Mumbai, May 2: Indian banks will have to maintain a core capital — Tier I capital —of at least 7 per cent of their risk-weighted assets, the Reserve Bank of India announced today, while unveiling its final guidelines on Basel III capital regulations.
The new regulations will come into effect in a phased manner from January 1 next year. Banks will have to attain a minimum Tier I capital ratio of 4.5 per cent by January 2013, 5.5 per cent by January 2014, and 6 per cent by January 2015. The new capital regulations will be fully implemented by March 31, 2018.
Under the existing guidelines based on the Basel II framework, banks are required to maintain Tier I capital of at least 6 per cent of their risk-weighted assets.
For the fiscal year ending March 31, 2013, banks will have to disclose capital ratios computed under both Basel II and III guidelines.
Under the existing capital adequacy guidelines, total regulatory capital comprises Tier I capital (or core capital) and Tier II capital (supplementary capital). Total regulatory capital should be at least 9 per cent of risk-weighted assets and, within this, Tier I capital should be at least 6 per cent of risk-weighted assets.
Under Basel III, Tier I capital will predominantly consist of common equity, which is defined as paid-up equity capital, share premium, surpluses arising from sale of assets, other disclosed free reserves, and balance in the profit and loss account at the end of the financial year.
The minimum total capital ratio — that is, Tier I and Tier II capital — will be 9 per cent by 2018. However, banks will have to maintain this at 8 per cent from January next year.
The guidelines provide for the creation of a capital conservation buffer of 2.5 per cent of their risk-weighted assets. The buffer will be created during periods when there is no stress within the banking system. Banks will be allowed to draw down on this buffer to cover losses suffered during periods of stress.
In addition, banks will have to create a counter-cyclical capital buffer within a range of zero to 2.5 per cent of risk-weighted assets in the form of common equity or other loss-absorbing capital. This buffer is designed to achieve a broader macro-prudential goal of protecting the banking sector during periods of excess aggregate credit growth.
The RBI is still working on the operational aspects of implementation of the counter-cyclical capital buffer. Guidance on this will be issued in due course.