Reserve Bank of India (Small Finance Banks – Prudential Norms on Capital Adequacy) Directions, 2025 (Updated as on July 01, 2026)
UR
- Applies toSmall finance banks
- StatusIn force
- RBI text changedRBI updated this document on October 7, 2026. BankPulse is re-reading it. BankPulse checked 109 points against RBI's new text on 9 October 2026. 105 stand. 4 are marked below and are being re-read.
- IssuedNov 28, 2025
- Last amendedOct 07, 2026 · 9 incorporated
- Length109 points in 5 sections · 10 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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Numbers to remember
| fifteen per cent | The Pillar 1 capital ratio must stay at fifteen per cent at all times. RBI Para 8 |
| 15 per cent | Inside the 15 per cent figure, Tier 2 capital counts only up to 7.5 per cent. RBI Para 10(4) |
| 7 per cent | The same 7 per cent trigger applies to perpetual debt instruments. RBI Para 15(9) |
| 1.25 per cent | These items count as Tier 2 only up to 1.25 per cent of credit risk assets. RBI Para 16 |
| five years | A Tier 2 debt instrument must run for at least five years. RBI Para 17(3) |
| 25 per cent | Upper Tier 2 issued in foreign currency cannot cross 25 per cent of Tier 1 capital. RBI Para 18(11) |
| 50 per cent | Subordinated debt counts only up to 50 per cent of Tier 1 capital. RBI Para 19(8) |
| 100 per cent | Subordinated debt of another bank held by the bank carries a 100 per cent weight. RBI Para 19(11) |
| 10 per cent | Holdings below 10 per cent of core capital are risk weighted, not deducted. RBI Para 20(8) |
| 20 per cent | A claim guaranteed by a State Government carries a 20 per cent risk weight. RBI Para 23 |
| 150 per cent | An unrated claim above the stated system-wide exposure carries 150 per cent. RBI Para 37 |
| ₹100 crore | A claim above ₹100 crore that loses its rating also carries 150 per cent. RBI Para 37 |
| 75 per cent | A claim inside the regulatory retail portfolio carries a 75 per cent risk weight. RBI Para 40 |
| ₹50 crore | A small business here is one with average yearly turnover below ₹50 crore. RBI Para 42 |
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.
Can be read two ways
A point marked this way sits on an RBI paragraph that can honestly be read two ways. Our own sentence takes one of the two. BankPulse does not choose for you: read RBI’s own paragraph, at the number printed on the point, before you act on it.
Two ways — both, or either one. RBI’s paragraph joins two things in the and-or form. One reading: Both of them apply, together. The other: Either one of them, on its own, is enough.
Chapter I. Preliminary
1. Capital rules for SFBs
This document sets how much capital small finance 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 small finance bank.
Chapter II. Board-approved policies
1. Board policy on capital
The Board must approve a policy on the capital adequacy matters listed here.
2. Board disclosure policy
The Board must approve a policy on what the bank discloses and how.
3. Yearly Board assessment
The Board must record once a year whether the capital process meets its aims.
Chapter III. Regulatory capital
Must know
1. Fifteen per cent floor
The Pillar 1 capital ratio must stay at fifteen per cent at all times.
2. Tier 2 share capped
Inside the 15 per cent figure, Tier 2 capital counts only up to 7.5 per cent.
3. Tier 2 against Tier 1
Tier 2 capital can never be more than Tier 1 capital.
4. No loans on own shares
Lending against its own shares would be funding its own capital, so it is barred.
5. Do not hint at redemption
The issuer must not create any expectation of an early redemption.
6. Short payment not made up
If less than the set rate is paid, the shortfall is never made good.
7. No rating linked coupon
The coupon cannot be reset according to the issuer's own credit standing.
8. Trigger for perpetual debt
The same 7 per cent trigger applies to perpetual debt instruments.
9. No lending against own paper
No advance may be given against the security of the issuer's own debt instruments.
10. No deposit rate benchmark
A floating rate instrument cannot use the bank's own deposit rate as its benchmark.
11. General provisions capped
These items count as Tier 2 only up to 1.25 per cent of credit risk assets.
12. Tier 2 debt minimum
A Tier 2 debt instrument must run for at least five years.
13. Holder cannot force repayment
The investor cannot demand redemption of these shares.
14. RBI approves redemption
No redemption may take place without the Reserve Bank's prior approval.
15. 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.
16. No put option
These instruments cannot carry a put option.
17. Subordinated debt capped
Subordinated debt counts only up to 50 per cent of Tier 1 capital.
18. Holding another bank's debt
Subordinated debt of another bank held by the bank carries a 100 per cent weight.
19. Specified items capped
Certain specified items count only up to 15 per cent of core capital.
20. RBI approval to repay capital
A bank cannot repay its equity capital without approval from RBI.
21. Small holdings risk weighted
Holdings below 10 per cent of core capital are risk weighted, not deducted.
Do it
22. Other regulators still apply
Conditions set by the market regulator or any other authority must also be met.
23. Investor must sign off
The loss absorbency features must be explained and the investor must sign off.
24. Other regulators apply too
Conditions set by the market regulator or any other authority must also be met.
25. Fully paid and unsecured
The instrument must be fully paid, unsecured and free of restrictive clauses.
26. Look through an index
A holding in an index must be looked through to the capital underneath it.
Background
27. Three pillars hold it up
The whole capital framework rests on three pillars.
28. Revaluation reserve rule
A revaluation reserve rejected from core capital is rejected from Tier 2 as well.
29. Dividend from this year only
A dividend on common shares may be paid only out of the current year's profit.
30. Board fixes the amount
The Board decides how much of the instrument may be raised.
31. Preference shares are perpetual
These preference shares carry no maturity date and no reward for early repayment.
32. Fixed or floating dividend
The dividend may be at a fixed rate or one tied to a market benchmark.
33. Skipped payment, no default
Cancelling a discretionary payment is not an event of default.
34. Approval for a floating rate
Offering a floating reference rate needs the Reserve Bank's prior approval.
35. Outside the borrowing limit
Foreign investment in these instruments sits outside the external borrowing limit.
36. Held paper carries weight
Holdings of another bank's capital paper carry a risk weight of their own.
37. Counted as market exposure
Holding another bank's perpetual shares counts against the capital market ceiling.
38. Board decides the amount
The Board decides how much of each capital instrument the bank raises.
39. Fixed or floating rate
Interest may be at a fixed rate or a rate tied to a market benchmark.
40. Losses netted off first
Accumulated losses and deferred revenue expenditure are netted off first.
41. Coupon needs the ratio met
A coupon paid out of reserves requires the core capital ratio to be met.
42. Written down near maturity
These debt instruments are written down as they approach maturity.
43. Foreign investor ceiling
Foreign institutional holding of these instruments has a separate ceiling of 500 million dollars.
44. Limit measured after goodwill
The ceiling is measured on Tier 1 after goodwill and intangibles are removed.
45. RBI approval to redeem
Every redemption of a capital instrument needs prior approval from RBI.
46. Foreign holding is capped
Foreign institutional investment in these instruments has a separate ceiling.
47. Goodwill deducted
Goodwill paid on buying a stake in an associate is deducted from core capital.
48. Losses are removed
Losses of this period and earlier periods are deducted from core capital.
49. Loss-linked tax assets
Deferred tax assets linked to past losses are deducted in full from core capital.
50. Cross holdings deducted
Capital that two institutions hold in each other is deducted in full.
51. Poor ratings weigh more
Where ratings differ, the one carrying the higher risk weight is applied.
52. Bank-backed returns not capital
Capital whose investor returns the bank has guaranteed does not count as capital.
53. 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.
Chapter IV. Calculation of risk weighted assets (RWAs)
Must know
1. State guarantee at twenty
A claim guaranteed by a State Government carries a 20 per cent risk weight.
2. Charge has a ceiling
The capital charge cannot exceed what the exposure would cost if it had no guarantee.
3. Core investment companies
An exposure to a core investment company carries a 100 per cent risk weight.
4. No better than the country
An unrated company cannot get a better weight than the country it belongs to.
5. Large unrated claims
An unrated claim above the stated system-wide exposure carries 150 per cent.
6. Rating lost above ₹100 crore
A claim above ₹100 crore that loses its rating also carries 150 per cent.
7. Retail portfolio at 75
A claim inside the regulatory retail portfolio carries a 75 per cent risk weight.
8. Small business defined
A small business here is one with average yearly turnover below ₹50 crore.
9. Retail cap per borrower
Total retail exposure to one borrower cannot cross ₹7.5 crore.
10. Residential projects at 75
A commercial property loan for residential housing carries a 75 per cent weight.
11. Other property at 100
Other commercial property lending carries a 100 per cent risk weight.
12. Half provided, half weight
If provisions reach 50 per cent or more, the weight falls to 50 per cent.
13. Venture capital funds
A claim on a venture capital fund carries a 150 per cent risk weight.
14. Microfinance consumer loans
A microfinance loan outside the retail portfolio carries a 100 per cent weight.
15. Credit card dues
Credit card receivables carry a 150 per cent risk weight, or higher if rated worse.
16. Other consumer credit
All other consumer credit carries a 100 per cent risk weight.
17. Capital market exposure
A capital market exposure carries a 125 per cent risk weight, or higher if rated worse.
18. Finance company equity
Equity in a non-banking finance company that is not deducted carries 250 per cent.
19. Secured staff loans
A staff loan covered by retirement benefits or a house mortgage carries 20 per cent.
20. Other staff loans
Other staff loans join the retail portfolio and carry a 75 per cent weight.
21. Everything else at 100
All other assets carry a uniform risk weight of 100 per cent.
22. Enhancement charge capped
The capital on a credit enhancement cannot exceed the enhancement itself.
23. Qualifying clearing house
Collateral counted as a trade exposure with a qualifying clearing house carries 2 per cent.
24. Weak clearing house
A default fund contribution to a non-qualifying clearing house carries 1,250 per cent.
25. Walkaway deals not netted
A contract with a walkaway clause cannot be netted when capital is worked out.
26. Originator cannot buy back
The originator cannot repurchase transferred exposures except through a clean up call.
27. Clean up call is optional
A clean up call can never be made compulsory on the originator.
28. No hidden support
A clean up call cannot be built so as to give hidden credit support.
29. Clean-up call limit
A clean-up call cannot become exercisable above 10 per cent of the original pool.
BankPulse example. Suppose the pool started at ₹500 crore. A clean-up call may become exercisable once the pool falls to 10 per cent of that. That is ₹50 crore. It may not be set to trigger while ₹80 crore is still outstanding.
Do it
30. Full capital below grade
If the bond's rating falls below investment grade, full capital must be held.
Background
31. Central Government at zero
A claim on the Central Government, funded or not, carries a zero risk weight.
32. State exposure at zero
A direct loan to a State Government and State securities carry a zero risk weight.
33. RBI treated as government
Claims on RBI and on the deposit insurance body carry the Central Government weight.
34. Third house is commercial
A loan for a person's third home onwards is treated as commercial property.
35. Other housing claims
Any other claim on housing takes the higher weight of the borrower or the purpose.
36. Some swaps are exempt
No future exposure is worked out on single currency floating to floating swaps.
37. Repurchase stays retained
A securitisation exposure bought back is treated as retained, not fresh.
38. Yearly rating review
RBI reviews the mapping of rating grades to risk weights every year.
Chapter V. Supervisory Review and Evaluation Process (SREP) and Market Discipline
1. Board capital plan
The capital plan must name the planning process and who is responsible for it.
2. All material risks included
That assessment must cover every material risk the bank carries.
3. Extra to the minimum
It sits on top of the minimum capital the rules already require.
4. Board owns the assessment
The Board carries final responsibility for designing and running the internal capital assessment.
Chapter VI. Leverage ratio framework
1. Leverage ratio floor
The leverage ratio must be at least 4.5 per cent.
2. Held at all times
That leverage floor must be met at all times, not only at quarter end.
3. Quarterly leverage disclosure
The leverage ratio and the figures behind it are disclosed at each quarter end.
Chapter VIII. 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 Dec 04, 2025. Takes effect From January 1, 2026..
- Paragraph 68 deleted. Banks must note that paragraph 68 of Chapter IV on risk weighted assets no longer applies.
- Start date. This amendment applies from January 1, 2026.
Changed on Jan 09, 2026.
- Unrated large exposures. Unrated claims with banking system exposure above ₹200 crore must carry a 150 per cent risk weight.
- Previously rated now unrated. Claims above ₹100 crore, earlier rated but now unrated, must carry a 150 per cent risk weight.
- No better than sovereign. Banks must not give an unrated corporate a lower risk weight than its home country sovereign risk weight.
Changed on Mar 10, 2026.
- New add on factors. Banks must use the new Table 14 add on factors for market off balance sheet items.
- Interest rate floor. Interest rate contracts over one year that meet the reset rule must use at least 0.50 per cent add on.
- CCR add on scope. Banks must apply Table 14 add on factors to all counterparty credit risk exposures.
- Clearing member capital. A bank that is a clearing member on equity or commodity exchanges must hold capital for counterparty credit risk.
Changed on Mar 30, 2026.
- Capital on IPC to CC. Treat irrevocable payment commitments to clearing corporations as financial guarantees with 100 percent credit conversion factor.
- Capital only on CME part. Keep capital only on the part of the exposure that is counted as capital market exposure.
- Risk weight for CME part. Apply 125 percent risk weight on the amount counted as capital market exposure.
Changed on May 08, 2026.
- Directions start. These Directions apply from the date the Reserve Bank issued them.
- Quarterly profit use. A small finance bank can use current year profits for capital ratio every quarter if it meets given conditions.
- Quarterly review needed. The bank must get quarterly financial statements audited or reviewed before using those profits for capital ratio.
- Profit formula. Eligible profit for capital must be calculated using the exact formula that this amendment gives.
Changed on Jun 16, 2026.
- New paragraph 25A. Banks must now follow new paragraph 25A in the capital rules.
- Effective immediately. These new capital rules apply from the date of this circular.
Changed on Jun 24, 2026.
- Start date. These amendment rules will apply from April 1, 2027.
- No market risk capital. Small finance banks do not have to hold capital for market and operational risk.
- Daily calculation. Small finance banks must calculate net open position every business day end, on a continuous basis.
Changed on Jul 30, 2026.
- All banks covered. Every bank must give Pillar 3 disclosures, even if it is not listed or publishing results.
- Board disclosure policy. The bank's Board must approve a formal policy for Pillar 3 disclosure controls and procedures.
- Board responsibilities. Board and senior management must set and maintain strong controls over all financial and Pillar 3 disclosures.
- Senior officer attestation. One or more senior board-level officers must sign that Pillar 3 disclosures follow the Board's control processes.
Changed on Oct 07, 2026.
The same subject for other kinds of institution
The same subject for other kinds of institution.
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