Capital Adequacy Norms

The requirement that banks maintain minimum capital adequacy ratios is an essential component of the prudential regulation of banks. There has been an international harmonization of capital adequacy norms with the adoption of a common capital adequacy standard known as the Cooke Ratio, prescribed by the Basle Committee on Banking Regulations and Supervisory Practices (the so-called Basle Accord of 1988) appointed by the Bank of International Settlements (BIS).

The underlying principle behind the Cooke Ratio is a risk-weighted approach to capital adequacy so that institutions with a higher risk maintain higher levels of capital. For the purpose of calculation of capital, BIS classic capital into two broad categories�Tier 1 capital consisting of share capital and disclosed reserves, and Tier 2 capital consisting of undisclosed and latent reserves, general provision, hybrid capital and subordinated debt. BIS recommends that Tier 2 capital should not exceed Tier I capital. The BIS norm for capital adequacy is 8 per cent of the risk-weighted assets, i.e. Tier I and Tier 2 capital must be equal to at least 8 per cent of total assets of the bank after applying risk-weighting cost to the assets. The Narasimham Committee has recommended that all banks in India reach this e in a phased manner, with the smaller banks given more time than the larger ones to achieve this norm, latest by March 1996. Reasonably satisfactory progress has been made by public sector banks to reach the target.

As at end-March 1995, thirteen of the twenty-seven public sector banks had attained a minimum capital to risk-weighted asset ratio of 8 per cent, eleven had reached 4 per cent, and the remaining three less than 4 per cent. The move to reach minimum capital adequacy ratios has been greatly facilitated by the infusion of fresh capital in several public sector banks by the government in its 1993-4 and 1994-5 budgets. Sums of Rs. 5,700 crores and Rs. 5,600 crores were kept aside in the 1993-4 and 1994-5 budgets, respectively by the government to recapitalize public sector banks.

Capital Requirements under Basel II and Basel III

As a percentage of risk weighted assets
Basel II Basel III
(as on Jan. 1, 2019)
A=(B+D) Minimum Total Capital 8.0 8.0
B Minimum Tier 1 Capital 4.0 6.0
C Of which Minimum Common Equity Tier 1 Capital 2.01 4.5
D Maximum Tier 2 Capital (within Total Capital) 4.0 2.0
E Capital Conservation Buffer (CCB) - 2.5
F=C+E Minimum Common Equity Tier 1 Capital + CCB 2.0 7.0
G=A+E Minimum Total Capital + CCB 8.0 10.5

Minimum Regulatory Capital Prescriptions (as percentage of risk weighted assets)

Basel III (as on Reserve Bank�s Prescriptions
Jan. 1, 2019) Current Basel III (as on
(Basel II)March 31, 2018)
A=(B+D) Minimum Total Capital 8.0 9.0 9.0
B Minimum Tier 1 Capital 6.0 6.0 7.0
C of which Minimum Common Equity Tier 1 Capital 4.5 3.63 5.5
D Maximum Tier 2 capital (within Total Capital) 2.0 3.0 2.0
E Capital Conservation Buffer (CCB) 2.5 - 2.5
F=C+E Minimum Common Equity Tier 1 Capital + CCB 7.0 3.6 8.0
G=A+E Minimum Total Capital + CCB 10.5 - 11.5
H Leverage Ratio (ratio to total assets) 3.0 - 4.54

Written by princy

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