Reserve Bank of India (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025

1. Capital rules for banks

This document sets how much capital commercial 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 commercial 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.

4. Shortfall filled by the parent

A shortfall of capital in an unconsolidated subsidiary must be made good.

5. Insurance arms left out

Insurance and non-financial subsidiaries are not consolidated for capital.

6. Those holdings come off

Capital put into insurance and non-financial subsidiaries is deducted from group capital.

1. Nine per cent floor

The Pillar 1 capital ratio must stay at nine per cent at all times.

2. Total capital floor

Total capital must stay at 9 per cent of risk weighted assets.

3. Core capital floor

Common equity Tier 1 capital must stay at 5.5 per cent of risk weighted assets.

4. Tier 1 at seven

Tier 1 capital must be at least seven per cent of risk weighted assets.

5. Tier 1 floor

Tier 1 capital must stay at 7 per cent of those assets.

6. Additional Tier 1 cap

Inside that Tier 1 figure, additional Tier 1 capital counts only up to 1.5 per cent.

7. Buffer on top

A further buffer of 2.5 per cent in core capital sits on top of that floor.

8. No loans on own shares

Lending against its own shares would be funding its own capital, so it is barred.

9. Do not hint at redemption

The issuer must not create any expectation of an early redemption.

10. Short payment not made up

If less than the set rate is paid, the shortfall is never made good.

11. No rating linked coupon

The coupon cannot be reset according to the issuer's own credit standing.

12. No lending against own paper

No advance may be given against the security of the issuer's own debt instruments.

13. No deposit rate benchmark

A floating rate instrument cannot use the bank's own deposit rate as its benchmark.

14. General provisions capped

These items count as Tier 2 only up to 1.25 per cent of credit risk assets.

15. Tier 2 debt minimum

A Tier 2 debt instrument must run for at least five years.

16. No put option

These instruments cannot carry a put option.

17. Specified items capped

Certain specified items count only up to 15 per cent of core capital.

18. RBI approval to repay capital

A bank cannot repay its equity capital without approval from RBI.

19. Small holdings risk weighted

Holdings below 10 per cent of core capital are risk weighted, not deducted.

20. Other regulators apply too

Conditions set by the market regulator or any other authority must also be met.

21. Investor must sign off

The loss absorbency features must be explained and the investor must sign off.

22. Write-down makes core capital

A conversion or write-down must itself generate common equity Tier 1 capital.

23. Records for the auditors

Records must let internal, statutory and inspecting auditors verify the transactions.

24. Bring the holding down

An investor left above the statutory ceiling must reduce it within the set time.

25. Look through an index

A holding in an index must be looked through to the capital underneath it.

26. Three pillars hold it up

The whole capital framework rests on three pillars.

27. Dividend from this year only

A dividend on common shares may be paid only out of the current year's profit.

28. Board fixes the amount

The Board decides how much of the instrument may be raised.

29. Fixed or floating dividend

The dividend may be at a fixed rate or one tied to a market benchmark.

30. Skipped payment, no default

Cancelling a discretionary payment is not an event of default.

31. Approval for a floating rate

Offering a floating reference rate needs the Reserve Bank's prior approval.

32. Outside the borrowing limit

Foreign investment in these instruments sits outside the external borrowing limit.

33. Counted as market exposure

Holding another bank's perpetual shares counts against the capital market ceiling.

34. Board decides the amount

The Board decides how much of each capital instrument the bank raises.

35. Fixed or floating rate

Interest may be at a fixed rate or a rate tied to a market benchmark.

36. Losses netted off first

Accumulated losses and deferred revenue expenditure are netted off first.

37. Written down near maturity

These debt instruments are written down as they approach maturity.

38. Foreign investor ceiling

Foreign institutional holding of these instruments has a separate ceiling of 500 million dollars.

39. RBI fixes the write-down

How much non-equity capital is converted or written off is decided by the Reserve Bank.

40. Non-bank minority left out

Minority interest in a non-bank subsidiary is left out of the group's capital.

41. Non-bank minority interest

Minority interest in subsidiaries that are not banks does not count as group capital.

42. Goodwill deducted

Goodwill paid on buying a stake in an associate is deducted from core capital.

43. Losses are removed

Losses of this period and earlier periods are deducted from core capital.

44. Loss-linked tax assets

Deferred tax assets linked to past losses are deducted in full from core capital.

45. Cross holdings deducted

Capital that two institutions hold in each other is deducted in full.

46. Poor ratings weigh more

Where ratings differ, the one carrying the higher risk weight is applied.

47. Bank-backed returns not capital

Capital whose investor returns the bank has guaranteed does not count as capital.

48. 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.

49. Board approval for overseas capital

A bank that meets its capital rules may, with Board approval, fund its overseas offices.

1. State guarantee at twenty

A claim guaranteed by a State Government carries a 20 per cent risk weight.

2. Export guarantee body

A claim on the Export Credit Guarantee Corporation carries a 20 per cent risk weight.

3. Charge has a ceiling

The capital charge cannot exceed what the exposure would cost if it had no guarantee.

4. Core investment companies

An exposure to a core investment company carries a 100 per cent risk weight.

5. No better than the country

An unrated company cannot get a better weight than the country it belongs to.

6. Large unrated claims

An unrated claim above the stated system-wide exposure carries 150 per cent.

7. Rating lost above ₹100 crore

A claim above ₹100 crore that loses its rating also carries 150 per cent.

8. Retail portfolio at 75

A claim inside the regulatory retail portfolio carries a 75 per cent risk weight.

9. Small business defined

A small business here is one with average yearly turnover below ₹50 crore.

10. Retail cap per borrower

Total retail exposure to one borrower cannot cross ₹7.5 crore.

11. Residential projects at 75

A commercial property loan for residential housing carries a 75 per cent weight.

12. Other property at 100

Other commercial property lending carries a 100 per cent risk weight.

13. Bad housing loans

A housing loan that turns bad carries 100 per cent, after taking off provisions.

14. Half provided, half weight

If provisions reach 50 per cent or more, the weight falls to 50 per cent.

15. Alternate investment funds

A claim on an alternate investment fund carries a 150 per cent risk weight.

16. Consumer credit at 125

Consumer credit, including personal loans, carries a 125 per cent risk weight.

17. Microfinance consumer loans

A microfinance loan outside the retail portfolio carries a 100 per cent weight.

18. Credit card dues

Credit card receivables carry a 150 per cent risk weight, or higher if rated worse.

19. Other consumer credit

All other consumer credit carries a 100 per cent risk weight.

20. Capital market exposure

A capital market exposure carries a 125 per cent risk weight, or higher if rated worse.

21. Finance company equity

Equity in a non-banking finance company that is not deducted carries 250 per cent.

22. Secured staff loans

A staff loan covered by retirement benefits or a house mortgage carries 20 per cent.

23. Other staff loans

Other staff loans join the retail portfolio and carry a 75 per cent weight.

24. Everything else at 100

All other assets carry a uniform risk weight of 100 per cent.

25. Enhancement charge capped

The capital on a credit enhancement cannot exceed the enhancement itself.

26. Qualifying clearing house

Collateral counted as a trade exposure with a qualifying clearing house carries 2 per cent.

27. Weak clearing house

A default fund contribution to a non-qualifying clearing house carries 1,250 per cent.

28. Walkaway deals not netted

A contract with a walkaway clause cannot be netted when capital is worked out.

29. Originator cannot buy back

The originator cannot repurchase transferred exposures except through a clean up call.

30. Clean up call is optional

A clean up call can never be made compulsory on the originator.

31. No hidden support

A clean up call cannot be built so as to give hidden credit support.

32. 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.

33. Full capital below grade

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

34. Central Government at zero

A claim on the Central Government, funded or not, carries a zero risk weight.

35. State exposure at zero

A direct loan to a State Government and State securities carry a zero risk weight.

36. Third house is commercial

A loan for a person's third home onwards is treated as commercial property.

37. Other housing claims

Any other claim on housing takes the higher weight of the borrower or the purpose.

38. Some swaps are exempt

No future exposure is worked out on single currency floating to floating swaps.

39. Repurchase stays retained

A securitisation exposure bought back is treated as retained, not fresh.

40. Yearly rating review

RBI reviews the mapping of rating grades to risk weights every year.

41. Market and operational risk

Unlike the smaller bank groups, these banks hold capital for operational risk as well.

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. Assessment at every level

That assessment is prepared for each entity in the group and for the group itself.

5. Board owns the assessment

The Board carries final responsibility for designing and running the internal capital assessment.

1. Extra capital for big banks

A systemically important bank carries an extra charge, held in core capital.

2. Extra charge at both levels

That extra charge applies both to the bank alone and to the group.

3. Extra charge extends the buffer

The extra charge works as an extension of the buffer described above.

1. Leverage ratio floors

The leverage floor is 4 per cent for a systemically important bank and 3.5 per cent for others.

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. Older rules cancelled

This document cancels the earlier capital rules for commercial banks.

2. Old rules stay repealed

Rules repealed before this document was issued remain repealed.

3. Old actions preserved

Anything already done under the old rules stays governed by those old rules.

4. Approvals carried over

Approvals given under the cancelled rules are now treated as given under these rules.

5. 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.