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Informist, Friday, May 8, 2026

 

--RBI issues norms on including bks qtr profits for capital adequacy ratio 

 

NEW DELHI – The Reserve Bank of India has issued final norms allowing banks to include quarterly profits in their capital-to-risk-weighted assets ratio, or CRAR, calculation, irrespective of provisioning levels, thereby bolstering capital and improving lending. The final norms come into force with immediate effect, the RBI said Friday. The central bank had issued the draft norms regarding this on Apr. 8, seeking feedback. 

 

Till now, commercial banks could include their profits in CRAR calculations every quarter, provided the incremental provisions made for non-performing assets at the end of any of the four quarters of the previous financial year did not deviate more than 25% from the average of the four quarters. "Based on a review, it has been decided to do away with this qualifying condition of incremental provisions for NPAs," the central bank said. 

 

The RBI had received feedback that transitory or unnatural earnings during a quarter for CRAR calculations raise the risk of artificially inflating lending capacity, leading to unsustainable credit expansion and potential capital stress when profits normalise in leaner periods. "Consequently, retaining yearly CET1 (Common Equity Tier 1) accounting with quarterly reviews offers a more prudent path," stakeholders said. 

 

The central bank, however, rejected these proposals and said that banks are required to factor in aspects like probable charges on profits, seasonal variations, among others, as well as compliance with extant guidelines before taking the quarterly profits to regulatory capital. This rules out the possibility of artificially inflating banks' capital adequacy.

 

According to the norms, in order to include profits in a bank's capital adequacy ratio calculation, the financial statements for the quarter must be subjected to review or audit by the statutory auditors. If the bank has a cumulative net loss up to the quarter end, the full amount of the loss must be deducted from the common equity tier 1 capital, and banks must also deduct average dividends paid in the previous three financial years while calculating the profit to be added to the capital.

 

This change in computing capital adequacy was first announced by RBI Governor Sanjay Malhotra on Apr. 8 as part of his statement following the Monetary Policy Committee meeting in April. "The guidelines regarding the change in the calculation of CRAR are a better reflection of the capital that banks have," Malhotra had said.  End

 

Reported by Priyasmita Dutta

Edited by Deepshikha Bhardwaj

 

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