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    RBI Allows Rural Banks to Issue Perpetual Debt to Augment Capital

    November 01, 2019

    RBI published a circular announcing the decision to allow regional rural banks to issue Perpetual Debt Instruments eligible for inclusion as tier 1 capital, with a view to providing these banks with additional options for augmenting regulatory capital funds. This will help the regional rural banks to maintain the minimum prescribed Capital to Risk-weighted Assets Ratio (CRAR), besides meeting the increasing business requirements. The terms and conditions for issuance of Perpetual Debt Instruments have been provided in the Annex to the circular.

    Regional rural banks are required to maintain a minimum CRAR of 9% on an ongoing basis. The capital funds for capital adequacy purpose shall consist of both tier 1 and tier 2 capital. The circular details limits on tier 1 capital as follows:

    • The total tier 1 capital should not be less than 7% of risk-weighted assets after the regulatory adjustment/deduction as per paragraphs 3.1.4 and 3.1.5 of the circular.
    • Of the minimum tier 1 capital of 7%, the Perpetual Debt Instruments will be limited to 1.5% of the total risk-weighted assets.
    • Any additional amount raised through Perpetual Debt Instruments over and above 1.5% of the risk-weighted assets will also be reckoned as tier 1 capital, provided the bank complies with the minimum tier 1 capital of 7% of the risk-weighted assets before reckoning such additional amounts.

    The circular provides information on deductions from Tier 1 Capital and Treatment of deferred tax assets. Additionally, the circular highlights that regional rule banks are not permitted to issue Perpetual Debt Instruments to retail investors/FPIs/NRIs, and invest in the Perpetual Debt Instruments of other banks, including the regional rural banks.

     

    Keywords: Asia Pacific, India, Banking, Regulatory Capital, Tier 1 Capital, CRAR, Perpetual Debt Instruments, Capital Adequacy, Regional Rural Bank, RWA, RBI

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