Notifications - Reserve Bank of India Skip to main content Selected Selected Change Language हिंदी Search the Website Search Home About Us ▼ About Us Organisation & Functions ▶ Organisation Structure Departments Offices Training Establishment ▶ College of Agricultural Banking Reserve Bank Staff College College of Supervisors RBI's Functions and Working Governors Deputy Governors Executive Directors Communication Policy of RBI Sources of Information ▶ Annual Publications Half-yearly Publications Quarterly Publications Monthly Publications Weekly Publications Occasional Publications SDDS NSDP Data Releases Publications available on Subscription General Information RBI History Museum ▶ The RBI Museum RBI Monetary Museum Notification ▼ Notifications Master Directions Master Circulars Amendment Directions Draft Notifications/Guidelines ▶ Draft Notifications/Guidelines Draft Directions (RE-wise) Index To RBI Circulars Standalone Circulars Circulars Withdrawn Press Releases Speeches & Media Interactions ▼ Speeches Media Interactions Memorial Lectures Podcasts Publications ▼ Biennial Annual Half-Yearly Quarterly Bi-monthly Monthly Weekly Occasional Reports Working Papers Legal Framework ▼ Act Rules Regulations Schemes Research ▼ External Research Schemes RBI Occasional Papers Working Papers RBI Bulletin History DRG Studies KLEMS State Statistics and Finances Statistics ▼ Data Releases Database on Indian Economy Public Debt Statistics Regulatory Reporting ▼ List of Returns Data Definition Validation rules/ Taxonomy List of RBI Reporting Portals FAQs of RBI Reporting Portals Home Notifications Notifications ( 891 kb ) Reserve Bank of India (Urban Co-operative Banks - Prudential Norms on Capital Adequacy) Directions, 2025 (Updated as on June 16, 2026) RBI/DOR/2025-26/275 DOR.CAP.REC.194/09-18-201/2025-26 November 28, 2025 Previous Versions Reserve Bank of India (Urban Co-operative Banks - Prudential Norms on Capital Adequacy) Directions, 2025 (Updated as on June 16, 2026) Table of Contents Chapter I Preliminary A Short Title and Commencement B Applicability C Definitions Chapter II Regulatory capital A Net worth B Statutory requirements C Minimum regulatory capital D Composition of capital E Tier 1 capital F Tier 2 Capital Chapter III Computation of risk weighted asset (RWA) A Capital charge for credit risk B Capital charge for market risk Chapter IV Other instructions A Share linking to Borrowings B Refund of share capital C Protection of investors in regulatory capital instruments D Reporting Chapter V Repeal and Other Provisions A Repeal and Savings B Application of other laws not barred C Interpretations Annex I Statement of Capital, RWAs and CRAR Annex II Reporting format for the purpose of monitoring the capital ratio In exercise of powers conferred by Section 35A read with Section 56 of the Banking Regulation Act (BR Act), 1949, the Reserve Bank of India, being satisfied that it is necessary and expedient in the public interest and in the interest of banking policy so to do, hereby, issues the Directions hereinafter specified. Chapter I Preliminary A Short Title and Commencement 1. These Directions shall be called the Reserve Bank of India (Urban Co-operative Banks - Prudential Norms on Capital Adequacy) Directions, 2025. 2. These Directions shall come into effect immediately upon issuance. B Applicability 3. These Directions shall be applicable to Urban Co-operative Banks (hereinafter collectively referred to as 'banks' or ‘UCBs’ and individually as a 'bank' or ‘UCB’). For the purpose of these Directions, Urban Co-operative Banks shall mean Primary Co-operative Banks as defined under section 5(ccv) read with Section 56 of Banking Regulation Act, 1949. C Definitions 4. In these Directions, unless the context states otherwise, the terms herein shall bear the meanings assigned to them below: (1) ‘Credit Risk’ is defined as the potential that a bank's borrower or counterparty may fail to meet its obligations in accordance with agreed terms. It is also the possibility of losses associated with diminution in the credit quality of borrowers or counterparties; (2) ‘Deferred Tax Assets (DTA)’ and ‘Deferred Tax Liabilities (DTL)’ shall have the same meaning as assigned under the applicable Accounting Standards; (3) ‘Derivative’ shall have the same meaning as assigned to it in section 45U(a) of the RBI Act, 1934; (4) ‘Market Risk’ is defined as the risk of losses in on-balance sheet and off- balance sheet positions arising from movements in market prices; (5) ‘Other approved securities’ shall have the same meaning as defined under ‘ Reserve Bank of India (Urban Co-operative Banks – Cash Reserve Ratio and Statutory Liquidity Ratio) Directions, 2025 ’; (6) ‘Public Financial Institution’ shall have the same meaning as defined under sub-section 2(72) of the Companies Act, 2013; and (7) ‘Subordinated’ refers to the status of the debt. In the event of the bankruptcy or liquidation of the debtor, subordinated debt only has a secondary claim on repayments, after depositors and other debt has been repaid. 5. All other expressions, unless defined herein, shall have the same meaning as have been assigned to them under the BR Act, 1949 or the RBI Act, 1934 or respective State Co-operative Societies Act and rules / regulations made thereunder, or any statutory modification or re-enactment thereto or as used in commercial parlance, as the case may be. Chapter II Regulatory capital A Net worth 6. A UCB shall have minimum net worth as under: (i) A Tier 1 UCB operating in a single district shall have minimum net worth of ₹2 crore; (ii) All other UCBs (of all tiers) shall have minimum net worth of ₹5 crore; (iii) A UCB which currently does not meet the minimum net worth requirement as above, shall achieve the minimum net worth of ₹2 crore or ₹5 crore (as applicable) in a phased manner. Such a UCB shall achieve at least 50 per cent of the applicable minimum net worth on or before March 31, 2026 and the entire stipulated minimum net worth on or before March 31, 2028. Explanation - (a) Tier 1 - All unit UCBs and salary earners’ UCBs (irrespective of deposit size), and all other UCBs having deposits up to ₹100 crore; (b) Tier 2 – A UCB with deposits more than ₹100 crore and up to ₹1000 crore; (c) Tier 3 – A UCB with deposits more than ₹1000 crore and up to ₹10,000 crore; and (d) Tier 4 – A UCB with deposits more than ₹10,000 crore. 7. The computation of ‘net worth’ in this context shall be as per the table given below. Sr. No. Description Amount (₹ crore) 1 2 Perpetual Non-Cumulative Preference Shares (PNCPS) 3 Contributions received from associate / nominal members where the bye-laws permit allotment of shares to them and provided there are restrictions on withdrawals of such shares, as applicable to regular members 4 Contribution / non-refundable admission fees collected from the nominal and associate members which is held separately as ‘reserves’ under an appropriate head since these are not refundable 5 Free Reserves including ‘Building Fund’, Capital Reserves etc., but excluding Revaluation Reserves. Free Reserves shall exclude all reserves / provisions which are created to meet anticipated loan losses, losses on account of fraud, etc., depreciation in investments and other assets, and other outside liabilities. 6 Investment Fluctuation Reserve (IFR) in excess of stipulated 5 per cent of investment in Available For Sale (AFS) and Held For Trading (HFT) categories 7 Credit balance in Profit and Loss Account, if any Deductions 8 Debit balance in Profit and Loss Account, if any 9 All intangible assets, including inter alia Deferred Tax Assets (DTAs) Note - (1) Funds raised through Perpetual Debt Instruments (PDIs) included in Tier 1 capital and debt capital instruments included in Tier 2 capital shall not be reckoned as part of net worth. (2) Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS) included in Tier 2 capital shall not be reckoned as part of net worth. (3) No general or specific provisions shall be included in computation of net worth. B Statutory requirements 8. In terms of the provisions contained in section 11 read with section 56 of the BR Act, 1949, no co-operative bank shall commence or carry on banking business unless the aggregate value of its paid-up capital and reserves is not less than one lakh of rupees. In addition, under section 22(3)(d) of the above Act, the Reserve Bank prescribes the minimum entry point capital (entry point norms) from time to time, for setting-up of a new UCB. C Minimum regulatory capital 9. A UCB shall maintain minimum Capital to Risk Weighted Assets Ratio (CRAR) as under: (1) A Tier 1 UCB shall maintain a minimum CRAR of 9 per cent of on an ongoing basis. (2) A UCB in Tiers 2 to 4 shall maintain a minimum CRAR of 12 per cent on an ongoing basis. (3) A UCB in Tiers 2 to 4, which does not currently meet the revised CRAR of 12 per cent, shall achieve the same in a phased manner. Such a UCB shall achieve the CRAR of at least 10 per cent by March 31, 2024, 11 per cent by March 31, 2025, and 12 per cent by March 31, 2026. D Composition of capital 10. The computation of CRAR shall be as under: The capital funds (eligible total capital) for capital adequacy purposes shall consist of Tier 1 and Tier 2 capital as defined below. The total of Tier 2 capital shall be limited upto a maximum of 100 per cent of total Tier 1 capital for the purpose of compliance with CRAR norms. The RWAs shall be calculated as per paragraph 17 given below. E Tier 1 capital 11. Tier 1 capital shall comprise the following: (i) Paid-up share capital collected from regular members having voting rights. Note - A UCB is permitted to raise share capital, as hitherto, by way of (a) issue of shares to persons within its area of operation, in accordance with the provisions of its bye-laws, and (b) issue of additional shares to the existing members; (ii) Contributions received from associate / nominal members where the bye- laws permit allotment of shares to them and provided there are restrictions on withdrawal of such shares, as applicable to regular members; (iii) Contribution / non-refundable admission fees collected from the associate and nominal members which is held separately as 'reserves' under an appropriate head since these are not refundable; (iv) Perpetual Non-Cumulative Preference Shares (PNCPS) which comply with the regulatory requirements as specified in paragraph 12; (v) Free Reserves as per the audited accounts. Reserves, if any, created to meet outside liabilities shall not be included in the Tier 1 Capital. Free reserves shall exclude all reserves / provisions which are created to meet anticipated loan losses, losses on account of fraud, etc., depreciation in investments and other assets and other outside liabilities. (vi) Capital reserves representing surplus arising out of sale proceeds of assets; (vii) Perpetual Debt Instruments (PDIs) which comply with the regulatory requirements as specified in paragraph 13; (viii) Any surplus (net) in profit and loss account, i.e., balance after appropriation towards dividend payable, education fund, other funds whose utilisation is defined, asset loss, if any, etc.; (ix) Outstanding amount in Special Reserve created under section 36(1)(viii) of the Income Tax Act, 1961; (x) Revaluation Reserves, arising out of change in the carrying amount of a bank’s property consequent upon its revaluation, may be reckoned as Tier 1 capital at a discount of 55 per cent, subject to meeting the following conditions: (a) A bank is able to sell the property readily at its own shall and there is no legal impediment in selling the property; (b) the revaluation reserves are presented / disclosed separately under ‘Reserve Fund and Other Reserves’ in the balance sheet; (c) revaluations are realistic, in accordance with applicable Accounting Standards; (d) valuations are obtained, from two independent valuers, at least once in every three years; (e) where the value of the property has been substantially impaired by any event, these are to be immediately revalued and appropriately factored into capital adequacy computation; (f) the external auditor(s) of a bank have not expressed a qualified opinion on the revaluation of the property; and (g) the instructions on valuation of properties and other specific requirements as mentioned in the Reserve Bank of India (Urban Co-operative Banks - Credit Risk Management) Directions, 2025 . Revaluation reserves which do not qualify as Tier 1 capital shall also not qualify as Tier 2 capital. A bank may choose to reckon revaluation reserves in Tier 1 capital or Tier 2 capital at its discretion, subject to fulfilment of all the conditions specified above. Note - (1) The amount held under the head ‘Building Fund’ shall be treated as part of Free Reserves. (2) ‘Bad and Doubtful Debt Reserve (BDDR)’, complying with all the terms and instructions mentioned below, shall also be treated as Free Reserves. In this regard, instructions for treatment of BDDR for prudential purposes are as per following: (i) With effect from the FY 2024-25, all provisions as per Income Recognition, Asset Classification and Provisioning (IRACP) norms, whether accounted for under the head ‘BDDR’ or any other head of account, shall be charged as an expense to the Profit and Loss Account in the accounting period in which they are recognised. The eligibility of such provisions for regulatory capital purposes shall continue to be as defined in the extant guidelines on capital adequacy. (ii) After charging all applicable provisions as per IRACP norms and other extant regulations to the Profit and Loss Account, a bank shall make any appropriations of net profits below the line to BDDR, if required, as per the applicable statutes or otherwise. (iii) As a one-time measure, with a view to facilitate rectification and smoother transition to an accounting standard compliant approach, the following regulatory treatment is prescribed: (a) Previously, a bank may have created provisions required as per IRACP norms by appropriating from the net profit rather than recognizing the same as an expense in the Profit and Loss Account. The balances in BDDR as on March 31, 2024, representing such provisions as per IRACP norms (that have been created by directly appropriating from net profits instead of recognising as an expense in the Profit and Loss Account) in the previous years (hereafter referred to as ‘BDDR2024’) shall be identified and quantified. (b) As at March 31, 2025, to the extent of BDDR2024, an appropriation shall be made directly (i.e., ‘below the line’) from the Profit and Loss Account or General Reserves to provisions for Non-Performing Assets (NPAs) (i.e., liability). Such provisions shall be permitted to be netted off from Gross NPAs (GNPAs) to arrive at Net NPAs (NNPAs). (c) To the extent the balances in BDDR are not required as per applicable statute, the same can also be transferred to General Reserves / Balance in Profit and Loss Account below the line. (d) After passing the above entries, the balances in the BDDR can be reckoned as Tier 1 Capital. However, balance in the BDDR shall not be reduced from GNPAs to arrive at NNPAs. (3) Balances in Dividend Equalisation Fund (DEF), created through appropriations of profits and transferred to general reserves / free reserves, shall be considered as Tier 1 Capital. (4) For a fund to be included in the Tier 1 Capital, the fund shall satisfy two criteria, viz., the fund shall be created as an appropriation of net profit and shall be a free reserve and not a specific reserve. However, if the same has been created not by appropriation of profit, but by a charge on the profit then this fund is in effect a provision, and hence shall be eligible for being reckoned only as Tier 2 Capital as defined in paragraph 14(i) and subject to a limit of 1.25 per cent of RWAs, provided it is not attributed to any identified potential loss or diminution in value of an asset or a known liability. (5) Outstanding Innovative Perpetual Debt Instruments (IPDIs) shall also be eligible to be reckoned as Tier 1 Capital subject to the ceilings prescribed in paragraph 13. (6) Deduction from regulatory capital (i) Amount of intangible assets, losses in current year and those brought forward from previous periods, deficit in NPA provisions, income wrongly recognised on NPAs, provision required for liability devolved on a bank, etc., shall be deducted from Tier 1 Capital. (ii) If a UCB’s contribution is in the form of subordinated units of any AIF scheme, then it shall deduct the entire investment from its capital funds – proportionately from both Tier 1 and Tier 2 capital (wherever applicable). Note - A UCB shall also refer to Reserve Bank of India (Urban Co-operative Banks – Undertaking of Financial Services) Directions, 2025 in this regard. (iii) A UCB shall be guided by the Reserve Bank of India (Urban Co-operative Banks – Transfer and Distribution of Credit Risk) Directions, 2025 for the prudential treatment of unrealised profits arising because of transfer of loan exposures and Security Receipts (SR) guaranteed by the Government of India. (iv) In terms of Reserve Bank of India (Urban Co-operative Banks – Credit Facilities) Directions, 2025 , if a bank is the Default Loss Guarantee (DLG) provider, it shall deduct full amount of the DLG, which is outstanding, from its capital. E.1 Guidelines on issuance of Perpetual Non-Cumulative Preference Shares (PNCPS) for inclusion in Tier 1 Capital 12. A UCB is permitted to issue PNCPS at face value to its members or any other person residing within its area of operation, with the prior approval of the Reserve Bank. The UCB shall submit the application seeking permission, together with the Prospectus / Offer Document / Information Memorandum, through the Pravaah Portal of the Reserve Bank. A certificate from a Chartered Accountant to the effect that the terms of the offer document are in compliance with these instructions shall also be submitted along with the application. The amounts raised through PNCPS shall comply with the following terms and conditions to qualify for inclusion as Tier 1 Capital: (1) Limits The outstanding amount of PNCPS and PDI along with outstanding IPDI shall not exceed 35 per cent of total Tier 1 Capital at any point of time. The above limit shall be based on the amount of Tier 1 Capital after deduction of goodwill and other intangible assets, but before deduction of equity investment in subsidiaries, if any. PNCPS issued in excess of the overall ceiling of 35 per cent, shall be eligible for inclusion under Upper Tier 2 capital, subject to limits prescribed for Tier 2 capital. However, the investors' rights and obligations shall remain unchanged. (2) Amount The amount of PNCPS to be raised shall be decided by the Board of Directors of a UCB. (3) Maturity The PNCPS shall be perpetual. (4) Options (i) PNCPS shall not be issued with a 'put option' or 'step up option'. (ii) PNCPS may be issued with a ‘call option’, subject to following conditions: (a) The call option on the instrument is permissible after the instrument has run for at least ten years; and (b) Call option shall be exercised only with the prior approval of Department of Regulation, Reserve Bank. While considering the proposals received from a UCB for exercising the call option, the Reserve Bank would, among other things, take into consideration the UCB’s CRAR position, both at the time of exercise of the call option and after exercise of the call option. (5) Classification in the Balance Sheet These instruments shall be classified as 'Capital' and shown separately in the balance sheet. (6) Dividend The rate of dividend payable to the investors shall be a fixed rate or a floating rate referenced to a market determined rupee interest benchmark rate. (7) Payment of dividend (i) The payment of dividend by a bank shall be subject to availability of distributable surplus out of current year’s profits, and if: (a) the CRAR is above the minimum regulatory requirement prescribed by the Reserve Bank; (b) the impact of such payment does not result in the UCB's CRAR falling below or remaining below the minimum regulatory requirement prescribed by the Reserve Bank; and (c) the balance sheet as at the end of the previous year does not show any accumulated loss. (ii) The dividend shall not be cumulative, i.e., dividend missed in a year shall not be paid in subsequent years even if adequate profit is available and the level of CRAR conforms to the regulatory minimum. When dividend is paid at a rate lesser than the prescribed rate, the unpaid amount shall not be paid in future years, even if adequate profit is available and the level of CRAR conforms to the regulatory minimum. (iii) All instances of non-payment of dividend / payment of dividend at a rate less than that specified shall be reported by the issuing UCB to the concerned Regional Office of Department of Supervision, Reserve Bank and Department of Regulation, Reserve Bank (latter at e-mail
[email protected] ). (8) Seniority of claim The claims of the investors in PNCPS shall be senior to the claims of investors in equity shares and subordinated to the claims of all other creditors and the depositors. (9) Voting rights The investors in PNCPS shall not be eligible for any voting rights. (10) Discount The PNCPS shall not be subjected to a progressive discount for capital adequacy purposes since these are perpetual. (11) Other Conditions (i) PNCPS shall be fully paid-up, unsecured, and free of any restrictive clauses; (ii) A UCB shall also comply with the terms and conditions, if any, stipulated by other regulatory authorities in regard to issue of the PNCPS, provided they are not in conflict with the terms and conditions specified in these guidelines. Any instance of conflict shall be brought to the notice of Department of Regulation, Reserve Bank for seeking confirmation of the eligibility of the instrument for inclusion in Tier 1 Capital. (12) Compliance with reserve requirements (i) The total amount raised by a UCB by issue of PNCPS shall not be reckoned as liability for calculation of Net Demand and Time Liabilities (NDTL) for the purpose of reserve requirements and, as such, shall not attract CRR / SLR requirements. (ii) However, the amount collected from members / prospective investors and held pending allotment of the PNCPS, shall be reckoned as liability for the purpose of calculating the NDTL and shall, accordingly, attract reserve requirements. Such amounts shall not be reckoned for calculation of capital funds. (13) Reporting requirements A UCB issuing PNCPS shall submit a report to the concerned Regional Office of Department of Supervision, Reserve Bank and Department of Regulation, Reserve Bank (latter at email:
[email protected] ), giving details of the capital raised, including the terms and conditions of the issue together with a copy of the Prospectus / Offer Document, soon after the issue is completed. (14) Investments in PNCPS and advances for purchase of PNCPS A UCB shall not grant any loan or advance to any person for purchasing its own PNCPS or the PNCPS of other banks. Further, a UCB shall not invest in PNCPS of other banks and shall not grant advances against the security of the PNCPS issued by them or other banks. E.2 Guidelines on issuance of Perpetual Debt Instruments (PDIs) eligible for inclusion Tier 1 Capital 13. A UCB may issue PDI as bonds or debentures to its members or any other person residing within its area of operation, with the prior approval of the Reserve Bank. The UCB shall submit the application seeking permission, together with the Prospectus / Offer Document / Information Memorandum through the Pravaah Portal of the Reserve Bank. A certificate from a Chartered Accountant to the effect that the terms of the offer document are in compliance with these instructions shall also be submitted along with the application. PDI can also be issued through conversion of a portion of existing deposits of the institutional depositors as a part of revival plan / financial reconstruction of the UCB with consent of depositors as per applicable regulatory instructions. The amounts raised through PDI shall comply with the following terms and conditions to qualify for inclusion as Tier 1 Capital: (1) Limit (i) The amount of PDI reckoned for Tier 1 Capital shall not exceed 15 per cent of total Tier 1 capital (As per paragraph 12, the outstanding amount of PNCPS and PDI along with outstanding IPDI shall not exceed 35 per cent of total Tier 1 Capital at any point of time). The outstanding IPDIs shall also be covered in the aforementioned ceiling of 15 per cent and reckoned for capital purposes as hitherto. PDI in excess of the above limits shall be eligible for inclusion under Tier 2 Capital, subject to the limits prescribed for Tier 2 Capital. However, the investors' rights and obligations shall remain unchanged. (ii) The aforesaid ceiling of 15 per cent for PDI can be exceeded with prior approval of the Department of Regulation, Reserve Bank, if PDI are issued as part of revival plan / financial reconstruction of a UCB. (iii) The eligible amount shall be computed with reference to the amount of Tier 1 Capital as on March 31 of the previous year, after deduction of goodwill, and other intangible assets, but before deduction of equity investment in subsidiaries, if any. (2) Amount The amount of PDI to be raised may be decided by the Board of Directors of a UCB. (3) Maturity These instruments shall be perpetual. (4) Options (i) The PDI shall not be issued with a 'put option' or ‘step-up’ option. (ii) However, PDI may be issued with a call option subject to following conditions: (a) The call option on the instrument is permissible after the instrument has run for at least ten years; and (b) Call option shall be exercised only with the prior approval of Department of Regulation, Reserve Bank. While considering the proposals received from a UCB for exercising the call option, the Reserve Bank would, among other things, take into consideration a UCB’s CRAR position both at the time of exercise of the call option and after exercise of the call option. (5) Classification PDI shall be classified as 'Borrowings' and shown separately in the balance sheet. (6) Rate of interest The interest payable to the investors may be either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate. (7) Lock-in-Clause (i) PDI shall be subjected to a lock-in-clause in terms of which the issuing UCB shall not be liable to pay interest, if (a) The UCB's CRAR is below the minimum regulatory requirement prescribed by the Reserve Bank; or (b) the impact of such payment results in the UCB's CRAR falling below or remaining below the minimum regulatory requirement prescribed by the Reserve Bank. (ii) However, a UCB may pay interest with the prior approval of the Department of Regulation, Reserve Bank when the impact of such payment may result in net loss or increase the net loss, provided the CRAR meets the regulatory norm. For this purpose, net loss is defined as either (a) the accumulated loss at the end of the previous financial year or (b) the loss incurred during the current financial year. (iii) The interest shall not be cumulative. (iv) All instances of invocation of the lock-in-clause shall be reported by the issuing UCB to the concerned Regional Office of Department of Supervision, Reserve Bank and Department of Regulation, Reserve Bank (latter at email:
[email protected] ). (8) Seniority of claim The claims of the investors of PDI shall be superior to the claims of investors in equity shares and PNCPS but subordinated to the claims of all other creditors and the depositors. Among investors in PDI and outstanding IPDI, the claims shall rank pari passu with each other. (9) Discount The PDI shall not be subjected to a progressive discount for capital adequacy purposes since these are perpetual. (10) Other conditions (i) PDI shall be fully paid-up, unsecured and free of any restrictive clauses. (ii) A UCB shall also comply with the terms and conditions, if any, stipulated by other regulatory authorities in regard to issue of the PDI, provided they are not in conflict with the terms and conditions specified in these guidelines. Any instance of conflict shall be brought to the notice of the Department of Regulation, Reserve Bank for seeking confirmation of the eligibility of the instrument for inclusion in Tier 1 Capital. (11) Compliance with Reserve requirements The total amount raised by a UCB through the issue of PDI shall not be reckoned as liability for calculation of NDTL for the purpose of reserve requirements and, as such, shall not attract CRR / SLR requirements. However, the amount collected from members / prospective investors and pending issue of PDI, shall be reckoned as liability for the purpose of calculating the NDTL and shall, accordingly, attract reserve requirements. Such amounts pending issue of PDI, shall not be reckoned for calculation of capital funds. (12) Reporting requirements A UCB issuing PDI shall submit a report to the concerned Regional Office of Department of Supervision, Reserve Bank and Department of Regulation, Reserve Bank (latter at email:
[email protected] ) giving details of the amount raised, including the terms and conditions of issue together with a copy of the Prospectus / Offer Document, soon after the issue is completed. (13) Investments in PDI and advances for purchase of PDI A UCB shall not grant any loan or advance to any person for purchasing its PDI or PDI of other banks. A UCB shall not invest in PDI issued by other banks (except when the PDI are issued as a part of revival plan of a UCB as mentioned in paragraph 13) and shall not grant advances against the security of PDI issued by them or other banks. F Tier 2 Capital 14. Tier 2 capital shall comprise the following: (i) General provisions and loss reserves These shall include such provisions of general nature appearing in the books of a bank which are not attributed to any identified potential loss or diminution in value of an asset or a known liability. Adequate care shall be taken to ensure that sufficient provisions have been made to meet all known losses and foreseeable potential losses before considering any amount of general provision as part of Tier 2 Capital as indicated above. To illustrate, general provision for Standard Assets, excess provision on transfer of stressed loans, etc., shall be considered for inclusion under this category. Such provisions, which are considered for inclusion in Tier 2 Capital, shall be admitted up to 1.25 per cent of total RWAs. As per the extant instructions, provisions made for NPAs as per prudential norms are deducted from the amount of GNPAs to arrive at the amount of NNPAs. The prudential treatment of different type of provisions and its treatment for capital adequacy purposes is given below: (a) Additional General Provisions (Floating Provisions) Additional general provisions (floating provisions) for bad debts, i.e., provisions not earmarked for any specific loan impairments (NPAs) may be used either for netting off of gross NPAs or for inclusion in Tier 2 Capital within the overall ceiling of 1.25 per cent of total RWAs but shall not be used on both counts. (b) Additional Provisions for NPAs at higher than prescribed rates In cases where a bank makes specific provision for NPAs in excess of what is prescribed under the prudential norms, the total specific provision may be deducted from the amount of GNPAs while reporting the amount of NNPAs. The additional specific provision made by a bank shall not be reckoned as Tier 2 Capital. (c) Excess provisions on transfer of stressed loans to Asset Reconstruction Companies (ARC) In terms of instructions issued vide Reserve Bank of India (Urban Co-operative Banks – Transfer and Distribution of Credit Risk) Directions, 2025 excess provisions on transfer of stressed loans to ARC, until reversal, shall continue to be shown under 'provisions' and shall be considered as Tier 2 Capital within the overall ceiling of 1.25 per cent of RWAs. (d) Provisions for Diminution in Fair Value Provisions for diminution in the fair value of restructured accounts, both in respect of standard assets and NPAs, are permitted to be netted from the relative loan asset and shall not be reckoned as Tier 2 Capital. (ii) Investment Fluctuation Reserve (IFR) Balances in the IFR, created in terms of Reserve Bank of India (Urban Co-operative Banks – Classification, Valuation, and Operation of Investment Portfolio) Directions, 2025 shall be eligible for inclusion in Tier 2 Capital. (iii) Tier 2 Capital instruments A UCB may issue the following instruments to augment its Tier 2 Capital: (a) Upper Tier 2 instruments - Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS) which comply with the regulatory requirements as specified in paragraph 15. (b) Lower Tier 2 instruments - Long Term Subordinated Bonds (LTSB) which comply with the regulatory requirements as specified in paragraph 16. Note - Outstanding Long Term (Subordinated) Deposits (LTD) shall also be eligible to be reckoned as Tier 2 capital subject to the ceilings prescribed in paragraph 10 and Paragraph 16. F.1 Guidelines on issuance Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative Preference Shares (RNCPS) and Redeemable Cumulative Preference Shares (RCPS) for inclusion in Upper Tier 2 capital 15. A UCB is permitted to issue PCPS / RNCPS / RCPS, at face value, to its members or any other person residing within its area of operation, with the prior approval of the Reserve Bank. The UCB shall submit the application seeking permission, together with the Prospectus / Offer Document / Information Memorandum through the Pravaah Portal of the Reserve Bank. A certificate from a Chartered Accountant to the effect that the terms of the offer document are in compliance with these instructions shall also be submitted along with the application. These three instruments, collectively referred to as Tier 2 preference shares, shall comply with the following terms and conditions, to qualify for inclusion as Upper Tier 2 Capital. (1) Limits The outstanding amount of these instruments along with other components of Tier 2 Capital shall not exceed 100 per cent of Tier 1 Capital at any point of time. The above limit shall be based on the amount of Tier 1 Capital after deduction of goodwill and other intangible assets, but before deduction of equity investment in subsidiaries, if any. (2) Amount The amount to be raised may be decided by the Board of Directors of a UCB. (3) Maturity The Tier 2 preference shares could be either perpetual (PCPS) or dated (RNCPS and RCPS) instruments with a minimum maturity of 10 years. (4) Options (i) These instruments shall not be issued with a 'put option' or 'step up option'. (ii) These instruments may be issued with a ‘call option’, subject to following conditions: (a) The call option on the instrument is permissible after the instrument has run for at least ten years; and (b) Call option shall be exercised only with the prior approval of Department of Regulation, Reserve Bank. While considering the proposals received from a bank for exercising the call option, the Reserve Bank would, among other things, take into consideration the UCB's CRAR position both at the time of exercise of the call option and after exercise of the call option. (5) Classification in the Balance Sheet These instruments shall be classified as 'Borrowings' and shown separately in the Balance sheet. (6) Coupon The coupon payable to the investors may be either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate. (7) Payment of Coupon (i) The coupon payable on these instruments shall be treated as interest and accordingly debited to Profit and Loss Account. However, it shall be payable only if: (a) a UCB’s CRAR is above the minimum regulatory requirement prescribed by the Reserve Bank. (b) the impact of such payment does not result in a UCB’s CRAR falling below or remaining below the minimum regulatory requirement. (c) a UCB shall not have a net loss. For this purpose, the net loss is defined as either (i) the accumulated loss at the end of the previous financial year or (ii) the loss incurred during the current financial year. (ii) In the case of PCPS and RCPS, the unpaid / partly unpaid coupon shall be treated as a liability. The interest amount due and remaining unpaid may be allowed to be paid in later years subject to the UCB complying with the above requirements. (iii) In the case of RNCPS, deferred coupon shall not be paid in future years, even if adequate profit is available and the level of CRAR conforms to the regulatory minimum. A UCB can however pay a coupon at a rate lesser than the specified rate if adequate profit is available and the level of CRAR conforms to the regulatory minimum, subject to conformity with paragraph 15(7)(i). (iv) All instances of non-payment of interest or payment of interest at a rate lesser than the specified rate shall be reported by the issuing UCB to the concerned Regional Office of Department of Supervision, Reserve Bank and Department of Regulation, Reserve Bank (latter at email:
[email protected] ). (8) Redemption / repayment of redeemable Tier 2 preference shares RNCPS and RCPS shall not be redeemable at the initiative of the holder. Redemption of these instruments at maturity shall be made only with the prior approval of the Department of Regulation, Reserve Bank subject inter alia to the following conditions: (i) a UCB’s CRAR is above the minimum regulatory requirement prescribed by the Reserve Bank. (ii) the impact of such payment does not result in the UCB’s CRAR falling below or remaining below the minimum regulatory requirement. (9) Seniority of Claim The claims of the investors in these instruments shall be senior to the claims of investors in instruments eligible for inclusion in Tier 1 Capital and subordinate to the claims of all other creditors including those in lower Tier 2 Capital and the depositors. Amongst the investors of various instruments included in Upper Tier 2 Capital, the claims shall rank pari passu with each other. (10) Voting Rights The investors in Tier 2 preference shares shall not be eligible for any voting rights. (11) Progressive Discount for the purpose of computing CRAR The Redeemable Preference Shares (both cumulative and non-cumulative) shall be subjected to progressive discount for capital adequacy purposes over the last five years of their tenor, as under: Remaining maturity of instruments Rate of discount (%) Less than one year 100 One year and more but less than two years 80 Two years and more but less than three years 60 Three years and more but less than four years 40 Four years and more but less than five years 20 (12) Other conditions (i) The Tier 2 preference shares shall be fully paid-up, unsecured, and free of any restrictive clauses. (ii) A UCB shall also comply with the terms and conditions, if any, stipulated by other regulatory authorities in regard to issue of the Tier 2 preference shares, provided they are not in conflict with any terms and conditions specified in these guidelines. Any instance of conflict shall be brought to the notice of Department of Regulation, Reserve Bank for seeking confirmation of the eligibility of the instrument for inclusion in Tier 2 Capital. (13) Compliance with Reserve Requirements (i) The total amount raised by a UCB through the issue of these instruments shall be reckoned as a liability for the calculation of NDTL for the purpose of reserve requirements and, as such, shall attract CRR / SLR requirements. (ii) The amount collected from members / prospective investors and held pending allotment shall not be reckoned for calculation of capital funds until the allotment process is over. (14) Reporting Requirements A UCB issuing these instruments shall submit a report to the concerned Regional Office of Department of Supervision, Reserve Bank and Department of Regulation, Reserve Bank (latter at email:
[email protected] ), giving details of the capital raised, including the terms and conditions of issue together with a copy of the Prospectus / Offer Document soon after the issue is completed. (15) Investments in Tier 2 preference shares and advances for purchase of Tier 2 preference shares. A UCB shall not grant any loan or advance to any person for purchasing its own Tier 2 preference shares or Tier 2 preference shares of other banks. A UCB shall not invest in Tier 2 preference shares issued by other banks and shall not grant advances against the security of Tier 2 preference shares issued by them or other banks. F.2 Guidelines on issuance Long Term Subordinated Bond (LTSB) eligible for inclusion in Lower Tier 2 Capital 16. A UCB is permitted to issue LTSB to its members, or any other person residing within its area of operation. The amounts raised through LTSB shall comply with the following terms and conditions to be eligible for inclusion in Lower Tier 2 Capital: (1) Eligibility (i) A UCB, fulfilling the following criteria as per its latest audited financial statements, is permitted to issue LTSB without seeking specific permission of the Reserve Bank in this regard: (a) The CRAR shall be at least one percentage point above the minimum CRAR applicable to UCBs; (b) GNPA less than 7 per cent and NNPA not more than 3 per cent; (c) Net profit for at least three out of the preceding four years, subject to the UCB not having incurred net loss in the immediate preceding year; (d) No default in maintenance of CRR / SLR during the preceding year; (e) The UCB has at least two professional directors on its Board; (f) Core Banking Solution (CBS) is fully implemented; and (g) No monetary penalty has been imposed on the UCB for violation of Reserve Bank’s directives / guidelines during the two financial years preceding the year in which the LTSB are being issued. (ii) Prior permission of the Reserve Bank is required for a UCB which does not comply with the above criteria. The UCB shall submit the application seeking permission, together with the Prospectus / Offer Document / Information Memorandum through the Pravaah Portal of the Reserve Bank. A certificate from a Chartered Accountant to the effect that the terms of the offer document are in compliance with these instructions shall also be submitted along with the application. (2) Limit The amount of LTSB eligible to be reckoned as Tier 2 Capital shall be limited to 50 per cent of total Tier 1 Capital. The outstanding LTDs shall also be covered in the aforementioned ceiling of 50 per cent and reckoned for capital purposes as hitherto. These instruments, together with other components of Tier 2 Capital shall not exceed 100 per cent of Tier 1 Capital. The aforementioned limit shall be based on the amount of Tier 1 Capital after deduction of goodwill and other intangible assets, but before the deduction of equity investments in subsidiaries, if any. (3) Amount The amount to be raised may be decided by the Board of Directors of a UCB. (4) Maturity LTSB shall be issued with a minimum maturity of ten years. (5) Options (i) The LTSB shall not be issued with a 'put option' or ‘step-up’ option. (ii) However, LTSB may be issued with a ‘call option’ subject to following conditions: (a) The call option on the instrument is permissible after the instrument has run for at least ten years; and (b) Call option shall be exercised only with the prior approval of Department of Regulation, Reserve Bank. While considering the proposal received from a UCB for exercising the call option, the Reserve Bank would, among other things, take into consideration the UCB’s CRAR position both at the time of exercise of the call option and after exercise of the call option. (6) Classification in the Balance Sheet These instruments shall be classified as 'Borrowings' and shown separately in the balance sheet. (7) Interest Rate LTSB may bear a fixed rate of interest, or a floating rate of interest referenced to a market determined rupee interest benchmark rate. (8) Redemption / Repayment Redemption / repayment at maturity shall be made only with the prior approval of the Department of Regulation, Reserve Bank. (9) Seniority of Claims LTSB shall be subordinated to the claims of depositors and other creditors but shall rank senior to the claims of investors in instruments eligible for inclusion in Tier 1 Capital and holders of preference shares (both Tier 1 and Tier 2 capital). Among investors of instruments included in Lower Tier 2 Capital (i.e., including outstanding LTDs, if any), the claims shall rank pari passu with each other. (10) Progressive Discount These bonds shall be subjected to a progressive discount for capital adequacy purposes in the last five years of their tenor, as under: Remaining maturity of instruments Rate of discount (%) Less than one year 100 One year and more but less than two years 80 Two years and more but less than three years 60 Three years and more but less than four years 40 Four years and more but less than five years 20 (11) Other Conditions (i) LTSB shall be fully paid-up, unsecured, and free of any restrictive clauses. (ii) A UCB shall also comply with the terms and conditions, if any, stipulated by other regulatory authorities in regard to issue of the LTSB, provided they are not in conflict with the terms and conditions specified in these guidelines. Any instance of conflict shall be brought to the notice of the Department of Regulation, Reserve Bank for seeking confirmation of the eligibility of the instrument for inclusion in Tier 2 Capital. (12) Reserve Requirement The total amount raised through the issue of LTSB shall be reckoned as liability for the calculation of NDTL for the purpose of reserve requirements and, as such, shall attract CRR / SLR requirements. The amount collected by the UCB from members / prospective investors and held by it pending issue of LTSB, shall not be reckoned for calculation of capital funds. (13) Reporting requirements A UCB issuing LTSB shall submit a report to the concerned Regional Office of Department of Supervision, Reserve Bank and Department of Regulation, Reserve Bank (latter at email:
[email protected] ) giving details of the amount raised, including the terms and conditions of issue together with a copy of Prospectus / Offer Document, soon after the issue is completed. (14) Investments in LTSB and advances for purchase of LTSB A UCB shall not grant any loan or advance to any person for purchasing its LTSB or LTSB of other banks. A UCB shall neither invest in LTSB issued by other banks nor it shall grant advances against the security of LTSB issued by them or other banks. Chapter III Computation of risk weighted asset (RWA) A Capital charge for credit risk 17. RWAs is calculated by multiplying assigned risk-weights to (a) on balance sheet exposure and (b) credit equivalent of off-balance sheet exposure. The credit equivalent of off-balance sheet exposure is calculated by multiplying notional amount of off-balance sheet exposure with credit conversion factors (CCFs). Risk weights for different categories of exposures of a bank and CCFs for off-balance sheet exposure of a bank are as under: (1) On balance sheet items Assets items Risk weight I. Balances i. Cash (including foreign currency notes) balances with the Reserve Bank 0 ii. Balances in current account with UCBs 20 iii. Balances in current account with other banks 20 II. Investments i. Investment in Government Securities 2.5 ii. Investment in other approved securities guaranteed by the Central Government / State Government 2.5 iii. Investment in other securities where payment of interest and repayment of principal are guaranteed by Central Government (include investment in Indira / Kisan Vikas Patras and investments in bonds and debentures where payment of interest and repayment of principal is guaranteed by Central Government / State Government) 2.5 iv. Investment in other securities where payment of interest and repayment of principal are guaranteed by State Government 2.5 Note - Investment in securities where payment of interest or repayment of principal is guaranteed by the State Government and which has become a non-performing investment, shall attract 102.5 percentage risk weight. v. Investment in other approved securities where payment of interest and repayment of principal is not guaranteed by the Central / State Government 22.5 Investment in Government guaranteed securities of government undertakings which do not form part of the approved market borrowing program 22.5 vi. (a) Claims on commercial banks, central co-operative banks, and state co-operative banks such as fixed deposits, certificates of deposits, etc. 20 (b) Claims on other UCBs such as term / fixed deposits. vii. Investments in bonds issued by All India Public Financial Institutions. 102.5 viii. Investments in bonds issued by Public Financial Institutions for their Tier 2 Capital 102.5 ix. Investment in bonds / debentures / Security Receipts issued by Asset Reconstruction Company (ARC) 102.5 x. All other Investments Note - Intangible assets and losses deducted from Tier 1 Capital shall be assigned zero per cent risk weight 102.5 xi. The off-balance sheet (net) position in 'WI' securities, scrip-wise. 2.5 III. Loans and advances i. Loans and advances including bills purchased and discounted and other credit facilities guaranteed by Government of India 0 ii. Loans guaranteed by State Government 0 iii. A State Government guaranteed advance which has become an NPA 100 iv. Loans granted to public sector undertaking of the Government of India 100 v. Real estate exposure (a) Mortgaged residential housing loan to individuals - up to ₹30.00 lakh (LTV* ratio = or 50 - above ₹30.00 lakh (LTV ratio = or 75 - Irrespective of the loan amount (LTV ratio > 75 %). 100 (b) Commercial real estate 100 (c) Co-operative / group housing societies and Housing Board and for any other purpose. 100 (d) Commercial real estate - Residential housing 75 *LTV ratio shall be computed as a percentage of total outstanding in the account (viz., ‘principal + accrued interest + other charges pertaining to the loan’ without any netting) in the numerator and the realizable value of the residential property mortgaged to a bank in the denominator vi. Retail loans and advances (a) consumer credit including personal loan 125 (b) loans up to ₹1 lakh against gold and silver ornaments 50 (c) All other loans and advances including educational loan 100 (d) Loans extended against primary / collateral security of shares / debentures 125 vii. Leased assets (a) Loans and advances for eligible activities to non-banking financial company (NBFC) engaged in hire purchase / leasing activities now classified as asset finance companies 100 (b) loans and advances for eligible activities to non-deposit taking NBFC (wherever allowed) engaged in hire purchase / leasing activities 125 viii. Advances covered by DICGC / ECGC 50 Note - The risk weight of 50% shall be limited to the amount guaranteed and not the entire outstanding balance in the accounts. In other words, the outstanding in excess of the amount guaranteed, shall carry 100% risk weight. ix. Advances to the extent guaranteed under any existing or future schemes launched by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) and National Credit Guarantee Trustee Company Ltd (NCGTC) satisfying the conditions as mentioned below in paragraph 17(6). The balance outstanding in excess of guaranteed portion shall attract appropriate risk-weight. 0 x. Advances for term deposits, Life policies, NSCs, IVPs, and KVPs where adequate margin is available 0 xi. Loans to staff of a bank, which are fully covered by superannuation benefits and mortgage of flat / house 20 Notes: While calculating the aggregate of funded and non-funded exposure of a borrower for the purpose of assignment of risk weight, a bank may 'net- off' against the total outstanding exposure of the borrower. (a) advances collateralised by cash margins or deposits, (b) credit balances in current or other accounts of the borrower which are not earmarked for specific purposes and free from any lien, (c) in respect of any assets where provisions for depreciation or for bad debts have been made, (d) claims received from DICGC / ECGC and kept in a separate account pending adjustment in case these are not adjusted against the dues outstanding in the respective accounts. IV. Other Assets 1. Premises, furniture and fixtures 100 2. Other assets (i) Interest due on Government securities 0 (ii) Accrued interest on CRR balances maintained with the Reserve Bank 0 (iii) Interest receivable on staff loans 20 (iv) Interest receivable from a bank 20 (v) All other assets (including contribution by a UCB towards eligible funds with NABARD, NHB, SIDBI, MUDRA Ltd., or any other entity specified by RBI, on account of shortfall in priority sector lending target) 100 V. Market Risk on Open Position 1. Market risk on foreign exchange open position (Applicable to Authorised Dealers only) 100 2. Market risk on open gold position 100 (2) Off-balance sheet items The credit risk exposure attached to off-balance sheet items has to be first calculated by multiplying the face amount of each of the off-balance sheet items by CCF as indicated in the table below. This shall then have to be again multiplied by the risk weights attributable to the relevant counterparty as specified above. Sr. No. Instruments CCF (%) 1 Financial guarantees / direct credit substitutes, e.g., general guarantees of indebtedness (including stand by Letter of Credits (L/Cs) serving as financial guarantees for loans and securities) and acceptances (including endorsements with character of acceptance) 100 2 Performance guarantees / related contingent items (e.g., warranties and stand by L/Cs related to particular transactions) 50 3 Short-term self-liquidating trade-related contingencies (such as documentary credits collateralised by the underlying shipments) 20 4 Sale and repurchase agreement and asset sales with recourse, where the credit risk remains with the bank 100 5 Forward asset purchase, forward deposit and partly paid shares and securities, which represent commitments with certain draw down 100 6 Note issuance facilities and revolving underwriting facilities 50 7 Other commitments (e.g., formal standby facilities and credit lines) with an original maturity of over one year 50 8 Similar commitments with an original maturity up to one year, or which can be unconditionally cancelled at any time 0 9 (i) Guarantees issued by a bank against the counter guarantees of other banks 20 (ii) Rediscounting of documentary bills accepted by a bank. Bills discounted by a bank which have been accepted by another bank shall be treated as a funded claim on a bank 20 Note - In these cases, a bank shall be fully satisfied that the risk exposure is, in fact, on the other bank. Bills purchased / discounted / negotiated under LC (where the payment to the beneficiary is not made 'under reserve') shall be treated as an exposure on the LC issuing bank and not on the borrower. All clean negotiations as indicated above, shall be assigned the risk weight, which is normally applicable to inter-bank exposures, for capital adequacy purposes. In the case of negotiations 'under reserve' the exposure shall be treated as on the borrower and risk weight assigned accordingly. 10 Aggregate outstanding foreign exchange contracts of original maturity* - Less than 14 calendar days 0 more than 14 days but less than one year 2 for each additional year or part thereof 3 *In case effective bilateral netting contracts as specified in paragraph 17(5) are in place, CCF for foreign exchange contracts shall be as provided in paragraph of 17(3)(ii) and CCF of ‘zero’ per cent for foreign exchange contracts which have original maturity of 14 calendar days or less shall not be applicable. Notes: While calculating the aggregate of funded and non-funded exposure of a borrower for the purpose of assignment of risk weight, a UCB may 'net-off' against the total outstanding exposure of the borrower credit balances in current or other accounts which are not earmarked for specific purposes and free from any lien. After applying the CCF as indicated above, the adjusted off-balance sheet value shall again be multiplied by the risk weight attributable to the relevant counter-party as specified. Note - At present, a UCB shall not be undertaking most of the off-balance sheet transactions. However, keeping in view its potential for expansion, risk-weights are indicated against various off balance sheet items, which, a UCB may undertake in future. (3) Additional risk weights (applicable to Authorised Dealers only) (i) Foreign exchange and interest rate related contracts (a) Foreign exchange contracts include the following: (i) Cross currency swaps (ii) Forward foreign exchange contracts (iii) Currency futures (iv) Currency options purchased (v) Other contracts of a similar nature (b) Interest rate contracts include the following: (i) Single currency interest rate swaps (IRSs) (ii) Basis swaps (iii) Forward rate agreements (iv) Interest rate futures (IRFs) (v) Interest rate options purchased (vi) Other contracts of a similar nature (ii) As in the case of other off-balance sheet items, a two-stage calculation prescribed below shall be applied: (a) Step 1 - The notional principal amount of each instrument is multiplied by the conversion factor given below. Original maturity Conversion factor Interest rate contracts Foreign exchange contracts Less than one year 0.5% 2% One year and less than two years 1.0% 5% (i.e., 2% + 3%) For each additional year 1.0% 3% When effective bilateral netting contracts as specified in paragraph 17(5) are in place, the conversion factors, as mentioned in the Table below, shall be applicable: Original maturity Conversion factor Interest rate contracts Foreign exchange contracts Less than one year 0.35% 1.5% One year and less than two years 0.75% 3.75% (i.e., 1.5% + 2.25%) For each additional year 0.75% 2.25% (b) Step 2 - The adjusted value thus obtained shall be multiplied by the risk weight allotted to the relevant counterparty as given in 17(1) above. Note - (i) At present, most of the UCBs are not carrying out forex transactions. However, those who have been given Authorised Dealer’s (AD's) license may undertake transactions mentioned above. (ii) For the purpose of calculating the credit exposure to a netting counterparty for forward foreign exchange contracts and other similar contracts in which the notional principal is equivalent to cash flows, the original CCF (i.e., without considering the impact of bilateral netting) shall be applied to the notional principal, which is defined as the net receipts falling due on each value date in each currency. In no case shall the reduced factors above be applied to the net notional amounts. (4) Repo in corporate bonds A UCB which is a lender of funds in the repo transaction is required to provide counter-party credit risk corresponding to the risk weight for such exposure as applicable to the loan / investment exposure. (5) Requirement for recognition of bilateral netting contract (i) A UCB may net transactions subject to novation under which any obligation between a UCB and its counterparty to deliver a given currency on a given value dat
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/DOR/2025-26/275 · issued 28 Nov 2025. The plain-English explanation above is BankPulse’s own independent summary.