RBI rejects industry feedback on capital adequacy norms
Industry feedback highlighted risks of temporary profit surges inflating lending capacity.
The Reserve Bank of India (RBI) on Friday said it has not accepted feedback that warned against allowing quarterly profits to be added to the calculation of capital adequacy levels.
It said that under current guidelines, banks are permitted to take quarterly profits to capital, but with an additional qualifying condition pertaining to bad loan provisions.
“The proposed revision to the guidelines removes the additional qualifying condition,” it said.
Quick answers to key questions
The RBI has decided not to accept industry feedback that suggested against allowing quarterly profits to be added to capital adequacy calculations. While banks could previously include quarterly profits with a condition on bad loan provisions, the proposed revision removes this condition.
The RBI proposed easing banks' capital requirements by allowing quarterly profits to be added to the calculation of capital adequacy levels. This change aims to provide a better reflection of the capital banks hold.
Industry feedback highlighted that quarterly profits can be influenced by seasonal variations and one-off events, potentially creating temporary surges not reflective of structural strength. This could risk artificially inflating lending capacity and lead to capital stress when profits normalize.
Banks are required to consider potential charges on profits, seasonal variations, and compliance with existing guidelines before including quarterly profits in regulatory capital. An audit or limited review is also necessary to verify and certify these profits.
State Bank of India's capital adequacy ratio (CAR) was 15.4% as of March 31, 2026, which is higher than the regulatory requirement of 12.3%.
RBI said that banks are required to factor in aspects like probable charges on profits, seasonal variations, etc., as well as compliance with extant guidelines, before taking the quarterly profits to regulatory capital.
“There is also a requirement of audit/limited review, which ensures that the quarterly profits are accrued to regulatory capital after verification and certification.”
On 8 April, RBI proposed easing banks’ capital requirements by allowing quarterly profits to be added to the calculation of capital adequacy levels.
Industry feedback
According to the regulator, it received feedback on its 8 April proposal that integrating quarterly profits into CET1 (common equity tier one) capital requires careful analysis of profit skewness, seasonal variations, cost-related challenges like depreciation and write-offs, regional differences, volatile asset quality, external shocks from geopolitical or climate factors, among others.
The feedback said that these, along with festive spikes, such as those during Diwali, can create temporary profit surges but are not reflective of structural strength.
“Recognizing these transitory earnings for capital adequacy ratio calculations risks artificially inflating lending capacity, leading to unsustainable credit expansion and potential capital stress when profits normalize in leaner periods,” RBI said, quoting the feedback.
RBI governor Sanjay Malhotra said on 8 April that it does not change the calculation of net profit but only alters the capital adequacy calculation. “It is a better reflection of the capital that the banks have,” Malhotra had told reporters at the post-policy press conference.
About the Author
Shayan leads the coverage for banking and finance in Mint. Based in Mumbai, he has spent 15 years as a journalist, joining the Mint team in 2018. Over the years, he has tracked the Reserve Bank of India (RBI), commercial banks, and the complex world of shadow banking.<br><br>His expertise goes beyond just reporting news, and he specializes in explaining the "why" behind India’s financial shifts. Shayan has covered major milestones in the industry, including the rollout of the Insolvency and Bankruptcy Code (IBC), mergers in the banking and non-banking space, and the many challenges facing the country's credit markets. He has tracked cases of wrongdoings at India’s private sector banks and murky boardroom battles, trying to get behind the scenes.<br><br>Shayan is driven by a commitment to accuracy and clear, honest reporting. He believes in making finance easy to understand, ensuring his readers and investors stay informed about the forces shaping their money. When not at work, he tries to hone his amateurish photography skills, read fiction, and listen to music. You can follow his work and updates on LinkedIn and Twitter/X.
Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
MoreWait for it…
Oops! Looks like you have exceeded the limit to bookmark the image. Remove some to bookmark this image.