What changed
RBI issued a Master Circular that consolidates all previous guidelines on capital adequacy and risk management for standalone Primary Dealers (PDs) into one document. It updates the earlier circular from January 2004 by incorporating subsequent instructions on capital requirements. The circular also clarifies that banks conducting PD activities departmentally must follow bank-specific guidelines.
What it means for you
Primary Dealers now have a single reference for all capital adequacy norms, reducing ambiguity and ensuring compliance consistency. The detailed definitions of Tier-I and Tier-II capital, including deductions for investments in subsidiaries and intangible assets, tighten the quality of regulatory capital. The 50% limit on subordinated debt as a proportion of Tier-I capital reinforces the primacy of core equity.
What you must do
- Review and align your capital funds composition with the Tier-I and Tier-II definitions, including deductions for DTA, intangible assets, and group exposures.
- Ensure subordinated debt does not exceed 50% of Tier-I capital and instruments with remaining maturity of one year or less are not included in Tier-II capital.
- Adopt the prescribed risk measurement frameworks for credit and market risk as per Annexes A and B.
- Submit the PDR III Return on capital adequacy as per Annex D.
Who it affects
Standalone Primary Dealers in the Government Securities market, Banks undertaking PD activities departmentally
What is the maximum limit for general provisions to be included in Tier-II capital?
General provisions and loss reserves can be included up to 1.25% of total risk-weighted assets, provided they are not attributable to actual or identifiable potential losses.
Can subordinated debt with a remaining maturity of less than one year be counted as Tier-II capital?
No, instruments with a remaining maturity of one year or less cannot be included in Tier-II capital. Also, initial maturity must be at least 5 years.
Do banks need to follow this circular if they conduct PD activities?
No, banks undertaking PD activities departmentally may follow the extant guidelines applicable to banks for capital adequacy and risk management.