Basel-III Capital Framework : Reserve Bank Of India
The Reserve Bank of India (RBI) has introduced new norms based on the Basel III capital framework for All India Financial Institutions (AIFIs), which will take effect from April 2024.
- India has five AIFIs under RBI regulation: Export-Import Bank of India (EXIM Bank), National Bank for Agriculture and Rural Development (Nabard), National Bank for Financing Infrastructure and Development (NaBFID), National Housing Bank (NHB), and Small Industries Development Bank of India (SIDBI).
The key provisions of the new norms are as follows:
- AIFIs will be required to maintain a minimum total capital of 9 per cent by April 2024.
- This includes a minimum tier-I capital of 7 percent and common equity tier-I (CET-1) capital of 5.5 percent.
- Consolidation of Financial Subsidiaries: All financial subsidiaries, except those involved in insurance and non-financial activities (both regulated and unregulated), must be fully consolidated for the purpose of capital adequacy.
- Investment Caps: The RBI has imposed limits on AIFIs’ investments in capital instruments of banking, financial, and insurance entities, capping them at 10 percent of their capital funds.
- Equity Investment Limits: AIFIs’ equity investment in a single entity cannot exceed 49 percent of the equity of the investee.
- Capital Planning and Risk Management: AIFIs are advised to focus on effective and efficient capital planning and long-term capital maintenance.
- Basel-III norms were adopted by financial regulators to improve the banking sector’s ability to absorb shocks arising from financial and economic stress.
- It was developed by the Basel Committee on Banking Supervision in the aftermath of the financial crisis of 2007-08.
- It mandates banks to maintain a CAR or Capital to Risk-weighted Assets (CRAR) of at least 8%.
- CRAR is a ratio that compares the value of a bank’s capital (or net worth) against the value of its various assets weighted according to risk.