The Narasimhan commitee has recommended a five per cent risk weightage even for government securities and 100 per cent risk weightage for open positions in the foreign exchange market in order to strengthen banks' prudential norms.

Bank of India has incorporated all these parameters and much more while calculating its capital adequacy ratio (CAR) for the year 1997-98. It had kicked off the exercise even before the Narasimham panel was instituted by former finance minister P Chidambaram.

The bank's tighter accounting procedure is based on the 1995 amendment to the historic Basle Accord of 1988, which had stipulated that banks maintain a minimum capital of eight per cent of risk-weighted assets to meet credit risks. As per the 1995 amendment, banks arerequired to provide capital for market risk also, arising from banks' trading activities and their open positions in foreign exchange and commodities.

The Narasimham committee has drawn much of its recommendations on improved prudential norms for banks from the 1995 amendment to the Basle accord.

According to the new procedure, market risk is defined as the losses in on- and off-balance sheet positions arising from movements in market prices. One major risk pertains to interest rate-related instruments and equities in the trading book -- which is the bank's proprietary positions in financial instruments intentionally held for resale. Other risks are foreign exchange risk and commodities risk.

For the purpose of calculating capital charge for market risk, BoI's investments portfolio and forex exposure are being divided into three categories; (i) Investments in gilts, bonds and debentures, (ii) Investment in equity and (iii) Forex exposure in both spot and forward markets.

In the first category, BoI hasdecided to treat only the current investments as tradable securities valued at either the market or book value -- whichever is lower. In this category, the capital charge for market risk will be provided for interest rate risk and foreign exchange risk while calculating CAR. Equity investments in the bank's subsidiaries, regional rural banks and other strategic investments will be excluded from the purview of calculating capital charge to be provided for investments in equity. The other equity investments will be taken at the lower of book value or market value as per the mark-to-market valuation policy. For foreign exchange risk, the market risk will be calculated currency-wise on the net spot position and net forward positions separately. The weightage accorded to exposures in government securities and other debt instruments varies from a low of 0.2 per cent to 6 per cent on a maturity ladder comprising 13 time bands. For the equity exposures, the overall position will be multiplied by a weighting factor ofeight per cent.

In forex exposure, the net spot position plus the net forward position in each currency will be multiplied by a weighting factor of eight per cent.

If the new accounting procedure for CAR is applied to BoI's balance-sheet for the first half of 1997-98, the original CAR of 11.53 per cent will be grought down to 10.26 per cent -- a reduction of 1.27 per cent. The total risk-weighted assets of the bank for the year 1997-98 will go up from the original Rs 21,848 crore to Rs 24,554 crore, an addition of Rs 2,706 crore, if the new procedure is followed. The bank's total capital funds, inclusive of Tier I and Tier II, is Rs 2,520 crore. This gives a CAR of over 10 per cent.