What changed
RBI inserted a new paragraph defining Stage 1, 2, and 3 assets by cross-referencing the 2026 Asset Classification Directions. It modified Tier 2 capital eligibility to explicitly include general provisions on Stage 1 or Stage 2 assets and excess provisions from NPA sales, capped at 1.25% of credit risk-weighted assets. Specific provisions on Stage 3 exposures and other identified deteriorations are excluded from Tier 2 capital. Two paragraphs (130(2) and note to 223) were deleted.
What it means for you
Banks must now use the same staging definitions for capital adequacy as for asset classification and provisioning, ensuring consistency. The cap on general provisions in Tier 2 capital remains at 1.25% of credit RWAs, but the scope is clarified to cover Stage 1 and Stage 2 assets. Deleting paragraphs likely removes outdated or redundant provisions, simplifying compliance. Banks should review their capital calculations to align with the new staging framework before the April 2027 effective date.
What you must do
- Update internal capital adequacy policies to reference the new Stage 1/2/3 definitions from the 2026 Asset Classification Directions.
- Reclassify general provisions on standard assets as Stage 1 or Stage 2 for Tier 2 capital eligibility, ensuring the 1.25% cap is not breached.
- Remove any specific provisions on Stage 3 exposures or other identified deteriorations from Tier 2 capital calculations.
- Prepare for the April 1, 2027 effective date by training staff and updating systems.
Who it affects
All commercial banks in India, Risk management and capital planning teams, Compliance and regulatory reporting departments
What is the key change in Tier 2 capital eligibility?
General provisions on standard assets (Stage 1 or Stage 2) and excess provisions from NPA sales qualify for Tier 2 capital, but only up to 1.25% of total credit risk-weighted assets under the standardised approach.
When do these amendments take effect?
The amendments come into force from April 1, 2027, giving banks nearly a year to align their systems and processes.
Why were paragraphs 130(2) and the note to paragraph 223 deleted?
The RBI did not specify reasons, but deletions likely remove outdated or redundant provisions to streamline the capital adequacy framework.