India's Central Bank Proposes Easing of Bank Capital Adequacy Regulations

Deep News04-08

The Reserve Bank of India (RBI) proposed on Wednesday to relax capital adequacy-related regulatory standards by eliminating the requirement for banks to establish an Investment Fluctuation Reserve.

This reserve mechanism was originally established to help banks hedge against the risk of depreciation in their investment assets.

RBI Governor Shaktikanta Das, while delivering the monetary policy address in Mumbai, stated, "Given the evolution of the prudential regulatory framework over the years, it is proposed to discontinue... this additional buffer requirement of Investment Fluctuation Reserve."

The central bank also proposed easing related rules to permit banks to use quarterly profit data for calculating the Capital to Risk-Weighted Assets Ratio (CRAR).

This ratio is a core financial metric for assessing a bank's capital strength, used to evaluate the adequacy of a bank's capital relative to its risk-weighted assets, which include provisions for non-performing loans.

Under current regulations, banks can only incorporate quarterly profits into their capital adequacy calculations after the quarterly profits have been audited and all provisions for non-performing loans have been confirmed.

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