RBI extends Basel III deadline to March 2019

Giving some respite to the Indian banks, the Reserve Bank of India (RBI) extended deadline for banks to implement global capital norms, Basel III, by a year to March 2019 amid concerns over the asset quality and profitability of the banks.

The RBI notified that prevailing slowdown in Indian industries has been putting pressure on the asset quality and thus impacting performance/profitability of the banks. Therefore, RBI decided to extend time for banks to raise capital within the internationally agreed timeline for full implementation of the Basel III capital regulations. Indian banks will now align full implementation of Basel III norms closer to the internationally agreed date of 1 January 2019.

The central bank has also revised certain aspects of guidelines like Minimum Common Equity Tier 1, Capital conservation buffer (CCB) and loss absorption features of non-equity capital instruments. However, the central bank issued more strict norms for Indian banks as compared to Basel Committee on Banking Supervision (BCBS). Under Basel III, total capital (Tier 1 and Tier 2) of a bank in India must be at least 9 per cent of risk weighted assets (RWAs) while, the BCBS requirement is minimum 8 per cent of RWAs.The RBI suggested Indian banks that capital requirements are substantially lower during the initial years as compared to later years for full implementation of Basel III Guidelines and therefore banks should consider this aspect carefully while undertaking their capital planning exercise. Referring to the dividend distribution, the RBI recommended that the dividend on common shares and perpetual non-cumulative preference shares (PNCPS) will be paid out of current year's profit only. If the coupon payment on perpetual debt instrument (PDI) would lead to result in losses in the current year, then declaration should be precluded to that extent. Coupons on perpetual debt instruments should not be paid out of retained earnings or reserves.