RBI eases accounting norms to align banks’ capital with Basel III norms

The Reserve Bank of India (RBI) has amended rules to allow gains from property revaluation, foreign currency conversions in financial statements and deferred tax assets to be added to a banks' core capital, subject to certain conditions.

The RBI's decision to treat certain items in banks' balance sheet items as regulatory capital will help cash-strapped banks to further align their tier I capital to international Basel III capital standards.

RBI said revaluation reserves arising from change in the carrying amount of a bank's property consequent upon its revaluation would now be considered as common equity Tier 1 capital (CET1) instead of Tier 2 capital as hitherto. These would continue to be reckoned at a discount of 55 per cent.

Foreign currency translation reserves arising due to translation of financial statements of a bank's foreign operations to the reporting currency may be considered as CET1 capital. These will be reckoned at a discount of 25 per cent.

Deferred tax assets arising due to timing differences may be recognised as CET1 capital up to 10 per cent of a bank's CET1 capital.

RBI also said conversions of foreign currency in a bank's financial statements of its foreign operations can now be considered common equity capital, although at a discount of 25 per cent, while also easing rules on counting up to 10 per cent of a bank's deferred tax assets as Tier I capital.

Gross NPAs, re-cast loans and write-offs of scheduled banks in India is estimated to be around RsRs9,50,000 crore as of September last year and the revised norms, applicable with immediate effect, will be a great relief to state-run banks.

India's central bank began implementing the Basel-III norms from 2014.

The standards, applied after the US financial crisis of 2008, aim at improving the banks' ability to absorb shocks from financial and economic stress, risk management and governance, and strengthening their transparency and disclosure standards.

This along with the government's budgetary allocation of Rs25,000 crore for recapitalisation of banks should give some respite to state-run banks sitting over mounting piles of non-performing assets (NPAs).

Presenting the union budget proposals for 2016-17 in parliament on Monday, finance minister Arun Jaitley said an allocation of Rs25,000 crore for capitalization of bank each in the current and next fiscal years (2015-16 and 2016-17), while Rs.20,000 crore would be provided during 2017-18 and 2018-19.

Public sector banks (PSBs) would need additional capital of up to Rs240,000 crore by 2018 to meet the Basel III capital adequacy norms and much of this should come from the market.