The Reserve Bank of India has increased the capital that banks need to maintain to 11.5% of risk weighted assets from 9% currently and said that bulk of Tier-I capital must be common equity.
RBI issued final guidelines for implementation of Basel III on Wednesday and said banks will have to reach the 11.5% capital level in phases over a period of six years. Minimum total capital to be maintained by banks will remain 9% for 2012-13 and 2013-2014. Banks will have to maintain total capital of 9.62% as on March 31, 2015, increase it to 10.25% as on March 31, 2016, to 10.87% as on March 31, 2017 and finally to 11.50% as on March 31 of 2018.
In the final phase, of the minimum capital of 11.5%, 2.5% will be in the form of counter-cyclical buffer capital, the RBI said. This counter-cyclical buffer capital must also be in the form of common equity, the RBI said.
The central bank has prescribed a Tier-I capital of 8% of risk weighted assets, entirely out of common equity.
Moreover, banks can maintain additional Tier-I capital of 1.5% of risk weighted assets over and above the common equity portion, the RBI said. ?Where the a bank does not have minimum Common Equity Tier 1 + capital conservation buffer of 2.5% of RWAs as required but, has excess Additional Tier 1 or Tier 2 capital, no such excess capital can be reckoned towards computation and reporting of Tier 1 capital and Total Capital,? RBI said.
Additional Tier-I capital can be in the form of perpetual bonds and perpetual non-cumulative preference shares. RBI also tightened the criteria for inclusion of perpetual debt instruments into Tier-I capital.
The central bank said that banks cannot issue additional Tier-I capital to retail investors. For Tier-II, the RBI has done away with different debt instruments as Upper and Lower Tier-II bonds. Under Basel III, banks will be able to issue only a single set of Tier-II bonds. Loan-loss provisioning made for future unidentified losses can be included in Tier-II capital, RBI said.