Draft Norms on Banks’ Minimum Capital Requirement

Draft Norms on Banks’ Minimum Capital Requirement

Subject : Economy

Section: Monetary Policy

Concept :

• The Reserve Bank of India has issued draft guidelines on minimum capital requirements for market risk as a part of the convergence of banking regulations with Basel III standards.
• The central bank has sought feedback on the norms by April 15, and has proposed that the final norms will come into effect from April 1, 2024.

Key highlights of the draft guidelines

• As per the proposed norms, banks will use the simplified standardised approach to compute risk-weight assets for market risk.
• Market risk is defined as the risk of losses in on- and off-balance-sheet positions arising from movements in market prices.
• The risks subject to market risk capital requirements include interest rate risk and equity risk for trading book instruments, and foreign exchange risk for trading book and banking book instruments.
• The capital requirement arising from the simplified standardised approach is the sum of the capital requirements arising from each of the three risk classes–interest rate risk, equity risk, and forex risk.
• Banks have to maintain the minimum capital requirement in terms of two separately calculated amounts—-first “specific risk” of each security, both for short and long positions, and second “general market risk” towards interest rate risk in the portfolio.
• The capital requirement for interest rate risk for the “specific risk” category will be computed based on the lowest rated debt instrument attracting the highest specific risk capital charge, and capital requirements for “general market risk” need to capture the risk of loss arising from changes in market interest rates.
• The capital requirement for equity risk for specific risk will be 9%, and for general market risk 9%.
• The guidelines are not applicable to cooperative banks, local area banks, payments banks, regional rural banks, and small finance banks.