What changed
RBI issued a Master Direction that consolidates all existing prudential norms on capital adequacy for Local Area Banks into one document. This replaces multiple earlier circulars and instructions on the subject. The Direction came into effect from October 26, 2021.
What it means for you
Local Area Banks now have a single reference for capital adequacy requirements, covering capital components, credit risk, and market risk. This simplifies compliance and ensures uniformity. Banks must align their capital planning and risk management with this consolidated framework.
What you must do
- Review the Master Direction and update internal capital adequacy policies accordingly.
- Ensure capital components and risk measurement methods comply with the consolidated norms.
- Train risk and compliance teams on the unified framework for credit and market risk.
- Monitor RBI updates to this Direction for any future amendments.
Who it affects
All Local Area Banks licensed by RBI, Risk management teams of LABs, Compliance officers of LABs
What is the effective date of this Master Direction?
The Direction came into effect from October 26, 2021.
Does this Direction replace all earlier capital adequacy guidelines for LABs?
Yes, it consolidates all existing guidelines and instructions on prudential norms for capital adequacy into one Master Direction.
What risks are covered under this Direction?
The Direction covers credit risk and market risk, including definitions for basis risk, interest rate risk, and hedging.