The Reserve Bank of India (RBI) has decreed that national financial institutions, including NABARD, SIDBI, EXIM Bank, and NabFid, will be obligated to comply with Basel III prudential regulations from April 2024. The National Housing Bank (NHB) is set to follow suit from July 1, 2024. The implementation of these regulations is part of a broader strategy to enhance financial stability in India.
These organizations are required to maintain a minimum total capital of 9 percent under these new rules, as stipulated by the first pillar of the Capital Adequacy Framework. Additionally, they must uphold a minimum common equity capital of 5.5 percent and a minimum tier 1 capital of 7 percent. These rules are not new to commercial banks in India which have been complying with Basel III norms for over a decade now. The norms will be applicable at both group and individual levels within these institutions.
The Capital Adequacy Framework is grounded on three pillars: Minimum Capital Ratio, Supervisory Review Process (SRP), and Market Discipline. The first pillar represents the Minimum Capital Ratio, while the SRP and Market Discipline are represented by the second and third pillars respectively.
The RBI’s decision is a response to the evolving role of these financial institutions in India’s expanding economy. As these institutions have adapted their business models over time, they have become increasingly vital in facilitating direct or indirect credit flow to various economic sectors.
To ensure that each institution’s held capital is proportionate to its overall risk profile, the RBI will consider relevant risk factors and the internal capital adequacy assessments of each institution. The evaluation process will involve assessing the effectiveness of each institution’s risk management systems in identifying, assessing or measuring, monitoring, and managing various risks. These include interest rate risk in the banking book, liquidity risk, concentration risk, and residual risk.
Based on their respective risk profiles and the effectiveness of their risk management systems, the RBI may prescribe a higher level of minimum capital ratio for each institution under the second pillar framework. The draft directions for these regulations were released for public comments on October 22, 2021.
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