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Prudential Regulations:

Regulation means a rule or restriction made


by an authority.
Prudential means acting with or showing
care and thought for the future.
So Prudential Regulations here means those
regulations issued by a regulator, (who has
got the authority to issue it) with a view to
have a safe and sound financial system in
the country.

Issuance of such regulations for the banks


and financial institutions are required
because:
Banks play an important role in the
economy
Their safety and soundness is very
much required for a sound financial
system and
They play with other peoples money
and such money must be made safe
and secure.

The areas covered by such Prudential


Regulations can be summarized as follows:

1.How much capital they must


have.
2.What should be included in
such Capital
3.How should their assets be
classified

4. Under what circumstances banks


must be required to make loan
loss provision
5. How much such loan loss
provision they must make
6. What should be the parameter for
banks to book interest income
7. What type of risk management
system banks must have

8. Should banks be allowed or

debarred from making


connected lending
9. How to make sure that banks
exposure is not concentrated
in one borrower.
10.How to comply banks with
regard to corporate social
responsibility.

2.
What should be included in such Capital
A. Core Capital
1) Paid-up Capital
2) Share Premium
3) Non Redeemable Preference Share
4) General Reserve Fund
5) Cumulative Profit/(Loss) (Up to Last Year)
6) Current Year Profit/(Loss)
7) Capital Redemption Reserve
8) Capital Adjustment Fund
9) Other Free Reserves
10) Dividend Equalization Fund

B. Supplementary Capital
1) General Loan Loss Provision
2) Asset Revaluation Reserve
3) Hybrid Capital Instruments
4) Unsecured Subordinated Term Debt
5) Exchange Equalization Fund
6) Additional Loan Loss Provision
7) Investment Adjustment Reserve
8) Interest Spread Reserve
9) Contingent Reserves
10) Provision for Loss on Investment

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