The Reserve Bank of India (RBI) has proposed changes to the leverage ratio rules for banks.
The main purpose is to bring India’s banking regulations in line with the latest global standards set by the Basel Committee on Banking Supervision (BCBS).
The RBI has released a draft amendment to its capital adequacy rules and is now seeking feedback from banks and other stakeholders.
What Is the Leverage Ratio?
The leverage ratio is a safety measure that helps regulators check whether a bank is taking on too much exposure compared with its core capital.
It is calculated by dividing a bank’s Tier 1 capital by its total exposure.
The RBI has proposed keeping the minimum leverage ratio at:
4% for Domestic Systemically Important Banks (D-SIBs)
3.5% for other banks
So, for most Indian banks, the basic minimum requirement would remain unchanged under the proposal.
New Requirement for Global Banks
The RBI has proposed a separate rule for branches of Global Systemically Important Banks (G-SIBs) operating in India.
These branches would need to maintain a leverage ratio of 3.5% plus the leverage ratio buffer applicable to their parent G-SIB.
If the bank’s home-country regulator requires an additional buffer, that would also have to be considered.
The goal is to ensure that branches of major international banks maintain a sufficient capital cushion while operating in India.
What Happens If a G-SIB Falls Below the Required Buffer?
The draft rules also propose restrictions on certain capital distributions by G-SIB branches that fail to meet their leverage ratio buffer.
The extent of these restrictions would depend on two measures:
The bank’s Common Equity Tier 1 (CET1) capital ratio
Its leverage ratio
In simple terms, a branch with weaker capital levels could face greater restrictions.
RBI May Allow a Temporary Exemption
The draft also includes a special provision for unusual economic situations.
During exceptional macroeconomic circumstances, the RBI could temporarily exclude a bank’s balances maintained with the central bank from its leverage ratio exposure calculation.
This would help the RBI implement monetary policy when special economic conditions require it.
However, banks would not simply get a lower capital requirement.
If such an exclusion is allowed, the minimum leverage ratio requirement would be increased proportionately.
Banks would also have to disclose how the exemption affected their leverage ratio.
RBI Seeks Comments Until August 28
The proposed changes are currently not final rules.
The RBI has invited comments and suggestions from banks and other stakeholders on the draft directions.
The deadline for submitting feedback is August 28.
The proposed changes are part of the RBI’s effort to align India’s banking regulations with international standards while maintaining a strong capital safety cushion for banks.