Reserve Bank of India (Small Finance Banks – Prudential Norms on Capital Adequacy) Directions, 2025 (Updated as on July 01, 2026)

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.

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.

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.

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.

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.

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.

30. Full capital below grade

If the bond's rating falls below investment grade, full capital must be held.

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.

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.

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.

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.