The Reserve Bank of India’s (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025 (with 2026 revisions) establish a Basel III–aligned capital regime for Indian commercial banks to ensure loss absorption and systemic stability.
Important Points -
📌 Minimum capital ratios and composition —
Scheduled commercial banks must maintain a Capital to Risk‑Weighted Assets Ratio (CRAR) of 11.5%; urban cooperative banks 9%. Tier‑1 capital must be at least 7% of risk‑weighted assets. Regulatory capital comprises Tier‑1 (CET‑1 plus AT‑1) as the core loss‑absorbing base, and Tier‑2 as supplementary capital, with a 1.25% cap on inclusion of general provisions against credit risk‑weighted assets.
📌 Risk weights and exposure treatment —
Risk‑weighted asset calculations assign weights by asset quality and counterparty type. Claims on non‑resident corporates are mapped to international ratings (S&P, Fitch, Moody’s) and CareEdge Global IFSC Limited for IFSC exposures. Unrated corporates cannot enjoy a better risk weight than their sovereign of incorporation; this prevents sovereign‑rating arbitrage.
📌 Tighter rules for large unrated exposures —
The 2026 amendment imposes a 150% risk weight on claims that are unrated when the bank’s aggregate exposure to the borrower exceeds ₹200 crore, and on exposures that were previously rated above ₹100 crore but have since become unrated. This closes avenues for regulatory arbitrage and raises capital for higher‑risk concentrations.
📌 Provisions, stages and NPAs —
Capital recognition follows an expected credit loss framework: Stage‑1 and Stage‑2 general provisions may be included in Tier‑2 (subject to caps), while Stage‑3 specific provisions for NPAs are excluded from regulatory capital. Banks may either net floating provisions against gross NPAs or include them in Tier‑2 capital; excess provisions from NPA sales remain eligible within the overall cap, providing operational flexibility.
📌 Harmonization and exclusions —
The fourth amendment (effective April 1, 2027) aligns capital adequacy with the 2026 asset‑classification norms, removes legacy provisions, and clarifies that restructuring‑related diminution in value and investment depreciation cannot be recognised as regulatory capital.
📌 Implication —
Collectively, these directions modernise India’s prudential framework, integrate forward‑looking credit assessment, enhance transparency, and strengthen resilience while maintaining alignment with international Basel standards.
