RBI revises capital adequacy norms for banks

The Reserve Bank of India (RBI) on May 8, 2026, revised its guidelines regarding how banks include current-year quarterly profits in their core capital calculations. The revised framework, which comes into force with immediate effect, applies to commercial banks, small finance banks, and payments banks.

The amendment follows a review of stakeholder feedback on draft proposals released by the central bank on April 8, 2026. 

What Has Changed?

The central bank has simplified the process of calculating a bank’s financial strength by eliminating a restrictive bad-loan provisioning requirement:

• The Old Rule: Previously, banks could only include quarterly profits in their capital adequacy calculations if the incremental provisions they made for Non-Performing Assets (NPAs) in any quarter of the preceding financial year did not deviate by more than 25% from the average provisions made across all four quarters.
• The New Rule: The RBI has completely removed this qualifying condition linked to NPA provisions. Banks are no longer restricted by fluctuations in their bad-loan provisioning when accounting for quarterly profits.

Revised Eligibility Criteria

Under the updated framework, banks can now seamlessly reckon quarterly profits for Common Equity Tier 1 (CET1) capital calculations under two main conditions:

1. Audit or Review: The bank’s financial statements must be audited or subjected to a limited review every quarter.
2. Formula-Based Limit: The actual profit amount eligible for inclusion will be calculated using a standardized formula linked to the bank’s net profit and its average dividend payout over the last three financial years.

 Common Equity Tier 1 (CET1) Capital

CET1 represents the highest quality of regulatory capital because it is the first to absorb losses as soon as they occur, providing a core buffer to ensure financial stability during economic crises.

• Key Components: A sum of common shares (or equivalents), stock surplus, retained earnings, other comprehensive income, qualifying minority interest, and regulatory adjustments.
• Global Basel III Standard: Typically requires a minimum ratio of 4.5% to 6% of risk-weighted assets.

Capital to Risk Weighted Assets Ratio (CRAR)

CRAR (also known as the Capital Adequacy Ratio) is a key metric indicating a bank’s overall capability to absorb potential losses. It is composed of Tier 1 (core) and Tier 2 (supplementary) capital.

• Global Basel III Standard: Recommends a minimum CRAR of 8%.

Stricter Indian Standard: The RBI enforces a tougher benchmark of 9% for Indian banks, ensuring an extra capital cushion to protect the domestic banking sector against exposure to stressed assets.