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
  • 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
  • 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
  • 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.