The Reserve Bank of India has relaxed the rules of capital calculation for banks. Under this, an important condition related to NPA has been removed to include quarterly profit in the calculation of capital adequacy. Besides, RBI has also proposed to abolish ‘Investment Fluctuation Reserve’ i.e. IFR. RBI Governor Sanjay Malhotra has given information about this after the first monthly policy review meeting for the financial year 2027.
Under existing rules, banks could include quarterly profit in their ‘Capital to Risk Weighted Assets Ratio’ (CRAR) only if the extra provisioning made for ‘non-performing assets’ did not differ by more than 25% from the average of the last four quarters. RBI has now proposed to remove this condition, which will ease the restrictions related to capital recognition. The regulator will issue a draft amendment on this and feedback will be sought from the public.
Apart from this, the Central Bank will also remove the condition of maintaining IFR for banks. IFR acts as an additional buffer against ‘mark-to-market’ losses on investments. This step has been taken because there have been many changes in the prudential norms, which include capital charge for market risk and revised framework of investment classification. Malhotra said that these are two important steps related to capital adequacy of banks.
condition of banking system
These decisions have been taken at a time when the balance sheet of the banking system is continuously strengthening. The capital adequacy of ‘Scheduled Commercial Banks’ till December 2025 was 16.91%, which is much higher than the regulatory limit. Asset quality has also improved. The ‘Gross NPA Ratio’ has come down to 1.89% from 2.42% a year ago, while the ‘Net NPA Ratio’ has come down to 0.44% from 0.55%.
‘Non-bank lenders’ (NBFCs) have also shown strength. Their CRAR was 25.59% and ‘Tier I’ was 23.71%. Their ‘Gross NPA Ratio’ improved from 2.52% to 2.14%, while ‘Net NPA’ declined from 1.10% to 0.93%. RBI said that changes will be made in IFR rules for other categories of banks, so that operational challenges can be resolved and uniformity can be brought in the rules. Draft guidelines will be issued soon in this regard.
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