What changed
RBI issued a Master Circular that consolidates all previous guidelines on capital adequacy and risk management for standalone Primary Dealers, replacing earlier circulars. The circular updates capital definitions, including Tier-I deductions for deferred tax assets and group exposures, and Tier-II limits on subordinated debt and general provisions.
What it means for you
Primary Dealers now have a single reference document for capital requirements, simplifying compliance. The updated definitions, such as deducting deferred tax assets from Tier-I capital and capping general provisions at 1.25% of risk-weighted assets, tighten capital quality standards. Banks conducting PD activities must follow bank-specific guidelines, not this circular.
What you must do
- Review the Master Circular to ensure your PD's capital composition aligns with the updated Tier-I, Tier-II, and Tier-III definitions.
- Verify that Tier-I capital deductions include deferred tax assets, intangible assets, and group exposures not related to business.
- Confirm that subordinated debt in Tier-II capital does not exceed 50% of Tier-I capital and apply the prescribed maturity-based discounts.
- Ensure general provisions and loss reserves counted as Tier-II capital are within the 1.25% limit of total risk-weighted assets.
- If your bank conducts PD activities departmentally, follow the separate capital adequacy guidelines applicable to banks.
Who it affects
Standalone Primary Dealers in the government securities market, Banks conducting PD activities departmentally (indirectly, via separate guidelines)
What is the maximum limit for general provisions to be included in Tier-II capital?
General provisions and loss reserves can be included in Tier-II capital only up to 1.25% of total risk-weighted assets, provided they are not attributable to specific asset losses.
How is subordinated debt treated in Tier-II capital as it nears maturity?
Subordinated debt with a remaining maturity of less than 5 years is progressively discounted for inclusion in Tier-II capital. Instruments with less than one year remaining are excluded entirely.
Does this circular apply to banks that undertake PD activities?
No, banks conducting PD activities departmentally must follow the capital adequacy and risk management guidelines applicable to banks, not this Master Circular.