Eligible Credit Rating Agencies- Rating of NBFC-FD by Infomerics Valuation and Rating Private Limited (IVRPL) As perMaster Direction
dated 25.08.16, the names of six approved Credit Rating Agencies and theirminimuminvestment grade credit ratings have been listed. RBI
decided on 14.07.17, that NBFCs can also use the ratings of Infomerics Valuation and Rating Private Limited for rating the fixed deposit
portfolios of NBFCs with IVR BBB as theminimuminvestment grade credit rating.
RiskManagement and Interbank Dealings- Reports to the Reserve Bank
In terms RBI circular dated July 05, 2016, the Head/Principal Office of AD Category-I banks are required to submit a statement in form BAL
giving details of their holdings of all foreign currencies on fortnightly basis through Online Returns Filing System(ORFS) within seven
calendar days fromthe close of the reporting period towhich it relates. RBI decided (on 10.08.17) that w.e.f. August 16, 2017 (i.e. for
the statement of first fortnight of August 2017), this statement may be submitted through the web portal at https:// bop.rbi.org.in
as per prescribed format. Head/Principal Office of AD Cat-I banks earlier required to submit a monthly statement of Nostro/Vostro
account balances are to discontinue this report.
Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure
Standard
In partial modification of extant guidelines, RBI decided (02.08.17) that Level 1 assets of banks would comprise of following. These
assets can be included in the stock of liquid assets without any limit as also without applying any haircut: i. Cash including cash
reserves in excess of required CRR.
(a). For banks incorporated in India,
Reserves held with foreign Central Banks in excess of reserve requirement, where a foreign sovereign has been assigned a
0% risk weight as per rating by an international rating agency.
(Central bank’s reserves would include banks overnight deposits with central banks, and term deposits with the central banks that:
(i) are explicitly and contractually repayable on notice from the depositing bank; or (ii) that constitute a loan against which the bank
can borrow on a term or on an overnight basis but automatically renewable basis (only where the bank has existing deposit with the
relevant central bank). Other term deposits with central banks are not eligible for the stock of HQLA. However, if the term expires
within 30 days, the term deposits could be considered as an inflow).
Reserves held with foreign Central Banks in excess of the reserve requirement, to the extent these balances cover the
bank’s stressed net cash outflows in that specific currency, in cases where a foreign sovereign has been assigned a non-0% risk
weight as per rating by an international rating agency, but a 0% risk weight has been assigned at national discretion under Basel II
Framework.
ii. Government securities in excess of the minimum SLR requirement.
iii. Within the mandatory SLR requirement, Government securities to the extent allowed by RBI, under Marginal Standing Facility
(MSF). (Government securities to the extent of 2 per cent of NDTL may be included i.e. currently allowed under marginal standing
facility (MSF).
iv. Marketable securities issued or guaranteed by foreign sovereigns satisfying all the following conditions:
(These securities will include only marketable securities which attract a 0% risk-weight in terms RBI Master Circular dated 01.07.13.
In cases where a foreign sovereign has been assigned a non-0% risk weight as per rating by an international rating agency, but a 0%
risk-weight has been assigned at national discretion under Basel II Framework, marketable securities issued or guaranteed by that
foreign sovereign within its domestic jurisdiction will be allowed to the extent those securities cover a bank’s stressed net cash
outflows in that specific foreign currency stemming from the bank’s operations in the jurisdiction where the bank’s liquidity risk is
being taken.)
(a) assigned a 0% risk weight under the Basel II standardized approach for credit risk;
(b) Traded in large, deep and active repo or cash markets characterised by a low level of concentration; and proven record as a
reliable source of liquidity in the markets (repo or sale) even during stressed conditions.
(c) not issued by a bank/FI/NBFC or any of its affiliated entities.
(d) Prudential Guidelines on Capital Adequacy andMarket Discipline- New Capital Adequacy Framework (NCAF) - Eligible Credit
Rating Agencies— INFOMERICS Valuation and Rating Pvt Ltd. (INFOMERICS)
(e) In terms exant guidelines, six domestic credit rating agencies viz. CARE, CRISIL, FITCH India,, ICRA/, Brickwork Ratings and
SMERA have been accredited for the purpose of risk weighting the banks' claims for capital adequacy purposes. The long term and
short term ratings issued by these domestic credit rating agencies have been mapped to the appropriate risk weights applicable as
per the 'Standardised Approach under the Basel II Framework.
(f) On Jun 13, 2017, RBI advised that banks may also use the ratings of the INFOMERICS Valuation and Rating Pvt Ltd.
(INFOMERICS) for the purpose of risk weighting their claims for capital adequacy purposes in addition to the existing six domestic
credit rating agencies. The rating-risk weight mapping for the long term and short term ratings assigned by INFOMERICS will be the
same as in case of other rating agencies.
BASEL III FRAMEWORK ON LIQUIDITY STANDARDS: * The RBI has permitted banks to reckon government securities held by
them up to another 3% of their Net Demand and Time Liabilities (NDTL) under Facility to Avail Liquidity for Liquidity Coverage Ratio
(FALLCR) within the mandatory Statutory Liquidity Ratio (SLR) requirement as Level 1 High Quality Liquid Assets (HQLAs) for the
purpose of computing their Liquidity Coverage Ratio (LCR).
* This is in addition to the assets allowed to banks as the Level 1 HQLAs for the purpose of computing the LCR of banks. Hence, the
total carve-out from SLR available to banks would be 10 per cent of their NDTL.
* For this purpose, banks should continue to value such reckoned government securities within the mandatory SLR requirement
at an amount not greater than their current market value (irrespective of the category of holding the security).
* The Reserve Bank on July 21, 2016 has decided that in addition to previous limits, banks will be permitted to reckon government
securities held by them up to another 1 per cent of their Net Demand and Time Liabilities (NDTL) under Facility to Avail Liquidity for
Liquidity Coverage Ratio (FALLCR) within the mandatory Statutory Liquidity Ratio (SLR) requirement as level 1 High Quality Liquid
Assets (HQLA) for the purpose of computing their Liquidity Coverage Ratio (LCR). Hence, the total carve-out from SLR available to
banks would be 11 per cent of their NDTL.
* For this purpose, banks should continue to value such reckoned government securities within the mandatory SLR requirement at
an amount not greater than their current market value (irrespective of the category of holding the security, that is, Available for
Sale(AFS), Held for Trading (HFT) or Held to Maturity (HTM).
BASEL III CAPITAL REGULATIONS – REVISION: RBI has decided to align, the current regulations on treatment of these balance
sheet items, for the purpose of regulatory capital, with the BCBS guidelines.
I) TREATMENT OF REVALUATION RESERVES:
Revaluation reserves arising out of change in the carrying amount of a bank’s property consequent upon its revaluation may, at the
discretion of banks, be reckoned as CET1 capital at a discount of 55%, instead of as Tier 2 capital under extant regulations, subject to
following conditions:
a) Bank is able to sell the property readily at its own will and there is no legal impediment in selling the property;
b) The revaluation reserves are shown under Schedule 2: Reserves & Surplus in the Balance Sheet of the bank;
c) Valuations are obtained, from two independent valuers, at least once in every 3 years; where the value of the property has
been substantially impaired by any event, these are to be immediately revalued and appropriately factored into capital
adequacy computations;
II) FOREIGN CURRENCY TRANSLATION RESERVE (FCTR): Banks may, at their discretion, reckon foreign currency translation reserve
arising due to translation of financial statements of their foreign operations in terms of Accounting Standard (AS) 11 as CET1 capital
at a discount of 25% subject to meeting the following conditions:
a) The FCTR are shown under Schedule 2: Reserves & Surplus in the Balance Sheet of the bank;
b) The external auditors of the bank have not expressed a qualified opinion on the FCTR.
III) TREATMENT OF DEFERRED TAX ASSETS (DTAS):
a) Deferred tax assets (DTAs) associated with accumulated losses and other such assets should be deducted in full from CET1 capital.
b) DTAs which relate to timing differences (other than those related to accumulated losses) may, instead of full deduction from CET1
capital, be recognised in the CET1 capital up to 10% of a bank’s CET1 capital, at the discretion of banks.
c) Further, the limited recognition of DTAs as above along with limited recognition of significant investments in the common shares
of unconsolidated financial (i.e. banking, financial and insurance) entities taken together must not exceed 15% of the CET1 capital,
calculated after all regulatory adjustments. However, banks shall ensure that the CET1 capital arrived at after application of 15%
limit should in no case result in recognising any item more than the 10% limit applicable individually.
CAPITAL ADEQUACY FRAMEWORK:
Minimum Capital Requirement 15%
Common Equity Tier 1 6%
Additional Tier I 1.5%
Minimum Tier I capital 7.5%
Tier 2 capital 7.5%
Capital Conservation Buffer Not Applicable
Counter-cyclical capital buffer Not applicable
Pre-specified Trigger for conversion of AT1 CET1 at 6% up to March 31, 2019, and 7%
thereafter
BASEL III CAPITAL REGULATIONS
The Reserve Bank has amended the Master Circular relating to Basel III Capital Regulations - Additional Tier 1 Capital as under:
‘Coupons must be paid out of ‘distributable items’.
In this context, coupon may be paid out of current year profits. However, if current year profits are not sufficient, coupon may be
paid subject to availability of:
i) Profits brought forward from previous years, and/or
ii) Reserves representing appropriation of net profits, including statutory reserves, and excluding share premium, revaluation
reserve, foreign currency translation reserve, investment reserve and reserves created on amalgamation.
The accumulated losses and deferred revenue expenditure, if any, shall be netted off from (i) and (ii) to arrive at the available
balances for payment of coupon.
If the aggregate of:
a) Profits in the current year;
b) Profits brought forward from the previous years, and
c) Permissible reserves as above, excluding statutory reserves, net of accumulated losses and deferred revenue expenditure are
less than the amount of coupon, only then the bank shall make appropriation from the statutory reserves.
In such cases, banks are required to report to the Reserve Bank within 21 days from the date of such appropriation in
compliance with Section 17(2) of the Banking Regulation Act 1949. The prior approval of the Reserve Bank for appropriation of
reserves is not required in this regard.
Payment of coupons on perpetual debt instruments (PDIs) from the reserves is, however, subject to the issuing bank
meeting minimum regulatory requirements for common equity tier 1 (CET1), Tier 1 and Total Capital ratios including the
additional capital requirements for domestic systemically important banks at all times and subject to the restrictions
under the capital buffer frameworks (i.e. capital conservation buffer and counter cyclical capital buffer). In order to meet the
eligibility criteria for perpetual debt instruments, banks must ensure and indicate in their offer documents that they have full
discretion at all times to cancel distributions / payments.
Reporting requirement under Basel III As per Master Circular dated 01.07.15 on Basel III capital regulation, banks can raise
perpetual non-cumulative preference shares (PNCPS) & perpetual debt instruments (PDI) for inclusion in Additional Tier 1 capital.
and debt capital instruments, perpetual cumulative preference shares (PCPS) / redeemable noncumulative preference shares
(RNCPS) / redeemable cumulative preference shares (RCPS) for inclusion in Tier 2 capital. The banks are required to submit a report
to RBI, giving the details of the debt raised, including the terms of the issue with a copy of the offer document soon after the issue is
completed. On a review of the extant instructions, RBI decided (23.06.16) that banks need not submit a copy of the offer document
to RBI, as hitherto. Banks shall report the details of the debt raised as per the prescribed format, to RBI.
Basel III Capital Regulations - Revision
The treatment of certain balance sheet items, as per the extant regulations of RBI on banks’ capital, differs from what is prescribed
by the Basel Committee on Banking Supervision (BCBS). RBI reviewed (on Mar 01, 2016) the position and decided to align the
current regulations with the BCBS guidelines, as under:
Treatment of revaluation reserves : Revaluation reserves arising out of change in the carrying amount of a bank’s property
consequent upon its revaluation may, at the discretion of banks, be reckoned as CET1 capital at a discount of 55%, instead of as Tier
2 capital under extant regulations, subject to meeting the following conditions:
bank is able to sell the property readily at its own will and there is no legal impediment in selling the property;
the revaluation reserves are shown under Schedule 2: Reserves & Surplus in the Balance Sheet of the bank;
revaluations are realistic, in accordance with Indian Accounting Standards.
valuations are obtained, from two independent valuers, at least once in every 3 years;
the external auditors of the bank have not expressed a qualified opinion on the revaluation of the property; Treatment of
foreign currency translation reserve (FCTR) : Banks may, at their discretion, reckon foreign currency translation reserve
arising due to translation of financial statements of their foreign operations in terms of Accounting Standard (AS) 11 as CET1
capital at a discount of 25% subject to meeting the following conditions:
the FCTR are shown under Schedule 2: Reserves & Surplus in the Balance Sheet of the bank;
the external auditors of the bank have not expressed a qualified opinion on the FCTR. Treatment of deferred tax assets
(DTAs)
i. Deferred tax assets (DTAs) associated with accumulated losses and other such assets should be deducted in full from CET1
capital.
ii. DTAs which relate to timing differences (other than those related to accumulated losses) may, instead of full deduction
from CET1 capital, be recognised in the CET1 capital up to 10% of a bank’s CET1 capital, at the discretion of banks [after the
application of all regulatory adjustments].
iii. Further, the limited recognition of DTAs as at (ii) above along with limited recognition of significant investments in the
common shares of unconsolidated financial (i.e. banking, financial and insurance) entities taken together must not exceed
15% of the CET1 capital, calculated after all regulatory adjustments. Banks shall ensure that the CET1 capital arrived at after
application of 15% limit should in no case result in recognising any item more than the 10% limit applicable individually.
iv. The amount of DTAs which are to be deducted from CET1 capital may be netted with associated deferred tax liabilities
(DTLs) provided that:
both the DTAs and DTLs relate to taxes levied by the same taxation authority and offsetting is permitted by the relevant
taxation authority;
the DTLs permitted to be netted against DTAs must exclude amounts that have been netted against the deduction of
goodwill, intangibles and defined benefit pension assets; and
the DTLs must be allocated on a pro rata basis between DTAs subject to deduction from CET1 capital as at (i) and (ii) above.
(v) The amount of DTAs which is not deducted from CET1 capital (in terms of para (ii) above) will be risk weighted at 250% as in the
case of significant investments in common shares not deducted from bank’s CET1 capital
dated 25.08.16, the names of six approved Credit Rating Agencies and theirminimuminvestment grade credit ratings have been listed. RBI
decided on 14.07.17, that NBFCs can also use the ratings of Infomerics Valuation and Rating Private Limited for rating the fixed deposit
portfolios of NBFCs with IVR BBB as theminimuminvestment grade credit rating.
RiskManagement and Interbank Dealings- Reports to the Reserve Bank
In terms RBI circular dated July 05, 2016, the Head/Principal Office of AD Category-I banks are required to submit a statement in form BAL
giving details of their holdings of all foreign currencies on fortnightly basis through Online Returns Filing System(ORFS) within seven
calendar days fromthe close of the reporting period towhich it relates. RBI decided (on 10.08.17) that w.e.f. August 16, 2017 (i.e. for
the statement of first fortnight of August 2017), this statement may be submitted through the web portal at https:// bop.rbi.org.in
as per prescribed format. Head/Principal Office of AD Cat-I banks earlier required to submit a monthly statement of Nostro/Vostro
account balances are to discontinue this report.
Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure
Standard
In partial modification of extant guidelines, RBI decided (02.08.17) that Level 1 assets of banks would comprise of following. These
assets can be included in the stock of liquid assets without any limit as also without applying any haircut: i. Cash including cash
reserves in excess of required CRR.
(a). For banks incorporated in India,
Reserves held with foreign Central Banks in excess of reserve requirement, where a foreign sovereign has been assigned a
0% risk weight as per rating by an international rating agency.
(Central bank’s reserves would include banks overnight deposits with central banks, and term deposits with the central banks that:
(i) are explicitly and contractually repayable on notice from the depositing bank; or (ii) that constitute a loan against which the bank
can borrow on a term or on an overnight basis but automatically renewable basis (only where the bank has existing deposit with the
relevant central bank). Other term deposits with central banks are not eligible for the stock of HQLA. However, if the term expires
within 30 days, the term deposits could be considered as an inflow).
Reserves held with foreign Central Banks in excess of the reserve requirement, to the extent these balances cover the
bank’s stressed net cash outflows in that specific currency, in cases where a foreign sovereign has been assigned a non-0% risk
weight as per rating by an international rating agency, but a 0% risk weight has been assigned at national discretion under Basel II
Framework.
ii. Government securities in excess of the minimum SLR requirement.
iii. Within the mandatory SLR requirement, Government securities to the extent allowed by RBI, under Marginal Standing Facility
(MSF). (Government securities to the extent of 2 per cent of NDTL may be included i.e. currently allowed under marginal standing
facility (MSF).
iv. Marketable securities issued or guaranteed by foreign sovereigns satisfying all the following conditions:
(These securities will include only marketable securities which attract a 0% risk-weight in terms RBI Master Circular dated 01.07.13.
In cases where a foreign sovereign has been assigned a non-0% risk weight as per rating by an international rating agency, but a 0%
risk-weight has been assigned at national discretion under Basel II Framework, marketable securities issued or guaranteed by that
foreign sovereign within its domestic jurisdiction will be allowed to the extent those securities cover a bank’s stressed net cash
outflows in that specific foreign currency stemming from the bank’s operations in the jurisdiction where the bank’s liquidity risk is
being taken.)
(a) assigned a 0% risk weight under the Basel II standardized approach for credit risk;
(b) Traded in large, deep and active repo or cash markets characterised by a low level of concentration; and proven record as a
reliable source of liquidity in the markets (repo or sale) even during stressed conditions.
(c) not issued by a bank/FI/NBFC or any of its affiliated entities.
(d) Prudential Guidelines on Capital Adequacy andMarket Discipline- New Capital Adequacy Framework (NCAF) - Eligible Credit
Rating Agencies— INFOMERICS Valuation and Rating Pvt Ltd. (INFOMERICS)
(e) In terms exant guidelines, six domestic credit rating agencies viz. CARE, CRISIL, FITCH India,, ICRA/, Brickwork Ratings and
SMERA have been accredited for the purpose of risk weighting the banks' claims for capital adequacy purposes. The long term and
short term ratings issued by these domestic credit rating agencies have been mapped to the appropriate risk weights applicable as
per the 'Standardised Approach under the Basel II Framework.
(f) On Jun 13, 2017, RBI advised that banks may also use the ratings of the INFOMERICS Valuation and Rating Pvt Ltd.
(INFOMERICS) for the purpose of risk weighting their claims for capital adequacy purposes in addition to the existing six domestic
credit rating agencies. The rating-risk weight mapping for the long term and short term ratings assigned by INFOMERICS will be the
same as in case of other rating agencies.
BASEL III FRAMEWORK ON LIQUIDITY STANDARDS: * The RBI has permitted banks to reckon government securities held by
them up to another 3% of their Net Demand and Time Liabilities (NDTL) under Facility to Avail Liquidity for Liquidity Coverage Ratio
(FALLCR) within the mandatory Statutory Liquidity Ratio (SLR) requirement as Level 1 High Quality Liquid Assets (HQLAs) for the
purpose of computing their Liquidity Coverage Ratio (LCR).
* This is in addition to the assets allowed to banks as the Level 1 HQLAs for the purpose of computing the LCR of banks. Hence, the
total carve-out from SLR available to banks would be 10 per cent of their NDTL.
* For this purpose, banks should continue to value such reckoned government securities within the mandatory SLR requirement
at an amount not greater than their current market value (irrespective of the category of holding the security).
* The Reserve Bank on July 21, 2016 has decided that in addition to previous limits, banks will be permitted to reckon government
securities held by them up to another 1 per cent of their Net Demand and Time Liabilities (NDTL) under Facility to Avail Liquidity for
Liquidity Coverage Ratio (FALLCR) within the mandatory Statutory Liquidity Ratio (SLR) requirement as level 1 High Quality Liquid
Assets (HQLA) for the purpose of computing their Liquidity Coverage Ratio (LCR). Hence, the total carve-out from SLR available to
banks would be 11 per cent of their NDTL.
* For this purpose, banks should continue to value such reckoned government securities within the mandatory SLR requirement at
an amount not greater than their current market value (irrespective of the category of holding the security, that is, Available for
Sale(AFS), Held for Trading (HFT) or Held to Maturity (HTM).
BASEL III CAPITAL REGULATIONS – REVISION: RBI has decided to align, the current regulations on treatment of these balance
sheet items, for the purpose of regulatory capital, with the BCBS guidelines.
I) TREATMENT OF REVALUATION RESERVES:
Revaluation reserves arising out of change in the carrying amount of a bank’s property consequent upon its revaluation may, at the
discretion of banks, be reckoned as CET1 capital at a discount of 55%, instead of as Tier 2 capital under extant regulations, subject to
following conditions:
a) Bank is able to sell the property readily at its own will and there is no legal impediment in selling the property;
b) The revaluation reserves are shown under Schedule 2: Reserves & Surplus in the Balance Sheet of the bank;
c) Valuations are obtained, from two independent valuers, at least once in every 3 years; where the value of the property has
been substantially impaired by any event, these are to be immediately revalued and appropriately factored into capital
adequacy computations;
II) FOREIGN CURRENCY TRANSLATION RESERVE (FCTR): Banks may, at their discretion, reckon foreign currency translation reserve
arising due to translation of financial statements of their foreign operations in terms of Accounting Standard (AS) 11 as CET1 capital
at a discount of 25% subject to meeting the following conditions:
a) The FCTR are shown under Schedule 2: Reserves & Surplus in the Balance Sheet of the bank;
b) The external auditors of the bank have not expressed a qualified opinion on the FCTR.
III) TREATMENT OF DEFERRED TAX ASSETS (DTAS):
a) Deferred tax assets (DTAs) associated with accumulated losses and other such assets should be deducted in full from CET1 capital.
b) DTAs which relate to timing differences (other than those related to accumulated losses) may, instead of full deduction from CET1
capital, be recognised in the CET1 capital up to 10% of a bank’s CET1 capital, at the discretion of banks.
c) Further, the limited recognition of DTAs as above along with limited recognition of significant investments in the common shares
of unconsolidated financial (i.e. banking, financial and insurance) entities taken together must not exceed 15% of the CET1 capital,
calculated after all regulatory adjustments. However, banks shall ensure that the CET1 capital arrived at after application of 15%
limit should in no case result in recognising any item more than the 10% limit applicable individually.
CAPITAL ADEQUACY FRAMEWORK:
Minimum Capital Requirement 15%
Common Equity Tier 1 6%
Additional Tier I 1.5%
Minimum Tier I capital 7.5%
Tier 2 capital 7.5%
Capital Conservation Buffer Not Applicable
Counter-cyclical capital buffer Not applicable
Pre-specified Trigger for conversion of AT1 CET1 at 6% up to March 31, 2019, and 7%
thereafter
BASEL III CAPITAL REGULATIONS
The Reserve Bank has amended the Master Circular relating to Basel III Capital Regulations - Additional Tier 1 Capital as under:
‘Coupons must be paid out of ‘distributable items’.
In this context, coupon may be paid out of current year profits. However, if current year profits are not sufficient, coupon may be
paid subject to availability of:
i) Profits brought forward from previous years, and/or
ii) Reserves representing appropriation of net profits, including statutory reserves, and excluding share premium, revaluation
reserve, foreign currency translation reserve, investment reserve and reserves created on amalgamation.
The accumulated losses and deferred revenue expenditure, if any, shall be netted off from (i) and (ii) to arrive at the available
balances for payment of coupon.
If the aggregate of:
a) Profits in the current year;
b) Profits brought forward from the previous years, and
c) Permissible reserves as above, excluding statutory reserves, net of accumulated losses and deferred revenue expenditure are
less than the amount of coupon, only then the bank shall make appropriation from the statutory reserves.
In such cases, banks are required to report to the Reserve Bank within 21 days from the date of such appropriation in
compliance with Section 17(2) of the Banking Regulation Act 1949. The prior approval of the Reserve Bank for appropriation of
reserves is not required in this regard.
Payment of coupons on perpetual debt instruments (PDIs) from the reserves is, however, subject to the issuing bank
meeting minimum regulatory requirements for common equity tier 1 (CET1), Tier 1 and Total Capital ratios including the
additional capital requirements for domestic systemically important banks at all times and subject to the restrictions
under the capital buffer frameworks (i.e. capital conservation buffer and counter cyclical capital buffer). In order to meet the
eligibility criteria for perpetual debt instruments, banks must ensure and indicate in their offer documents that they have full
discretion at all times to cancel distributions / payments.
Reporting requirement under Basel III As per Master Circular dated 01.07.15 on Basel III capital regulation, banks can raise
perpetual non-cumulative preference shares (PNCPS) & perpetual debt instruments (PDI) for inclusion in Additional Tier 1 capital.
and debt capital instruments, perpetual cumulative preference shares (PCPS) / redeemable noncumulative preference shares
(RNCPS) / redeemable cumulative preference shares (RCPS) for inclusion in Tier 2 capital. The banks are required to submit a report
to RBI, giving the details of the debt raised, including the terms of the issue with a copy of the offer document soon after the issue is
completed. On a review of the extant instructions, RBI decided (23.06.16) that banks need not submit a copy of the offer document
to RBI, as hitherto. Banks shall report the details of the debt raised as per the prescribed format, to RBI.
Basel III Capital Regulations - Revision
The treatment of certain balance sheet items, as per the extant regulations of RBI on banks’ capital, differs from what is prescribed
by the Basel Committee on Banking Supervision (BCBS). RBI reviewed (on Mar 01, 2016) the position and decided to align the
current regulations with the BCBS guidelines, as under:
Treatment of revaluation reserves : Revaluation reserves arising out of change in the carrying amount of a bank’s property
consequent upon its revaluation may, at the discretion of banks, be reckoned as CET1 capital at a discount of 55%, instead of as Tier
2 capital under extant regulations, subject to meeting the following conditions:
bank is able to sell the property readily at its own will and there is no legal impediment in selling the property;
the revaluation reserves are shown under Schedule 2: Reserves & Surplus in the Balance Sheet of the bank;
revaluations are realistic, in accordance with Indian Accounting Standards.
valuations are obtained, from two independent valuers, at least once in every 3 years;
the external auditors of the bank have not expressed a qualified opinion on the revaluation of the property; Treatment of
foreign currency translation reserve (FCTR) : Banks may, at their discretion, reckon foreign currency translation reserve
arising due to translation of financial statements of their foreign operations in terms of Accounting Standard (AS) 11 as CET1
capital at a discount of 25% subject to meeting the following conditions:
the FCTR are shown under Schedule 2: Reserves & Surplus in the Balance Sheet of the bank;
the external auditors of the bank have not expressed a qualified opinion on the FCTR. Treatment of deferred tax assets
(DTAs)
i. Deferred tax assets (DTAs) associated with accumulated losses and other such assets should be deducted in full from CET1
capital.
ii. DTAs which relate to timing differences (other than those related to accumulated losses) may, instead of full deduction
from CET1 capital, be recognised in the CET1 capital up to 10% of a bank’s CET1 capital, at the discretion of banks [after the
application of all regulatory adjustments].
iii. Further, the limited recognition of DTAs as at (ii) above along with limited recognition of significant investments in the
common shares of unconsolidated financial (i.e. banking, financial and insurance) entities taken together must not exceed
15% of the CET1 capital, calculated after all regulatory adjustments. Banks shall ensure that the CET1 capital arrived at after
application of 15% limit should in no case result in recognising any item more than the 10% limit applicable individually.
iv. The amount of DTAs which are to be deducted from CET1 capital may be netted with associated deferred tax liabilities
(DTLs) provided that:
both the DTAs and DTLs relate to taxes levied by the same taxation authority and offsetting is permitted by the relevant
taxation authority;
the DTLs permitted to be netted against DTAs must exclude amounts that have been netted against the deduction of
goodwill, intangibles and defined benefit pension assets; and
the DTLs must be allocated on a pro rata basis between DTAs subject to deduction from CET1 capital as at (i) and (ii) above.
(v) The amount of DTAs which is not deducted from CET1 capital (in terms of para (ii) above) will be risk weighted at 250% as in the
case of significant investments in common shares not deducted from bank’s CET1 capital
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