What changed
RBI has mandated a minimum CET1 capital ratio of 9% for NBFC-ULs. Revaluation reserves can be included in CET1 capital at a discount of 55% (i.e., only 45% of the reserve is counted), subject to strict conditions. The circular also specifies how profits, reserves, and deductions like goodwill and DTAs are to be treated.
What it means for you
Banks lending to or investing in NBFC-ULs should reassess counterparty risk, as higher CET1 requirements strengthen these NBFCs' loss-absorption capacity. Lenders must also ensure their own capital planning aligns with these tighter norms if they have NBFC subsidiaries in the Upper Layer.
What you must do
- Review NBFC-UL counterparties' CET1 ratios and compliance with the 9% minimum.
- Update internal credit risk models to reflect the new capital treatment of revaluation reserves and deductions.
- Ensure NBFC-UL subsidiaries in your group meet the CET1 requirements and maintain proper documentation for revaluation reserves.
- Train credit and risk teams on the revised CET1 components and deduction rules.
Who it affects
NBFCs classified in the Upper Layer (NBFC-UL), Banks with exposure to NBFC-ULs, Banking groups with NBFC-UL subsidiaries, Auditors and valuers involved in revaluation of NBFC-UL assets
What is the new CET1 requirement for NBFC-UL?
NBFC-UL must maintain a Common Equity Tier 1 (CET1) ratio of at least 9% of Risk Weighted Assets on an ongoing basis.
Can revaluation reserves be included in CET1 capital?
Yes, at the NBFC's discretion, revaluation reserves can be included in CET1 capital at a 55% discount, provided conditions like independent valuation every 3 years and no legal impediment to sale are met.
How are deferred tax assets (DTAs) treated under the new rules?
DTAs associated with accumulated losses must be fully deducted from CET1 capital. Other DTAs are netted against deferred tax liabilities before deduction.