Proposes minimum capital ratio of 11.5%, including a conservation buffer.
The Reserve Bank of India (RBI) on Friday proposed banks in India maintain a capital conservation buffer in the form of common equity at 2.5 per cent of their risk weighted assets, in addition to the minimum capital adequacy ratio of nine per cent. In other words, banks’ minimum capital ratio should be 11.5 per cent. Banks in India are required to maintain a minimum capital adequacy ratio of nine per cent.
In the draft guidelines on Basel III capital regulations released on Friday, RBI suggested common equity in Tier-I capital be 5.5 per cent of risk weighted assets. The central bank also proposed the minimum Tier-I capital adequacy ratio be increased from six per cent to seven per cent.
The banking regulator said it aimed to implement minimum capital requirements and deductions from common equity from January 1, 2013 and complete the entire implementation by March 31, 2017.
The capital conservation buffer requirement is expected to be implemented between March 31, 2014 and March 31, 2017. “The implementation schedule indicated would be finalised taking into account the feedback received on these guidelines,” RBI said in a statement. RBI would accept comments and feedback on these guidelines till February 15, 2012.
Capital conservation
The central bank said it had designed the capital conservation buffer to ensure banks build up capital buffers, which can be reduced if there are losses during a period of stress. The requirement is based on simple capital conservation rules, designed to avoid breach of minimum capital requirements.
RBI expects the framework of capital conservation buffer would strengthen the ability of banks to withstand adverse economic conditions, increase the sector’s resilience during a downturn and help lenders rebuild capital during the early stages of economic recovery. “This framework is expected to help reduce pro-cyclicality,” RBI said.
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Common equity in Tier -I
According to the banking regulator, if Tier-I capital consists predominantly of common equity, it would improve the quality of banks’ capital. It suggested common equity comprise paid-up equity capital, share premium, statutory reserves, capital reserves, balance in profit and loss account at the end of the previous financial year, and any other disclosed free reserves.
Other measures
RBI also proposed supplementing the risk-based capital requirement with a leverage ratio. “The parallel run for the leverage ratio would be from January 1, 2013 to January 1, 2017, during which banks would be expected to strive to operate at a minimum Tier-I leverage ratio of five per cent. The leverage ratio requirement would be finalised taking into account the final proposal of the Basel committee,” RBI said.
The central bank also suggested for over-the-counter derivatives, in addition to the capital charge for counterparty default risk under the current exposure method, banks compute an additional credit value adjustments risk capital charge.