RBI gives banks draft guidelines on capital regulation
The Reserve Bank of India (RBI) released draft guidelines for implementing Basel III capital regulation in India aimed at improving the banking sector's ability to deal with economic stress. This will reduce the risk of a spillover from financial sector to the real economy.
Basel III is the new international regulatory framework for banks which aims to prevent any repeat of the international financial crisis of 2008.
The RBI said in a statement the guidelines were in response to the comprehensive reform package entitled -- Basel III: A global regulatory framework for more resilient banks and banking systems -- of theBasel Committee on Banking Supervision ( BCBS) issued in Dec 2010.
According to these guidelines, the common equity Tier 1 capital must be at least 5.5 percent of risk-weighted assets (RWAs), while Tier 1 capital must be at least 7 percent of RWAs and total capital must be at least 9 percent of RWAs.
Presently, a bank's capital comprises Tier 1 and Tier 2 capital with a restriction that Tier 2 capital cannot be more than 100 percent of Tier 1 capital. Within Tier 1 capital, innovative instruments are limited to 15 percent of Tier 1 capital.
Further, perpetual non-cumulative preference shares along with innovative Tier 1 instruments should not exceed 40 percent of total Tier 1 capital at any point of time. Within Tier 2 capital, subordinated debt is limited to a maximum of 50 percent of Tier 1 capital.
However, under Basel III, the Tier 1 capital will predominantly consist of common equity to improve the quality of capital.
The draft proposes that the implementation period of minimum capital requirements and deductions from common equity should begin from Jan, 1 2013 and be fully implemented as on March 31, 2017.