What changed
This master circular updates the previous July 2006 circular by incorporating all instructions issued up to June 30, 2007. It consolidates guidelines on capital components, credit and market risk charges, and computation of the Capital to Risk-Weighted Assets Ratio (CRAR). For banks migrating to Basel II from March 31, 2008, separate instructions from April 27, 2007 apply; others continue under this circular until March 30, 2008.
What it means for you
Banks must ensure they maintain adequate capital as per the updated risk weights and tier definitions. The circular reinforces the need for stable capital buffers to absorb losses from credit and market risks. Lenders should prepare for the Basel II transition if applicable, or continue compliance with these norms.
What you must do
- Review and update internal capital adequacy policies to align with the consolidated instructions in this master circular.
- Ensure CRAR computation uses the prescribed risk weights for balance sheet assets, off-balance sheet items, and trading book exposures.
- For banks not migrating to Basel II, continue applying these norms until March 30, 2008; for migrating banks, refer to the April 27, 2007 circular.
- Train risk management teams on the updated definitions of Tier I and Tier II capital and their loss absorption roles.
Who it affects
All commercial banks in India (excluding Regional Rural Banks), Risk management and compliance departments, Treasury and capital planning teams
What is the key difference between Tier I and Tier II capital under this circular?
Tier I capital, mainly share capital and disclosed reserves, is fully available to cover losses and is the highest quality. Tier II capital includes certain reserves and subordinated debt, with lower loss absorption capacity.
Are banks migrating to Basel II still subject to this master circular?
No, banks migrating to Basel II from March 31, 2008 should follow the separate instructions in RBI circular DBOD. No. BP. BC.90 /20.06.001/2006-07 dated April 27, 2007. This circular applies to others until March 30, 2008.
What risks does the capital charge cover in this circular?
The circular requires explicit capital charges for credit risk and market risk, including interest rate risk in the trading book, equity risk, and foreign exchange risk (including gold and precious metals).