Money & Banking

RBI extends Basel-III Capital framework to AIFIs

Our Bureau Mumbai | Updated on October 22, 2021

All India Financial Institutions include EXIM Bank, Nabard, NHB, SIDBI

The Reserve Bank of India (RBI) decided to extend Basel-III Capital framework to All India Financial Institutions (AIFIs) such as Export-Import Bank of India (EXIM Bank), the National Bank for Agriculture and Rural Development (Nabard), National Housing Bank (NHB) and the Small Industries Development Bank of India (SIDBI).

Basel-III standards mainly seek to raise the quality and level of capital to ensure that financial entities are better able to absorb losses on both a going concern and a gone concern basis.

These standards also increase the risk coverage of the capital framework, introduce leverage ratio to serve as a backstop to the risk-based capital measure, raise the standards for the supervisory review process and public disclosures etc.

‘AIFIs are key institutions’

The RBI said as the Indian economy grows further, the AIFIs are increasingly being seen as key institutions to promote the flow of direct or indirect credit to the economic sectors they cater to.

As per the draft Master Direction on Prudential Regulation for AIFIs, AIFIs will implement all the three Pillars of Basel-III capital regulations – pillar 1 covering capital, risk coverage and containing leverage, pillar 2 covering risk management and supervision and pillar 3 covering market discipline.

The central bank wants AIFIs to achieve minimum total capital of 9 per cent and capital conservation buffer of 2.5 per cent, with the minimum total capital and CCB adding up to 11.5 per cent, by April 1, 2022.

For NHB, since the accounting year is July-June, the implementation shall commence on July 1, 2022.

Capital instruments already issued by the AIFIs which no longer qualify under Basel-III will be allowed to be counted as tier 1 or tier 2, as the case may be, as per the existing rules until their maturity or the first call date.

All capital instruments issued by AIFIs after these directions come into effect shall comply with the requirements set out in the Master Directions.

As investment of AIFIs in the regulatory capital instruments of other financial entities contributes to the inter-connectedness amongst the financial institutions and also amounts to double counting of capital in the financial system, the draft Master Direction prescribed stringent treatment of such investment in terms of deduction from respective tiers of regulatory capital.

The RBI has invited comments on the draft Directions from all the stakeholders by November 30, 2021.

Published on October 22, 2021

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