RBI issues draft norms to implement Basel III Capital Framework for AIFIs
The RBI on Friday released a draft framework on master directions to implement the Basel III Capital Framework for All India Financial Institutions (AIFIs) including EXIM Bank, NABARD, NHB, and SIDBI.
The draft directions propose minimum capital ratio of 11.5% of total risk weighted assets (RWA). They also propose AIFIs to maintain a capital conservation buffer in the form of common equity at 2.5% of RWA, in addition to the minimum capital adequacy ratio of 9%. These Basel III norms are in line with the minimum capital ratio of 11.5% and minimum capital adequacy ratio of 9% followed by Indian banks.
The draft regulations proposed raising common equity in tier-1 capital to 5.5% of RWA and proposed the minimum tier-1 capital at 7%. The captial conservation buffer is proposed at 2.5%. Capital distribution constraints will be imposed on an AIFI when capital level falls within this range. However, they will be able to conduct business as normal when their captial levels fall into the conservation range. “Therefore, the constraints imposed are related to the distributions on AIFIS when their capital levels fall into the range increase as the AIFIs’ capital levels approach the minimum requirements,” it noted.
Common equity consists of paid-up equity capital, share premium, statutory reserves, capital reserves, balance in poft and loss account and other disclosed free reserves. According to RBI, the AIFIs shall implement all three pillars of Basel III captial regulations, considering their role in the Indian financial system. AIFIs are required to maintain a minimum pillar 1 capital to RWA (CRAR) of 9% on an on-going basis other than capital conservation buffer and counter-cyclical captial buffer.