In order to strengthen risk management mechanism, the Reserve Bank has issued draft guideline envisaging that the equity capital of a bank should not be less than 5.5% of risk-weighted loans.
Besides, it also recommends Tier 1 capital comprising pure equity and statutory and capital reserves must be at least 7% and total capital must be at least 9% of RWAs. RBI has also suggested setting up of the capital conservation buffer in the form of Common Equity of 2.5% of RWAs. It is proposed that the implementation period of minimum capital requirements and deductions from Common Equity will begin from January 1, 2013 and be fully implemented as on March 31, 2017.
However, the capital conservation buffer requirement is proposed to be implemented between March 31,2014 and March 31,2017. The instruments which no longer qualify as regulatory capital instruments will be phased out during the period beginning from January 1, 2013 to March 31, 2022. The central bank has invited comments and feedback on the draft guidelines, including implementation schedule by February 15, 2012.
Though the Indian banking sector was comfortably placed to implement Basel III regulations, some banks might need additional capital.
Currently, RBI follows Basel II norms under which Tier I component is not only pure equity capital but Perpetual Non-cumulative Preference Shares (PNCPS), Innovative Perpetual Debt Instruments and capital reserves. Banks are required to maintain a minimum Capital to Risk weighted Assets Ratio (CRAR) of 9% within which Tier 1 capital should be at least 6% of risk weighted assets.
Under the existing capital adequacy guidelines based on Basel II framework, total regulatory capital is comprised of Tier 1 capital (core capital) and Tier 2 capital (supplementary capital).
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