The Capital Funds for capital adequacy purpose shall consist of Tier 1 and Tier 2 capital
FinTech BizNews Service
Mumbai, March 24, 2025: To enable RRBs to have current instructions at one place, a Master Direction (MD), incorporating all the existing guidelines / instructions / directives on the subject has been prepared for reference. This Direction also incorporates suitable modifications to and rationalisation in existing guidelines.
This Master Direction covers instructions regarding the capital required to be provided for by banks commensurate with their risks and the components thereof. These Directions serve to specify the prudential norms from the point of view of capital adequacy. Permission for RRBs to undertake transactions in specific instruments/products/ activities shall be guided by the regulations, instructions and guidelines on the same issued by Reserve Bank from time to time.
Composition of Regulatory Capital
5. Minimum regulatory capital
RRBs are required to maintain a minimum Capital to Risk Weighted Assets Ratio (CRAR) of 9 per cent on an ongoing basis. A bank shall compute CRAR in the following manner:
Where, Total Risk Weighted Assets (RWAs) is calculated as the aggregate of RWAs and other off-balance sheet exposures.
Definition of Capital Funds
The Capital Funds for capital adequacy purpose shall consist of Tier 1 and Tier 2 capital.
6.1 Tier 1 Capital
6.1.1 Components of Tier 1 Capital
The elements of Tier 1 Capital are:
(a) Paid up share capital
(b) Share premium, if any, resulting from the issue of shares
(c) Share capital deposit
(d) Statutory and other free reserves1
(e) Capital Reserve representing surplus arising out of sale proceeds of assets
(f) Revaluation reserves, arising out of change in the carrying amount of a bank’s property consequent upon its revaluation, may be reckoned as Tier 1 capital at a discount of 55 per cent, subject to meeting the following conditions:
Note: Revaluation reserves which do not qualify as Tier 1 capital shall also not qualify as Tier 2 capital. The bank may choose to reckon revaluation reserves in Tier 1 capital or Tier 2 capital at its discretion, subject to fulfilment of all the conditions specified above.
(g) Balance in Profit & Loss Account at the end of the previous financial year.
(h) Perpetual Debt Instruments (PDIs), which comply with the regulatory requirements as specified in Annex I are eligible for inclusion in Tier 1 capital, subject to the limits prescribed in paragraph 6.1.2 below.
6.1.2 Limits in Tier 1 Capital
(a) The total Tier 1 capital shall not be less than 7 per cent of RWAs after the regulatory adjustment / deduction as per paragraph 6.1.3 below.
(b) Of the minimum Tier 1 capital of 7 percent, the PDIs will be limited to 1.5 per cent of the total RWAs.
(c) Any additional amount raised through PDIs over and above the 1.5 per cent of the RWAs may also be reckoned as Tier 1 capital.
Provided that the bank complies with the minimum Tier 1 capital of 7 percent of RWAs before reckoning such additional amounts.
6.1.3 Regulatory Adjustments/ Deductions from Capital
6.1.3.1 The following items shall be fully deducted from Tier 1 capital:
(a) Goodwill and other intangible assets
(b) Losses in current year and those brought forward from previous years
(c) Defined Benefit Pension Fund Assets and Liabilities: Defined benefit pension fund liabilities, as included on the balance sheet, must be fully recognised in the calculation of Tier 1 capital (i.e., Tier 1 capital cannot be increased through derecognising these liabilities). For each defined benefit pension fund that is an asset on the balance sheet, the asset should be deducted in the calculation of Tier 1.
Note 1: The following items, if identified in the course of supervisory inspection, or otherwise, will also be deducted from Tier 1 capital:
(i) Deficit in NPA provisions2
(ii) Income wrongly recognized on non-performing assets
(iii) Provision required for liability devolved on bank, and such similar amounts.
Note 2: In terms of circular DOR.ACC.REC.No.67/21.04.018/2024-25 on “Amortisation of additional pension liability - Implementation of Pension Scheme in Regional Rural Banks with effect from November 1, 1993 - Prudential Regulatory Treatment” dated March 20, 2025, pension related unamortised expenditure would not be reduced from Tier 1 Capital of the RRBs.
6.1.3.2 Treatment of Deferred Tax Assets
(a) Deferred tax assets (DTAs) associated with accumulated losses and other such assets shall be deducted in full from Tier 1 capital.
(b) DTAs which relate to timing differences (other than those related to accumulated losses) may, instead of full deduction from Tier 1 capital, be recognized in the Tier 1 capital up to 10% of a bank's Tier 1 capital (after the application of all regulatory adjustments).
(c) The amount of DTAs which are to be deducted from Tier 1 capital may be netted with associated deferred tax liabilities (DTLs),
Provided that:
6.2 Tier 2 Capital
6.2.1 Components of Tier 2 Capital
(a) General Provisions and Loss Reserves
General provisions and loss reserves will be admitted as Tier 2 capital up to a maximum of 1.25 per cent of the total RWAs.
Provided that, banks have taken adequate care to ensure that sufficient provisions have been made to meet all known losses and foreseeable potential losses before considering any amount of general provision as part of Tier 2 capital.
(b) Investment Fluctuation Reserve
Banks may include the entire amount of balance in Investment Fluctuation Reserve in Tier 2 capital.
Note: The cap applicable on recognition of General Provisions and Loss Reserves as Tier 2 capital is not applicable to IFR.
6.2.2 Limits on Tier 2 Capital
The total of Tier 2 elements will be limited to a maximum of 100 percent of total Tier 1 elements for the purpose of compliance with the capital adequacy framework.
Chapter III: Computation of Risk Weighted Assets
7. Risk Adjusted Assets and Off-Balance Sheet Items
Risk adjusted assets means the weighted aggregate of funded and non-funded items. Degrees of credit risk expressed as percentage weightings have been assigned to Balance Sheet assets and conversion factors to off-Balance Sheet items. Banks shall multiply the value of each asset/item by the relevant weights to produce risk-adjusted values of assets and of off-Balance Sheet items. The aggregate shall constitute the total RWAs to be taken into account for computing CRAR. The weights allotted to each category of Balance Sheet assets and off-Balance Sheet items are furnished in the Annex II.
Chapter IV: Reporting
8. Reporting
Banks shall furnish an annual return to the respective NABARD Regional Office, indicating capital funds and risk assets ratio, in the format given in Annex III. The return shall be signed by two officials who are authorised to sign the statutory returns submitted to the Reserve Bank. The statement shall be furnished as soon as the annual accounts are finalised.
Chapter V: Repeal and other provisions
9. Repeal Provisions
With the issue of these Directions, the instructions / guidelines contained in the circulars mentioned in the Annex IV stand repealed. All the instructions / guidelines given in the above circulars shall be deemed as given under these Directions. Any reference in other Circulars / Guidelines / Notifications issued by the Reserve Bank containing reference to the said repealed Circulars, shall mean the reference to these Directions, namely, the Reserve Bank of India (Prudential Norms on Capital Adequacy for Regional Rural Banks) Directions, 2025, after the date of repeal. Notwithstanding such repeal, any action taken, purported to have been taken or initiated under the Circulars hereby repealed shall continue to be governed by the provisions of the said Circulars.
10. Application of other laws not barred
The provisions of these Directions shall be in addition to, and not in derogation of the provisions of any other laws, rules, regulations or directions, for the time being in force.
11. Interpretations
For the purpose of giving effect to the provisions of these Directions or in order to remove any difficulties in the application or interpretation of the provisions of these Directions, the Reserve Bank of India may, if it considers necessary, issue necessary clarifications in respect of any matter covered herein and the interpretation of any provision of these Directions given by the Reserve Bank of India shall be final and binding.
Annex I
[Paragraph 6.1.1(h)]
Terms and Conditions applicable to Perpetual Debt Instruments to qualify for inclusion as Tier 1 Capital
The Perpetual Debt Instruments (PDIs) that may be issued as bonds or debentures by RRBs should meet the following terms and conditions to qualify for inclusion as Tier 1 Capital for capital adequacy purposes:
1. Terms of Issue of PDIs
(a) Amount:
RRBs shall issue PDI in Indian currency only. The amount of PDI to be raised may be decided by the Board of Directors of banks.
(b) Paid-in Status:
The instruments should be issued by the bank (i.e., not by any ‘SPV’ etc. set up by the bank for this purpose) and fully paid-in.
(c) Limits:
Within minimum Tier 1 of 7 percent, the PDIs will be limited to 1.5 per cent of the total RWAs. Any additional amount raised through PDIs over and above the 1.5 per cent of the RWAs will also be reckoned as Tier 1 capital provided the bank complies with the minimum Tier 1 capital of 7 percent of RWAs before reckoning such additional amounts.
(d) Maturity Period:
The instruments shall be Perpetual i.e., there is no maturity date and there are no step-ups or other incentives to redeem.
(e) Rate of Interest:
(i) The interest payable to the investors shall be either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate.
(ii) The instrument cannot have a credit sensitive coupon feature, i.e., a coupon that is reset periodically based in whole or in part on the banks’ credit standing. For this purpose, any reference rate including a broad index which is sensitive to changes to the bank’s own creditworthiness and / or to changes in the credit worthiness of the wider banking sector will be treated as a credit sensitive reference rate.
(f) Options:
PDI shall not be issued with a 'put option' or a 'step-up option'. However, RRBs may issue the instruments with a call option subject to strict compliance with each of the following conditions:
(i) Call option shall be exercised only after the instrument has run for minimum five years; and
(ii) Call option shall be exercised only with the prior approval of RBI (Department of Regulation). While considering the proposals received from RRBs for exercising the call option, the RBI would, among other things, take into consideration the bank’s CRAR position both at the time of exercise of the call option and after exercise of the call option.
(g) Lock-In Clause:
(i) PDI should be subject to a lock-in clause in terms of which the issuing bank shall not be liable to pay interest, if
(a) The bank's CRAR is below the minimum regulatory requirement prescribed by RBI.
Or
(b) The impact of such payment results in bank's capital to risk assets ratio (CRAR) falling below or remaining below the minimum regulatory requirement prescribed by RBI.
(ii) However, RRBs may pay interest with the prior approval of RBI, when the impact of such payment may result in net loss or increase the net loss, provided the CRAR remains above the regulatory norm. For this purpose, ‘Net Loss’ would mean either (a) the accumulated loss at the end of the previous financial year; or (b) the loss incurred during the current financial year.
(iii) The interest shall not be cumulative.
(iv) All instances of invocation of the lock-in clause should be notified by the issuing banks to the Chief General Manager, Department of Regulation, Reserve Bank of India and Department of Supervision, NABARD, Head Office, Mumbai.
(h) Seniority of Claim:
The claims of the investors in PDI shall be:
(i) Discount:
The PDIs shall not be subjected to a progressive discount for capital adequacy purposes since these are perpetual.
(j) Other Conditions:
(i) PDI should be fully paid-up, unsecured, and free of any restrictive clauses.
(ii) RRBs should comply with the terms and conditions, if any, stipulated by SEBI / other regulatory authorities in regard to issue of the instruments.
2. Compliance with Reserve Requirements
The total amount raised by a bank through PDI shall not be reckoned as liability for calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, will not attract CRR / SLR requirements.
3. Reporting Requirements
RRBs issuing PDI shall submit a report to Chief General Manager, Department of Supervision, NABARD, Head Office, Mumbai giving details of the debt raised, including the terms of issue specified at paragraph 1 above, together with a copy of the offer document, soon after the issue is completed.
4. Investment in PDIs
(a) RRBs shall not invest in PDI issued by other banks including RRBs.
(b) RRBs shall not issue PDI to retail investors/ FPI/ NRIs.
5. Grant of Advances against PDI
RRBs should not grant advances against the security of the PDI issued by them.
6. Classification in the Balance Sheet
RRBs may indicate the amount raised by issue of PDI in the Balance Sheet under ‘Schedule 4 – Borrowings’.
