Implementation of Basel III Capital Regulations in India - Capital Planning - ആർബിഐ - Reserve Bank of India
Implementation of Basel III Capital Regulations in India - Capital Planning
RBI/2013-14/538 March 27, 2014 The Chairman and Managing Directors/ Madam / Sir, Implementation of Basel III Capital Regulations in India – Capital Planning Please refer to the Master Circular DBOD.No.BP.BC.2 /21.06.201/2013-14 dated July 1, 2013 on Basel III Capital Regulations. 2. In view of the implementation of Basel III Capital Regulations, banks need to improve and strengthen their capital planning processes. While conducting the capital planning exercise, banks may consider the potential impact of the changing macro-economic conditions and the outcomes of periodic stress tests on the adequacy and composition of regulatory capital. A forward looking capital planning process will enable banks to appropriately assess the level of capital needed to support their business strategies over the medium-term. 3. The capital requirements may be substantially lower during the initial years as compared to later years of full implementation of Basel III Guidelines. Accordingly, banks should keep this aspect in view while undertaking their capital planning exercise. Boards of banks should actively engage themselves in the capital planning process and oversee its implementation. 4. Of late, industry-wide concerns have been expressed about the potential stresses on the asset quality and consequential impact on the performance / profitability of the banks. This may necessitate some lead time for banks to raise capital within the internationally agreed timeline for full implementation of the Basel III Capital Regulations. Accordingly, the transitional period for full implementation of Basel III Capital Regulations in India is extended upto March 31, 2019, instead of as on March 31, 2018. This will also align full implementation of Basel III in India closer to the internationally agreed date of January 1, 2019. 5. In addition to the above, certain other aspects of the guidelines, more specifically, those relating to the loss absorption features of non-equity capital instruments have been reviewed in response to clarifications sought in this regard. 6. The revised transitional arrangements along with other modifications have been furnished in the Annex to this circular. These guidelines become applicable with immediate effect. Further, these instructions would be incorporated in the subsequent Master Circular on Basel III Capital Regulations. Yours faithfully, (Chandan Sinha) Basel III Capital Regulations in India – Amendments 1. Basel III Transitional Arrangements 1.1 In terms of Basel III Capital Regulations issued by the Reserve Bank of India, the Capital Conservation Buffer (CCB) is scheduled to be implemented from March 31, 2015 in phases and would be fully implemented as on March 31, 2018. It has been decided that the implementation of CCB will begin as on March 31, 2016. Consequently, Basel III Capital Regulations will be fully implemented as on March 31, 2019. The Transitional Arrangements as indicated in Paragraph 4.5 of the Master Circular is, therefore, revised as under:
1.2 In addition, Table 25 of Paragraph 15.2 of the Master Circular is revised as under: 2. Loss Absorption Features of Non-Equity Capital Instruments 2.1 The criteria for Additional Tier 1 (AT1) capital instruments inter alia require that these instruments should have principal loss absorption through either (i) conversion into common shares or (ii) a write-down mechanism which allocates losses to the instruments at an objective pre-specified trigger point. The pre-specified trigger is set at Common Equity Tier 1 (CET1) of 6.125% of risk weighted assets (RWAs). It has now been decided that all Basel III compliant AT1 instruments issued before March 31, 2019 i.e., before the full implementation of Basel III, will have two pre-specified triggers. A lower pre-specified trigger at CET1 of 5.5% of RWAs will apply and remain effective before March 31, 2019, after which this trigger would be raised to CET1 of 6.125% of RWAs for all such instruments. AT1 instruments issued on or after March 31, 2019 will, however, have pre-specified trigger at CET1 of 6.125% of RWAs only. 2.2 Presently, in addition to conversion feature, both the temporary and permanent write-down features have been permitted at the pre-specified trigger point for AT1 capital instruments. On a review, it has been decided that banks may issue AT1 capital instruments with conversion / permanent write-down features only. Similarly, with regard to write-off feature at Point of Non-Viability (PONV) trigger, all non-equity capital instruments will have permanent write-off feature only, even in cases where there is no public sector injection of funds. Further, it is clarified that Basel III compliant capital instruments issued with temporary write-off feature till the date of this circular will continue to be recognised as eligible regulatory capital instruments. 2.3 Accordingly, Annex 16 of the Basel III Master Circular has been revised as indicated in the Appendix. 3. Dividend/Coupon Discretion on Capital Instruments 3.1 As regards ‘distributable items’, it is clarified that:
4. Dividend Payment by Banks 4.1 Currently, dividend payment by banks is governed by the provisions of circular DBOD.No.BP.BC.88/21.02.067/2004-05 dated May 04, 2005 on ‘Declaration of Dividends by Banks’. Further, Basel III framework also imposes certain constraints on distributions (i.e. payment of dividend or bonuses in any form etc.) in case the capital level of banks falls within the stipulated range as prescribed by the capital buffers framework (i.e. capital conservation and countercyclical buffers, etc.). It is clarified that the dividend payment by banks would be governed by the interaction of both these guidelines, once the capital buffer framework has kicked-in. 4.2 Incidentally, the reference to Basel II capital requirements under paragraph 5(d) on ‘Board Oversight’ of the above circular should be read as the prevailing capital adequacy framework implemented by the Reserve Bank of India and applicable to scheduled commercial banks operating in India. 5. Optionality of Capital Instruments One of the essential criteria with regard to the optionality of Basel III compliant capital instruments is that a bank must not do anything which creates an expectation that the call will be exercised. For example, to preclude such expectation of the instrument being called, the dividend / coupon reset date need not be co-terminus with the call date. Banks may, at their discretion, consider having an appropriate gap between dividend / coupon reset date and call date. |