What changed
RBI replaced existing prudential norms with a consolidated Directions document for LABs, effective immediately upon issuance on November 28, 2025. It introduces detailed definitions for capital components, risk categories, and calculation methods for risk-weighted assets. The directions also include reporting formats for FII/NRI investments in perpetual non-cumulative preference shares.
What it means for you
LABs must now align their capital adequacy framework with the updated RBI directions, ensuring stricter compliance on capital definitions and risk measurement. Banks need to review their capital funds composition, especially Tier 1 and Tier 2 elements, and adjust their risk-weighted asset calculations for credit, market, and interest rate risks. This may impact capital planning and reporting processes.
What you must do
- Review and update internal capital adequacy policies to align with the new Directions.
- Recompute capital funds as per revised definitions of Tier 1 and Tier 2 capital.
- Ensure risk-weighted asset calculations incorporate the specified capital charges for credit, market, and interest rate risks.
- Update reporting systems to include the new annex format for FII/NRI investments in qualifying Tier 1 instruments.
Who it affects
Local Area Banks (LABs), RBI compliance and risk management teams at LABs, Auditors and consultants advising LABs on capital adequacy
When do these Directions take effect?
The Directions came into effect immediately upon issuance on November 28, 2025.
What is the scope of these Directions?
They apply exclusively to Local Area Banks and cover regulatory capital, risk-weighted assets, and related prudential norms.
Do these Directions replace earlier guidelines?
Yes, they repeal and replace previous prudential norms on capital adequacy for LABs, with a saving clause for actions taken under earlier rules.