100%
Commercial Real estate	100%
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 Capital:

The following formulas are used for calculating the Tier I and total Capital fund as per the Basel II guidelines.

Tier I CRAR:

=(Eligible Tier I Capital Funds ÷ Total Risk Weighted Assets )X 100

Total CRAR

=(Eligible Total Capital Funds )÷(Total Risk Weighted Assets ) X 100