RBI rolls out tighter capital adequacy norms for banks from April 2027 to align with global standards
Mumbai: The Reserve Bank of India on Friday revised its capital adequacy framework to align with global Basel Committee on Banking Supervision (BCBS) standards, aimed at safeguarding banks against default risks.
The amendments update the 2025 directions by enforcing a uniform cap on overall leverage, regardless of an asset’s risk profile, to strengthen balance-sheet resilience.
The central bank had issued draft guidelines on 7 August, seeking public comments through 28 August. While commercial banks requested additional time to implement the revised leverage ratio framework, the RBI rejected the extension, confirming the new rules will take effect on 1 April 2027.
The new framework prescribes the minimum leverage ratio at 4% for domestic systemically important banks (D-SIB), and 3.5% for other banks. The leverage ratio measures a bank’s core capital relative to its total exposure, without accounting for the riskiness of its loans or investments. It acts as a safety backstop to regular capital rules.
Basel III defines leverage ratio as the capital measure divided by the exposure measure, expressed as a percentage. A higher ratio indicates that a bank has more capital available to absorb losses relative to the size of its balance sheet and off-balance-sheet exposures.
Banks must meet the minimum leverage ratio at all times, the RBI said. The capital and exposure measures must be calculated at the end of every quarter, though banks can compute them on a daily or monthly average basis with the central bank’s approval.
Exposure rules
Unlike risk-weighted capital rules, the leverage ratio measures total exposure—including on-balance-sheet assets, derivatives, securities financing, and off-balance-sheet commitments—without allowing reductions for collateral, guarantees, or netting unless explicitly permitted.
The exposure measure generally relies on gross accounting values, the RBI circular said, noting that banks cannot use physical or financial collateral, guarantees, or credit risk mitigation techniques to lower their reported exposure or net off assets and liabilities.
In their feedback, banks also requested aligning the calculation of replacement cost, potential future exposure, and the multiplier under the leverage ratio framework with the Standardised Approach for Counterparty Credit Risk (SA-CCR). The RBI rejected the proposal, clarifying that as a non-risk-based metric, the leverage ratio exposure cannot be reduced by collateral received from counterparties.
“A bank shall be particularly vigilant to transactions and structures that have the result of inadequately capturing its sources of leverage,” the central bank said, adding that where such transactions are not adequately captured in the leverage ratio exposure measure, it may consider a range of supervisory actions.
The RBI may also, at its discretion, temporarily exempt central bank reserves from the leverage ratio exposure measure or increase the calibration of the minimum leverage ratio to ensure transmission of monetary policy.
