Reserve Bank of India (Local Area Banks – Prudential Norms on Capital Adequacy) Directions, 2025
UR
- Applies toLocal area banks
- StatusIn force
- IssuedNov 28, 2025
- Last amendedJun 24, 2026 · 1 incorporated
- Length48 points in 5 sections · 4 min read
The four dates on this rule
- PublishedNov 28, 2025The day RBI put this document out. This is the same day as the Issued date on this rule.
- Starts to applyNov 28, 2025The day this rule starts to apply, as RBI's own text states it.
- Time to get readyNoneIt starts to apply on the day it was published.
- Last date to actNot statedNo date to act by was found in this document. Other dates may sit inside single paragraphs.
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47 of the 48 points name no product and bind every product. All products.
Numbers to remember
| forty per cent | Perpetual preference shares above the forty per cent ceiling drop to Tier 2. RBI Para 9(1) |
| 25 per cent | Upper Tier 2 issued in foreign currency cannot cross 25 per cent of Tier 1 capital. RBI Para 10(10) |
| 55 per cent | A revaluation reserve is cut by 55 per cent before it counts in Tier 2. RBI Para 11 |
| 15 years | An Upper Tier 2 instrument must run for at least 15 years. RBI Para 13(4) |
| fifteen years | An upper Tier 2 instrument must run for at least fifteen years. RBI Para 13(4) |
| five years | An upper Tier 2 instrument is written down over its last five years. RBI Para 13(9) |
| 50 per cent | Subordinated debt counts only up to 50 per cent of Tier 1 capital. RBI Para 15(6) |
What it says
How firm is each point
Stated by RBI — RBI’s own paragraph says this. We have only made it plainer.
Our reading — BankPulse read RBI’s paragraph and shortened it. The paragraph is the authority, not this line.
Needs judgement — RBI leaves this to the bank to settle, so nobody can give you a fixed number here.
Chapter I. Preliminary
1. Capital rules for LABs
This document sets how much capital local area banks must hold.
2. Start date
These Directions took effect on the day RBI issued them.
BankPulse example. There is no gap here between issue and effect. The Directions come into effect immediately upon issuance. A bank cannot wait for a separate start date, because there is none.
3. In force at once
The rules took effect the day they were issued. There was no grace period.
4. Who is covered
These Directions apply to every local area bank.
Chapter II. Regulatory capital
Must know
1. Forty per cent ceiling
Perpetual preference shares above the forty per cent ceiling drop to Tier 2.
BankPulse example. Perpetual preference shares count in Tier 1 only up to a ceiling of 40 per cent. Suppose a bank issues shares worth 50 per cent. The slice above 40 per cent moves into upper Tier 2.
2. Short payment not made up
If less than the set rate is paid, the shortfall is never made good.
3. Not a lending security
The issuer cannot lend against the security of its own instrument.
4. Foreign currency Upper Tier 2
Upper Tier 2 issued in foreign currency cannot cross 25 per cent of Tier 1 capital.
BankPulse example. Upper Tier 2 raised in foreign currency may not exceed 25 per cent of Tier 1. Suppose Tier 1 is ₹400 crore. The foreign currency slice stops at ₹100 crore.
5. Revaluation cut by half
A revaluation reserve is cut by 55 per cent before it counts in Tier 2.
BankPulse example. A revaluation reserve of ₹200 crore does not count in full. A discount of 55 per cent applies. What counts in Tier 2 is ₹90 crore.
6. No currency swap on bonds
The bank cannot swap rupee liabilities on these bonds into foreign currency.
7. Tier 2 stays smaller
Tier 2 capital may never be larger than Tier 1 capital.
BankPulse example. Tier 2 capital may not exceed 100 per cent of Tier 1. Suppose Tier 1 is ₹300 crore. Then Tier 2 counts to ₹300 crore, and anything beyond that does not.
8. Upper Tier 2 minimum
An Upper Tier 2 instrument must run for at least 15 years.
BankPulse example. An Upper Tier 2 instrument has a minimum maturity of 15 years. One written for 12 years does not qualify. One written for 20 years does.
9. Fifteen year minimum
An upper Tier 2 instrument must run for at least fifteen years.
BankPulse example. An Upper Tier 2 instrument has a minimum maturity of 15 years. One written for 12 years does not qualify. One written for 20 years does.
10. Written down near maturity
An upper Tier 2 instrument is written down over its last five years.
11. Holder cannot force repayment
The investor cannot demand redemption of these shares.
12. RBI approves redemption
No redemption may take place without the Reserve Bank's prior approval.
13. No put option
These instruments cannot carry a put option.
14. Subordinated debt capped
Subordinated debt counts only up to 50 per cent of Tier 1 capital.
BankPulse example. Subordinated debt is limited to 50 per cent of Tier 1. Suppose Tier 1 is ₹200 crore. Then ₹100 crore of subordinated debt counts, and no more.
Do it
15. Other regulators still apply
Conditions set by the market regulator or any other authority must also be met.
16. Provide for losses first
Known and foreseeable losses must be provided for before this reserve counts.
17. Issue in rupees
Upper Tier 2 instruments must be issued in Indian rupees.
18. Other regulators apply too
Conditions set by the market regulator or any other authority must also be met.
Background
19. Limit measured after goodwill
The ceiling is measured on Tier 1 after goodwill and intangibles are removed.
20. Board fixes the amount
The Board decides how much of the instrument may be raised.
21. Fixed or floating dividend
The dividend may be at a fixed rate or one tied to a market benchmark.
22. Where the holder ranks
These holders rank above equity but below every creditor and depositor.
23. Outside the borrowing limit
Foreign investment in these instruments sits outside the external borrowing limit.
24. Held paper carries weight
Holdings of another bank's capital paper carry a risk weight of their own.
25. Counted as market exposure
Holding another bank's perpetual shares counts against the capital market ceiling.
26. Shown under capital
These instruments are shown under schedule one, capital, in the balance sheet.
27. Board decides the amount
The Board decides how much of each capital instrument the bank raises.
28. Fixed or floating rate
Interest may be at a fixed rate or a rate tied to a market benchmark.
29. What a net loss means
A net loss means either loss brought forward or loss in the current year.
30. No progressive discount
These instruments are not written down as they age.
31. Shown under borrowings
Perpetual debt is shown under schedule four, borrowings, in the balance sheet.
32. Subordinated debt counts
Rupee subordinated debt may be included in Tier 2 on the stated terms.
33. Foreign holding is capped
Foreign institutional investment in these instruments has a separate ceiling.
34. RBI approval to redeem
Every redemption of a capital instrument needs prior approval from RBI.
35. Coupon is interest
The coupon on these instruments is treated as interest in the accounts.
36. Losses are removed
Losses of this period and earlier periods are deducted from core capital.
37. Fund units are deducted
A holding in subordinated units of an alternative investment fund is deducted in full.
BankPulse example. A lender puts ₹10 crore into such a fund, as subordinated units. The whole ₹10 crore comes off capital funds. It is taken proportionately from Tier 1 and Tier 2 capital.
38. Guarantee money is deducted
A default loss guarantee given by the lender is taken out of its capital.
BankPulse example. A lender gives a default loss guarantee and ₹20 crore of it is still outstanding. The whole ₹20 crore comes off its capital. Nothing is left in on the ground that no loss has happened yet.
Chapter III. Calculation of risk weighted assets (RWAs)
1. Walkaway deals not netted
A contract with a walkaway clause cannot be netted when capital is worked out.
2. Charge has a ceiling
The capital charge cannot exceed what the exposure would cost if it had no guarantee.
Chapter IV. Repeal and Other provisions
1. Old rules stay repealed
Rules repealed before this document was issued remain repealed.
2. Old actions preserved
Anything already done under the old rules stays governed by those old rules.
3. Approvals carried over
Approvals given under the cancelled rules are now treated as given under these rules.
4. Other laws still apply
These Directions add to other laws. They do not replace any of them.
BankPulse example. A bank follows these Directions and thinks the matter is closed. It is not. Any other laws, rules, regulations or directions in force still apply on top. Where another one asks for more, the bank does the more.
How this rule has changed
The points above are the rule as it stands today, after every change listed here.
Issued on Nov 28, 2025. This is the date RBI put the rule out.
Changed on Jun 24, 2026. Takes effect From April 1, 2027..
- start date. These amendment rules will apply from April 1, 2027.
- daily capital cover. A local area bank must hold capital for foreign exchange risk at the end of every business day.
- capital deduction items. No foreign exchange capital charge is needed for items already deducted from regulatory capital, including their hedges.
- matured or NPA securities. No foreign exchange capital is needed for matured unpaid or non-performing securities; only credit risk capital is required.
The same subject for other kinds of institution
The same subject for other kinds of institution.
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