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RBI Issued Draft Directions to Implement Basel III framework for AIFIs

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RBI issues draft directions to implement Basel III framework

In October 2021, the Reserve Bank of India (RBI) issued draft directions for implementing the Basel III capital adequacy norms for All India Financial Institutions (AIFIs) that are regulated by RBI viz, Exim Bank, NABARD (National Bank for Agriculture and Rural Development), National Housing Bank (NHB), and SIDBI (Small Industries Development Bank of India).

  • The draft directions have consolidated the existing guidelines on exposure norms, classification, valuation and operation of an investment portfolio and resource raising norms issued to the AIFIs.
  • RBI has issued the directions in the exercise of the powers conferred by Section 45 L of the RBI Act, 1934.

Key Points:

i.The draft includes Prudential Regulations on Basel III Capital Framework, Exposure Norms, Significant Investments, Classification, Valuation and Operation of Investment Portfolio Norms and Resource Raising Norms for AIFIs.

ii.Basel III strengthens the institution-level i.e. micro-prudential regulation, with the intention to raise the resilience of individual financial institutions in periods of stress.

iii.Draft Basel III Capital Regulations for AIFIs

Minimum capital ratios  April 1, 2022
Minimum Common Equity Tier

1 (CET1)

5.5%
Capital conservation buffer

(CCB)

2.5%
Minimum CET1+ CCB 8%
Minimum Tier 1 capital  7%
Minimum Total Capital  9%
Minimum Total Capital + CCB 11.5%

Note – Since the accounting year for NHB is July-June, the implementation will start from July 1, 2022.

iv.Limits on an AIFI’s Investments: An AIFI’s investments in the capital instruments issued by banking, financial and insurance entities should not exceed 10 percent of its capital funds.

v.AIFIs are required to maintain a minimum Pillar 1 Capital to Risk-weighted Assets Ratio (CRAR) of 9 percent on an ongoing basis.

vi.The insurance and non-financial subsidiaries / joint ventures/associates etc. of an AIFI should not be consolidated for the purpose of capital adequacy.

About Basel III Norms:

i.Basel Accord/Basel norms are the international banking regulations issued by the Basel Committee on Banking Supervision.

ii.The Basel Committee has issued 3 sets of regulations known as Basel-I, II, and III to improve the quality of banking supervision.

iii.The BCBS issued a comprehensive reform package entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” in December 2010 and later revised in June 2011 to improve the banking sector’s ability to absorb shocks arising from financial and economic stress. (in response to the financial crisis of 2008).

Recent Related News:

On September 24, 2021, the Reserve Bank of India (RBI) issued the master directions of RBI (Securitisation of Standard Assets) Directions, 2021, and RBI (Transfer of Loan Exposures) Directions, 2021.

About Reserve Bank of India (RBI):

Subsidiaries of RBI:

i.Deposit Insurance and Credit Guarantee Corporation of India (DICGC),
ii.Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL),
iii.Reserve Bank Information Technology Private Limited (ReBIT),
iv.Indian Financial Technology and Allied Services (IFTAS),
v.Reserve Bank Innovation Hub (RBIH).