The Reserve Bank of India has issued the Reserve Bank of India (Prudential Norms on Capital Adequacy for Local Area Banks) Directions, 2021 on October 26, 2021. The Master Directions shall be applicable to all Local Area Banks, licensed to operate in India by the Reserve Bank of India comes into effect from October 26, 2021. Key highlights:
- This Master Direction covers instructions regarding the components of capital and the capital required to be provided for by banks for credit and market risks. These Directions serve to specify the prudential norms from the point of view of capital adequacy. Permission for LABs to undertake transactions in specific instruments/products shall be guided by the regulations, instructions and guidelines on the same issued by Reserve Bank from time to time.
- Banks are required to maintain a minimum Capital to Risk Weighted Assets Ratio (CRAR) of 9 per cent on an ongoing basis. The capital funds shall consist of the sum of Tier I Capital and Tier II Capital.
- Banks shall not enter into swap transactions involving conversion of fixed rate rupee liabilities in respect of Tier I/Tier II bonds into floating rate foreign currency liabilities.
- Banks shall manage the market risks in their books on an ongoing basis and ensure that the capital requirements for market risks are maintained on a continuous basis, at the close of each business day. Banks shall also maintain strict risk management systems to monitor and control intra-day exposures to market risks.
- The funds collected by various branches of the bank or other banks for the issue and held pending finalisation of allotment of the Tier I Preference Shares shall be taken into account for the purpose of calculating reserve requirements.
- The total amount raised by the bank by issue of PNCPS shall, however, not be reckoned as liability for calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, shall not attract CRR / SLR requirements.
Access the Reserve Bank of India (Prudential Norms on Capital Adequacy for Local Area Banks) Directions, 2021, HERE
Tanvi Singh, Editorial Assistant has reported this brief.