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RBI issues norms on capital adequacy for local area banks

The Reserve Bank of India (RBI) has issued several guidelines/instructions/directives to local area banks (LABs) on prudential capital adequacy norms. A Master Direction has been prepared for the banks’ reference in order to provide LABs with current instructions in one place. These guidelines have come into effect from October 26, 2021. 

On an ongoing basis, LABs must maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 9%. The capital funds shall consist of the sum of Tier I capital and Tier II capital. Perpetual Non-Cumulative Preference Shares (PNCPS) and Perpetual Debt Instruments (PDI) are eligible for Tier I capital if they meet the minimum regulatory requirements specified in Annex 1 and Annex 2, respectively. 

Banks may include quarterly/half yearly profits for computation of Tier I capital only if the quarterly/half yearly results are audited by statutory auditors and not when the results are subjected to limited review. Tier II capital shall consist of undisclosed reserves, revaluation reserves, general provisions and loss reserves, hybrid debt capital instruments, subordinated debt, and an investment reserve account. 

These banks are not permitted to enter into swap transactions involving conversion of fixed rate rupee liabilities in respect of Tier I/Tier II bonds into floating rate foreign currency liabilities. Tier II elements shall be limited to a maximum of 100% of total Tier I elements for the purpose of compliance with the norms. Banks’/FIs’ investment in certain instruments shall be included in the prudential limit of 10%. 

A consolidated bank, defined as a group of entities that includes a licenced bank, must maintain a minimum CRAR as applicable to the parent bank on an ongoing basis. When computing capital funds, the parent bank must take the specified points into account. Banks issuing PNCPS must submit a report with details of the capital raised to the chief general manager-in-charge, department of regulation, RBI, Mumbai. More information is available on the RBI website.

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