RBI defers implementation of regulations under Basel III capital

On Tuesday, September 29, 2020, in two separate notifications, RBI said it would push back the final tranche of the capital conservation buffer (CCB) and the implementation of the net stable funding ratio (NSFR) by six months due to uncertainty related to COVID crisis.

The capital conservation buffer (CCB) is designed to ensure that banks build up capital buffers during normal times which can be drawn down as losses are incurred during a stressed period. RBI had asked banks to build up CCB of 2.5% in stages. The final stage of 0.625% was to be kept from 30 September 2020. This has been deferred to 1 April 2021. The RBI had earlier deferred the implementation by six months from 31 March 2020. The minimum capital conservation ratios in para 15.2.2 of Part D ‘Capital Conservation Buffer Framework’ of Master Circular, DBR.No.BP.BC.1/21.06.201/2015-16 dated July 1, 2015, on ‘Basel III Capital Regulations’, as applicable from March 31, 2018, will also apply for a further period of six months from March 31, 2020, till the CCB attains the level of 2.5% on 1 April 2021. “The pre-specified trigger for loss absorption through conversion/write-down of Additional Tier 1 instrument (PNCPS and PDI) shall remain at 5.5% of RWAs and will rise to 6.125% of RWAs on September 30, 2020. These guidelines shall now come into effect from April 1, 2021” it said.

“In view of the continued uncertainty on account of COVID-19, on a review, it has been decided to defer the implementation of NSFR guidelines by a further period of six months. These guidelines shall now come into effect from April 1, 2021” the notification said.

NSFR can be defined as the amount of available stable funding (ASF) relative to the amount of required stable funding (RSF).  The NSFR guidelines ensures reduction in funding risk over a longer time horizon by requiring banks to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress. The NSFR of an institution is computed with following formula;

NSFR = ASF÷ RSF ≥ 100 [i.e. net stable funding ratio (NSFR) should be equal to or greater than [Available Stable Funding (ASF) ÷ (Required Stable Funding (RSF)]